112 INDEPENDENT ACCOUNTANT'S REVIEW REPORT ON INTERNAL ACCOUNTING CONTROL SYSTEM ("IACS")

Transcription

1 MERITZ INSURANCE ANNUAL REPORT ANNUAL ACCOUNTS 46 FINANCIAL STATEMENTS INDEPENDENT AUDITORS REPORT BALANCE SHEETS PROFIT AND LOSS ACCOUNT STATEMENTS OF APPROPRIATIONS OF RETAINED EARNINGS STATEMENTS OF CASH FLOWS NOTES TO FINANCIAL STATEMENTS 112 INDEPENDENT ACCOUNTANT'S REVIEW REPORT ON INTERNAL ACCOUNTING CONTROL SYSTEM ("IACS")

2 46 WE ARE AHEAD INDEPENDENT AUDITORS REPORT English Translation of a Report Originally Issued in Korean 14FI., Hanwha Securities Bldg., 23-5 Yoido-dong Youngdeungpo-gu, Seoul , Korea Tel: , 1114 Fax:: To the Board of Directors and Shareholders of Meritz Fire & Marine Insurance Co., Ltd. We have audited the accompanying balance sheets of Meritz Fire & Marine Insurance Co., Ltd. (the Company ) as of March 31, 2007 and 2006, and the related statements of income, appropriations of retained earnings and cash flows for the years then ended, all expressed in Korean won. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2007 and 2006, and the results of its operations, changes in its retained earnings and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea. Accounting principles and auditing standards and their application in practice vary among countries. The accompanying financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those knowledgeable about Korean accounting procedures and auditing standards and their application in practice. May 23, 2007 Notice to Readers This report is effective as of May 23, 2007, the auditors report date. Certain subsequent events or circumstances may have occurred between the auditors report date and the time the auditors report is read. Such events or circumstances could significantly affect the accompanying financial statements and may result in modifications to the auditors report.

3 MERITZ INSURANCE ANNUAL REPORT BALANCE SHEETS AS OF MARCH 31, 2007 AND 2006 (In thousands of Korean won) ASSETS Cash and deposits (Notes 2, 3, 14, 16 and 22) 283,082, ,642,145 Trading securities (Notes 2, 4, 5 and 16) 346,000, ,769,976 Available-for-sale securities (Notes 2, 5, 9 and 16) 1,099,133, ,702,119 Held-to-maturity securities (Notes 2, 5, 6 and 16) 327,751, ,480,539 Securities accounted for using the equity method (Notes 2 and 7) 79,734,947 58,428,996 Loans, net of allowance for doubtful accounts of 7,154,837 thousand as of March 31, 2007 and 5,628,164 thousand as of March 31, 2006 (Notes 2, 8 and 10) 488,968, ,588,322 Real estate investments (Notes 2, 11 and 15) 1,224,635 1,224,635 Tangible assets - net (Notes 2, 10, 11, 12, 14 and 33) 389,317, ,944,608 Intangible assets - net (Notes 2 and 13) 4,138,605 2,788,698 Other assets: Insurance receivables, net of allowance for doubtful accounts of 2,013,992 thousand as of March 31, 2007 and 1,872,335 thousand as of March, 2006 (Notes 2, 8, 10, 16 and 21) 61,959,802 64,118,986 Other accounts receivable, net of allowance for doubtful accounts of 1,616,002 thousand as of March 31, 2007 and 3,593,054 thousand as of March 31, 2006 (Notes 2 and 8) 29,540,987 17,677,232 Leasehold and other deposits (Note 10) 74,634,963 71,184,450 Accrued income, net of allowance for doubtful accounts of 10,435 thousand as of March 31, 2007 and 9,488 thousand as of March 31, 2006 (Notes 2 and 8) 26,196,421 21,923,942 Prepaid expenses 1,960,948 1,684,458 Compensation receivables (Notes 2 and 20) 20,457,232 17,974,131 Separate account credits (Notes 2 and 19) 220, ,447 Separate account assets (Notes 2 and 19) 130,985,963 87,974,096 Deferred acquisition cost (Notes 2 and 30) 350,393, ,506,685 Notes receivable, net of allowance for doubtful accounts of 3,845 thousand as of March 31, 2007 and 4,536 thousand as of March 31, 2006 (Notes 2 and 8) 765, ,858 Advanced payments 716,245 1,978,506 Others 30,587,273 28,228,932 TOTAL ASSETS 3,747,770,348 3,110,006,761

4 48 WE ARE AHEAD BALANCE SHEETS (CONTINUED) (In thousands of Korean won) LIABILITIES AND SHAREHOLDERS' EQUITY Policy reserves, net (Notes 2 and 17) 3,001,702,375 2,447,496,146 Catastrophe reserves (Notes 2 and 18) 132,463, ,742,154 Other liabilities: Unpaid claims (Notes 10, 16 and 21) 89,991, ,011,086 Other accounts payable (Note 33) 13,828,876 11,906,469 Accrued expenses 49,727,055 42,443,935 Separate account debits (Notes 2 and19) 5,643, ,586 Separate account liabilities (Notes 2 and19) 130,985,963 87,974,096 Accrued severance indemnities, net of transfer to the National Pension Fund of 257,176 thousand as of March 31, 2007 and 311,154 thousand as of March 31, 2006 and deposits for retirement insurance of 23,035,528 thousand as of March 31, 2007 and 17,722,498 thousand as of March 31, 2006 (Note 2) 12,213,125 11,943,953 Premiums received in advance 2,431,946 4,544,309 Borrowings (Notes 3 and 22) 500, ,000 Advances 2,355,439 3,014,852 Withholdings 1,418, ,992 Leasehold deposits received (Note 10) 21,002,993 20,683,097 Income tax payable 463, ,134 Deferred income tax liabilities (Notes 2 and 32) 20,426,030 15,987,688 Others 2,529,317 1,590,787 TOTAL LIABILITIES 3,487,682,421 2,879,650,284 SHAREHOLDERS' EQUITY Common stock (Notes 1 and 23) 42,900,000 42,900,000 Capital surplus (Note 26) 28,973,891 28,171,304 Retained earnings (Note 25) 188,859, ,874,962 Capital adjustments: Treasury stock (Notes 1 and 23) (13,338,622) (12,231,604) Gain on valuation of available-for-sale securities (Notes 2 and 5) 7,802,273 9,858,909 Gain (loss) on valuation of securities accounted for using the equity method (Notes 2 and 7) 816,481 (320,686) Stock options (Notes 2 and 36) 2,425, ,643 Gain (loss) on valuation of derivatives (Notes 2 and 31) 1,649, ,949 TOTAL SHAREHOLDERS' EQUITY 260,087, ,356,477 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 3,747,770,348 3,110,006,761 See accompanying notes to financial statements

5 MERITZ INSURANCE ANNUAL REPORT PROFIT AND LOSS ACCOUNT (In thousands of Korean won) REVENUE Premium revenue (Notes 2, 10 and 28) 2,167,185,685 1,856,926,566 Reinsurance revenue (Note 27) 110,832, ,284,603 Interest income (Notes 2, 4 and 10) 115,441,414 99,108,921 Dividend income 8,754,074 3,872,531 Gain on disposal of trading securities 7,289,402 19,562,647 Gain on valuation of trading securities (Notes 2 and 4) 9,796,691 1,721,840 Expenses recovered 48,971,151 52,074,301 Reversal of policy reserves - 11,503,702 Others 78,242,019 45,461,235 Total 2,546,512,475 2,250,516,346 OPERATING EXPENSES Provision for policy reserves (Notes 2 and 17) 554,206, ,313,031 Provision for catastrophe reserves (Notes 2 and 18) 11,720,950 12,292,848 Claims expense (Note 10) 756,328, ,232,824 Surrenders 387,635, ,925,827 Reinsurance expense (Note 27) 224,074, ,110,166 Interest expense 111, ,481 Loss on disposal of trading securities 2,407,482 3,796,688 Loss on valuation of trading securities (Notes 2 and 4) 995, ,938 Operating expenses (Notes 2, 8, 10, 12, 29, 36 and 37) 384,867, ,487,731 Investment administration expenses (Notes 2, 8, 12 and 37) 15,559,491 7,619,003 Others 198,391, ,293,406 Total 2,536,299,182 2,252,367,943 TOTAL OPERATING INCOME (LOSS) 10,213,293 (1,851,597)

6 50 WE ARE AHEAD PROFIT AND LOSS ACCOUNT (CONTINUED) (In thousands of Korean won) OTHER INCOME (EXPENSES) Gain on disposal of available-for-sale securities - net 18,588,769 25,915,301 Equity in earnings of affiliates (Notes 2 and 7) 14,589,185 12,532,553 Gain (loss) on disposal of tangible assets - net (179,298) 183,118 Gain (loss) on foreign currency transactions - net (Note 2) (1,141,390) (83,729) Loss on foreign currency translation - net (Notes 2 and 16) (5,482,748) (6,238,088) Reversal of allowance for doubtful accounts (Notes 2 and 8) 2,079, ,201 Gain on valuation of derivatives - net (Notes 2 and 31) 3,082,649 4,311,402 Gain on transactions of derivatives - net 2,034, ,420 Donations (572,033) (358,204) Others - net 1,021,928 (2,133,609) Total other income, net 34,021,278 34,522,365 INCOME BEFORE INCOME TAX 44,234,571 32,670,768 INCOME TAX EXPENSE (Notes 2 and 32) 8,441,803 6,254,266 NET INCOME 35,792,768 26,416,502 NET INCOME PER SHARE (Note 35) ( In Korean Won ) - Basic Diluted See accompanying notes to financial statements

7 MERITZ INSURANCE ANNUAL REPORT STATEMENTS OF APPROPRIATIONS OF RETAINED EARNINGS (In thousands of Korean won) RETAINED EARNINGS BEFORE APPROPRIATIONS: Beginning of the year 66,294 48,697 Net income 35,792,768 26,416,502 End of the year 35,859,062 26,465,199 TRANSFER FROM RESERVES Transfer from reserve for business stabilization - 9,763 APPROPRIATIONS: Legal reserve (800,000) (800,000) Voluntary reserve (27,100,000) (17,800,000) Cash dividends (Note 24) (7,927,623) (7,808,668) Total appropriations (35,827,623) (26,408,668) UNAPPROPRIATED RETAINED EARNINGS TO BE CARRIED FORWARD TO SUBSEQUENT YEAR 31,439 66,294 See accompanying notes to financial statements

8 52 WE ARE AHEAD STATEMENTS OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES (In thousands of Korean won) Net income 35,792,768 26,416,502 Addition of expenses not involving cash outflows: Depreciation 17,070,561 11,381,497 Provision for severance indemnities 15,039,083 10,263,764 Bad debts 1,787,569 1,801,123 Reserve for outstanding claims 32,581,043 8,600,070 Long-term saving insurance premium reserve 466,340, ,743,657 Unearned premium reserve 47,556,989 - Policyholders' profit dividend reserve 739,798 1,408,395 Policyholders' dividend reserve 6,987,604 6,560,909 Catastrophe reserve 11,720,950 12,292,848 Loss on disposal of trading securities 2,407,482 3,796,688 Loss on valuation of trading securities 995, ,938 Loss on disposal of available-for-sale securities 1,073,834 4,282,547 Amortization of intangible assets 1,764,246 1,688,708 Amortization of deferred acquisition cost 125,483,786 78,734,636 Loss on foreign exchange translation 6,682,370 6,521,104 Others 18,378,628 2,485,934 Sub-total 756,610, ,707,818 Deduction of revenues not involving cash inflows: Interest income (1,082,879) (2,530,818) Gain on disposal of trading securities (7,289,402) (19,562,647) Gain on valuation of trading securities (9,796,691) (1,721,840) Gain on disposal of available-for-sale securities (19,662,603) (30,197,848) Gain on disposal of tangible assets (67,409) (189,065) Gain on foreign currency translation (1,199,623) (296,401) Gain on valuation of derivatives (4,369,834) (4,343,342) Gain on disposition of derivatives (12,872,427) (1,843,030) Equity in earnings of affiliated companies (14,589,185) (12,532,553) Reversal of policy reserve - (11,503,702) Others (7,780,188) (5,552,624) Sub-total (78,710,241) (90,273,870)

9 MERITZ INSURANCE ANNUAL REPORT (In thousands of Korean won) Changes in assets and liabilities resulting from operations: Decrease in insurance receivables 1,809,622 5,659,175 Increase in accrued income (4,273,426) (2,814,472) Increase in prepaid expenses (276,490) (51,551) Increase in deferred policy acquisition costs (251,370,935) (192,664,796) Decrease in notes receivable 138, ,477 Decrease (increase) in advanced payments 1,262,260 (1,513,158) Increase in other assets (41,336,674) (13,187,162) Increase (decrease) in unpaid claims (18,943,302) 12,472,698 Increase in accrued expenses 7,283,120 12,392,744 Payment of severance indemnities (9,510,859) (9,260,296) Decrease in transfers to the National Pension Fund 53,977 74,469 Increase in income tax payable 84, ,993 Increase in other liabilities 45,717,118 27,649,620 Sub-total (269,363,031) (160,413,259) Net cash provided by operating activities 444,329, ,437,191 CASH FLOWS FROM INVESTING ACTIVITIES Cash inflows from investing activities: Withdrawal of deposits 299,359, ,227,018 Proceeds from sale of trading securities 1,318,057,253 2,962,920,627 Proceeds from sale of available-for-sale securities 485,503, ,810,646 Proceeds from sale of held-to-maturity securities 1,833,229 60,218,623 Collection of loans 2,833,934,938 1,127,566,857 Disposal of tangible assets 1,769,699 3,047,461 Decrease in other receivables 1,201,619,468 1,175,534,420 Decrease in other assets 67,499,837 33,378,484 Sub-total 6,209,576,984 6,116,704,136

10 54 WE ARE AHEAD STATEMENTS OF CASH FLOWS (CONTINUED) (In thousands of Korean won) Cash outflows for investing activities: Payment of deposits (295,720,478) (282,843,801) Acquisition of trading securities (1,481,418,028) (2,775,380,937) Acquisition of available-for-sale securities (636,574,261) (632,658,036) Acquisition of held-to-maturity securities (869,204) (60,000,000) Extension of loans (2,840,481,431) (1,233,856,299) Acquisition of tangible assets (25,392,537) (94,278,618) Increase in other receivables (1,211,506,171) (1,173,515,545) Increase in other assets (69,578,885) (75,395,980) Sub-total (6,561,540,995) (6,327,929,216) Net cash used in investing activities (351,964,011) (211,225,080) CASH FLOWS FROM FINANCING ACTIVITIES Cash inflows from financing activities: Increase in other accounts payable 1,382,807,849 1,199,472,250 Increase in bank overdraft - 49,091,747 Collection of leasehold deposits received 21,407,698 9,884,038 Decrease of treasury stock - 715,872 Sub-total 1,404,215,547 1,259,163,907 Cash outflows for financing activities: Decrease in other accounts payable (1,380,885,442) (1,196,404,059) Payment of dividends (7,808,668) (7,749,990) Decrease in bank overdrafts - (51,815,528) Refund of leasehold deposits received (21,042,802) (2,371,500) Decrease in other liabilities (962,089) (2,220,075) Sub-total (1,410,699,001) (1,260,561,152) Net cash used in financing activities (6,483,454) (1,397,245) NET INCREASE IN CASH 85,882,458 64,814,866 CASH AT BEGINNING OF YEAR (Note 34) 121,912,677 57,097,811 CASH AT END OF YEAR (Note 34) 207,795, ,912,677 See accompanying notes to financial statements

11 MERITZ INSURANCE ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 1. GENERAL Meritz Fire & Marine Insurance Co., Ltd. (the Company ) was incorporated in October On October 1, 2005, the Company changed its name from Oriental Fire & Marine Insurance Co., Ltd. to Meritz Fire & Marine Insurance Co., Ltd. The Company is engaged in the insurance business and offers primarily property and casualty insurance products. The Company s shares have been listed on the Korea Stock Exchange since July 1957 and the Company s capital stock as of March 31, 2007 amounted to 42,900 million. The Company s total issued shares are held by the following shareholders: Percentage of Number of shares total shares issued owned (%) Three individuals, including Cho Jeong - Ho 19,245, % Meritz Fire & Marine Insurance Co., Ltd. (Treasury stock) 5,413, % Hanjin Heavy Industries & Construction Co. Ltd. 3,055, % The Korea Fund, Inc. 2,113, % Kookmin Bank (Templeton) 1,914, % Pension - Templeton 1,908, % SSB-EUF 1,820, % Others 50,329, % Total 85,800, % The accompanying financial statements for the year ended March 31, 2007 was approved by the Board of Directors on May 22, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Basis of Financial Statement Presentation The Company maintains its official accounting records in Korean won and prepares financial statements in the Korean language (Hangul) in conformity with the accounting principles generally accepted in the Republic of Korea ( Korean GAAP ). Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying financial statements have been restructured and translated into English from the Korean language financial statements. Certain information included in the Korean language financial statements, but not required for a fair presentation of the Company s financial position, results of operations or cash flows, is not presented in the accompanying financial statements.

12 56 WE ARE AHEAD NOTES TO FINANCIAL STATEMENTS (CONTINUED) The significant accounting policies followed by the Company in the preparation of its financial statements are summarized as follows: b. Adoption of Statements of Korea Accounting Standards ( SKAS ) As of March 31, 2007, the Korea Accounting Standards Board ( KASB ) has published SKAS No. 1 through No. 25, of which SKAS No. 1 through No. 17, except No. 11, are effective before April 1, 2006 and SKAS No. 18 through No. 20 are effective from the fiscal year beginning after March 31, In addition, the Company early adopted SKAS No. 22. Such adoption of SKAS did not have an effect on the financial position of the Company as of March 31, 2007 and 2006 or the ordinary income and net income of the Company for the years then ended. In addition, SKAS No. 21 through No. 25, except No. 22, are effective from the fiscal year beginning after March 31, c. Revenue Recognition Revenues from premium income are recognized at the time when such premium payments become due. However, in the case of insurance contracts of which the first premium payment or lump-sum premium payment are uncollected as of the first day of the insured period due to a payment extension allowed by the Company, the first premium payment or lump-sum premium payment may be recognized as revenue in the period in which the first day of insured period falls. If premium income is received before the nominated collection date, the Company records unearned insurance premium based on calendar period calculation. The Company recognizes interest income when earned based on the passage of time. However, interest income related to non-performing loans is recognized when cash is collected. d. Securities (Excluding Securities Accounted for Using the Equity Method) Debt and equity securities are initially stated at their acquisition costs (fair value of considerations paid) including incidental cost incurred in connection with acquisition of the related securities using the moving average method and classified into trading, available-for-sale and held-to-maturity securities depending on the acquisition purpose and nature. The details the Company s accounting treatment of securities, except for the equity securities accounted for using the equity method, are as follows: i) Trading Securities Debt and equity securities bought and held for the purpose of selling them in the near term are classified as trading securities. Trading securities are recorded at fair value and valuation gain or loss from trading securities is recorded in current operations (see Note 4).

13 MERITZ INSURANCE ANNUAL REPORT ii) Held-to-maturity Securities Debt securities whose payment terms for principal and interest are fixed or determinable by a contract and for which the management has an intent and an ability to hold until maturity are classified as held-to-maturity securities under non-current assets. However, if the maturity of a held-to-maturity security is within one year from the balance sheet date, it is presented as current asset. Held-to-maturity securities are recorded at their amortized cost with the difference between the acquisition cost and the par value being amortized over the payment periods of the securities using the effective interest method. Such amortization is reflected in interest income. When the amortized cost exceeds their recoverable value, the excess amount is recognized as impairment loss in the current operations. If the value of impaired securities subsequently recovers and the recovery objectively relates to an event arising after the period when the impairment loss was recorded, such recovery is credited in the current operations up to the amortized cost, which would have been recorded if the impairment loss had not been recorded (see Note 6). iii) Available-for-sale Securities Debt and equity securities that do not fall under the classifications of trading or held-to-maturity securities are categorized as available-for-sale securities under non-current assets. However, if an available-for-sale security matures or it is certain to be dispose of within one year from the balance sheet date, it is presented as current asset. Available-for-sale securities are recorded at fair value. However, available-for-sale equity securities, of which fair value cannot be reliably measured, are recorded at cost, and the fair value of available-for-sale debt securities without quoted market price is estimated discounting the expected future cash flows at an interest rate commensurate with the credit rating published by independent credit rating institutions. Unrealized gain or loss from availablefor-sale securities is recorded as capital adjustments and when the decline in fair value is not deemed recoverable, an impairment loss is recognized in the current operations. If the value of impaired securities subsequently recovers and the recovery objectively relates to an event arising after the period when the impairment loss was recorded, such recovery is credited in the current operations up to the previously recorded impairment loss (see Note 5). e. Securities Accounted for using the Equity Method Investments in equity securities of companies, over which the Company exercises significant influence, are accounted for using the equity method. Under the equity method, the Company records changes in its proportionate equity of the book value of the investee as current operations, capital adjustments or adjustments to retained earnings, depending on the nature of the underlying changes in the investee. The difference between the acquisition cost and the Company s share of net asset fair value of the investee at the date of acquisition is accounted for in accordance with Accounting Principles for Merger and Acquisition, where negative goodwill is amortized over the weighted average useful lives of the investee s identifiable non-monetary assets and reflected in the operations.

14 58 WE ARE AHEAD NOTES TO FINANCIAL STATEMENTS (CONTINUED) In case the Company s ownership percentage in the investee increases as a result of the change in investee s capital, the difference from such change is accounted for as goodwill, whereas if the Company s ownership decreases, the difference is accounted for as disposal loss on securities. f. Allowance for Doubtful Accounts In accordance with the Regulation on Supervision of Insurance Business (the Supervisory Regulation ), the Company classifies all credits into five categories as normal, precautionary, substandard, doubtful or estimated loss, based on borrowers repayment capability and historical financial transaction records. The Supervisory Regulation also requires the Company to provide the minimum rate of loss provision for each category balance using the prescribed minimum percentages of 0.5 percent (0.75% for individual loan) or more, 2 percent (5% for individual loan) or more, 20 percent or more, 50 percent or more and 100 percent, respectively. No allowance is provided for loans to the Korean government and local government entities, and call loans. g. Restructured Receivables In case the contractual terms, such as those pertaining to the face amount and interest rate or maturity, have been modified to alleviate the debtor s burdens, as a result of an agreement between the creditor and debtor, or through initiation of corporate reorganization procedures under court trustee or under debtor s management and in case of transfer of an asset or issuance of equity securities in order to restructure troubled debts, the assets transferred or equity securities issued are accounted for at fair value by the creditor. If the fair value of the asset received is less than the carrying amount of the receivable before subtracting relevant provisions, the carrying amount of the receivable is written off against the relevant provisions and any remaining difference is recognized as bad debt expense. Furthermore, the difference between the fair value and the carrying amount of the asset transferred is recognized as gain or loss on disposal of the asset by the debtor. When a troubled debt restructuring occurs as a result of various types of modification of terms, the difference between the present value calculated by discounting the future cash flows determined under the modified terms of the restructuring by the effective interest rate as of the inception of the debt and the carrying amount of the debt is recognized as discount on present valuation of debt and gain on debt restructuring by the debtor. However, if the aggregate sum of the future cash flows contractually determined in a troubled debt restructuring effected through modification of terms involving reduction of the maturity amount and accrued interest of a debt is less than the carrying amount of the debt, the debtor initially writes down the carrying amount of the debt to the sum of the future cash flows and the effects resulting from other modifications of terms are recognized. h. Tangible Assets Tangible assets are stated at acquisition cost, except the revalued tangible assets, which are stated at the appraised value. Major renewals and betterments, which prolong the useful life or enhance the value of assets, are capitalized.

15 MERITZ INSURANCE ANNUAL REPORT Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is computed using the declining balance method (buildings: the straight-line method) over the following useful lives as follows: Account Buildings Vehicles Furniture and equipment Useful lives 40 years 4 years 4 years The Company does not capitalize financing cost associated with production, acquisition and development of an asset. i. Intangible Assets Intangible assets are recorded at cost, net of accumulated amortization. Development costs resulting from developing new products and other intangible assets are amortized using the straight-line method over 5 years, beginning in the year the sale or use of the related products is available. j. Impairment Loss The Company assesses any possible recognition of impairment loss when there is an indication that expected future economic benefits of an asset (tangible, intangible and investment assets except for securities) is considerably less than its carrying amount, as a result of technological obsolescence, rapid declines in market value or other causes of impairment. If the value of impaired asset subsequently recovers and the recovery objectively relates to an event arising after the period when the impairment loss was recorded, such recovery is credited in the current operations up to the previously recorded impairment loss. The Company recorded reversal of 48,250 thousand in other income and impairment of 408,488 thousand in other expenses for the years ended March 31, 2007 and 2006, respectively. k. Compensation Receivables Of the amounts paid for claims during the year, amounts recoverable by exercising compensation and other rights or through disposal of secured assets acquired in the resolution of accidents are accounted for as compensation receivables and deducted directly from insurance reserves in the accompanying balance sheet. Compensation receivables are calculated by multiplying the average recovery ratio (recovery amount/net claims) for the last 3 years from the prior year balance sheet date to the amount of net claims for the last year from the prior year balance sheet date claimed.

16 60 WE ARE AHEAD NOTES TO FINANCIAL STATEMENTS (CONTINUED) l. Deferred Acquisition Costs The Company capitalizes acquisition costs, to the extent that they are within the predetermined cost estimates, incurred from long-term insurance policies and amortizes using the straight-line method over the duration of insurance policies. m. Insurance Reserves (1) Policy Reserves When an insurance contract is made, policy reserves are appropriated in consideration of the future claims, refunds, policyholder dividends and related expenses. The amount collectible from reinsurance contracts (termed reinsurance reserves) is reported as a deduction from policy reserves. i) Reserve for outstanding claims Reserve for outstanding claims is claims payable or estimated to be payable as of the balance sheet date. ii) Long-term insurance premium reserves The Company maintains a reserve for the portion of premiums (and investment income on such portion), which is refundable to policyholders upon maturity and cancellation of the policy under long-term deposit-type insurance, unless there has been a substantial claim for payment under the policy. iii) Unearned premium reserves Unearned premium reserves are premiums due, of which recognition is deferred over the future periods. iv) Reserve for participating policyholder dividend Reserve for participating policyholder dividend is provided for the purpose of future dividends in accordance with the laws and contract terms. v) Excess participating policyholder dividend reserve Pursuant to relevant laws and contracts terms, the Company may establish excess participating policyholder dividend reserve depending on the operating results of related insurance products. The reserve may be used to pay participating policyholder dividend or additional dividend. In accordance with the amended Regulation on Supervision of Insurance Business and its Enforcement Rules, the Company must reserve accounts for claims incurred but not reported (IBNR) related to long-term insurance policies as policy reserves as much as 100% of the amount calculated by the statistical method from the current year (10% and 5% of the earned premium of the last year in prior year and year before prior year, respectively).

17 MERITZ INSURANCE ANNUAL REPORT As a result, claims incurred but not reported (IBNR) related to long-term insurance policies totaling 28,486,950 thousand and 12,658,522 thousand as of March 31, 2007 and 2006, respectively, have been recorded as policy reserves. (2) Catastrophe Reserves Catastrophe reserves are required based on the regulations approved by the Governor of the Financial Supervisory Service. Non-life insurance companies may establish a catastrophe reserve in proportion to underwriting profit for the year. These reserves can be used against exceptionally large claims in the future. n. Separate Accounts Separate accounts representing assets and liabilities that are separately maintained for the insurance contracts, such as variable contracts and retirement insurance contracts, are recorded as single gross amount in the balance sheet as separate account assets and separate account liabilities, respectively. Separate account assets are recorded at fair value and policy reserves within separate account liabilities are recorded as prescribed by the Financial Supervisory Services. Loss resulting from separate accounts is initially applied to excess participating policyholder dividend reserve and remaining loss, if any, is applied to shareholders equity. Due from or to the separate accounts are recorded as separate account debits and credits, respectively. o. Accrued Severance Indemnities In accordance with the Company s policy, all employees with more than one year of service are entitled to receive severance indemnity payments, based on their average salary during the last three months of service and length of employment at termination. The accrual for severance indemnities is made assuming all employees were to terminate at the balance sheet date. In accordance with the National Pension Law of Korea, the Company transferred a portion of its severance indemnities in cash to the National Pension Fund through March 1999, which is deducted from accrued severance indemnities. Funding of severance indemnities is not required. However, the Company maintains deposits for severance indemnities with Tongyang Life Insurance Co., Ltd. and other insurance companies to meet the requirements for tax deduction purposes under the Korean Corporate Income Tax Law. The deposits for severance indemnities are presented as a deduction from accrued severance indemnities. The Company paid severance indemnities to employees amounting to 9,510,859 thousand and 9,260,296 thousand for the years ended March 31, 2007 and 2006, respectively.

18 62 WE ARE AHEAD NOTES TO FINANCIAL STATEMENTS (CONTINUED) p. Translation of Assets and Liabilities Denominated in Foreign Currency Monetary assets and liabilities denominated in foreign currency are translated into Korean won at the Base Rates announced by Seoul Money Brokerage Services., Ltd. on the balance sheet date, which were and to US$1.00 and and to at March 31, 2007 and 2006, respectively. Gain or loss arising from foreign currency translations is charged or credited to current operations. q. Derivative Instruments The Company records rights and obligations arising from derivative instruments as assets and liabilities, which are stated at fair value. The gain and loss that results from the change in the fair value of derivative instruments is reported in current operations. However, for derivative instruments designated as hedging the exposure of variable cash flows, the effective portion of the gain or loss on the hedging instruments is recorded as a separate component of shareholders equity and credited/charged to operations at the time the hedged transactions affect earnings, and the ineffective portion of the gain or loss is credited/charged to current operations. r. Share-based Payment The stock option program allows the Company s employees to acquire shares of the Company. The Company values stock options based on an option pricing model under the fair value method and recognizes this value as an expense over the period in which the options vest. In case of equity-settled share-based payment, the Company recognizes compensation cost as an expense and capital adjustment (stock option) over the period in which the options vest. When the options are exercised, the Company records capital surplus based on the difference of the amount added as capital adjustment (stock option) to the exercise price and new stock s par value in case of issuing new stocks. In case of granting treasury stock, the Company records capital surplus based on the difference of the amount added as capital adjustment (stock option) to the exercise price and the book value of treasury stock. In case of cash-settled share-based payment, the Company recognizes compensation cost as an expense and liability (long-term accrued expense) over the period in which the options vest. When stock options cancelled within the vesting period, capital adjustment (stock option) or liability (long-term accrued expenses) recognized before are reduced and compensation expenses are reduced by the same amount. When stock options cancelled after the vesting period, capital adjustment (stock option) are transferred to capital surplus.

19 MERITZ INSURANCE ANNUAL REPORT s. Accounting for Leases If a lease meets any one of the following criteria, it is accounted for as a financing lease: a. The lease transfers ownership of the property to the lessee by the end of the lease term; b. The lease contains an option to purchase the leased property at a bargain price; c. The lease term is equal to or greater than 75 percent of the estimated economic life of the leased property; and d. The present value of rental and other minimum lease payments equals or exceeds 90 percent of the fair value of the leased property. e. the leased assets are of a specialized nature such that only the lessee can use them without major modifications being made. All other leases are operating leases. For operating leases, rental expense is recognized on a straight-line basis over the lease term in the statement of income and contingent rent is recorded as incurred. For operating leases, straight-line minimum lease expense (except residual value on guarantee) is recorded over the lease term and contingent lease is charged to operations as incurred. For financing leases, the lesser of the present value of lease payments in the future and the fair value of leased assets is recorded as a leased asset and lease payable. t. Deferred Income Taxes Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profits. Deferred tax liabilities are generally recognized for all taxable temporary differences with some exceptions and deferred tax assets are recognized to the extent that it is certain that taxable profit will be available against which the deductible temporary difference can be utilized. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the assets to be recovered. Income tax expense is determined by adding or deducting the total income tax and surtaxes to be paid for the current period and the changes in deferred income tax assets and liabilities. In accordance with Statement of Korea Accounting Standards ( SKAS ) No Income Tax which became effective from the year ended March 31, 2006, tax effects of capital adjustment items, such as gain on valuation of available-for-sale securities, are directly adjusted to the related capital adjustment accounts. As a result, total liabilities increased and shareholders equity decreased by 4,744,395 thousand as of March 31, u. Contingent liability The Company records liabilities when it is certain that the Company s asset has decreased and the loss is reasonably estimable.

20 64 WE ARE AHEAD NOTES TO FINANCIAL STATEMENTS (CONTINUED) v. Accounting Changes regarding Lapsed Contracts Through March 31, 2005, no liability had been recorded for lapsed contracts, which the Company no longer had obligation to pay for surrenders. From the prior year, the Company started recording liabilities for such lapsed contracts as it deems as constructive obligation and the industry, including the Company, has actually paid for it. As a result, such obligation totaling 3,659,437 thousand and 3,462,566 thousand as of March 31, 2007 and 2006, respectively, has been estimated and recorded as liability based on rates from studies of historical statistics on the payment of such lapsed contracts. w. Accounting Changes regarding Separate Accounts Both revenue and expense in separate accounts are recorded in income statement from current year. 3. RESTRICTED BANK DEPOSITS Details of restricted bank deposits as of March 31, 2007 and 2006 are as follows (In thousands of Korean won): Account Remarks Deposits - 1,000,000 Pledged as collateral 10,500 10,500 Collateral for checking account 9,403,000 39,036,000 Pledged as collateral 104,776 - Garnishment Total 9,518,276 40,046,500 4.TRADING SECURITIES (1) Details of trading securities as of March 31, 2007 and 2006 are as follows (In thousands of Korean won): Details Balance before valuation Fair value Valuation gain / (loss) Equity securities 272,323 37, ,074 40,257 26,751 2,849 Special bonds 19,796,110 9,788,226 19,797,080 9,788, Corporate bonds 9,918,543 30,001,887 9,919,765 30,001,773 1,222 (114) Beneficiary certificate 125,869, ,402, ,901, ,029,862 2,032,235 1,627,159 Overseas bonds 161,272,734 1,463, ,295,214 1,475,561 6,022,480 11,711 Other 20,071,000 21,500,000 20,788,344 21,434, ,344 (65,813) Total 337,199, ,194, ,000, ,769,976 8,801,002 1,575,902 (Note) The fair value of marketable securities was valued at the closing price as of balance sheet dates. In addition, the fair value of non-marketable debt securities was valued at the amount that is applied properly based on future cash flow and discount rates estimated by independent bond-price-valuation companies.

21 MERITZ INSURANCE ANNUAL REPORT (2) Details of interest income in connection with securities are as follows (In thousands of Korean won): Details Trading securities Available-forsale securities Held-tomaturity securities Total Government and agency bonds 699, ,127 10,264,678 4,686,096 1,762,629 2,166,545 12,726,363 7,365,768 Special bonds 1,017, ,753 15,289,788 16,925,308 12,270,654 12,317,241 28,577,749 30,089,302 Corporate bonds 140,649 96,406 13,554,163 15,923,570 1,107,766 2,710,038 14,802,578 18,730,014 Overseas bonds 2,224,771-1,485, ,637 4,432,696 4,493,665 8,143,181 5,427,302 Other 628,558-4,081,516 1,611, ,710,074 1,611,830 Total 4,710,341 1,456,286 44,675,859 40,080,441 19,573,745 21,687,489 68,959,945 63,224, AVAILABLE- FOR-SALE SECURITIES Details of available-for-sale securities as of March 31, 2007 and 2006 are as follows (In thousands of Korean won): (1) Classification Classification Equity securities a. Equity securities with readily determinable fair values 27,453,862 41,770,540 b. Equity securities without readily determinable fair values 7,534,223 8,057,166 Sub total-equity securities 34,988,085 49,827, Contributed capital 7,209,332 9,511, Beneficiary certificates 153,156, ,987, Debt securities 903,778, ,375,692 Total 1,099,133, ,702,119

22 66 WE ARE AHEAD NOTES TO FINANCIAL STATEMENTS (CONTINUED) (2) Equity securities a. As of March 31, 2007 Companies Shares Unrealized Ownership Cost/beg Fair value Book Impairment loss gain (loss) percentage balance (Note 1) value (Note 3) ~ <Equity securities with readily determinable fair values> KOCREF CR-REIT 1 1,736, % 8,680,000 8,410,920 8,410,920 ( 269,080) - - Realty 1 1,000, % 5,000,000 8,770,000 8,770,000 3,770, SK Networks (Note 2) 370, % 2,214,786 2,214,786 2,214, Hyundai Eng & Const 88, % 4,772,330 4,508,295 4,508,295 (264,035) - - Co. Ltd. Korean Air Terminal 61, % 1,970,626 3,049,462 3,049,462 1,078, Co., Ltd INICIS Co., Ltd. 64, % 1,328, , ,640 (1,049,760) - - Dae Joo Co., Ltd. 288, % 432, , ,760 (210,240) - - Sub total 24,398,141 27,453,862 27,453,862 3,055, <Equity securities without readily determinable fair values> Shinwha Electronics Co. 8, % 40, ,070 40, Korea Securities Depository % 3,160 4,769 3, Pusan New Port Company 897, % 4,489,870 3,808,474 4,489, ARD Holdings, Inc. 320, % 1,600,000 1,728,916 1,600, Pointpark Ltd. 100, % 200,000 27,521 20, ,129 - Final Data Inc. 25, % 900, , , KDS 1 Preferred stock 3,193-6,042-6, SK Networks redeemable preferred 9, , , , stock (Note 2) Sub total 7,713,352 6,459,575 7,534, ,129 - (Continued)

23 MERITZ INSURANCE ANNUAL REPORT Companies Shares Unrealized Ownership Cost/beg Fair value Book Impairment loss gain (loss) percentage balance (Note 1) value (Note 3) ~ <Contributed capital> MIC % 416, , , Macquarie Korea OPP % 5,473,000 5,392,419 5,473, Shinhan Infra Portfolio % 1,041, ,649 1,041, Korea Infra % 278, , , Sub total 7,209,332 7,080,636 7,209, <Beneficiary certificates> Beneficiary certificates 150,198, ,156, ,156,843 2,958, Sub total 150,198, ,156, ,156,843 2,958, Total 189,519,65 194,150, ,354,260 6,013, ,129 - b. As of March 31, 2006 Companies Shares Unrealized Ownership Cost/beg Fair value Book Impairment loss gain (loss) percentage balance (Note 1) value (Note 3) ~ <Equity securities with readily determinable fair values> KOCREF CR-REIT 1 2,000, % 10,000,000 15,300,000 15,300,000 5,300, Kyobo-Meritz 500, % 2,500,000 2,600,000 2,600, , Realty 1 1,000, % 5,000,000 6,570,000 6,570,000 1,570, Ures-Meritz 1 1,000, % 5,000,000 5,220,000 5,220, , KT 160, % 6,314,775 6,272,992 6,272,992 (41,783) - - SK Networks (Note 1) 370, % 2,214,786 2,214,786 2,214, Hyundai Eng & Const 5, % 238, , ,475 22, Co. Ltd. Han Jin Transportation 10, % 134, , , , Korean Air Line Co., Ltd. 10, % 126, , , , Korean Air Terminal Co., Ltd. 94, % 3,021,860 2,267,107 2,267,107 (754,753) - - INICIS Co., Ltd. 64, % 1,328, , ,140 (1,009,260) - - Dae Joo Co., Ltd. 288, % 432, , ,040 (264,960) - - Sub total 36,311,230 41,770,540 41,770,540 5,459, (Continued)

24 68 WE ARE AHEAD NOTES TO FINANCIAL STATEMENTS (CONTINUED) Companies Shares Unrealized Ownership Cost/beg Fair value Book Impairment loss gain (loss) percentage balance (Note 1) value (Note 3) ~ <Equity securities without readily determinable fair values> Shinwha Electronics Co. 8, % 40, ,095 40, Korea Securities Depository % 3,160 23,199 3, Pusan New Port Company 775, % 3,875,590 3,602,816 3,875, ARD Holdings, Inc. 320, % 1,600,000 1,670,576 1,600, Pointpark Ltd. 100, % 200,000 23,028 20, ,129 - Final Data Inc. 25, % 900, , , KDS 1 Preferred stock 3,193-6,042-6, KDS 2 Preferred stock 798-1,510-1, SK Networks redeemable preferred stock 30,969-1,609,993 1,609,993 1,609, (Note 2) Sub total 8,236,295 7,196,618 8,057, ,129 - <Contributed capital> MIC % 500, , , Macquarie Korea OPP % 9,011,000 8,900,282 9,011, Sub total 9,511,000 9,452,687 9,511, <Beneficiary certificates> Beneficiary certificates 99,000, ,987, ,987,721 7,987, Sub total 99,000, ,987, ,987,721 7,987, Total 153,058, ,407, ,326,427 13,447, ,129 - (Note 1) Fair value/book value of the securities presented above is based on financial data as of December 31, 2006 and 2005, except Final Data Inc. and Macquarie Korea OPP which is based on data as of March 31, 2007 and (Note 2) The fair value of SK Networks was valuated based on Korea Bond Pricing & KR Co. as of December (Note 3) Unrealized gain (loss) on valuation of investment securities above is before adjustment of deferred income tax.

25 MERITZ INSURANCE ANNUAL REPORT (3) Debt securities a. As of March 31, 2007 Maturity Type Cost Unrealized Amortized Fair value Book value Impairment loss gain (loss) cost (Note 1) (Note 2) (Note 3) ~ Within Government and public bonds 5,078,747 5,734,405 6,590,784 5,782,168 47, year Special bonds 20,190,855 20,013,894 20,007,535 20,003,445 (10,449) - - Corporate bonds 5,000,000 5,000,000 5,048,203 5,002,585 2, Overseas bonds (Note 5) 14,269,380 14,269,380 12,483,440 12,483,440 (1,536,650) - - Sub total 44,538,982 45,017,679 44,129,962 43,271,638 (1,496,751) - - Within Government and public bonds 20,234,003 20,413,919 22,580,252 22,251,888 1,837, years Special bonds 109,009, ,416, ,232, ,797,955 1,381, Corporate bonds (Note 4) 193,197, ,791, ,529, ,063, , Overseas bonds (Note 5) 10,132,000 10,132,000 10,194,733 10,194, , Others 30,727,000 30,727,000 28,713,496 28,691,374 (2,035,626) - - Sub total 363,300, ,480, ,250, ,999,705 2,252, Within Government and public bonds 84,170,822 84,967,718 87,676,580 87,174,445 2,206, years Special bonds 189,974, ,979, ,130, ,953, , Corporate bonds 54,060,978 54,145,022 54,792,667 54,292, , Overseas bonds (Note 5) 24,066,052 24,066,861 22,729,267 22,697,349 (170,043) - - Others 66,535,200 66,539,690 65,606,571 65,594,388 (945,302) - - Sub total 418,807, ,698, ,935, ,712,117 2,212, Over Government and public bonds 61,261,160 61,335,939 64,779,705 64,582,830 3,246, years Special bonds 10,000,000 10,000,000 10,318,406 10,212, , Sub total 71,261,160 71,335,939 75,098,111 74,795,430 3,459, Total Government and public bonds 170,744, ,451, ,627, ,791,331 7,339, Special bonds 329,174, ,409, ,688, ,967,285 2,557, Corporate bonds 252,258, ,936, ,370, ,358, , Overseas bonds 48,467,432 48,468,241 45,407,440 45,375,522 (910,496) - - Others 97,262,200 97,266,690 94,320,067 94,285,762 (2,980,928) - - Total 897,907, ,532, ,414, ,778,890 6,428,