ANNUAL REPORT 2005 Creating the New Paradigmir.meritzfire.com/isw/download/ofm/oiv/AR2005.pdfANNUAL...

ANN

UAL R

EPOR

T 2005

Meritz Tower, 825-2, Yeoksam-dong,

Gangnam-gu, Seoul, Korea

(postal code 135-080)

Telephone : 82-2-3786-2114

Facsimile : 82-2-3786-2115

www.Meritzfire.com

Act on Innovation,Creating the New Paradigm

ANNUALREPORT 2005

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Shareholder Information

Establishment October 1, 1922

Head Office Meritz Tower, 825-2, Yeoksam-dong, Gangnam-gu, Seoul, Korea


Tel.82-2-3786-2114, Fax.82-2-3786-2115

Website www.meritzfire.com

Paid in capital KRW 42.9 billion

Total number of stocks 85,800,000 shares

Investor Relations Investor Relations Department

Tel. 82-2-3786-1037, Fax. 82-2-3786-1040

Status of Affiliates

Acquisition date Equity ratio(%)

Meritz Securities Nov. 24, 2005 28.78

PT. Asuransi Hanjin Korindo Nov. 18, 1998 51.00

Contents

01 Who We Are and What We Do

02 Financial Highlights

04 A Message to Shareholders

07 Board of Directors

08 Commitment to Our Stakeholders

16 Building Strong Momentum

17 Management Goals for FY2006

18 Meritz Fire Core Management

23 Business Overview

34 Financial Section

35 Management’s Discussion & Analysis

45 Financial Statements

54 Notes to Financial Statements

109 History in Brief

110 Organization

111 Shareholder Information

Who We Are and What We Do

Act on Innovation, Creating the New Paradigm

Meritz Fire and Marine Insurance, Korea’s oldest non-life insurer, has enjoyed steady growth over its 84-year-long history,

while being fully committed to satisfying the varied needs of our customers and promoting the welfare of society overall.

Recently, the Company adopted a new CI to create the positive momentum to establish itself as a new industry leader in

response to the new economic paradigms of accelerating globalization and market liberalization. Furthermore, we are

now housed in our Meritz Fire headquarters in Gangnam, a prime business and residential district of southeast Seoul,

thereby laying the groundwork for another takeoff. We will thus persevere in our efforts to remain at the forefront of the

non-life insurance sector, while striving to maximize customer satisfaction.

Establishing a Solid Profit StructureStrong and stable Inspired by customers An eye for the future

www.meritzfire.com1

Financial Highlights

*Par value was changed from KRW 5,000 to KRW 500

as a result of 10:1 stock split as of February 2006.

Financial Highlights 2

(KRW in billions)

Total Assets

FY2003 FY2004 FY2005

2,332

2,676

3,110

(KRW in billions)

Direct Premiums Written

FY2003 FY2004 FY2005

1,5441,695

1,877

(KRW in billions)

Net Income

FY2003 FY2004 FY2005

2021

26

200

150

100

FY2003 FY2004 FY2005

12.011.011.5

193.1179.1185.5

106.3105.3106.2

Solvency Margin Ratio(%) Combined Ratio(%)

Adjusted ROE(%)

50

200

150

100

Jul.1, 2005Apr.1, 2005 Oct.1, 2005 Jan.1, 2006 Mar.31, 2006

230.81

186.11

138.47

Meritz Fire

Non-Life Insurance Industry

KOSPI

Relative Stock Performance to KOSPI (2005. 4. 1 ~ 2006. 3. 31)

50

300

250

350

(KRW)

Share Price

FY2003 FY2004 FY2005

1,7301,980

4,570

(KRW)

BPS

FY2003 FY2004 FY2005

3,438

3,9074,092

Earned premiums written ＼ 1,604 ＼ 1,392 ＼ 1,204 $ 1,644

Direct premiums written 1,877 1,695 1,544 1,923

Net premiums written 1,593 1,413 1,208 1,632

Incurred losses 1,315 1,147 984 1,347

Net operating expenses 391 321 298 401

Net increase in catastrophe reserve 12 12 11 12

Underwriting income (114) (87) (88) (117)

Investment income 150 126 120 154

Operating income 36 38 32 37

Non-operating income (3) (12) (3) (3)

Net income 26 21 20 27

Adjusted net income(1) 38 33 31 39

Total assets 3,110 2,676 2,332 3,187

Invested assets 2,555 2,260 2,027 2,618

Non-invested assets 555 416 305 569

Total liabilities 2,880 2,449 2,134 2,951

Total shareholders’ equity 230 227 198 236

Net assets ＼ 351 ＼ 335 ＼ 295 $ 360

DESCRIPTION FY2005 FY2004 FY2003 FY2005(2)

(1) Adjusted net income = Net income + Net increase in catastrophe reserve

(2) Korean won amounts for FY2005 are converted into U.S. dollars at ＼ 975.9 per US$1.00, the basic exchange rate of Mar. 31, 2006.

KRW in billions US$ in millions

www.meritzfire.com3

I am very pleased to report that the Company achieved strong

financial results in FY2005, while at the same time building positive

momentum for our sustained growth in the years ahead.

As we look back at FY2005, it was in many respects the most

momentous year of the company’s 84-year history. Meritz Fire &

Marine Insurance carried out a full-scale overhaul of both

“hardware” and “software” sides of our operations, enabling us to

respond more effectively to the evolving business environment and

move ahead in our effort to build a better future.

To leverage our hardware strengths, we changed our name from

Oriental Fire & Marine Insurance to Meritz Fire & Marine

Insurance, moved our headquarters to Gangnam, the business and

residential center of southern Seoul, and acquired Meritz

Securities as a subsidiary. Through these moves we have

Through our core management ideals - “ethical management, customer satisfaction management,

employee satisfaction management, sharing management and profit-based management” - we remain

strongly committed to maximizing corporate value and shareholder returns.

A Message to

Shareholders

A Message to Shareholders 4

President & CEO

Myung-Soo, Wohn

established a strong platform for a new take-off.

Meritz Fire & Marine Insurance also employed aggressive measures

to upgrade “software.” With profit-driven growth as our core

management strategy, we initiated internal reforms to consolidate

our financial strength. Moreover, to maintain the highest global

standards in our management practices, we have fully implemented

ethical and transparent management initiatives that will improve

performance.

The change and innovations we have implemented in FY2005

include the creation of the Marketing Division to enhance insurance

operations, strengthening CRM programs, realignment of

distribution channels, and upgrading IT infrastructure. At the same

time, we streamlined our organization to maximize efficiencies,

while developing new management strategies tailored specifically

for each business line.

Meritz Fire & Marine Insurance declared ethical management as

our guiding management philosophy at a management strategy

meeting attended by all Company officers. In reinforcing internal

controls, we introduced an advanced accounting management

system which would yield more practical results.

These innovative measures helped Meritz Fire & Marine Insurance

turn in an excellent performance for FY2005. Direct premiums

written expanded 10.7% in FY2005 over a year earlier to KRW 1,876.9

billion. Although commercial and motor coverage, which was

expected to record low profitability, slowed due to prudent

underwriting policies, profitable long-term lines recorded an

impressive 28.1% increase, resulting in the industry’s highest

growth rate in this segment for two consecutive years.

Furthermore, net income rose 25.1% (KRW 5.3 billion) year-on-year

in FY2005 to KRW 26.4 billion, comparing favorably with a 5.5% rise in

FY2004. As a result, return on equity improved 1.0 percentage point

to 12.0%.

In FY2005, our asset segment continued its brisk performance of

previous years, with total assets and invested assets rising 16.2%

and 13.0%, respectively, amounting to KRW 3,110 billion and KRW

2,554.6 billion. Adjusted shareholders’ equity grew 4.8% (KRW 15.9

billion) over the previous year to KRW 351.1 billion. Of special note,

our solvency margin ratio - one of the key indices for measuring a

non-life insurer’s financial soundness - surged 14.0 percent points

in FY2005 over a year earlier to 193.1%.

www.meritzfire.com5

A Message to Shareholders 6

Our improved financial status was duly recognized by the securities

market and reflected in the stellar performance of Meritz Fire &

Marine Insurance stock during the year. As of FY2005 year-end, our

share price had soared 130.8% to KRW 4,570 from KRW 1,980 at the

end of the previous fiscal year, exceeding the industry’s average

growth rate of 86.7%.

By product line, the company recorded strong growth in profitable

long-term lines in FY2005 amidst intense market competition. We also

made major strides in expanding distribution channels through

business alliances with the Seoul Metropolitan Government, home

shopping outlets and convenience stores, as well as commercial banks.

In the area of auto coverage, where profitability has lagged in recent

years, our focus was on profit-oriented growth, which involved

reinforcing underwriting and patrol services for auto policyholders.

This led us to overcome unfavorable market conditions and

strengthen our profit base.

In FY2006, Meritz Fire & Marine Insurance will harness best

practices and innovative marketing strategies to achieve maximum

profit growth. As part of our overall management goals for the year,

we will upgrade agency management and revise marketing

strategies, such as beefing up target marketing aimed at small and

medium-sized commercial and industrial customers. By

institutionalizing “no-default sales” to ensure policyholders fully

understand and consent to the terms of their contracts, we expect to

further enhance our management transparency and competitive

strength.

In the year under review, our priority was to develop strategies and

measures in response to the evolving business environment. This year

we will put these into practice and pursue the limits of our potential.

Through our core management ideals -ethical management,

customer satisfaction management, employee satisfaction

management, sharing management and profit-based

management- we remain strongly committed to maximizing

corporate value. In so doing, I wish to thank you for your continued

interest and support.

MMyyuunngg--SSoooo,, WWoohhnn

President & CEO

Company headquarters is now housed in

MERITZ TOWER with adoption of new CI.

www.meritzfire.com7

Board of Directors

EXECUTIVE DIRECTORS

NON-EXECUTIVE DIRECTORS

�Myung-Soo, Wohn

- President & CEO

- Senior Managing Director & CIO of

Samsung Fire & Marine Insurance

- Senior Managing Director & COO of PCA

Life Insurance

� Joong-Gwan, Oh

- Auditor General

- Chief of the Bureau of Consumer Protection

at Financial Supervisory Service

- Team manager of the Bureau of Settlement

at the Consumer Protection Center

� Hyung-Jun, Kim

- Outside Director

- Senior Managing Director at Winnet

Ventures, Inc.

- Consulting Director at Deloitte

- Korea Partner of IBM Business Consulting

& Service

� In-Joon, Kim

- Outside Director

- Director of Jeil Products Ltd. / CEO of IFS

Co., Ltd.

- Professor at the Graduate School of

Management in Korea Advanced Institute of

Science & Technology

� Jae-Won, Shim

- Outside Director

- Chief of the Department of Non-life

Insurance at the Insurance Supervisory

Board

- Standing auditor at Lucky Life insurance

company

� Sung-Chul, Hong

- Outside Director

- Incumbent CEO of ‘BestHome’

- CEO of Seoul F&B

� Jung-Ho, Cho

- Chairman

- Incumbent Chairman & CEO of Meritz

Securities

8

Establishinga SolidProfitStructure

Sustaining profitable growth

Commitment to Our Stakeholders

www.meritzfire.com9

16%DOUBLE-DIGIT TOTAL ASSET GROWTH

In FY2005, the Company’s net income recorded a robust 25.1% growth, which

enabled the Company to improve its return on equity (ROE) to 12.0%, marking a

1.0 percentage point gain over the previous year, despite challenging industry and

marketing conditions.

12.0%ADJUSTED RETURN ON EQUITY

10

Enhanced asset soundness

Strong and stable


www.meritzfire.com11

The Company’s solvency margin ratio improved a significant 14.0 percentage

points in FY2005 over the previous year to 193.1%, clearly confirming

our sound financial structure.

193.1%SOLVENCY MARGIN RATIO

12

Reaching new heights

Inspired bycustomers



Meritz Fire focuses on maximizing customer satisfaction by development of new,

innovative products tailored to the evolving needs of customers. The Company’s

long-term lines recorded a 28.1% growth rate in gross premiums written, the

industry’s highest growth rate in this segment.

28.1%LONG-TERM LINES GROWTH RATE

14

An eye for the future

Opportunities of Blue Ocean



The share price of Meritz Fire closed at KRW 4,570 on March 31, 2006,

representing a dramatic year-on-year surge of 130.8%, which was 1.5 times

better than the insurance industry’s average growth of 86.7%. In FY2006,

Meritz Fire will strive to enhance its entrepreneurial value.

130.8%SHARE PRICE INCREASE

Building Strong Momentum

LAUNCH OF MERITZ FIRE’S NEW CORPORATE IDENTITY

“MERITZ” combines “MERIT” which signifies excellence, merit, and

benefit, with a “Z” to form a stylized plural of MERIT. Overall,

MERITZ refers to an ideal business enterprise that creates an

abundance of value for its stakeholders, including customers,

shareholders, and employees.

Meritz Fire, therefore, refers to an enterprise that possesses a

wealth of knowledge and expertise about the insurance business,

offers high-quality products and services to its customers, and

diligently promotes the interests of its stakeholders and society

overall, along with contributing much to sound advancement of the

insurance industry.

The red bar of the Company logo signifies our ardent passion and

pioneering spirit. The white dot above the letter “I” highlights our

Insurance business as well as our International and Innovative character.

The logo lettering is written in bold type to express security and

reliability, the most essential components of an insurance firm.

NEW BRAND IDENTITY

Meritz Fire has developed “Ready,” as its service brand, to reinforce

the Company’s brand identity and value, in conjunction with the

launch of our new corporate identity (CI).

“Ready” reflects our management’s steadfast commitment to its

customers, the Company’s most valuable asset. Currently, our auto

insurance line is promoted under the “Readycar” brand, which

includes roadside emergency service.

The “R” of Ready signifies an array of ways to assure safety through

the resolution of whatever difficulties that might arise. The branding

is utilized in all media and related materials to communicate a

cohesive message. EXCELLENCE MERIT BENEFIT

MERITZ refers to an excellent enterprise that

provides an abundance of value to stakeholders,

including customers, shareholders and employees.

Building Strong Momentum 16

Management Goals for FY2006

MAXIMIZING OPERATIONAL EFFICIENCY

Meritz Fire’s management goals for FY2006 emphasize the

implementation of optimal practices and innovative marketing

strategies to maximize profitability and sound growth. The Company

seeks to optimize operational efficiency through prudent allocation

of management resources, while pursuing customer-driven

initiatives based on an in-depth understanding of the varied needs of

customers. Furthermore, the Company’s distinctive competitive

advantages will be reinforced by capitalizing on our innovative

corporate culture.

First, for the prudent allocation of management resources, we will

carefully scrutinize business line performance, in order to

restructure or discard under-achieving sectors. In this manner, the

Company can commit available resources on business areas with

the greatest long-term value.

Second, new markets will be explored under a “Blue Ocean”

strategy centered on Customer Relationship Management (CRM).

Moreover, innovative marketing channels will be aggressively

pursued to help broaden the customer base and step up marketing

of target customers, based on a streamlined sales network.

Third, customer value will be optimized through “perfect

development, perfect preparation, and perfect sales,” based on our

future-oriented corporate culture. Meritz Fire will also strive to

maintain global standards in the execution of its business through

training programs designed to bolster the professionalism and

technical expertise of employees. In addition, our brand value will be

fortified through effective implementation of public relations

activities and customer-satisfaction measures.

Ensure the best practice perfection of profitable growth

through execution of strategic management

Maximize efficiencies through prudent

allocation of management resources

Realize customer-driven management by

satisfying the varied needs of customers

Upgrade our competitive edge through

adoption of an innovative corporate culture


18

>> ETHICAL MANAGEMENT WAS LAUNCHED IN FY2005

Corporate enterprises pursue management strategies and innovation to fulfill the demands and

expectations of their stakeholders. By gaining the trust of stakeholders (customers in particular),

enterprises seek to maintain a positive corporate image and assure sustained growth.

Ethical management is a future-oriented strategic initiative that provides a framework for realizing

these fundamental objectives.

As such, ethical management will be vigorously implemented through stepped-up internal controls,

which will contribute to improved profitability and firm establishment of a sound corporate culture.

Meritz Fire aspires to be the No. 1 enterprise in terms of management transparency.

In FY2005, Meritz Fire declared ethical management as a top priority, related to which all Company

officers and staff pledged to abide by a code of business ethics. In addition, the relevant parties have

conducted a self-assessment of internal controls. Moreover, an internal accounting assessment system

is now in place in preparation for shareholder lawsuits against senior executives and an internal

accounting management system. A grievance system is also now operational to help curtail irregular

practices, along with systematic management of potential legal risks.

In FY2006, the Company will focus on reinforcing its internal control processes and adopting a

self-regulatory system to assure the fairness of Company transactions. Also, the VOC (Voice of

Customer) program and effective feedback mechanisms will be fully utilized in an intensified effort to

strengthen consumer protection.

Ethical conduct

Ethical Management

MERITZ FIRE CORE MANAGEMENT:

_ Ethical Management

Customer Satisfaction Management

Employee Satisfaction Management

Sharing Management

Profit-based Management

Meritz Fire Core Management

Reinforcing internalcontrol processes


People to people

Customer SatisfactionManagement

2005 Custom valueinnovation award


Ethical Management

_ Customer Satisfaction Management


Sharing Management


>> DEDICATED TO OPTIMIZING CUSTOMER SATISFACTION

The Company’s customer-first mindset applies to all aspects of management activities. Indeed, we are

wholly dedicated to optimizing customer satisfaction through constant adoption of innovation and

provision of differentiated products and services tailored to the particular needs of our customers. And in

doing so, we seek to sustain profitable growth.

Meritz Fire implements a wide array of innovative initiatives to upgrade its customer services. This

includes the Company’s continuing efforts to develop and manage customer-satisfaction indexes to

maximize customer value, enhance education and training programs for sales personnel, minimize

policyholder complaints, create services for premier customers, and undertake perfect sales practices

on a continuous basis to boost customer satisfaction.

Management also developed the “Ready Service” brand to reinforce on-the-spot compensation services.

In recognition of our innovative customer services, Meritz Fire received a prestigious award in FY2005

from the Korean Management Association for the Company’s creative efforts to enhance customer value.

To offer more practical benefits to customers, the Company has developed “membership services,”

expanded our capability to provide one-stop services, and installed an integrated customer-service

management system. At Meritz Fire, we put forth our utmost efforts to optimize customer satisfaction.

>> A FAMILY-LIKE WORKPLACE ATMOSPHERE

Above all, the Company’s employee-centered management strives to create a family-like workplace

atmosphere, since a self-assured employee will be capable of contributing more to our corporate

endeavors.

An environment that is conducive to creativity, productivity, and efficiency, which originates from

traditional family values, will serve as a solid foundation to support the stable growth of Meritz Fire.

In line with this principle, the Company sponsors a diversity of events, including a large-scale dinner

party to which employees and their family members are invited, as well as festivals and photo contests.

In FY2006, our family-related management will focus on enhancing a sense of pride and loyalty among

every employee of our Company. Management will also actively organize family get-togethers related to

the workplace and come up with new programs to promote the benefits of sound family relations.

Family-like workplace

Meritz Fire Core Management 20

Employee SatisfactionManagement


Ethical Management


_ Employee Satisfaction Management

Sharing Management


A sense of pride andloyalty among everyemployee

>> A RESPONSIBLE CORPORATE CITIZEN

The basic tenet of our “sharing management” is to return a fair share of profits to society in order to fulfill

its responsibility as an exemplary corporate citizen.

As such, a fundamental objective of Meritz Fire is to ensure advancement of the corporate sector in

parallel with enhancement of the welfare of Korean society.

In FY2005, the Company sought to upgrade its corporate image by launching “societal investment” in an

effort to boost employee morale and energize sales activities.

We thus intend to steadily increase our contributions to society and provide “volunteer activities based on

our love for everyone.”

In FY2006, our charitable activities will be expanded in cooperation with non-profit social organizations.

Accordingly, Meritz Fire will actively undertake community-minded projects under a belief that a

pre-eminent business enterprise is one that contributes generously to social welfare.Societal investment


Sharing Management

Volunteer activitiesbased on our lovefor everyone


Ethical Management



_ Sharing Management


>> BUILDING UNDERWRITING EXPERTISE

The Company focuses on the profitability of all business activities while formulating its management

plans, along with placing a priority on those areas with the greatest growth potential.

In FY2005, Meritz Fire reported a solid profit performance, which enabled the Company to improve its

return on equity to 12.0%, marking a 1.0 percentage point gain over the previous year.

In response to an adverse market environment, due to a series of large-scale natural catastrophes, the

Company developed sophisticated and profit-based underwriting guidelines, which resulted in a

reduction of its combined loss ratio in FY2005. In fact, Meritz Fire was the only domestic insurer that

managed to record a decline in its loss ratio in FY2005.

Of particular note, the auto line’s loss ratio was limited to 75.1%, the second-best result for the industry. In

addition, the investment yield for FY2005 stood at an impressive 6.4%, thanks to an array of leading-edge

asset management systems, like SAA and TAA.The Company’s solvency margin ratio improved a significant

14.0 percentage points to 193.1%, clearly confirming our sound financial structure. Moreover, the share price

of Meritz Fire closed at KRW 4,570 on March 31, 2006, representing a dramatic year-on-year surge of

130.8%, which was 1.5 times better than the insurance industry’s average growth of 86.7%.

In FY2006, Meritz Fire intends to further promote its profit-based management, based on concerted

efforts to optimize management efficiency and offer flexible rates in response to market conditions,

while fully taking advantage of our stable capital management structure and accurate profit-and-loss

analyses of business activities.

A vision for the future

Profit-basedManagement


Ethical Management



Sharing Management

_ Profit-based Management

Meritz Fire Core Management 22

Diversified investmentportfolio


Business Overview24 Overall business environment for FY2005

25 Strategy and operating environment by channel

27 Strategy and market environment by line

32 Asset Management

33 Risk Management

In FY2005, Meritz Fire & Marine Insurance recorded solid growth, in

line with its strategic focus on sustaining profitable results.

The Company realigned its business portfolio and committed all

available management resources to the expansion of business and

product lines with the strongest profit potential. In addition, our

underwriting expertise and risk-management have been steadily

reinforced with a view to enhancing Company profitability and

bolstering our corporate value.

Moreover, Meritz Fire stepped up efforts to attract new customers

and upgrade customer services through optimal operation of

distribution channels and development of products tailored to the

specific and evolving needs of our customers. Of note, the Company

focused on continued expansion of traditional (face to face)

distribution channels, which contributed to an exceptional

performance of the long-term insurance lines.

In FY2005, Meritz Fire diligently sought to boost customer loyalty

through a range of innovative and unique initiatives. This included

fortifying the Company’s competitive strengths in external services

through systematic CSI (Customer Satisfaction Index) management,

which includes expeditious claims handling and dedication of all

employees and sales personnel. Differentiated services are offered

to our premium clientele as well.

Moreover, a responsibility-oriented management and

performance-based mindset have taken firm root throughout the

Company. Management also continues to adopt measures to upgrade

our corporate culture through improved employee satisfaction and

the availability of more extensive education/training programs.

>> SALES AND PROFITABILITY

In FY2005, Meritz Fire recorded direct premiums written of KRW

1,876.9 billion: KRW 273.6 billion for commercial lines, KRW 622.0

billion of auto insurance, KRW 926.1 billion for long-term lines, and

KRW 55.2 billion of annuity-related products. Of significant note, the

long-term lines reported an industry-leading annual growth of

28.1%.

As for the Company’s loss ratio, the long-term and auto lines

reported improvements of 2.5 percentage points and 1.1 percentage

point, respectively. This positive outcome is even more noteworthy

in light of the fact that the industry’s overall loss ratio worsened by

3.8 percentage points. In addition, in FY 2005, investment income

surged 19.0%, over a year earlier, to KRW149.5 billion. Net income

posted strong growth as well to KRW 26.4 billion, representing an

impressive 25.1% gain from the previous year.

Business Overview 24

Overall business environment for FY2005


>> KEY ACHIEVEMENTS OF FY2005

As for face-to-face channels, the Company capitalized on its Sales

Enhancement Program (SEP) to boost branch productivity, based on

the productivity gains and added mobility of marketing personnel.

Meanwhile, systematic efforts have led to successful recruitment

and cultivation of talented personnel, which contributed to

measurable improvement in employee retention. Overall, the

Company organization proceeded with restructuring measures with

a focus on retaining high-performance professionals.

In the bancassurance area, a key component of the new

market/new channel arena, Meritz Fire revamped its call center to

strengthen customer-service competitiveness. As such,

bancassurance sales in FY2005 expanded KRW 150 billion, from a

year earlier, accounting for a 17.9% market share. This marks a 1.1

percentage point gain, year on year, which confirms that the

Company remains on the right track for sustained growth.

Of special note, Meritz Fire successfully launched online operations

for auto insurance sales, while minimizing conflict with the existing

sales force. In its first year, the online operations resulted in KRW

7.6 billion of auto insurance sales, thereby securing a solid platform

for continued growth. The Company also strives to develop

large-scale cooperatives to explore new markets and upgrade our

competitive edge.

>> MARKET OUTLOOK BY CHANNEL

To assure compliance with the telecommunications marketing

guidelines now in force, “perfect sales” practices are essential when

selling insurance policies via telecommunication means, such as

telemarketing and broadcasting. As for life planners, they are

encouraged to boost their earnings through active sales of

beneficiary certificates. Moreover, continued growth is expected in

the cross-sales of non-life and life insurance products, in line with

steady expansion of the bancassurance business. Indeed,

significant institutional changes are on the horizon.

In terms of overall performance by channel, face-to-face

distribution channels are expected to see stable growth, driven by

continuous expansion of long-term insurance activities. However,

the growth rate is likely to lag behind that of the online and

bancassurance sectors. Of note, the bancassurance market is

projected to experience robust market expansion as a result of

steady growth of long-term coverage and sales of guarantee-type

products that are redeemable at maturity.

Meanwhile, leading insurance firms, including Hyundai Hicar and

Strategy and operatingenvironment by channel


LIG, are likely to aggressively promote their online auto insurance

marketing. Small- to medium-size companies are also expected to

realize stable growth by strengthening their online sales activities.

>>COMPANY STRATEGY BY CHANNEL

In FY2006, Meritz Fire will implement differentiated and innovative

strategies for the insurance market, by individual channels. Meritz

Fire will commit management resources to core marketing

operations, while at the same time striving to broaden our

customer base.

Management priority will be focused on the development of key

channels and growth engines, along with efforts to reinforce the

roles of primary channels and actively respond to specific client

needs, in order to quickly seize upon market opportunities.

As for conventional distribution channels, a win-win strategy will be

promoted by taking advantage of an outstanding specialized agency

approach. Moreover, differentiated and localized marketing

strategies will be undertaken based on an agency ranking system.

In terms of new channels, the Company will focus on mega-scale

banks, develop niche products, and launch targeted marketing, by

product type.

Meritz Fire will actively promote online sales of auto insurance, with

a focus on outbound sales, along with endeavoring to upgrade

branding efforts to expand inbound sales. The Company will

markedly step up publicity for online auto insurance sales in Seoul

and surrounding vicinity, while accelerating the development of

products designed to meet the specific and evolving needs of clients.

As for alliance channels, management intends to reinforce

marketing efforts for large-scale cooperatives, based on

partnership relations, and move aggressively to boost profitability

related to alliances by creating by-product derivatives of the

military-personnel insurance coverage.

17.9%FY2005 MARKET SHARE

(BANCASSURANCE)


>> MARKETING (SALES)

Auto lines

Key achievements of FY2005

The domestic auto insurance market in FY2005 was up 2.6%, over

the previous year, to KRW 8.73 trillion, thanks to the moderate

growth of total vehicles on the road. The number of registered

vehicles at 2005 year-end stood at 15.4 million units, up 3.1% from a

year earlier. Meritz Fire’s direct premiums written declined 5.8% to

KRW 622 billion, representing a market share of 7.3%.

Market outlook for FY2006

The auto insurance market will likely experience steady growth in

FY2006. Despite anticipation of sluggish growth of registered

vehicles, hikes in premium rates and auto maintenance fees will

enable the auto insurance sector to record continuous expansion.

The direct auto insurance sector is expected to show a consistent

upward trend, as leading business groups, such as Hyundai and LIG,

have made inroads into the market, while small- and medium-sized

companies are poised to noticeably strengthen their online sales

activities.

Marketing strategy for FY2006

Meritz Fire strives to satisfy its sales targets by broadening its base

of active policyholders so as to bolster the Company’s profitability,

allocating a greater share of strategic resources to large-size cities

where the loss ratio is relatively lower, and reinforcing new channel

sales, including a focus on large-scale cooperatives.

Long-term lines


FY2005 was characterized by continuous growth of the Company’s

long-term insurance activities. Of note, the growth rate of our

long-term lines reached 28.1% (No. 1 ranking in the industry), which

was notably higher than the industry average of 15.7%. Moreover,

the Company’s retention ratio was among the highest in the industry

as well, thereby laying the groundwork for sustained profits in the

years ahead.


As auto and commercial lines continue to experience a slow-growth

pattern, long-term lines are poised to lead the Company’s future

growth of insurance revenue. The long-term lines are expected to

enjoy continued strong growth thanks to projected expansion of

long-term coverage related to conversion and health insurance

product sales by leading insurers. Another positive factor is the

upward trend of bancassurance sales, which is likely to result from the

launch of sales of guarantee-type insurance products that are

Strategy and marketenvironment by line


redeemable at maturity. Moreover, people’s growing needs for health

insurance will fuel robust growth of long-term insurance revenue.


The Company’s priorities include efforts to upgrade the competitive

strengths of specialized agencies through a specialized agency

oversight system, launch marketing initiatives targeted to core

clientele, and to build a stable sales structure through “perfect

sales” practices and enhanced retention ratio of long-term lines.

Meritz Fire, which has outperformed the competition in the

long-term lines over the past two years, is looking forward to

another year of impressive growth in FY2006.

Commercial lines


As for the commercial lines industry-wide, growth of fire insurance

has been adversely impacted by a slowdown of construction activity,

along with intensified price competition. Nonetheless, Meritz Fire

recorded moderate growth, backed by its stepped-up direct marketing

of casualty insurance through telemarketing and expanded sales of

group accident insurance to government employees.

In FY2005, marine insurance incurred a slight downturn in gross

premiums, as compared to the prior year. However, the Company

has strengthened its future growth potential through a realignment

of its cargo and hull insurance portfolios.


The commercial lines sector is forecast to experience a slowdown in

FY2006, due primarily to the weak growth of the construction, hull,

and fire insurance segments, which comprise the mainstream of

non-life insurance operations. As a result, insurers will likely commit

their available resources to newly emerging potential markets,

including crop insurance and natural-disaster insurance coverage.


In FY2006, the Company will focus on upgrading its competitive

advantages by promoting staff professionalism based on a

streamlined customer-driven organizational structure; allocating

more human resources to explore new market/new product

opportunities; and tapping into market niches, including the small-

to medium-sized commercial and industrial market sectors.

Meritz Fire intends to accelerate efforts to enhance underwriting

profitability as a result of the significant increase in retained

premiums based on the creation of an optimal reinsurance-processing

system.

[ STRATEGY AND MARKET ENVIRONMENT BY LINE ]


>> UNDERWRITING (LOSS RATIO)

Auto lines

Key achievements in FY2005

The industry’s loss ratio for auto lines in FY2005 rose 4.1 percentage

points, over the previous year, to 76.9%. This deterioration was largely

attributable to an increase in the number of accidents due to harsh

winter conditions as well as a rise in the number of vehicles on the

road with the spread of the five-day workweek system. Consequently,

the industry’s overall profitability for auto lines worsened.

The Company’s loss ratio for auto lines stood at 75.1%, which is 1.8

percentage point below the industry-wide average. Indeed, Meritz

Fire was the only non-life insurer in Korea to report improvement in

the loss ratio for its auto lines. The key factor behind this positive

outcome was management’s efforts to upgrade the soundness of its

portfolio based on an underwriting approach that emphasizes

high-yielding products, along with profit-oriented sales strategies.

Sales target for FY2006(KRW in billions, %)

FY2006 FY2005

Direct premiums Market Direct premiums Market

written share written share

Commercial 305.0 10.0 273.6 9.3

Auto 644.8 7.1 622.0 7.3

Long-term 1,184.9 8.8 981.3 8.3

Total 2,134.7 8.4 1,876.9 7.9

Composition of direct premiums written(%)

FY2006 FY2005

Commercial 14.3 14.6

Auto 30.2 33.1

Long-term 55.5 52.3

1,876.9FY2005

(KRW in billions)

2,134.7FY2006(target)

Long-term

Auto

Commercial

8.4%FY2006 SALES GROWTH TARGET FOR

DIRECT PREMIUMS WRITTEN

FY2006(target)



Despite cost-push effects, such as rate hikes and continued

increases in vehicle maintenance expenses, the loss ratio is

expected to remain at a similar level as the previous year due to

several negative factors. The adverse influences include an upward

trend in the frequency of accidents due to large-scale pardons for

violators of traffic regulations; increase in vehicles on the road due

to wider application of the five-day workweek system; rise in the loss

amount per case as a result of consumers owning ever-more

high-priced vehicles; and strengthened consumer-protection rights

in regard to claim payments.

Underwriting strategy for FY2006

Based on a pledge of “maximizing profit growth,” we will strive to

fortify rate competition through timely and accurate analysis,

differentiated underwriting based on optimal application of

underwriting processing, and efficient allocation of resources.

Overall, efforts will be accelerated to upgrade our portfolios in line

with a focus on high-yielding products.

Long-term lines


Meritz Fire upgraded its portfolio quality through a keen focus on

loss ratios and collateral. Moreover, to enhance the effectiveness of

its underwriting, the Company adopted a practice of screening

beneficiaries for any pre-existing cancer so that appropriate

coverage can be extended for protection from serious illness. In

addition, underwriting margins have been reinforced by applying

differentiated criteria for the extension of coverage commensurate

with related risk factors.


Since the strong growth potential of long-term lines is primarily

derived from the upward trend of new policy contracts centered on

health insurance, the loss ratio of illness-protection insurance will

inevitably increase because the incidents of debilitating illnesses,

such as cancer and various adult diseases, are on the rise. As such,

the application of the Company’s actual experience ratio, based on

its IBNR accumulation ratio from FY 2006, will result in a higher loss

ratio for our long-term insurance sector. This is due primarily to the

high compensation payout ratios for illness-coverage policies,

related to medical expenses and daily allowances.

Nonetheless, in view of the expected double-digit sales growth of

the long-term lines industry-wide, the loss ratio for the long-term

lines will be in line with the previous year’s level, despite the

influence of cost-push effects.

[ STRATEGY AND MARKET ENVIRONMENT BY LINE ]



The FY2006 long-term insurance operation strategy calls for

upgrading underwriting margins with an emphasis on

strengthening profitability, enhancing work processes, accepting

reinsurance to improve profit-loss results, nurturing staff

professionals, and integrating service channels.

Notably, to enhance the profitability of illness-protection insurance,

which is enjoying growth at a remarkable pace, efforts are being

focused on fostering specialized underwriters.

Moreover, the Company is also reinforcing its customer-oriented

contract management process by standardizing the contract

endorsement procedure and shifting the focus of customer service

from work items to individual customers. As such, our top priority is

to maintain the industry’s highest retention ratio and maximize

operating profit.

Commercial lines


The commercial lines sector has experienced a falloff in sales due to

the construction industry’s sluggishness and related developments,

as well as the continued maintenance of an acceptable loss ratio,

which have resulted in rate reductions over several consecutive

years. Consequently, earned premiums have decreased across the

industry, even while the loss ratio has been on the rise.

To prevent a worsening of the loss ratio, Meritz Fire has stepped up

its support to field personnel in the form of more detailed guidelines

for underwriting and concluding contracts. In addition, to reinforce

the effectiveness of underwriting for property insurance, a

web-based system is now in operation to access reliable data and

share due-diligence information through the Internet.


The loss ratio for commercial lines is expected to improve from its

current high level, which has come about from insurers’ excessive

rate competition, by gradually increasing rates and expanding sales

through new channels.


In FY2006, the Company will strengthen underwriting margins by

emphasizing improved field operations in order to assure prudent

underwriting and optimize retention. Moreover, management

intends to maximize bottom-line results through cost-effective

reinsurance transactions. Intensified efforts will be exerted to

encourage policyholders to take precautionary measures in order to

minimize damage from large-scale natural disasters.


>> KEY ACHIEVEMENTS OF FY2005

In FY2005, our investment strategy focused on maturity matching

rather than market timing for special account funds. Indeed, maximum

investment returns were realized through the application of SAA.

As for the general account, the Company pursued optimal gains by

flexibly responding to changing market conditions and largely

ignoring liquidity risks, in principle. Also, for management

efficiency, the special account was divided into fixed income and AI

investment, along with 67 databases being monitored in regard to

macro-economic, securities, and stock market trends.

>> DIVERSIFICATION OF MANAGEMENT STRATEGIES

It is difficult to predict the direction of the domestic capital market in

FY2006 due to its considerable uncertainty. As such, management is

pursuing a variety of income sources for general account funds

based on the diversification of investment targets as well as

management strategies and operations.

As for the special account, undue credit risk exposure will be

avoided while increasing the share of investment in high-yield

assets. In this regard, Meritz Fire intends to expand its holdings of

overseas securities, AI assets, and loan acquisitions, along with

applying newly developed management strategies.

>> MERITZ FIRE’S ASSET MANAGEMENT STRATEGY FOR FY2006

Asset management

EXISTING MANAGEMENT STRATEGY

DIVERSIFICATION OF MANAGEMENTSTRATEGIES

■Directional trading of stocks and bonds

- Including short investment strategy

■Pair trading

- Valuation of each stock item

- Based on statistical methods

■Improving overseas investments and derivative trading

■System trading

■Improving ways to manage the portfolio

- Portfolio exposure management

- Liquidity management

- Fixed income and performance asset management

- Cash flow management

■Attracting superior human resources

■Streamlining work and processes

BOLSTERING MANAGEMENT EFFICIENCY

UPGRADING PROFESSIONALISM OF THEORGANIZATION AND HUMAN RESOURCES


Risk management

Meritz Fire & Marine Insurance maintains an independent risk

management team in an effort to efficiently oversee and control

various risks, which are classified as insurance, market, credit,

liquidity, interest rate, and non-financial risks. The risk

management team operates independently of the marketing, asset

management, and business management planning units.

The team implements risk management policies and guidelines,

oversees the risk management systems, conducts and analyzes risk

assessment in real-time, and reports on the status of consolidated

risk. In addition, the risk management team supports the Risk

Management Committee by executing its decisions and ensuring

their proper implementation.

In FY2005, the Risk Management Committee adopted a number of

significant decisions in regard to overall risk management,

including amendments to risk-related regulations, the status of risk

management by business line, strategic asset allocation,

determination of acceptable risk levels, and renewal of reinsurance

contracts.

Of note, a special task force is now in operation to devise ways to

improve the management of non-financial risks. In particular,

efforts are focused on the enhancement of customer-information

management, monitoring of “non-perfect sales” practices, timely

resolution of policyholder complaints, and security of internal IT

systems, along with the prevention of financial mishaps. Moreover,

the Company operates effective risk management systems to

control market, liquidity, interest rate, insurance, and credit risks.

>> RISK MANAGEMENT STRATEGY FOR FY2006

The Company seeks to reinvigorate the participation of the Risk

Management Committee and actively implement the

risk-management improvement measures developed by the special

task force. Moreover, the Company will seriously consider

implementation of the RAAS (Remedial Action Assessment System)

and RBC (Risk-based Capital) systems. Management will also

diligently strive to further upgrade its risk management systems

and install a risk-based capital management structure.

These risk management activities are all designed to assure the

stability of our profit performance and boost client confidence in

Meritz Fire. As such, we are fully committed to continued efforts to

elevate our risk management systems to a higher plane, in line with

the demands of a changing business environment.

34Financial Highlights

Financial Section35 Management’s Discussion & Analysis


_ Independent Auditors’ Report

_ Balance Sheets

_ Statements of Income

_ Statements of Appropriations of Retained Earnings

_ Statements of Cash Flows


Management’s discussion and analysis may contain

forward-looking statements provided to assist in the understanding

of anticipated future financial performance and business plans.

However, such performance and plans involve risks and

uncertainties that may cause actual results to differ materially from

those expressed in forward-looking statements due to factors

beyond the Company’s control. The term ‘the Company’ and ‘Meritz’

used here without any other qualifying description will refer to

‘Meritz Fire & Marine Insurance Co., Ltd.’

>> EXECUTIVE SUMMARY


[ MANAGEMENT’S DISCUSSION & ANALYSIS ]

Summary of Income Statement(KRW in billions)

Change

FY2003 FY2004 FY2005 Amount %

Direct premiums written 1,544 1,695 1,877 182 10.7

Net premiums earned 1,204 1,392 1,604 212 15.3

Incurred losses 984 1,147 1,315 168 14.7

Loss ratio (%) 81.5 82.2 81.9 (0.3%p)

Net expenses 298 321 391 70 21.8

Expense ratio (%) 24.7 23.1 24.4 1.3%p

Underwriting income (88) (87) (114) (27) n.a.

Investment income 120 126 150 24 19.0

Net increase in catastrophe reserves 11 12 12 1 5.7

Net income 20 21 26 5 25.0

1,877FY2005

Direct premiums written (KRW in billions)

1,695FY20041,544

FY2003

The fiscal year 2005 was an eventful one in Korea and the rest of the

world. Natural disasters such as earthquakes and hurricanes, oil

prices exceeding 60 U.S. dollars per barrel, the adverse impact of an

appreciating won on exports and weak domestic demand all

created a difficult business environment. The local non-life

insurance industry also suffered from a surge in the loss ratio on

auto insurance. The culprits were heavy snow, a hike in auto

maintenance costs and increased road traffic from the spreading

five-day workweek. On the other hand, the aging population pushed

up demand for long-term insurance products. On the whole, the

non-life insurance sector saw direct premiums written increase

9.9% year-on-year (YoY) to KRW 23.6 trillion in FY2005.

Persons aged 65 years and older already comprised 7.8% of the

Korean population in 2000. The Korean society continues to age at a

rapid pace. The 20~49 year-old age group accounts for more than

50% of the population and the birth rate is on the decline. These

trends have given a boost to long-term lines such as health

insurance and casualty insurance. Bancassurance and new

integrated insurance products are also helping to sustain growth of

the domestic non-life insurance industry.

In FY2005, Meritz Fire adopted new corporate identity and carried

out full-scale overhaul on its operations, enabling the Company to

respond more effectively to the evolving business environment and

pursue new opportunities to expand its market presence. Meritz

Financial Section 36


Summary of Balance Sheet(KRW in billions)

Change


Invested assets 2,027 2,260 2,555 295 13.0

Insurance accounts receivable 84 72 66 (6) (8.3)

Other assets 161 274 401 127 46.2

Separate account assets 60 69 88 19 27.1

Total assets 2,332 2,676 3,110 434 16.2

Policy reserves 1,797 2,091 2,447 357 17.1

Catastrophe reserves 97 108 121 12 11.3

Insurance accounts payable 100 97 109 12 12.7

Other liabilities 81 84 114 30 36.1

Separate account liabilities 60 69 88 19 26.8

Total liabilities 2,134 2,449 2,880 430 17.6

Common stock 43 43 43 - -

Capital surplus 27 27 28 1 3.6

Retained earnings 128 142 161 19 13.1

Capital adjustments 1 14 (2) (16) n.a.

Total shareholders’ equity 198 227 230 4 1.6

3,110FY2005

Total assets(KRW in billions)

2,676FY2004

2,332FY2003

>> UNDERWRITING PERFORMANCE

In FY2005, direct premiums written of the non-life insurance

industry increased by 9.5% YoY due primarily to the notable growth

in long-term lines. Despite sluggish recovery of the domestic

economy and intensifying competition in the non-life insurance

industry, Meritz Fire outperformed the industry by achieving an

increase of 10.7% in direct premiums written to KRW 1,877 billion in

FY2005. In particular, Meritz Fire boasted a remarkable growth of

28.1% in long-term lines.

Meanwhile, direct premiums written from auto lines and

commercial lines slowed down in tandem with prudent

underwriting policies.

aggressively reinforced its operations and financial stability with a

profit-oriented growth strategy. In addition, the Company

streamlined the organization to maximize efficiencies, while

developing new management strategy tailored specifically for each

business line.

In the year under review, the share price of Meritz Fire skyrocketed

130.8%, far outperforming the insurance sector index. Turning to

the operating results, direct premiums written increased by 10.7%

YoY to KRW 1,877 billion in FY2005. Even though fierce competition

deteriorated the profitability of auto lines, net income grew 25.1%

YoY to KRW 26 billion thanks to stronger underwriting activities and

improved emergency and accident assistant services. Return on

equity (ROE) stood at 12.0%, rising by 1.0%p over the previous year.

Total assets and invested assets amounted to KRW 3,110 billion and

KRW 2,555 billion, respectively, representing growth of 16.2% and

13.0% over the previous year. Adjusted shareholders’ equity went up

4.8% YoY to KRW 351 billion as of the end of FY2005. Financial

soundness also improved with the solvency margin ratio climbing

by 14.0%p to 193.1%.


Adjusted net income(KRW in billions)

(KRW in billions)

Change


Underwriting income (88) (87) (114) (27) na


Net income 20 21 26 5 25.0

Adjusted net income 31 33 38 5 15.2

38FY2005

33FY200431

FY2003

Direct premiums written by line (FY2005)(KRW in billions)

274 (14.6%)Commercial

622 (33.1%) Auto

981 (52.3%) Long-term



Meritz Fire earned total net premiums of KRW 1,604 billion in

FY2005, up by 15.3% YoY from KRW 1,392 billion in FY2004. Net

premiums written also posted a 12.8% growth to KRW 1,593 billion

in FY2005, compared with KRW 1,413 billion last fiscal year, while

direct premiums written increased by 10.7% YoY to KRW 1,877

billion from KRW 1,695 billion.

Meanwhile, incurred losses rose by 14.6% YoY to KRW 1,315 billion

with provisions of incurred but not reported (IBNR) losses in

long-term lines. However, loss ratio edged down 0.3%p to 81.9% in

FY2005 from 82.2% in FY2004 in line with improvement of loss ratios

in auto lines and long-term lines. Meritz Fire was the only non-life

insurer in Korea achieving the reduction in loss ratio in FY2005.

On the other hand, net operating expenses of Meritz Fire soared by

21.8% YoY or KRW 70 billion to KRW 391 billion in FY2005 as

management consultation as well as introduction of new corporate

identity caused a temporary surge in administrative expenses;

expense ratio gained by 1.3%p to 24.4%, as a result. All in all, the

Company suffered from an increase of 1.0%p in combined ratio to

106.3% and recorded underwriting loss of KRW 114 billion in

FY2005.

7.9FY2005

Combined M/S(%)

7.9FY20047.8

FY2003

Market share by line(%)

FY2003 FY2004 FY2005 Change

Auto lines 7.8 7.9 7.3 (0.6%p)

Long-term lines 6.8 7.5 8.3 0.8%p

Commercial lines 11.5 9.9 9.3 (0.6%p)

Combined M/S 7.8 7.9 7.9 0.0%p

(KRW in billions)

Change


Net premiums earned 1,204 1,392 1,604 212 15.3

Incurred losses 984 1,147 1,315 168 14.6

Loss ratio (%) 81.5 82.2 81.9 (0.3%p)

Net expenses 298 321 391 70 21.8

Expense ratio (%) 24.7 23.1 24.4 1.3%p

Combined ratio (%) 106.2 105.3 106.3 1.0%p

1,604FY2005

Net premiums earned (KRW in billions)

1,392FY20041,204

FY2003

The Company’s market share within the non-life insurance industry

remained stable at 7.9% in FY2005, solidifying its market position as

one of major five non-life insurers in Korea. By type of insurances,

Meritz Fire expanded its market share in lucrative long-term lines

by 0.8%p to 8.3% in FY2005, while keeping its careful stance in less

profitable auto lines and commercial lines.


Long-term Lines

Direct premiums written for long-term lines led the overall growth

of the non-life insurance industry in FY2005, increasing 15.7% YoY to

KRW 11,888 billion, on the back of continued expansion of new

contracts and bancassurance services. As mentioned above, Meritz

Fire has strategically allotted business resources to long-term

lines, of which growth potential and profitability are outstanding,

and has achieved the significant growth in long-term lines among

non-life insurers. The Company’s direct premiums written for

long-term lines surged 28.1% YoY in FY2005, outperforming the

industry average growth rate by a large margin, to total KRW 981

billion. Accordingly, Meritz’ market share in the long-term line

segment further expanded by 0.8%p to reach 8.3% in FY2005.

Moreover, the loss ratio for long-term lines dropped by 2.5%p to

89.4% in FY2005 compared to 91.9% in FY2004.

Long-term lines

Change


Direct premiums written (KRW in billions) 632 766 981 215 28.1

Market share (%) 6.8 7.5 8.3 0.8%p

Loss ratio (%) 88.2 91.9 89.4 (2.5%p)

981FY2005


766FY2004

632FY2003

Auto Lines

Due to decelerating growth in the number of automobiles

registered and intensifying price competition caused by expansion

of online auto insurances, direct premiums written for auto lines in

the non-life insurance industry grew by 2.6% YoY to KRW 8,730

billion in FY2005. With its core business strategy of “profitable and

sustainable growth,” Meritz Fire took a prudent underwriting stance

for unprofitable auto lines. The Company’s direct premiums written

for auto lines dropped by 5.8% YoY to KRW 622 billion in FY2005, and

its market share in the auto line sector declined by 0.7%p to reach

7.1%. However, in terms of loss ratio, Meritz Fire was one of a few

non-life insurers achieving the improvement of auto line loss ratio

in FY2005. On its part, Meritz Fire improved its auto line loss ratio by

1.1%p to 75.1%, 1.8%p lower than the industry average, through a

profitability-oriented underwriting policy.

Auto lines

Change


Direct premiums written (KRW in billions) 616 660 622 (38) (5.8)

Market share (% 7.8 7.9 7.3 (0.6%p)

Loss ratio (%) 79.2 76.2 75.1 (1.1%p)

622FY2005


660FY2004616

FY2003



Commercial Lines

While direct premiums written for the industry’s commercial lines

recorded KRW 2,984 billion, an increase of 8.7% YoY, Meritz’s direct

premiums written for commercial lines edged up only 1.9% YoY to

KRW 274 billion in FY2005. Same as in auto lines, the industry

suffered from intensifying competition and premium rate cuts in

commercial lines. Meritz Fire’s market share in commercial lines

eroded by 0.6%p to reach 9.3% in FY2005 as the Company

committed its management resources on long-term lines.

In addition, the non-life insurance industry experienced

deteriorating profitability in commercial lines due to intensifying

competition and premium rate reductions. Meritz Fire also

recorded a 5.6%p hike in loss ratio to 49.1%.

Commercial lines

Change


Direct premiums written (KRW in billions) 296 269 274 5 1.9

Market share (%) 11.5 9.9 9.3 (0.6%p)

Loss ratio (%) 48.1 43.5 49.1 5.6%p


269FY2004

296FY2003

(KRW in billions)

Change


Total assets 2,332 2,676 3,110 434 16.2

Invested assets 2,027 2,260 2,555 295 13.0

2,260FY20042,027

FY2003

Invested assets(KRW in billions)

2,555 FY2005

274FY2005

>> INVESTMENT PERFORMANCE

The Company’s investment policy aims to reduce and control

market risks by maintaining a diversified investment portfolio with

high credit-rating debt securities. Total assets of Meritz Fire

amounted to KRW 3,110 billion at the end of FY2005. Invested

assets, accounting for 82.1% of total assets, reached KRW 2,555

billion, an increase of 13.0% or KRW 295 billion at the end of FY2005,

as a result of increases in interest-bearing assets and equity

investment.


Invested assets in the fixed income category include cash and

deposits, loans, bonds, beneficiary certificates, and overseas

securities, while risk assets consist of equities and real estate

investments. To stabilize investment return and tighten risk

management, Meritz Fire has favored interest-bearing assets. As

part of an asset management strategy centered on profitability and

stability, the Company boosted loans by 31.2% YoY to KRW 401

billion as of March 31, 2006, accounting for 15.7% of total invested

assets. Loans, bonds, and beneficiary certificates, which ensure a

steady stream of income over the long term, formed 70.4% of

invested assets as of the end of FY2005. Separately, in an effort to

diversify its invested asset portfolio, Meritz Fire gradually expanded

its exposure to stocks, structured securities, overseas securities

and real estate in FY2005.

(KRW in billions)

Change


Cash & deposits 12 18 13 (5) (27.8)

Bonds 80 89 71 (18) (20.2)

Equities 15 1 47 46 4,600.0

Loans 16 21 24 3 14.3

Others (4) (4) (5) (1) n.a.


Net investment yield (%) 6.1 6.0 6.4 0.4%p

Meritz Fire improved the quality of its investment portfolio and

investment yield in FY2005 rose by 0.4%p to 6.4%. Accordingly, net

investment income jumped 19.0% YoY to KRW 150 billion. This

outstanding performance was primarily attributable to a substantial

growth in income from equity investment. On the back of brisk stock

market movement, the Company’s equity investment generated

investment income of KRW 47 billion in FY2005 compared to mere

KRW 1 billion in the previous fiscal year. Meanwhile, investment

yield from interest-bearing assets fell down due to the prolonged

low-interest rate circumstances. Investment income from cash &

deposits and bonds decreased by 27.8% YoY and 20.2% YoY in

FY2005, respectively. As loan assets surged 31.2% YoY to KRW 401

billion as of March 31, 2006 from KRW 305 billion a year ago,

investment income from loans jumped by 14.3% YoY to KRW 24

billion in FY2005.

6.4FY2005

Net Investment yield(%)

6.0FY2004

6.1FY2003



>> ASSET QUALITY

The Company’s asset management has centered around bonds and

loans so as to simultaneously maximize both profitability and

stability of invested assets. In FY2005, total loans before

provisioning increased 36.1% YoY to reach KRW 406 billion. At the

same time, non-performing loans (NPL) ratio inched up by 0.1%p to

0.7%. Nonetheless, the Company’s asset soundness has continued

to improve with the coverage ratio of 203.3% as of the end of FY2005,

an increase of 11.4%p.

Invested assets portfolio(KRW in billions)

Change


Cash & deposits 215 228 292 64 27.8

Stock 87 85 59 (26) (30.4)

Equity applied stocks 10 7 58 51 739.1

Bonds 944 977 972 (5) (0.6)

Beneficiary certificates 235 237 219 (18) (7.5)

Structured securities - - 54 54 n.a.

Overseas securities 46 79 93 14 18.7

Other securities 30 44 37 (7) (16.4)

Loans 211 305 401 96 31.2

Real estate 249 298 370 72 24.3

Invested assets 2,027 2,260 2,555 295 13.0

NPL & Coverage ratio(KRW in billions)

Change


Loans 214 298 406 108 36.1

Normal 195 280 393 113 40.1

Precautionary 15 17 11 (6) (34.5)

Below substandard 3 2 3 1 70.2

Provisions 2 3 6 2 75.0

NPL ratio (%) 1.4 0.6 0.7 0.1%p

Coverage ratio (%) 77.9 191.9 203.3 11.4%p

406FY2005

Loans(KRW in billions)

298FY2004

214FY2003


Portfolio of bonds in rating(KRW in billions)

FY2003 FY2004 FY2005 Change

A- or above 95.1 95.8 99.0 3.2%p

BBB+ or below 4.9 4.2 1.0 (3.2%p)

99.0FY2005

A- or Above (KRW in billions)

95.8FY2004

95.1FY2003

>> CAPITAL ADEQUACY & SOLVENCY MARGIN RATIO

As of March 31, 2006, the Company’s total shareholders’ equity rose

1.6% YoY to KRW 230 billion. While the Company’s capital stock

remained unchanged at KRW 43 billion with a total number of

outstanding common stocks of 85,800,000 shares, buoyant net

income made retained earnings increase by 13.1% YoY to KRW 160

billion at the end of FY2005 compared with KRW 142 billion a year

ago. In addition, in order to further solidify its asset soundness, the

Company raised catastrophe reserves by 11.3 % YoY or KRW 12

billion to KRW 121 billion as of March 31, 2006. As a result, Meritz

Fire posted adjusted shareholders’ equity of KRW 351 billion as of

the end of FY2005, and its adjusted return on equity (ROE) increased

by 1.0%p to 12.0% in FY2005 from 11.0% last fiscal year.

In FY2005, Meritz Fire has successfully enhanced its solvency

margin ratio and maintained the adequate capital structure.

Solvency margin requirements of Meritz Fire rose by 5.8% YoY to

KRW 207 billion in FY2005, whereas solvency margin jumped by

14.1% YoY to KRW 400 billion. Accordingly, the Company’s solvency

margin ratio reached 193.1% in FY2005, an increase of 14.0%p.

With respect to bonds, Meritz Fire seeks stable income through

portfolio balancing around high quality bonds with credit rating of A-

or above. As of March 31, 2006, bonds with credit rating of A- or

above accounted for 99.0% of the Company’s bond portfolio,

extremely limiting its exposure to default risk

Change


Solvency margin (KRW in billions) 320 351 400 49 14.1

Solvency margin requirements (KRW in billions) 172 196 207 11 5.8

Solvency margin ratio (%) 185.5 179.1 193.1 14.0%p

193.1FY2005

Solvency margin ratio(%)

179.1FY2004

185.5FY2003



>> RISK MANAGEMENT

Meritz Fire has practiced a risk management system to maximize

corporate value. The Company classifies overall risks as insurance,

market, credit, liquidity, interest rate, and non-financial risks. The

risk management team independently assesses these risks,

measures the asset portfolio through diversified investments, and

analyzes credit risk factors through a series of checks and

balances. With the establishment of an asset-liability management

system (ALM) and an Insurance Risk Management system, the

Company aims to minimize the interest rate risk on a quarterly

basis. In addition, Meritz Fire has executed Strategic Asset

Allocation and developed a Credit VaR system.

>> BUSINESS OUTLOOK FOR FY2006

Various economic and geo-political issues still linger. These include

lofty oil prices, a strong Korean currency, weak domestic

consumption and the North Korea issue. As a result, the Korean

economy is expected to lose steam in 2006. Even so, the non-life

insurance sector is positioned for sustained growth and greater

profitability. Along with top-line growth and a lower loss ratio, an

increase in invested assets should raise the investment income.

The non-life insurance sector is forecast to post around 9% growth

in FY2006 as robust performance of long-term lines offsets a

slowdown in auto and commercial lines.

The long-term insurance market should flourish as the need for

health insurance expands and the sale of risk-type products via

bancassurance is permitted. Meritz Fire reported the industry’s

highest growth in long-term insurance in FY2004 and FY2005. The

target growth rate for FY2006 is over 20%, with more competitive

branches, target marketing and a higher retention ratio serving as

the growth drivers. Moreover, a further decline in the loss ratio is

foreseen for long-term lines as the expiry of high interest rate

products will reduce the provisioning burden.

The auto insurance market is experiencing a slowdown. The

number of registered vehicles is growing at a slower pace and price

competition is set to heighten further as the major insurance firms

enter the direct auto insurance market. However, the loss ratio

should improve in view of the hike in auto insurance premiums in

FY2006 and the comprehensive measures from the government.

Meritz Fire will strive to keep the loss ratio stable, currently at the

second lowest level in the industry, by adhering to a systematic

underwriting policy centered on profits.

In terms of investment operations, the investment yield should

maintain a healthy level. While the stock market is undergoing a

correction, market interest rates are on the rise and invested assets

are expanding. Meritz Fire will strive for more efficient use of

resources, swiftly and accurately identify customer needs, and

differentiate itself with an innovative corporate culture.


INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of

Meritz Fire & Marine Insurance Co., Ltd. (Formerly Oriental Fire & Marine Insurance Co., Ltd.)

We have audited the accompanying balance sheet of Meritz Fire & Marine Insurance Co., Ltd. (formerly Oriental Fire & Marine Insurance Co.,

Ltd.; thereafter, the “Company”) as of March 31, 2006 and 2005, 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, 2006 and 2005, and the results of its operations, the appropriations of its retained earnings and its cash flows for the years then

ended in conformity with financial 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 12, 2006

NOTICE TO READERS

This report is effective as of May 12, 2006, 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.

14FI., Hanwha Securities Bldg.,

23-5 Yoido-dong

Youngdeungpo-gu, Seoul

150-717, Korea

Tel : +82 2 6676 1000, 1114

Fax : +82 2 6674 2114

www.deloitteanjin.co.kr

Financial Statement 46

[ BALANCE SHEETS ]

ASSETS

Cash and deposits (Notes 2, 3, 14, 16 and 22) ＼ 291,642,145 ＼ 238,238,933

Trading securities (Notes 2, 4, 5 and 16) 174,769,976 344,952,654

Available-for-sale securities (Notes 2, 5, 9 and 16) 928,702,119 744,281,647

Held-to-maturity securities (Notes 2, 5, 6 and 16) 330,480,539 332,904,258

Securities accounted for using the equity method (Notes 2 and 7) 58,428,996 6,959,864

Loans, net of allowance for doubtful accounts

of ＼ 5,628,164 thousand as of March 31, 2006 and ＼ 3,195,022 thousand

as of March 31, 2005 (Notes 2, 8 and 10) 400,588,322 295,243,540

Real estate investments (Notes 2, 11 and 15) 1,224,635 3,892,085

Tangible assets - net (Notes 2, 10, 11, 12, 14 and 33) 382,944,608 300,244,381

Intangible assets - net (Notes 2 and 13) 2,788,698 3,645,353

Other assets:

Insurance receivables, net of allowance for doubtful accounts


as of March, 2005 (Notes 2, 8, 10, 16 and 21) 64,118,986 69,945,140

Other accounts receivable, net of allowance for doubtful accounts


as of March 31, 2005 (Notes 2 and 8) 17,677,232 20,543,157

Leasehold and other deposits (Note 10) 71,184,450 66,617,007

Accrued income, net of allowance for doubtful accounts of ＼ 9,488

thousand as of March 31, 2006 and ＼ 16,950 thousand as of March 31, 2005

(Notes 2 and 8) 21,923,942 19,102,008

Prepaid expenses 1,684,458 1,632,906

Compensation receivables (Notes 2 and 20) 17,974,131 17,298,102

Separate account debits (Note 2 and 19) 282,447 -

Separate account assets (Note 2 and 19) 87,974,096 69,448,206

Deferred acquisition cost (Note 2 and 30) 224,506,685 110,576,524

Notes receivable, net of allowance for doubtful accounts

of ＼ 4,536 thousand as of March 31, 2006 and ＼ 7,144 thousand

as of March 31, 2005 (Notes 2 and 8) 902,858 1,421,727

Advanced payments 1,978,506 465,348

Others 28,228,932 28,665,083

TOTAL ASSETS ＼ 3,110,006,761 ＼ 2,676,077,924

(Continued)

FY2005 FY2004

(In thousands of Korean won)

AS OF MARCH 31, 2006 AND 2005


LIABILITIES AND SHAREHOLDERS’ EQUITY

Policy reserves, net (Notes 2 and 17) ＼ 2,447,496,146 ＼ 2,090,686,817

Catastrophe reserves (Notes 2 and 18) 120,742,154 108,449,306

Other liabilities:

Unpaid claims (Notes 10, 16 and 21) 109,011,086 96,761,579

Other accounts payable (Note 33) 11,906,469 8,838,278

Accrued expenses 42,443,935 30,051,192

Separate account credits (Note 2 and19) 103,586 8,858

Separate account liabilities (Note 2 and19) 87,974,096 69,448,206

Accrued severance indemnities, net of transfer to the National Pension

Fund of ＼ 311,154 thousand as of March 31, 2006 and ＼ 385,623

thousand as of March 31, 2005 and deposits for retirement insurance

of ＼17,722,498 thousand as of March 31, 2006 and 16,973,233 thousand

as of March 31, 2005 (Note 2) 11,943,953 11,615,281

Premiums received in advance 4,544,309 1,344,584

Bank overdraft (Notes 3 and 38) - 2,723,781

Borrowings (Notes 3 and 22) 900,000 1,300,000

Advances 3,014,852 3,438,270

Withholdings 928,992 1,122,723

Leasehold deposits received (Note 10) 20,683,097 13,125,558

Income tax payable 379,134 71,140

Deferred income tax liabilities (Notes 2 and 32) 15,987,688 9,182,178

Others 1,590,787 1,182,386

TOTAL LIABILITIES 2,879,650,284 2,449,350,136

SHAREHOLDERS’ EQUITY

Common stock (Notes 1 and 23) 42,900,000 42,900,000

Capital surplus (Note 26) 28,171,304 27,181,459

Retained earnings (Notes 25) 160,874,962 142,208,450

Capital adjustments :

Treasury stock (Notes 1 and 23) (12,231,604) (11,200,811)

Gain on valuation of available-for-sale securities (Notes 2 and 5) 9,858,909 25,563,738

Gain (loss) on valuation of securities accounted for using the equity method

(Notes 2 and 7) (320,686) 421,119

Stock option (Notes 2 and 36) 523,643 107,137

Gain (loss) on valuation of derivatives (Notes 2 and 31) 579,949 (453,303)

Total shareholders’ equity 230,356,477 226,727,788

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY ＼ 3,110,006,761 ＼ 2,676,077,924

See accompanying notes to financial statements.

FY2005 FY2004



[ STATEMENTS OF INCOME ]

REVENUE

Premium revenue (Notes 2, 10 and 28) ＼ 1,856,926,566 ＼ 1,671,672,684

Reinsurance revenue (Notes 27) 160,284,603 146,417,913

Interest income (Notes 2, 4 and 10) 99,108,921 91,184,221

Dividend income 3,872,531 4,165,085

Gain on disposal of trading securities 19,562,647 16,065,823

Gain on valuation of trading securities (Notes 2 and 4) 1,721,840 1,996,122

Expenses recovered 52,074,301 54,927,597

Reversal of policy reserves 11,503,702 -

Others 5,206,567 2,873,526

Total 2,210,261,678 1,989,302,971

OPERATING EXPENSES

Provision for policy reserves (Notes 2 and 17) 368,313,031 294,112,095

Provision for catastrophe reserves (Notes 2 and 18) 12,292,848 11,626,542

Claims expense (Note 10) 724,232,824 670,619,903

Surrenders 382,925,827 349,192,691

Reinsurance expense (Note 27) 264,110,166 259,093,730

Interest expense 150,481 189,579

Loss on disposal of trading securities 3,796,688 6,865,424

Loss on valuation of trading securities (Notes 2 and 4) 145,938 1,429,650

Operating expenses (Notes 2, 8, 10, 12, 29, 36 and 37) 364,487,731 350,225,271

Investment administration expenses (Notes 2, 8, 12 and 37) 7,619,003 5,379,774

Others 84,038,738 27,996,782

Total 2,212,113,275 1,976,731,442

TOTAL OPERATING INCOME (LOSS) ＼ (1,851,597) ＼ 12,571,529

(Continued)

FY2005 FY2004


FOR THE YEARS ENDED MARCH 31,2006 AND 2005


OTHER INCOME (EXPENSES)

Gain on disposal of available-for-sale securities - net ＼ 25,915,301 ＼ 10,818,443

Equity in earnings (losses) of affiliates (Notes 2 and 7) 12,532,553 (480,963)

Loss on disposal of securities accounted for using the equity method - (443,143)

Gain on disposal of tangible assets - net 183,118 96,559

Loss on foreign currency transactions - net (Notes 2) (83,729) (556,356)

Loss on foreign currency translation - net (Notes 2 and 16) (6,238,088) (13,969,078)

Reversal of allowance for doubtful accounts (Notes 2 and 8) 132,201 1,500,500

Gain on valuation of derivatives - net (Notes 2 and 31) 4,311,402 13,604,173

Gain on transactions of derivatives - net 261,420 1,446,683

Donations (358,204) (299,979)

Others - net (2,133,609) 2,108,184

Total other income, net 34,522,365 13,825,023

INCOME BEFORE INCOME TAX 32,670,768 26,396,553

INCOME TAX EXPENSE (Notes 2 and 32) (6,254,266) (5,283,132)

NET INCOME ＼ 26,416,502 ＼ 21,113,420

NET INCOME PER SHARE (Note 35) ( In Korean Won )

Basic ＼ 340 ＼ 272

Diluted ＼ 340 ＼ 271


FY2005 FY2004



[ STATEMENTS OF APPROPRIATIONS OF RETAINED EARNINGS ]

RETAINED EARNINGS BEFORE APPROPRIATIONS:

Beginning of the year ＼ 48,697 ＼ 9,181

Valuation gain using the equity method (Notes 2 and 7) - 676,085

Net income 26,416,502 21,113,420

End of the year 26,465,199 21,798,687

TRANSFER FROM RESERVES

Transfer from reserve for business stabilization 9,763 -

APPROPRIATIONS:

Legal reserve (800,000) (800,000)

Voluntary reserve (17,800,000) (13,200,000)

Cash dividends (Note 24) (7,808,668) (7,749,990)

Total appropriations (26,408,668) (21,749,990)

UNAPPROPRIATED RETAINED EARNINGS TO BE

CARRIED FORWARD TO SUBSEQUENT YEAR ＼ 66,294 ＼ 48,697


FY2005 FY2004


FOR THE YEARS ENDED MARCH 31, 2006 AND 2005


[ STATEMENTS OF CASH FLOWS ]

CASH FLOWS FROM OPERATING ACTIVITIES

Net income ＼ 26,416,502 ＼ 21,113,420

Addition of expenses not involving cash outflows :

Depreciation 11,381,497 7,471,066

Provision for severance indemnities 10,263,764 9,458,060

Bad debts 1,801,123 274,277

Reserve for outstanding claims 8,600,070 13,628,592

Long-term saving insurance premium reserves 351,743,657 254,774,208

Unearned premium reserves - 20,593,159

Policyholders’ profit dividend reserves 1,408,395 1,868,493

Policyholders’ dividend reserves 6,560,909 3,247,643

Catastrophe reserves 12,292,848 11,626,542

Loss on disposal of trading securities 3,796,688 6,865,424

Loss on valuation of trading securities 145,938 1,429,650

Loss on disposal of available-for-sale securities 4,282,547 1,132,890

Equity in earnings (losses) of affiliated companies - 480,963

Amortization of intangible assets 1,688,708 1,799,530

Amortization of deferred acquisition cost 78,734,636 25,561,230

Loss on foreign exchange translation 6,521,104 14,597,270

Others 2,485,934 3,557,268

Sub-total 501,707,818 378,366,266

Deduction of revenues not involving cash inflows :

Interest income (2,530,818) (3,248)

Gain on disposal of trading securities (19,562,647) (16,065,823)

Gain on valuation of trading securities (1,721,840) (1,996,122)

Gain on disposal of available-for-sale securities (30,197,848) (11,951,333)

Gain on disposal of tangible assets (189,065) (119,246)

Gain on foreign currency translation (296,401) (637,538)

Gain on valuation of derivatives (4,343,342) (14,066,322)

Gain on disposition of derivatives (1,843,030) (3,953,642)

Equity in earnings (losses) of affiliated companies (12,532,553) -

Reversal of unearned premium reserves (11,503,702) -

Others (5,552,624) (3,021,571)

Sub-total (90,273,870) (51,814,844)

(Continued)

FY2005 FY2004




[ STATEMENTS OF CASH FLOWS ]

Changes in assets and liabilities resulting from operations :

Decrease in insurance receivables ＼ 5,659,175 ＼ 11,329,992

Increase in accrued income (2,814,472) (2,022,858)

Increase in prepaid expenses (51,551) (83,014)

Increase in deferred policy acquisition cost (192,664,796) (113,729,240)

Decrease in notes receivable 521,477 405,994

Decrease (increase) in advanced payments (1,513,158) 334,181

Increase in other assets (13,187,162) (7,227,547)

Increase (decrease) in unpaid claims 12,472,698 (2,407,876)

Increase in accrued expenses 12,392,744 5,302,413

Payment of severance indemnities (9,260,296) (6,489,030)

Decrease in transfers to the National Pension Fund 74,469 118,903

Increase (decrease) in income tax payable 307,993 (6,977,310)

Increase in other liabilities 27,649,620 12,510,276

Sub-total (160,413,259) (108,935,117)

Net cash provided by operating activities 277,437,191 238,729,726

CASH FLOWS FROM INVESTING ACTIVITIES

Cash inflows from investing activities :

Withdrawal of deposits 292,227,018 518,402,468

Proceeds from sale of trading securities 2,962,920,627 3,439,404,338

Proceeds from sale of available-for-sale securities 461,810,646 237,489,450

Proceeds from sale of held-to-maturity securities 60,218,623 3,818,985

Collection of loans 1,127,566,857 844,195,398

Disposal of tangible assets 3,047,461 336,297

Decrease in other receivables 1,175,534,420 1,443,254,208

Decrease in other assets 33,378,484 23,114,386

Sub-total 6,116,704,136 6,510,015,530

Cash outflows for investing activities :

Payment of deposits (282,843,801) (609,429,250)

Acquisition of trading securities (2,775,380,937) (3,392,678,988)

Acquisition of available-for-sale securities (632,658,036) (199,459,427)

Acquisition of held-to-maturity securities (60,000,000) (141,280,059)

Extension of loans (1,233,856,299) (927,788,885)

Acquisition of tangible assets (94,278,618) (56,054,779)

Increase in other receivables (1,173,515,545) (1,446,475,794)

Increase in other assets (75,395,980) 73,721,491

Sub-total (6,327,929,216) (6,699,445,690)

Net cash used in investing activities ＼ (211,225,080) ＼ (189,430,160)

(Continued)

FY2005 FY2004




CASH FLOWS FROM FINANCING ACTIVITIES

Cash inflows from financing activities :

Increase in other accounts payable ＼ 1,199,472,250 ＼ 1,286,822,088

Increase in bank overdraft 49,091,747 49,773,842

Collection of leasehold deposits received 9,884,038 433,859

Decrease of treasury stock 715,872 -

Sub-total 1,259,163,907 1,337,029,789

Cash outflows for financing activities :

Decrease in other accounts payable (1,196,404,059) (1,289,221,837)

Payment of dividends (7,749,990) (7,746,446)

Decrease in bank overdrafts (51,815,528) (47,050,061)

Refund of leasehold deposits received (2,371,500) (914,938)

Decrease in other liabilities (2,220,075) (2,464,632)

Sub-total (1,260,561,152) (1,347,397,914)

Net cash used in financing activities (1,397,245) (10,368,125)

NET INCREASE IN CASH 64,814,866 38,931,442

CASH AT BEGINNING OF YEAR (Note 34) 57,097,811 18,166,369

CASH AT END OF YEAR (Note 34) ＼ 121,912,677 ＼ 57,097,811


FY2005 FY2004


Notes to Financial Statement 54

[ NOTES TO FINANCIAL STATEMENTS ]

Meritz Fire & Marine Insurance Co., Ltd. (formerly Oriental Fire & Marine Insurance Co.,Ltd., thereafter the “Company”) was incorporated in

October 1922. 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, 2006

amounted to ＼ 42,900 million.

The Company’s total issued shares are held by the following shareholders:

The accompanying financial statements for the year ended March 31, 2006 are expected to be approved by the shareholders’ meeting on May

19, 2006.

>>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 the

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.

Number of shares Percentage of

Owned total shares issued (%)

Three individuals, including Cho Jeong - Ho 19,245,240 22.43%

Meritz Fire & Marine Insurance Co., Ltd. (Treasury stock) 5,413,220 6.31%

BONYL/BONYE-MERL LHCH IN 4,403,000 5.13%

HUNTER HALL INVESTMENT M 3,400,040 3.96%

Others 53,338,500 62.17%

Total 85,800,000 100.00%

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. GENERAL


The significant accounting policies followed by the Company in the preparation of its financial statements are summarized as follows:

>>B. 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 the insured period falls. If the premium income is received before the nominated collection date, the Company

records unearned insurance premium based on the 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.

>>C. Securities (Excluding Securities Accounted For Using The Equity Method)

Debt and equity securities are initially stated at their acquisition cost (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 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).

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, an impairment loss in the amount of such excess 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 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-sales security matures or is certain to be disposed

of within one year from the balance sheet date, it is presented as current asset.

Available-for-sales securities are recorded at fair value. However, available-for-sales equity securities, of which fair value cannot be

reliably measured, are recorded at cost, and the fair value of available-for-sales debt securities without the 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 available-for-sales 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).

>>D. 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.


In case the Company’s ownership percentage in the investee increases as a result of the investee’s change in capital, the difference from such

change is accounted for as a goodwill, whereas the Company’s ownership decreases, the difference is accounted for as disposal loss on

securities.

>> E. 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 the 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.

>> F. 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 a 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.


>>G. Property And Equipment

Property and equipment are stated at acquisition cost, except the revalued property and equipment, which are stated at appraised value. Major

renewals and betterments, which prolong the useful life or enhance the value of assets, are capitalized. 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:

The Company does not capitalize financing cost associated with production, acquisition and development of an asset.

>>H. 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.

>> I. 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. Impairment loss of ＼ 408,488 was recorded in

other loss for the year ended March 31, 2006.

>>J. 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.


Account Useful lives

Buildings 40 years

Vehicles 4 years

Furniture and equipment 4 years


>>K. Deferred Acquisition Costs

The Company capitalizes acquisition costs, to the extent that they are within the predetermined cost estimates, incurred from long-term and

amortizes using the straight-line method over the duration of insurance.

>> L. 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.

In accordance with the amended Regulation on Supervision of Insurance Business and its Enforcement Rules, effective from April 1, 2004,

the Company accounts for claims incurred but not reported (IBNR) related to long-term insurance policies (excluding general and auto

insurance policies) as policy reserves and changed its method of calculating IBNR for general insurance policies.

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 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 contract 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.

(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.

>>M. 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.

>>N. 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 ＼ 9,260,296 thousand and ＼ 6,489,030 thousand for the years ended

March 31, 2006 and 2005, respectively.

>>O. 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, ＼ 975.90 and ＼ 1,024.30 to US$1.00 and ＼ 831.720 and ＼ 952.530 to ¥ 100.00 at

March 31, 2006 and 2005, respectively. Gain or loss arising from foreign currency translations is charged or credited to current operations.

>>P. 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.

>>Q. Stock Options

The stock option program allows the Company’s employees to acquire shares of the Company. The option exercise price is generally fixed

below the market price of underlying shares at the date of the grant. 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. When the options are exercised,

equity is increased by the amount of the proceeds received, and the difference between the exercise price and market price is included in

compensation cost and credited to the capital adjustment account.


>>R. Accounting For Leases

If a non-cancelable 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.

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 lease expense is recorded over the lease term and contingent lease are 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 payables.

>> S. 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 or liabilities.

In accordance with Statement of Korea Accounting Standards (‘SKAS’) No. 16, ‘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-sales securities, are directly adjusted to the related

capital adjustment accounts. As a result, total liabilities increased by ＼ 4,744,395 thousand and shareholders’ equity as of March 31, 2006



decreased by the same amount. As allowed under SKAS No. 16, the prior year financial statement which is comparatively presented, were not

restated.

>> T. Contingent Liability

The Company records liabilities when it is certain that the Company’s asset has decreased and the loss is reasonably estimable.

>>U. Accounting Changes Regarding Lapsed Contracts

Through the prior year, no liability had been recorded for lapsed contracts which the Company no longer had obligation to pay for surrenders.

From the current year, the Company started recording liabilities for such lapsed contracts as it deems constructive obligation and the industry

including the Company has actually paid for it. As a result, such obligation totaling ＼ 3,426,566 thousand as of March 31, 2006 has been

estimated and recorded as liability based on rates from studies of historical statistics on the payment of such lapsed contracts.

Details of restricted bank deposits as of March 31, 2006 and 2005 are as follows (in thousands of Korean won):

3. RESTRICTED BANK DEPOSITS

Account FY2005 FY2004 Remarks

Deposits ＼ 1,000,000 ＼ 1,925,358 Pledged as collateral

“ 10,500 10,500 Collateral for checking account

“ 39,036,000 40,972,000 Pledged as collateral

Total ＼ 40,046,500 ＼ 42,907,858


(1) Details of trading securities as of March 31, 2006 and 2005 are as follows (in thousands of Korean won):

(2) Details of interest income in connection with securities are as follows (in thousands of Korean won):

Details of available-for-sale securities as of March 31, 2006 and 2005 are as follows (In thousands of Korean won):

(1) Classification


5. AVAILABLE-FOR-SALES SECURITIES

Trading securities Available-for-sale securities Held-to-maturity securities Total

Details FY2005 FY2004 FY2005 FY2004 FY2005 FY2004 FY2005 FY2004

Government and

agency bonds ＼ 513,127 ＼ 346,735 ＼ 4,686,096 ＼ 2,984,167 ＼ 2,166,545 ＼ 2,097,595 ＼ 7,365,768 ＼ 5,428,497

Special bonds 846,753 4,827,948 16,925,308 16,581,036 12,317,241 7,047,832 30,089,302 28,456,816

Corporate bonds 96,406 291,007 15,923,570 14,973,733 2,710,038 3,237,465 18,730,014 18,502,205

Overseas bonds - - 933,637 321,023 4,493,665 4,502,282 5,427,302 4,823,305

Others - 314,274 1,611,830 219,313 - - 1,611,830 533,587

Total ＼ 1,456,286 ＼ 5,779,964 ＼ 40,080,441 ＼ 35,079,272 ＼ 21,687,489 ＼ 16,885,174 ＼ 63,224,216 ＼ 57,744,410

Classification FY2005 FY2004

Equity securities

Equity securities with readily determinable fair values ＼ 41,770,540 ＼ 61,234,027

Equity securities without readily determinable fair values 8,057,166 16,260,524

Sub total-equity securities 49,827,706 77,494,551

Contributed capital 9,511,000 524,000

Beneficiary certificate 106,987,721 21,311,852

Debt securities 762,375,692 644,951,245

Total ＼ 928,702,119 ＼ 744,281,648

4. TRADING SECURITIES

Balance before valuation Fair value Valuation gain / (loss)

Details FY2005 FY2004 FY2005 FY2004 FY2005 FY2004

Equity securities ＼ 37,408 ＼ 7,424,405 ＼ 40,257 ＼ 7,342,356 ＼ 2,849 ＼ (82,049)

Government and agency bonds - 20,185,664 - 19,929,981 - (255,683)

Special bonds 9,788,226 89,831,882 9,788,336 89,621,859 110 (210,023)

Corporate bonds 30,001,887 4,962,657 30,001,773 4,968,832 (114) 6,175

Beneficiary certificate 110,402,703 213,817,623 112,029,862 215,382,049 1,627,159 1,564,426

Overseas bonds 1,463,850 5,163,951 1,475,561 4,836,745 11,711 (327,206)

Others 21,500,000 3,000,000 21,434,187 2,870,833 (65,813) (129,167)

Total ＼ 173,194,074 ＼ 344,386,182 ＼ 174,769,976 ＼ 344,952,655 ＼ 1,575,902 ＼ 566,473


(2) Equity securities

a. As of March 31, 2006

Ownership Cost/beg. Fair value Unrealized Impairment loss

Company Shares percentage balance (Note1) Book value gain (loss) FY2004 FY2005

Equity securities with readily

determinable fair values

KOCREF CR-REIT 1 2,000,000 7.52% ＼ 10,000,000 ＼ 15,300,000 ＼ 15,300,000 ＼ 5,300,000 ＼ - ＼ -

Kyobo-Meritz 500,000 2.98% 2,500,000 2,600,000 2,600,000 100,000 - -

Realty 1 1,000,000 7.58% 5,000,000 6,570,000 6,570,000 1,570,000 - -

Ures-Meritz 1 1,000,000 10.00% 5,000,000 5,220,000 5,220,000 220,000 - -

KT 160,640 0.06% 6,314,775 6,272,992 6,272,992 (41,783) - -

SK Networks (Note 1) 370,381 0.16% 2,214,786 2,214,786 2,214,786 - -

Hyundai Eng & Const

Co. Ltd. 5,277 0.00% 238,825 261,475 261,475 22,650 - -

Han Jin Transportation 10,000 0.08% 134,114 268,000 268,000 133,886 - -

Korean Air Line Co., Ltd. 10,000 0.01% 126,470 310,000 310,000 183,530 - -

Korean Air Terminal Co., Ltd. 94,660 2.99% 3,021,860 2,267,107 2,267,107 (754,753) - -

INICIS Co., Ltd. 64,800 0.51% 1,328,400 319,140 319,140 (1,009,260) - -

Dae Joo Co., Ltd. 288,000 0.81% 432,000 167,040 167,040 (264,960) - -

Sub total 36,311,230 41,770,540 41,770,540 5,459,310 - -

Equity securities without readily

determinable fair values

Shinwha Electronics Co. 8,000 2.00% 40,000 141,095 40,000 - - -

Korea Securities Depository 359 0.01% 3,160 23,199 3,160 - - -

Pusan New Port Company 775,118 1.30% 3,875,590 3,602,816 3,875,590 - - -

ARD Holdings, Inc. 320,000 2.52% 1,600,000 1,670,576 1,600,000 - - -

Pointpark Ltd. 100,000 2.32% 200,000 23,028 20,871 - 179,129 -

Final Data Inc. 25,000 0.50% 900,000 125,911 900,000 - - -

KDS 1 Preferred stock 3,193 - 6,042 - 6,042 - - -

KDS 2 Preferred stock 798 - 1,510 - 1,510 - - -

SK Networks redeemable

preferred stock (Note 2) 30,969 - 1,609,993 1,609,993 1,609,993 - - -

Sub total 8,236,295 7,196,618 8,057,166 - 179,129 -

Contributed capital

MIC2003-1 - 0.83% 500,000 552,405 500,000 - - -

Macquarie Korea OPP - 5.89% 9,011,000 8,900,282 9,011,000 - - -

Sub total 9,511,000 9,452,687 9,511,000 - - -

Beneficiary certificates

Beneficiary certificates 99,000,000 106,987,721 106,987,721 7,987,721 - -

Sub total 99,000,000 106,987,721 106,987,721 7,987,721 - -

Total ＼ 153,058,525 ＼ 165,407,566 ＼ 166,326,427 ＼ 13,447,031 ＼ 179,129 ＼ -



b. As of March 31, 2005

Impairment loss

Ownership Cost/beg. Fair value Unrealized

Company Shares percentage balance (Note1) Book value gain (loss) FY2003 FY2004

Equity securities with readily determinable fair valuesKyobo-Meritz 500,000 2.98% ＼ 2,500,000 ＼ 2,710,000 ＼ 2,710,000 ＼ 210,000 ＼ - ＼ -

KOCREF CR-REIT 1 2,000,000 7.52% 10,000,000 12,800,000 12,800,000 2,800,000 - -

Realty 1 1,000,000 7.58% 5,000,000 6,090,000 6,090,000 1,090,000 - -

Ures-Meritz 1 1,000,000 10.00% 5,000,000 5,380,000 5,380,000 380,000 - -

KT 229,500 0.08% 9,021,669 9,042,300 9,042,300 20,631 - -

Hyundai Eng & Const Co. Ltd. 5,277 0.01% 238,825 92,611 92,611 (146,214) -

Dae Joo Co., Ltd. 28,800 0.81% 432,000 55,872 55,872 (376,128)

Hynix Semiconductor 2,585 0.00% 25,977 33,734 33,734 7,757 - -

SK Networks (Note 2) 370,381 0.16% 2,214,786 2,214,786 2,214,786 - - -

INICIS Co., Ltd. 64,800 0.51% 1,328,400 141,264 141,264 (1,187,136) - -

CJ preferred stock 12,000 - 394,785 531,600 531,600 136,815 - -

LG Chemical preferred stock 111,000 - 2,993,862 3,191,250 3,191,250 197,388 - -

Korean Air Line Co., Ltd. 621,820 0.87% 7,864,167 12,312,036 12,312,036 4,447,869 - -

Korean Air Terminal Co., Ltd. 94,660 2.99% 3,021,860 1,666,016 1,666,016 (1,355,844) - -

Han Jin Transportation 357,738 2.99% 4,797,766 4,972,558 4,972,558 174,792 - -

Sub total 54,834,097 61,234,027 61,234,027 6,399,930 - -

Equity securities without readily determinable fair valuesShinwha Electronics Co. 8,000 2.00% 40,000 135,386 40,000 - - -

Korea Securities Depository 359 0.01% 3,160 33,934 3,160 - - -

Pusan New Port Company 642,084 1.00% 3,210,420 2,782,522 3,210,420 - - -

ARD Holdings, Inc. 320,000 2.52% 1,600,000 1,545,238 1,600,000 - - -

Pointpark Ltd. 100,000 2.32% 200,000 23,079 20,871 - 179,129 -

SK Networks redeemable

preferred stock (Note 2) 30,969 - 1,609,993 1,609,993 1,609,993 - - -

Final Data Inc. 25,000 0.50% 900,000 122,778 900,000 - - -

Sanyang Electronics. Co. 9,598 0.12% 64,595 32,615 64,595 - - -



PT.Asuransi Hanjin Korindo (Note 3) - 51.00% 953,955 2,295,974 953,955 - - -

Jungsuck Enterprise 44,179 2.11% 4,419,667 4,119,105 4,419,667 - - -

Hanjin Travel Service 84,532 4.99% 3,430,309 2,400,990 3,430,309 - - -

Sub total 16,439,653 15,101,614 16,260,524 - 179,129 -

Contributed capitalMIC2003-1 - 0.83% 500,000 516,641 500,000 - - -

GEO No. 7 - - 24,000 - 24,000 - - -

Sub total 524,000 516,641 524,000 - - -

Beneficiary certificatesBeneficiary certificates - - 21,000,000 21,311,852 21,311,852 311,852 - -

Sub total - - 21,000,000 21,311,852 21,311,852 311,852 - -

Total ＼ 92,797,750 ＼ 98,164,134 ＼ 99,330,403 ＼ 6,711,782 ＼ 179,129 ＼ -


(Note 1) Fair value/book value of the securities presented above were based on financial data as of December 31, 2005 and 2004, except

Macquarie Korea OPP which was based on data as of March 31, 2006 and 2005.

(Note 2) The fair value of SK Networks was valuated based on Korea Bond Pricing & KR Co. as of December 2003.

(Note 3) From the current year, the equity method of accounting began to be applied as PT Asransi Hanjin Korindo has become material.

(3) Debt securities


Amortized Fair value Unrealized Impairment loss

Maturity Type Cost cost (book value) gain (loss) FY2004 FY2005

Within 1 year Special bonds ＼ 89,460,813 ＼ 89,939,973 ＼ 90,900,553 ＼ 960,580 ＼ - ＼ -

Corporate bonds 15,500,000 15,500,000 15,518,669 18,669 - -

Others 15,000,000 15,000,000 15,753,750 753,750 - -

Sub total 119,960,813 120,439,973 122,172,972 1,732,999 - -

Within 5 years Government and

public bonds 5,621,663 6,163,831 6,263,790 99,959 - -

Special bonds 109,752,403 109,911,946 111,927,186 2,015,239 - -

Corporate bonds

(Note 1) 169,144,422 168,945,818 169,207,019 261,202 - -

Overseas bonds (Note 2) 10,132,000 10,132,000 9,881,378 122,378 - -

Others 35,947,000 35,947,000 34,122,343 (1,824,657) - -

Sub total 330,597,488 331,100,595 331,401,716 674,121 - -


public bonds 113,939,034 114,342,299 114,703,834 361,536 - -

Special bonds 48,870,794 48,961,659 49,852,364 890,705 - -

Corporate bonds 67,765,521 68,005,592 66,069,537 (1,936,056) - -

Overseas bonds (Note 2) 25,299,300 25,299,300 23,349,091 (961,010) - -

Others 20,100,000 20,100,000 19,527,759 (572,241) - -

Sub total 275,974,649 276,708,850 273,502,585 (2,217,066) - -

Over 10 years Government and

public bonds 25,235,000 25,337,009 25,175,494 (161,516) - -

Special bonds 10,000,000 10,000,000 10,122,924 122,924 - -

Sub total 35,235,000 35,337,009 35,298,418 (38,592) - -

Total Government and

public bonds 144,795,697 145,843,139 146,143,118 299,979 - -

Special bonds 258,084,010 258,813,579 262,803,027 3,989,448 - -

Corporate bonds 252,409,943 252,451,410 250,795,225 (1,656,185) - -

Overseas bonds 35,431,300 35,431,300 33,230,469 (838,632) - -

Others 71,047,000 71,047,000 69,403,852 (1,643,148) - -

Total ＼ 761,767,950 ＼ 763,586,428 ＼ 762,375,691 ＼ 151,462 ＼ - ＼ -




(Note 1) Impairment loss on SK Networks Co., Ltd.’s (formerly SK Global Co., Ltd.) investment bonds of ＼ 1,611,307 thousand was recorded for

the year ended March 31, 2004, and reclassified into available-for-sale securities or account receivables. The reversal of impairment

loss on SK Networks Co., Ltd. of ＼ 836,305 thousand was recorded for the year ended March 31, 2005.

(Note 2) Certain portion of the unrealized gain/loss from overseas bonds was reflected in current operations as hedge accounting was applied

(Note 31).

Amortized Fair value Unrealized Impairment loss

Maturity Item Cost cost (book value) gain (loss) FY2003 FY2004

Within 1 year Special bonds ＼ 57,173,760 ＼ 57,036,376 ＼ 57,814,984 ＼ 778,608 ＼ - ＼ -

Corporate bonds 43,275,526 43,037,626 43,371,492 333,866 - -

Sub total 100,449,286 100,074,002 101,186,476 1,112,474 - -


public bonds 5,621,663 5,995,935 6,277,148 281,213 - -

Special bonds 159,194,450 159,715,718 166,686,361 6,970,643 - -

Corporate bonds

(Note 1) 153,406,833 153,888,414 156,483,124 2,594,710 - -

Others 40,000,000 40,000,000 41,605,526 1,605,526 - -

Sub total 358,222,946 359,600,067 371,052,159 11,452,092 - -


public bonds 39,596,280 39,698,386 41,985,067 2,286,681 - -

Special bonds 49,319,664 49,323,980 51,740,822 2,416,842 - -

Corporate bonds 64,779,711 64,464,753 66,695,121 2,230,368 - -

Overseas bonds (Note 2) 6,030,000 6,030,000 5,121,500 (646,500) - -

Sub total 159,725,655 159,517,119 165,542,510 6,287,391 - -

Over 10 years Overseas bonds

(Note 2) 7,028,800 7,028,800 7,170,100 - - -

Sub total 7,028,800 7,028,800 7,170,100 - - -

Total Government and

public bonds 45,217,943 45,694,321 48,262,215 2,567,894 - -

Special bonds 265,687,874 266,076,074 276,242,167 10,166,093 - -

Corporate bonds 261,462,070 261,390,793 266,549,737 5,158,944 - -

Others 40,000,000 40,000,000 41,605,526 1,605,526 - -

Overseas bonds 13,058,800 13,058,800 12,291,600 (646,500) - -

Total ＼ 625,426,687 ＼ 626,219,988 ＼ 644,951,245 ＼ 18,851,957 ＼ - ＼ -


(4) Changes in unrealized gain (loss)



(5) Pledged securities

Details of pledged securities as of 31, March 2006 are as follows (in thousands of Korean won):

Descriptions April 1, 2005 Increase Decrease March 31, 2006

Equity securities ＼ 6,399,930 ＼ - ＼ 940,620 ＼ 5,459,310

Government and

public bonds 2,567,893 - 2,267,914 299,979

Special bonds 10,166,093 - 6,176,645 3,989,448

Corporate bonds 5,158,943 - 6,815,127 (1,656,184)

Beneficial securities 311,852 7,675,869 - 7,987,721

Overseas bonds (646,500) - 192,132 (838,632)

Others 1,605,526 - 3,248,674 (1,643,148)

Total ＼ 25,563,737 ＼ 7,675,869 ＼ 19,641,112 ＼ 13,598,494


Equity securities ＼ (1,392,642) ＼ 7,792,572 ＼ - ＼ 6,399,930

Government and

public bonds 3,473,084 - 905,191 2,567,893

Special bonds 2,986,321 7,179,772 - 10,166,093

Corporate bonds 5,358,058 - 199,115 5,158,943

Beneficial securities - 311,852 - 311,852

Overseas bonds - - 646,500 (646,500)

Others - 1,605,526 - 1,605,526

Total ＼ 10,424,821 ＼ 16,889,722 ＼ 1,750,806 ＼ 25,563,737

Descriptions Company Book value Amounts of mortgage Contents Remarks

Trading securities Industrial bank of Korea $ 1,500,000 1,463,850 Pledged as collateral Pledged for derivatives

Available-for-sale

securities “ 10,000,000 10,000,000 “ “

“ “ $ 15,000,000 14,638,500 “ “

“ $ 74,000,000 72,216,600 “ “

Held-to-maturity securities Korea Development Bank $ 20,000,000 19,518,000 “ “

“ “ $ 40,000,000 39,036,000 “ “

“ KB Futures Co., Ltd. 10,000,000 10,000,000 “ “



Details of held-to-maturity securities as of March 31, 2006 and 2005 are as follows (in thousands of Korean won):

March 31, 2006

March 31, 2005

6. HELD-TO-MATURITY SECURITIES

Maturity Company Cost Amortized cost Recoverable value Book value

Within 1 year Government and public bonds ＼ 1,571,233 ＼ 1,778,074 ＼ 1,778,074 ＼ 1,778,074

Within 5 years Government and public bonds 27,174,174 29,203,408 29,203,408 29,203,408

Special bonds 60,959,198 60,957,421 60,957,421 60,957,421

Corporate bonds 19,953,573 19,967,416 19,967,416 19,967,416

Sub total 108,086,945 110,128,245 110,128,245 110,128,245

Within 10 years Government and public bonds 20,220 20,220 20,220 20,220

Special bonds 150,000,000 150,000,000 150,000,000 150,000,000

Overseas bonds 69,745,000 58,554,000 58,554,000 58,554,000

Sub total 219,765,220 208,574,220 208,574,220 208,574,220

Over 10 years Special bonds 10,000,000 10,000,000 10,000,000 10,000,000

Total Government and public bonds 28,765,627 31,001,702 31,001,702 31,001,702

Special bonds 220,959,198 220,957,421 220,957,421 220,957,421

Corporate bonds 19,953,573 19,967,416 19,967,416 19,967,416

Overseas bonds 69,745,000 58,554,000 58,554,000 58,554,000

Total ＼ 339,423,398 ＼ 330,480,539 ＼ 330,480,539 ＼ 330,480,539

Maturity Company Cost Amortized cost Recoverable value Book value

Within 1 year Government and public bonds ＼ 171,493 ＼ 171,493 ＼ 171,493 ＼ 171,493

Special bonds 10,071,200 10,015,949 10,015,949 10,015,949

Corporate bonds 20,000,000 20,000,000 20,000,000 20,000,000

Sub total 30,242,693 30,187,442 30,187,442 30,187,442

Within 5 years Government and public bonds 24,183,165 30,313,218 30,313,218 30,313,218

Special bonds 40,960,271 40,958,067 40,958,067 40,958,067

Corporate bonds 10,000,000 10,000,000 10,000,000 10,000,000

Sub total 75,143,436 81,271,285 81,271,285 81,271,285

Within 10 years Government and public bonds 30,060 30,060 30,060 30,060

Special bonds 139,996,267 139,996,677 139,996,677 139,996,677

Corporate bonds 19,953,573 19,960,793 19,960,793 19,960,793

Overseas bonds 69,745,000 61,458,000 61,458,000 61,458,000

Sub total 229,724,900 221,445,530 221,445,530 221,445,530

Total Government and public bonds 24,384,718 30,514,771 30,514,771 30,514,771

Special bonds 191,027,738 190,970,693 190,970,693 190,970,693

Corporate bonds 49,953,573 49,960,793 49,960,793 49,960,793

Overseas bonds 69,745,000 61,458,000 61,458,000 61,458,000

Total ＼ 335,111,029 ＼ 332,904,257 ＼ 332,904,257 ＼ 332,904,257


(1) Details of securities accounted for using the equity method of accounting as of March 31, 2006 and 2005 are as follows

(in thousands of Korean won):

March 31, 2006

March 31, 2005

(Note 1) Though the Company’s ownership was less than 20% as of March 31, 2005, the Company used the equity method on the above

securities because key directors of the Company were also a member of investee Company’s board of directors. 25.66% ownership

were additionally purchased in second half of the year.

(Note 2) From the current year, the equity method of accounting began to be applied as PT Asuransi Hanjin Korindo has become material.

(2) The changes in the difference between the cost and proportionate net asset value of investee at the time of acquisition (goodwill and

negative goodwill) for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):

March 31, 2006

March 31, 2005

7. SECURITIES ACCOUNTED FOR USING THE EQUITY METHOD

Number of Ownership Market Net asset Book

Companies shares (%) Cost value value value

Meritz Securities Co.(Note 1) 10,021,285 28.78% ＼ 47,754,264 ＼ 60,829,200 ＼ 69,779,600 ＼ 56,099,142

PT.ASURANSIHANJIN KORINDO (Note 2) 7,650 51.00% 953,955 - 2,329,854 2,329,854

Total ＼ 48,708,219 ＼ 60,829,200 ＼ 72,109,454 ＼ 58,428,996

Number of Ownership Market Net asset Book

Companies shares (%) Cost value value value

Meritz Securities Co.(Note 1) 1,115,764 3.22% ＼ 9,029,835 ＼ 3,882,859 ＼ 7,022,480 ＼ 6,959,864

April 1, Increase Amortization March 31,

Company 2005 (decrease) (accretion) 2006

Meritz Securities Co. ＼ - ＼ (21,764,894) ＼ (8,084,436) ＼ (13,680,458)

April 1, Amortization March 31,

Company 2004 Increase (accretion) 2005

Korea French Banking Corp. ＼ 125,184 ＼ (104,320) ＼ 20,864 ＼ -

Meritz Securities Co. (18,347) - (18,347) -

Total ＼ 106,837 ＼ (104,320) ＼ 2,517 ＼ -


[ NOTES TO FINANCIAL STATEMENTS ][ NOTES TO FINANCIAL STATEMENTS ]

(3) Details of valuation using the equity method for the years ended March 31, 2006 and 2005 are as follows


March 31, 2006

March 31, 2005

(4) The condensed financial information of the investees as of and for the years ended March 31, 2006 and 2005 is as follows


March 31, 2006

March 31, 2005

April 1, Equity in earnings Other increase March 31,

Companies 2005 (loss) of investee (decrease) 2006

Meritz Securities Co. ＼ 6,959,864 ＼ 10,551,699 ＼ 38,587,579 ＼ 56,099,142

PT.ASURANSIHANJIN KORINDO - 1,980,853 349,001 2,329,854

Total ＼ 6,959,864 ＼ 12,532,552 ＼ 38,936,580 ＼ 58,428,996

Companies Total assets Total liabilities Revenue Net income (loss)

Meritz Securities Co. ＼ 706,674,659 ＼ 464,216,008 ＼ 294,825,455 ＼ 20,519,277

PT.ASURANSI HANJIN KORINDO 5,399,096 830,755 5,388,348 448,524

Total ＼ 712,073,755 ＼ 465,046,763 ＼ 300,213,803 ＼ 20,967,801

Companies Total assets Total liabilities Revenue Net income (loss)

Meritz Securities Co. ＼ 631,526,220 ＼ 413,445,422 ＼ 178,283,045 ＼ (3,883,717)

PT.ASURANSI HANJIN KORINDO 5,511,403 1,023,315 5,930,585 370,249

Total ＼ 637,037,623 ＼ 414,468,737 ＼ 184,213,630 ＼ (3,513,468)

April 1, Equity in earnings Other increase March 31,

Companies 2005 (loss) of investee (decrease) 2006

Korea French Banking Corp. ＼ 1,897,653 ＼ 585,004 ＼ (2,482,657) ＼ -

Meritz Securities Co. 8,142,654 (1,065,967) (116,823) 6,959,864

Total ＼ 10,040,307 ＼ (480,963) ＼ (2,599,480) ＼ 6,959,864


(1) Maturity of loans as of March 31, 2006 and 2005 are as follows (in thousands of Korean won):

(2) As of March 31, 2006 and 2005, loans to directors and employees consist of the following (in thousands of Korean won):

(3) The Company classifies loans into five different grades, “normal”, “precautionary”, “substandard”, “doubtful” and “estimated loss”,

pursuant to Article 43 of the Insurance Regulations and the Company’s own classification criteria of assets. Details of the classification

as of March 31, 2006 are as follows (in thousands of Korean won):

8. LOANS

Period FY2005 FY2004

Under 1 year ＼ 151,160,564 ＼ 71,411,200

1 year ~ 3 years 81,806,603 78,326,700

3 years ~ 5 years 37,891,720 39,173,696

Over 5 years 135,357,599 109,526,966

Total ＼ 406,216,486 ＼ 298,438,562

Descriptions Interest rate FY2005 FY2004

Unsecured loans to employees 5.0% ＼ 1,850,489 ＼ 1,577,529

Loans related to housing 2% ~ 5.0% 7,499,465 7,489,039

Loans related to employee stock purchases 4% ~ 10% - 278,482

Total ＼ 9,349,954 ＼ 9,345,050

Estimated

Descriptions Normal Precautionary Substandard Doubtful loss Total

Loans secured by insurance policy ＼ 149,334,415 ＼ - ＼ - ＼ - ＼ - ＼ 149,334,415

Loans secured by marketable securities 2,504,000 - - - - 2,504,000

Loans secured by real estate 153,994,459 270,000 1,325,000 1,400,000 - 156,989,459

Unsecured loans 2,539,476 10,496,561 13,600 4,944 26,962 13,081,543

Loans for guaranty payments 8,921,207 53,093 - - - 8,974,300

Others 75,332,769 - - - - 75,332,769

Loans total 392,626,326 10,819,654 1,338,600 1,404,944 26,962 406,216,486

Insurance receivables (Note 1) 7,624,778 6,082,205 1,162,150 426,150 1,267,064 16,562,347

Notes receivable 907,393 - - - - 907,393

Other accounts receivable 15,549,048 100,220 40,961 4,149,884 1,430,172 21,270,285

Suspense payment - - 39,629 26 3,785 43,440

Dishonored notes - - - - 6,267 6,267

Accrued income (Note 2) 21,916,437 16,993 - - - 21,933,430

Total ＼ 438,623,982 ＼ 17,019,072 ＼ 2,581,340 ＼ 5,981,004 ＼ 2,734,250 ＼ 466,939,648


(Note 1) The Company provides an allowance for doubtful accounts on the balance of insurance receivables after deducting the unpaid claims

to the same companies.

(Note 2) The Company records accrued income for the accounts classified as “normal” or “precautionary”. The Company does not provide an

allowance for doubtful accounts for accrued income receivables from financial institutions.

(4) Details of allowance for doubtful accounts for the balances of the above receivables as of March 31, 2006 are as follows


Bad debt write-offs for the years ended March 31, 2006 and 2005 amounting to ＼ 25,583 thousand and ＼ 349,455 thousand respectively, were

offset against the allowance for doubtful accounts.

(5) As of March 31, 2006 and 2005, the allowance for doubtful accounts, based on the type of loans, is as follows


Normal Precautionary Substandard Doubtful Estimated

Descriptions (0.5~0.75%) (2~5%) (20%) (50%) loss(100%) Total

Loans ＼ 2,575,598 ＼ 1,518,612 ＼ 384,520 ＼ 1,122,472 ＼ 26,962 ＼ 5,628,164

Insurance receivables 38,123 121,644 232,429 213,075 1,267,064 1,872,335

Trade Notes receivables 4,536 - - - - 4,536

Other accounts receivables 77,745 2,004 8,192 2,074,941 1,430,172 3,593,054

Suspense payments - - 7,925 12 3,785 11,722

Dishonored notes - - - - 6,267 6,267

Accrued income 9,150 338 - - - 9,488

Total ＼ 2,705,152 ＼ 1,642,598 ＼ 633,066 ＼ 3,410,500 ＼ 2,734,250 ＼ 11,125,566

Classification Type FY2005 FY2004

Loans Loans secured by insurance policy ＼ 1,120,008 ＼ 913,934

Loans secured by marketable securities 15,780 64,439

Loans secured by real estate 2,492,644 1,844,418

Unsecured loans 1,553,507 175,631

Loans for guaranty payments 69,562 74,600

Others 376,663 122,000

Total ＼ 5,628,164 ＼ 3,195,022



(6) The provision ratio of allowance for doubtful accounts to total receivables for the years ended March 31, 2006, 2005 and 2004 is as follows


(7) The loans under estimated loss of which the Company’s right over such loans were still valid as of March 31, 2006 and 2005 are as

follows (in thousands of Korean won):

Receivables of SK Networks (formerly SK Global) restructured in reorganization procedures were ＼ 14,506 million (face value : ＼ 14,711

million). As of October 27, 2003, the restructuring of receivables of SK was confirmed. The Company acquired securities by converting into

equity. Securities consisted of common shares (＼ 1,574 million, 460,700 shares), preferred shares (＼ 1,610 million, 54,196 shares) and

convertible bonds (＼ 703 million, 205,870 shares). The fair value of securities was valuated based on Korea Bond Pricing & KR Co. in

December 2003. The remainder will be classified to long-term receivables (＼ 6,013 million) by December 31, 2007.

Descriptions FY2003 FY2004 FY2005

Loans ＼ 213,500,954 ＼ 298,438,562 ＼ 406,216,486

Insurance receivables 83,652,010 71,850,622 65,991,320

Other accounts receivables 19,897,247 23,294,435 21,270,285

Suspense payments 12,817 15,091 43,440

Accrued income 17,096,101 19,118,958 21,933,430

Notes receivables 1,834,865 1,428,871 907,393

Dishonored bills 1,082 709 6,267

Total 335,995,076 414,147,248 516,368,621

Allowance for doubtful accounts 8,147,815 7,884,452 11,125,566

Allowance ratio 2.42% 1.90% 2.15%

FY2005 FY2004

Descriptions Credit Claim Credit Claim

Loans ＼ 26,962 ＼ 26,962 ＼ 41,664 ＼ 41,664

Other accounts receivables 1,430,172 1,430,172 582,107 582,107

Suspense payments 3,785 3,785 5,976 5,976

Dishonored bills 6,267 6,267 708 708

Total ＼ 1,467,186 ＼ 1,467,186 ＼ 630,455 ＼ 630,455

9. RESTRUCTURED RECEIVABLES



Significant transactions and account balances with related parties as of and for the years ended March 31, 2006 and 2005 are as follows


(1) Transactions

10. RELATED PARTY TRANSACTIONS AND BALANCES

Premium income Premium expense

Related companies FY2005 FY2004 FY2005 FY2004

Keoyang Shipping Co., Ltd. ＼ 276,932 ＼ 282,900 ＼ 19,941 ＼ 247,139

InHa Hospital 266,191 344,714 190,113 (24,148)

InHa Academy 79,086 78,297 37,017 25,415

InHa Technical College 1,849 2,823 4,344 -

Jung Suck Enterprise Co., Ltd. 2,174 3,426 500 6,411

Jung Suck Academy 35,641 42,543 - 819

Total Technology Development 15,482 14,144 3,985 1,303

Korean Air Lines Co., Ltd. 2,018,357 1,913,206 7,365,710 5,196,452

Han Jin Transportation Co., Ltd. 1,387,909 3,500,057 882,898 1,967,913

Han Jin Travel Service Co., Ltd. 193,988 545,468 11,859 53,530

Hanjin Shipping Corporation 1,912,471 4,631,189 (892,087) 5,501,253

Hanjin Korindo 316,062 475,532 179,908 221,845

Korea Air Terminal Service Co., Ltd. 496,382 541,061 107,307 179,709

Korean French Banking Corp. 85,199 61,191 5,109 9,070

HanIl Leisure Co., Ltd. 37,953 31,651 4,044 1,913

Hanjin Information System &

Telecommunication 37,408 42,096 48 43

Hanjin Heavy Industries Co., Ltd. 9,408,837 6,305,892 704,206 661,764

Meritz Securities Co., Ltd. 559,204 625,460 10,849 2,315

Aviation University 221,966 188,705 114 -

Topas Co., Ltd. - 534 - 14

Our Home 80,524 - 37 -

Total ＼ 17,433,615 ＼ 19,630,889 ＼ 8,635,902 ＼ 14,052,760


(2) Account balances

(3) Other

a. As of and the year ended March 31, 2006

Accounts Related companies FY2005 FY2004

(Asset)

Insurance receivables Hanjin Heavy Industries Co., Ltd. ＼ 568,965 ＼ 7,324

“ Hanjin Shipping Corporation - 20,594

“ Korean Air Lines Co., Ltd. 2,986 526,694

“ Han Jin Transportation Co., Ltd. 16,426 -

“ Hanjin Information System & Telecommunication 7,137 -

Loans KAL Hotel Network 9,687,500 10,000,000

Leasehold and other deposits Jung Suck Academy 38,740 96,148

“ Jung Suck Enterprise Co., Ltd. - 104,005

“ Korean Air Line Co., Ltd. 278,075 110,000

Total 10,599,829 10,864,765

(Liability)

Claims payable Han Jin Travel Service Co., Ltd 100 100

“ Hanjin Transportation Co., Ltd 2,111 96

“ Korea Air Terminal Service Co., Ltd. 337 337

Leasehold deposits received Korean Air Lines Co., Ltd. 280,000 280,000

“ Hanjin Information System & Telecommunication 27,520 27,520

Total ＼ 310,068 ＼ 308,053

Construction in General Other Rent Interest

Related companies progress expenses expenses income income

Hanjin Heavy Industries Co., Ltd. ＼ 63,553,414 ＼ 8,589 ＼ - ＼ 33,000 ＼ -

Hanjin Information System & Telecommunication - 5,134,518 - 81,818 -

Han Jin Travel Service Co., Ltd. - - 1,490 - -

Korean Air Lines Co., Ltd. - 254,987 12,904 17,140 -

Han Jin Transportation Co., Ltd. - 192,553 42,269 10,721 -

Jung Suck Enterprise Co., Ltd. - 139,168 - - -

Korea Air Terminal Service Co., Ltd. - 802 248,272 - -

HanIl Leisure Co., Ltd. - 112,481 3,122 - -

KAL Hotel Network - - - - 626,234

Meritz Securities Co., Ltd. - - 33,238 17,507 -

Our Home - 17,425 197,193 834,120 -

Total ＼ 63,553,414 ＼ 5,860,523 ＼ 538,488 ＼ 994,306 ＼ 626,234



b. As of and the year ended March 31, 2005

The book value and published value of land declared by the government for the purposes of taxes and land policy as of March 31, 2006 and 2005

are as follows (in thousands of Korean won):

Construction Equipment General Other Rent Interest

Related companies in process purchase expenses expenses income income

Hanjin Heavy Industries Co., Ltd. ＼ 43,529,341 ＼ - ＼ 10,818 ＼ - ＼ 91,049 ＼ -

Hanjin Information System

& Telecommunication - 811,940 5,528,670 - 103,215 -

Han Jin Travel Service Co., Ltd. - - 5,716 3,170 - -

Korean Air Lines Co., Ltd. - - 125,256 39,568 25,401 -

Han Jin Transportation Co., Ltd. - - 136,021 32,693 26,126 -

Jung Suck Enterprise Co., Ltd. - - 271,465 - - -

Korea Air Terminal Service Co., Ltd. - - 686 233,322 - -

HanIl Leisure Co., Ltd. - - 118,252 7,982 - -

KAL Hotel Network - - - - - 689,346

Total ＼ 43,529,341 ＼ 811,940 ＼ 6,196,884 ＼ 316,735 ＼ 245,791 ＼ 689,346

11. PUBLISHED VALUE OF LAND

Book value Published value

Descriptions FY2005 FY2004 FY2005 FY2004

Headquarters ＼ 43,660,468 ＼ 43,660,468 ＼ 59,321,095 ＼ 55,053,732

Yeuido 11,083,600 11,083,600 12,137,000 11,450,000

Annex building of headquarters 11,581,500 11,581,500 15,727,677 10,979,262

Branch buildings 30,848,506 30,848,506 20,323,799 19,922,571

Training center 20,127,005 20,127,005 26,910,982 23,291,524

Other 3,319,386 6,036,511 1,903,995 5,397,356

Total ＼ 120,620,465 ＼ 123,337,590 ＼ 136,324,548 ＼ 126,094,445


(1) The Company’s tangible assets as of March 31, 2006 and 2005 are summarized as follows (in thousands of Korean won):

(2) Changes in property, plant and equipment for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):

March 31, 2006

March 31, 2005

(3) The residual values of fixed assets still in usage as of March 31, 2006 and 2005 of which the depreciation have been completed, totaled

＼ 48,812 thousand and ＼ 45,307 thousand, respectively.

12. PROPERTY, PLANT AND EQUIPMENT

Accounts Useful lives FY2005 FY2004

Loans ＼ 120,357,559 ＼ 120,407,234

Buildings 40 265,260,647 89,929,524

Construction in-progress 528,000 96,458,978

Vehicles 4 638,446 516,988

Furniture and equipment 4 54,540,517 41,630,945

Total 441,325,169 348,943,669

Less accumulated depreciation (58,380,559) (48,699,287)

Net ＼ 382,944,610 ＼ 300,244,382

Descriptions April 1, 2005 Purchases Disposals Transfer Depreciation March 31, 2006

Land ＼ 120,407,234 ＼ - ＼ 49,675 ＼ - ＼ - ＼ 120,357,559

Buildings 77,001,125 - 54,574 175,397,623 4,439,600 247,904,574

Vehicles 6,153,367 14,483,957 25,978 - 6,703,208 13,908,138

Furniture and equipment 223,678 328,015 66,664 - 238,690 246,339

Construction in-progress 96,458,978 79,466,645 - (175,397,623) - 528,000

Total ＼ 300,244,382 ＼ 94,278,617 ＼ 196,891 ＼ - ＼ 11,381,498 ＼ 382,944,610

Descriptions April 1, 2004 Purchases Disposals Depreciation March 31, 2005

Land ＼ 120,435,550 ＼ 86,333 ＼ 114,649 ＼ - ＼ 120,407,234

Buildings 78,645,950 671,450 66,903 2,249,372 77,001,125

Vehicles 131,080 287,376 35,500 159,278 223,678

Furniture and equipment 6,940,119 4,298,350 22,686 5,062,416 6,153,367

Construction in-progress 45,747,708 50,711,270 - - 96,458,978

Total ＼ 251,900,407 ＼ 56,054,779 ＼ 239,738 ＼ 7,471,066 ＼ 300,244,382



(1) Details of Company’s intangible assets as of March 31, 2006 and 2005 are as follows (in thousands of Korean won):

March 31, 2006

March 31, 2005

(2) Changes in property, plant and equipment for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):

March 31, 2006

March 31, 2005

Accumulated amortization as of March 31, 2006 and 2005 totaled ＼ 5,881,117 and ＼ 6,339,239, respectively.

13. INTANGIBLE ASSETS

Accumulated Accumulated

Descriptions Cost depreciation impairment March 31, 2006

Development cost ＼ 5,769,103 ＼ 4,204,427 ＼ - ＼ 1,564,676

Other intangible assets 2,900,712 1,676,690 - 1,224,022

Total ＼ 8,669,815 ＼ 5,881,117 ＼ - ＼ 2,788,698

Accumulated Accumulated

Descriptions Cost depreciation impairment March 31, 2005

Development cost ＼ 7,233,590 ＼ 4,889,152 ＼ - ＼ 2,344,438

Other intangible assets 2,751,002 1,450,087 - 1,300,915

Total ＼ 9,984,592 ＼ 6,339,239 ＼ - ＼ 3,645,353

Impairment March 31,

Descriptions April 1, 2005 Purchases loss (recovery) Amortization 2006

Development cost ＼ 2,344,438 ＼ 337,053 ＼ - ＼ 1,116,815 ＼ 1,564,676

Other intangible assets 1,300,915 495,000 - 571,893 1,224,022

Total ＼ 3,645,353 ＼ 832,053 ＼ - ＼ 1,688,708 ＼ 2,788,698

Impairment March 31,

Descriptions April 1, 2004 Purchases loss (recovery) Amortization 2005

Development cost ＼ 2,642,876 ＼ 1,015,793 ＼ - ＼ 1,314,231 ＼ 2,344,438

Other intangible assets 1,099,473 686,741 - 485,299 1,300,915

Total ＼ 3,742,349 ＼ 1,702,534 ＼ - ＼ 1,799,530 ＼ 3,645,353


(3) Details of amortization for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):

(4) The Company’s intangible assets at March 31 are summarized as follows (in thousands of Korean won):

As of March 31, 2006, the Company has fire insurance for its buildings with Dongbu Insurance Co., Ltd. and other insurance companies with

coverage amount totaling ＼ 227,650,248 thousand. In addition, the Company has comprehensive insurance for its furniture and equipment

with Dongbu Insurance Co., Ltd. with coverage amount totaling ＼ 17,257,124 thousand and burglary insurance for its cash and securities with

Dongbu Insurance Co., Ltd. with coverage amount totaling ＼ 1,371,000 thousand. The Company also has directors’ insurance for its directors

and comprehensive insurance for financial institutions and its vehicles.

The Company’s other real estate owned from foreclosed collection of loans as of March 31, 2006 and 2005 is summarized as follows


Descriptions March 31, 2006 March 31, 2005

Non operating expense ＼ 1,688,708 ＼ 1,799,530

Accounts FY2005 FY2004

Land ＼ 262,907 ＼ 2,930,357

Buildings 961,728 961,728

Total ＼ 1,224,635 ＼ 3,892,085

Descriptions March 31, 2006 Useful lives Remarks

Development cost ＼ 1,564,676 1~4 System development cost and others

Other intangible assets 1,224,022 1~4 Software

Total ＼ 2,788,698

14. INSURANCE COVERAGE

15. INVESTMENTS IN REAL PROPERTIES



Assets and liabilities denominated in foreign currencies as of March 31, 2006 and 2005 are as follows (in thousands of Korean won):

16. FOREIGN CURRENCY ASSETS AND LIABILITIES

FY2005 FY2004

Foreign Equivalent Foreign Equivalent

Account currencies Korean won currencies Korean won

(Assets)

Insurance receivables

US$ 8,559,384.02 ＼ 8,353,102 8,326,521.93 ＼ 8,528,855

EUR 158,668.69 188,360 410,055.37 542,708

YEN 14,054,674.31 116,896 - -

Others 105,834 344,392

Sub-total 8,764,192 9,415,955

Deposits in foreign currencies

US$ 51,076,923.84 49,845,969 50,134,089.67 51,352,348

YEN 1,472,181.00 12,244 5,226,653.00 49,785

GBP 957.66 1,632 581.06 1,118

EUR 97,155.86 115,336 68,323.92 90,425

Sub-total 49,975,181 51,493,676

Overseas securities

US$ 139,000,000 135,553,193 77,000,000.00 78,586,345

Others

US$ 11,500,000 11,356,939 - -

Total 205,649,505 139,495,976

(Liabilities)

Insurance payables

US$ 10,743,539.93 10,484,620 10,523,395.78 10,779,114

YEN 110,391.54 131,049 - -

EUR 3,392,104.27 28,213 266,421.41 352,608

Others - 258,459 - 78,157

Total ＼ 10,902,341 ＼ 11,209,879


As of March 31, 2006 and 2005, policy reserves consist of the followings (in thousands of Korean won):

(1) As of March 31, 2006

17. POLICY RESERVES


Long-term Insurance Premium Reserves:

Long-term ＼ 1,123,434,049 ＼ 319,916,660 ＼ - ＼ 1,443,350,709

Personal pension 413,813,940 31,826,997 - 445,640,937

Sub total 1,537,247,989 351,743,657 - 1,888,991,646

Reserve for Outstanding Claims:

General 94,162,019 - 1,549,158 92,612,861

Auto 166,158,047 - 5,801,410 160,356,637

Long-term 30,470,149 9,407,092 - 39,877,241

Personal pension 2,391,998 - 143,421 2,248,577

Reinsurance (80,363,172) - (6,686,967) (73,676,205)

Sub total 212,819,041 9,407,092 807,022 221,419,111

Unearned Premium Reserves:

General 114,915,678 4,011,061 - 118,926,739

Auto 296,613,584 - 15,781,087 280,832,497

Long-term 4,223,831 - 41,345 4,182,486

Personal pension 10,264 - 989 9,275

Reinsurance (94,314,214) - (308,660) (94,005,554)

Sub total 321,449,143 4,011,061 15,514,761 309,945,443

Reserve for Participating Policyholders’ Dividends:


Severance insurance - 130,663 - 130,663

Sub total 8,122,427 6,560,910 - 14,683,337

Excess Participating Policyholders’ Dividends:


Severance insurance 220,738 - 106,797 113,941

Sub total 11,048,216 1,515,191 106,797 12,456,610

Total ＼ 2,090,686,816 ＼ 373,237,911 ＼ 16,428,580 ＼ 2,447,496,147



(2) As of March 31, 2005

(Note 1) Excess Participating Policyholders’ Dividends as of April 1, 2004 include ＼71,873 thousands of loss on prior period error corrections.

a. Details of catastrophe reserves as of March 31, 2006 are as follows (in thousands of Korean won):


Long-term Insurance Premium Reserve:

Long-term ＼ 897,761,431 ＼ 225,672,618 ＼ - ＼ 1,123,434,049


Sub total 1,282,473,781 254,774,208 - 1,537,247,989

Reserve for Outstanding Claims:

General 115,319,334 - 21,157,315 94,162,019

Auto 156,280,243 9,877,804 - 166,158,047

Long-term 23,084,911 7,385,238 - 30,470,149

Personal pension 2,565,186 - 173,188 2,391,998

Reinsurance (98,059,225) - (17,696,053) (80,363,172)

Sub total 199,190,449 17,263,042 3,634,450 212,819,041

Unearned Premium Reserve:

General 115,656,245 - 740,567 114,915,678

Auto 275,719,674 20,893,910 - 296,613,584

Long-term 6,449,437 - 2,225,606 4,223,831

Personal pension 13,377 - 3,113 10,264

Reinsurance (96,982,749) - (2,668,535) (94,314,214)

Sub total 300,855,984 20,893,910 300,751 321,449,143

Reserve for Participating Policyholders’ Dividends:


Sub total 4,874,785 3,247,642 - 8,122,427

Excess Participating Policyholders’ Dividends:

Personal pension(Note 1) 9,179,722 1,868,494 - 11,048,216

Sub total 9,179,722 1,868,494 - 11,048,216

Total ＼ 1,796,574,721 ＼ 298,047,296 ＼ 3,935,201 ＼ 2,090,686,816

18. CATASTROPHE RESERVES


General ＼ 49,259,928 ＼ 4,688,766 ＼ - ＼ 53,948,694

Auto 59,189,378 7,604,082 - 66,793,460

Total ＼ 108,449,306 ＼ 12,292,848 ＼ - ＼ 120,742,154


b. Details of catastrophe reserve as of March 31, 2005 are as follows (in thousands of Korean won):

The Company manages retirement insurance contracts separately from the general account. Financial information of separate account as of

and for the years ended March 31, 2006 and 2005 is as follows (in thousands of Korean won):

(1) Balance sheets of separate accounts


General ＼ 44,838,131 ＼ 4,421,797 ＼ - ＼ 49,259,928

Auto 51,984,633 7,204,745 - 59,189,378

Total ＼ 96,822,764 ＼ 11,626,542 ＼ - ＼ 108,449,306

19. SEPARATE ACCOUNTS

Descriptions FY2005 FY2004

(Assets)Ⅰ. Cash and deposits

1. Ordinary deposits ＼ 2,239 ＼ 420

2. Time deposits 10,000,000 -

3. Other deposits - 5,000,000

Sub total 10,002,239 5,000,420

Ⅱ.Marketable securities

1. Stocks 1,324,957 1,257,395

2. Government and public bonds 1,375,590 1,410,319

3. Special bonds 22,948,220 16,687,822

4. Corporate bonds 15,059,592 10,179,876

5. Investment funds 32,757,976 33,203,653

Sub-total 73,466,335 62,739,065

Ⅲ. Loans

1. Loans secured by credit 372,150 301,442

Allowance for doubtful accounts (83,516) (1,507)

2. Loans on real property 61,500 61,193

3. Other loans 2,500,000 -

Sub-total 2,850,134 361,128

Ⅳ. Other Assets

1. Other accounts receivable - 468,173

2. Accrued income 1,551,803 847,313

3. Accrued dividends - 23,250

Sub-total 1,551,803 1,338,736

Ⅴ. Due to general account 103,585 8,858

Total assets ＼ 87,974,096 ＼ 69,448,207

(Continued)



(2) Income statements of separate accounts


(Liabilities)

Ⅰ. Other liabilities

1. Other payables ＼ 568 ＼ -

2. Accrued expenses 176,448 145,902

3. Unearned income 1,807 1,807

4. Withholding tax payables 2,278 5,588

Sub total 181,101 153,297

Ⅱ. Due to general account 282,447 -

Total liabilities 463,548 153,297

(Reserve)

Ⅰ. Reserve for participating policyholders

1. Insurance reserves 86,108,279 68,162,032

2. Reserve for participating policyholders’ dividend 553,642 559,214

3. Excess participating policyholders’ dividend

reserves 847,814 573,664

4. Retained earning for non-dividend 813 -

Sub-total 87,510,548 69,294,910

Total liabilities and reserves ＼ 87,974,096 ＼ 69,448,207

Expense Income

Descriptions FY2005 FY2004 Descriptions FY2005 FY2004

1. Policyholders’ reserves ＼ 18,215,639 ＼ 9,509,789 1. Premium income ＼ 36,546,705 ＼ 18,487,623

2. Claims paid 21,208,032 11,627,950 (Group premium)

1) Claims expense 11,964,596 9,079,346 2. Interest income 2,007,427 2,169,709

2) Refund of claims 1)Deposits interest

expense 9,243,436 2,548,604 2,996 186,086

3. Separate account 2)Marketable

operating fees 487,157 423,582 securities interest 1,883,222 1,943,747

4. Commissions paid 126 - 3)Loans interest 86,712 -

5. Taxes and dues 189 - 4)Other income interest 34,497 39,876

6. Bad debt expense 12,806 6,985 3. Dividend income 22,500 25,750

7. Property management fees 4. Gain on disposal

- 1,190 of marketable securities 1,241,226 564,626

8. Loss on disposal of 5. Gain on valuation of

marketable securities 82,074 136,236 marketable securities 434,168 573,584

9. Loss on valuation of 6. Other income

marketable securities 231,354 108,750 2,642 -

10. Interest expenses 7. Gain on foreign

17,291 6,810 currency transactions - -

Total ＼ 40,254,668 ＼ 21,821,292 Total ＼ 40,254,668 ＼ 21,821,292


Compensation receivables as of March 31, 2006 and 2005 are as follows (in thousands of Korean won):

a. Details of compensation receivables as of March 31, 2006 are as follows:

b. Details of compensation receivables as of March 31, 2005 are as follows:

Details of insurance receivables and unpaid claims as of March 31, 2006 and 2005 are as follows (in thousands of Korean won):

(1) Insurance receivables

20. COMPENSATION RECEIVABLES

21. INSURANCE RECEIVABLES AND UNPAID CLAIMS

Descriptions April 1, 2005 Increase (decrease) March 31, 2006

General ＼ 2,760,059 ＼ 787,144 ＼ 3,547,203

Auto 14,491,109 (164,279) 14,326,830

Long-term 44,516 54,209 98,725

Personal pension 2,418 (1,045) 1,373

Total ＼ 17,298,102 ＼ 676,029 ＼ 17,974,131

Descriptions April 1, 2004 Increase (decrease) March 31, 2005

General ＼ 2,763,190 ＼ (3,131) ＼ 2,760,059

Auto 13,797,272 693,837 14,491,109

Long-term 50,182 (5,666) 44,516

Personal pension 2,692 (274) 2,418

Total ＼ 16,613,336 ＼ 684,766 ＼ 17,298,102

Description FY2005 FY2004

Premiums receivable ＼ 1,678,424 ＼ 4,031,895

Due from agents 6,330,050 13,089,861

Co-insurance accounts receivable 5,625,489 5,109,870

Due from agency receivables 7,866,077 9,671,099

Re-insurance accounts receivable 26,971,851 23,354,661

Overseas reinsurance accounts receivable 12,830,000 12,456,452

Deposits on reinsurance contracts assumed 4,689,430 4,136,785

Total ＼ 65,991,321 ＼ 71,850,623


(2) Unpaid claims

Borrowings as of March 31, 2006 and 2005 and repayment schedule are as follows (in thousands of Korean won):

(1) Borrowings in Korean won

Certain bank deposits as of March 31, 2006 and 2005 are pledged as collateral on the above long-term borrowings.

(2) Repayment schedule of borrowings as of March 31, 2006

22. BORROWINGS



Claims payable ＼ 24,818,783 ＼ 17,397,784

Due to agents 728,573 782,752

Premiums refund payable 1,153,312 1,868,018

Co-insurance accounts payable 150,843 67,652

Due to agency business 8,416,284 11,136,001

Re-insurance accounts payable 36,222,914 31,877,092

Overseas reinsurance premiums payable 19,556,462 14,834,462

Deposit on reinsurance contracts ceded 17,963,915 18,797,817

Total ＼ 109,011,086 ＼ 96,761,578

Amount to be repaid for the year ending March 31

Total FY2005 FY2006 FY2007

＼ 900,000 ＼ 300,000 ＼ 400,000 ＼ 200,000

Description Payable to Interest rate FY2005 FY2004 Maturity

Job training facility loans Chohung Bank 2.50% ＼ 900,000 ＼ 1,300,000 2008.6.30


Details of common shares as of March 31, 2006 are as follows:

(1) Number of common shares authorized: 200,000,000 shares

(2) Par value: ＼ 500

(3) Number of common shares issued and outstanding: 85,800,000 shares

(4) Changes in common stock: N/A

(5) During the year ended March 31, 2006, there was a stock split, where par value previously ＼ 5,000 per share became ＼ 500 per share

and total number of shares issued increased 10 times.

(6) As of March 31, 2005, the Company had treasury stock of ＼ 12,232 million (7,713,320 shares) purchased in order to stabilize its stock

price and to increase management control.

(1) Dividends during the years ended March 31, 2006 and 2005 are calculated as follows (in Korean won):

(2) Dividend payout ratios for the years ended March 31, 2006 and 2005 are computed as follows (in Korean won):

23. COMMON STOCK

24. DIVIDENDS

Description FY2005 FY2004

Dividend per share (percentage of par) ＼ 100 (20%) ＼ 100 (20%)

Number of shares issued and Outstanding, excluding treasury stock 78,086,680 77,499,900

Total dividends ＼ 7,808,668,000 ＼ 7,749,990,000


Dividends ＼ 7,808,668,000 ＼ 7,749,990,000

Net income 26,416,501,917 21,113,420,213

Payout ratios 29.56% 36.71%


(3) Dividend yields for the years ended March 31, 2006 and 2005 are as follows (in Korean won):

The Korean Commercial Code requires the Company to appropriate, as a legal reserve, at least 10% of cash dividends for each accounting

period until the reserve equals 50% of outstanding capital stock. The legal reserve may not be utilized for cash dividends, but may be used to

offset a future deficit, if any, or may be transferred to capital stock.

In accordance with the Korean Asset Revaluation Act and the Insurance Business Act, the Company revalued its land and buildings in 1976 and

1994, resulting in a revaluation gain of ＼ 41,737 million, net of revaluation tax, which was offset entirely against the accumulated deficit in

1993. In addition, the Company revalued its land and buildings in 1998, resulting in a revaluation gain of ＼ 9,555 million, which was recorded as

revaluation surplus as of March 31, 2006.

Details of reinsurance claims for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):

a. March 31, 2006

25. RESTRICTED RETAINED EARNINGS

26. ASSET REVALUATION

27. REINSURANCE CLAIMS



Dividend per share ＼ 100 ＼ 100

Stock price at the balance sheet date 4,570 19,800

Price-dividend yields 2.19% 5.05%

Reinsurance Cash surrender Reinsurance Reinsurance claims

Descriptions premium written value recovered claims recovered

General ＼ 180,052,583 ＼ 902,214 ＼ 96,094,701 ＼ 2,640,716

Auto 49,352,431 2,227,485 37,202,256 -

Long-term 37,151,398 74,346 29,218,512 52,056

Personal pension 757,964 165 462,134 229

Total ＼ 267,314,376 ＼ 3,204,210 ＼ 162,977,603 ＼ 2,693,001


b. March 31, 2005

Details of premium income for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):

(1) March 31, 2006

(2) March 31, 2005

Reinsurance Cash surrender Reinsurance Reinsurance claims

Descriptions premium written value recovered claims recovered

General ＼ 181,338,317 ＼ 2,163,827 ＼ 92,558,571 ＼ 851,407

Auto 49,919,893 2,203,302 32,909,120 -

Long-term 31,461,931 68,879 21,416,947 75,084

Personal pension 809,811 213 459,766 -

Total ＼ 263,529,952 ＼ 4,436,221 ＼ 147,344,404 ＼ 926,491

Direct premium Assumed reinsurance

Descriptions written premium Surrenders Total

General ＼ 273,634,874 ＼ 16,101,887 ＼ 4,406,685 ＼ 285,330,076

Auto 621,965,323 - 31,691,663 590,273,660

Long-term 926,123,989 - - 926,123,989

Personal pension 55,198,841 - - 55,198,841

Total ＼ 1,876,923,027 ＼ 16,101,887 ＼ 36,098,348 ＼ 1,856,926,566

Direct premium Assumed reinsurance

Descriptions written premium Surrenders Total

General ＼ 268,573,469 ＼ 14,432,548 ＼ 4,867,827 ＼ 278,138,190

Auto 660,095,834 - 32,681,079 627,414,755

Long-term 705,726,587 - - 705,721,587

Personal pension 60,398,152 - - 60,398,152

Total ＼ 1,694,789,042 ＼ 14,432,548 ＼ 37,548,906 ＼ 1,671,672,684

28. PREMIUM INCOME


Details of operating expenses for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):

Details of deferred acquisition cost as of March 31, 2006 and 2005 are as follows (in thousand of Korean won):

(1) March 31, 2006

(2) March 31, 2005

29. OPERATING EXPENSES

30. DEFERRED ACQUISITION COST


Accounts FY2005 FY2004

Wages and salaries ＼ 85,836,249 ＼ 74,357,537

Retirement and severance benefits 10,128,338 9,224,035

Other employee benefits 18,736,800 16,525,878

Maintenance 108,074,599 94,450,866

Acquisition and collection 24,986,592 (15,301,599)

Agent commissions 100,960,436 156,063,190

Co-insurance commissions 680,591 655,310

Agency business commissions 519,295 658,629

Claim inspection fees 10,035,822 9,022,127

Reinsurance commissions 3,798,520 3,540,616

Reinsurance profit commissions 321,288 250,786

Interest on outward reinsurance reserve deposits 409,201 777,897

Total ＼ 364,487,731 ＼ 350,225,272


Long-term insurance (Non-participating) ＼ 104,839,560 ＼ 190,905,856 ＼ 76,258,917 ＼ 219,486,499

Personal pension 5,736,964 1,758,941 2,475,719 5,020,186

Total ＼ 110,576,524 ＼ 192,664,797 ＼ 78,734,636 ＼ 224,506,685


Long-term insurance (Non-participating) ＼ 17,525,150 ＼ 109,811,480 ＼ 22,497,070 ＼ 104,839,560

Personal pension 4,883,364 3,917,760 3,064,160 5,736,964

Total ＼ 22,408,514 ＼ 113,729,240 ＼ 25,561,230 ＼ 110,576,524


(1) Details of derivative contracts for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):

a. For the year ended March 31, 2006

The Company contracted currency forward and swap to hedge the exchange rate risk and fluctuation of currency for

overseas-investment, and index options for transaction.

The earnest money (current swap) deposit of ＼ 29,764,950 thousand are held for the purpose to hedge risk of fair value. The

gain/loss on valuation of available-for-sale securities, which is related to the changes in exchange rate, were reported as loss on

valuation of available-for-sale securities in the income statement. While, the earnest money (current swap) deposit of ＼ 53,674,500

thousand and interest swap are held for the cash-flow hedge accounting. Generated gain/loss by it, all of effective parts was

reflected to capital adjustment. And accumulated gain/loss of derivative contract were recorded to assets/liabilities of derivative.

b. For the year ended March 31, 2005

31. DERIVATIVE CONTRACTS

Notional amount Gain or loss on valuation (I/S) Gain or loss

Trading Hedging Trading Hedging on valuation

Descriptions Total purpose purpose Total purpose purpose (B/S)

Currency Currency forwards ＼ 26,368,818 ＼ - ＼ 26,368,818 ＼ 1,308,416 ＼ - ＼ 1,308,416 ＼ -

related Currency swaps 160,047,600 - 160,047,600 2,713,986 - 2,713,986 986,918

Sub-total 186,416,418 - 186,416,418 4,022,402 - 4,022,402 986,918

Interest rate Interest rate swaps 10,000,000 - 10,000,000 - - - (406,968)

related Stock price index

options 950,000 950,000 - 289,000 289,000 - -

Sub-total 10,950,000 950,000 10,000,000 289,000 289,000 - -

Total ＼ 197,366,418 ＼ 950,000 ＼ 196,416,418 ＼ 4,311,402 ＼ 289,000 ＼ 4,022,402 ＼ 579,950

Notional amount Gain or loss on valuation (I/S) Gain or loss

Trading Hedging Trading Hedging Ineffective on valuation

Descriptions Total purpose purpose Total purpose purpose hedging (B/S)

Currency Currency forwards ＼ 24,070,896 ＼ - ＼ 24,070,896 ＼ 2,355,505 ＼ - ＼ 2,355,505 ＼ - ＼ -

related Currency swaps 111,342,800 - 111,342,800 11,337,668 - 11,337,668 - -

Sub-total 135,413,696 - 135,413,696 13,693,173 - 13,693,173 -

Interest rate Interest rate swaps 10,000,000 - 10,000,000 - - - - (453,303)

related Stock price index

options 950,000 950,000 - (89,000) (89,000) - - -

Sub-total 10,950,000 950,000 10,000,000 (89,000) (89,000) - - (453,303)

Total ＼ 146,363,696 ＼ 950,000 ＼ 145,413,696 ＼ 13,604,173 ＼ (89,000) ＼ 13,693,173 ＼ - ＼ (453,303)


The earnest money (current swap) deposit of ＼ 7,028,800 thousand and loss on valuation of derivatives of ＼ 134,683 thousand are

held for the purpose to hedge risk of fair value. The gain on valuation of available-for-sale securities of 141,300 thousand, which is

related to the changes in exchange rate, was reported as loss on valuation of available-for-sale securities in the income statement.

While, the interest swap is held for the cash-flow hedge accounting. Generated gain/loss by it, all of effective parts was reflected to

capital adjustment.

(2) Credit Linked Note

The Company invests in Credit Linked Notes (CLN) of which book value as of March 31, 2006 was ＼ 48,797,928 thousand. Through these

investments, the Company takes the risks of underlying assets such as corporate bonds constituting CLNs but earns interests higher than

the market rates. However, there could be a loss resulting from changes in the credit status of the underlying assets. CLNs are recorded at

fair value, which is obtained from outside independent credit rating agencies. In addition, no derivatives are recognized regarding the credit

risk inherent to such CLN, as such risk is not separable.

(1) Components of income tax expense for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):


32. INCOME TAX


Current ＼ 4,193,914 ＼ 812,504

Deferred

Change in cumulative temporary differences (Note 1) (6,804,747) (4,470,628)

Related to capital adjustments 4,744,395 -

Income tax expense ＼ 6,254,266 ＼ 5,283,132

(Note 1) Net deferred income tax liabilities on temporary

differences at the end of the year ＼ (15,987,688) ＼ (9,182,178)

Net deferred income tax liabilities on temporary

differences at the beginning of the year (9,182,178) (4,711,550)

Deferred income tax assets on tax adjustment (763) -

Changes in deferred tax on temporary differences ＼ (6,804,747) ＼ (4,470,628)


(2) Reconciliation of accounting income and taxable income for the years ended March 31, 2006 and 2005 are as follows


Temporary differences Permanent differences

Descriptions FY2005 FY2004 FY2005 FY2004

Additions:

Compensation receivables ＼ 17,298,102 ＼ 16,613,336 ＼ - ＼ -

Additional income tax paid - - - 51,700

Miscellaneous losses - - 76,966 152,016

Interest expenses - - 150,481 189,579

Interest on housing loans - - 508,358 494,916

Provision for severance indemnities 5,254,225 5,335,831 - -

Group-term retirement insurance 4,577,676 3,435,510 - -

Accrued income 14,474,409 11,062,372 - -

Loss on valuation of investment securities 408,488 505,311 - -

Gain on valuation of derivatives 1,336,668 - - -

Amortization of deferred acquisition cost 612,339 1,095,274 - -

Dividends - 781,035 - -

Dormancy of insurance money 3,462,566 - - -

Other additional capital surplus - - 2,904,307 -

Development costs 429,667 270,548 - -

Loss on valuation using the equity method - 480,963 - -

Loss on valuation of marketable securities - 545,060 - -

Gain on valuation of marketable securities 485,253 - - -

Stock options - - 529,379 -

Entertainment expense in excess of tax limit - - 548,509 452,781

Taxes and dues 6,574,646 6,465,491 - -

Retained earnings (valuation using the equity method) - - - 676,085

Accumulated depreciation 2,013 2,647 - -

Capital adjustments (available-for-sale securities) - - 13,598,495 -

Capital adjustments (derivatives) - - 799,930 -

Stock dividend - 310 - -

Total ＼ 54,916,052 ＼ 46,593,688 ＼ 19,116,425 ＼ 2,017,077

(Continued)



Temporary differences Permanent differences

FY2005 FY2004 FY2005 FY2004

Deductions:

Dividends ＼ - ＼ - ＼ (1,072,001) ＼ (2,295,570)

Investment securities (bonds) (59,409) (57,194) - -

Write-off of bad debts - (177,659) - -

Equity method securities (retained earnings) - (676,085) - -

Accrued income (16,264,586) (14,474,409) - -

Provision for severance indemnities (5,279,851) (5,310,205) - -

Stock options - (56,681) (112,873) -

Refundment - - - (535,000)

Gain on valuation of derivatives (4,311,402) (13,604,173) - -

Increase in provision for severance indemnities (4,577,676) (3,435,510) - -

Present value discount - (338,501) - -

Compensation receivables (17,974,131) (17,298,102) - -

Gain on valuation of trading securities (1,778,716) (1,031,306) - -

Gain on assets contributed (2,099,022) - - -

Capital adjustments (available-for-sale securities) (13,598,495) - - -

Capital adjustments (derivatives) (799,930) - - -

Other additional capital surplus (2,904,307) - - -

Loss on sale of treasury stock - - (50,385) -

Discipline compensation of insurance collection - - (2,898) -

Reduction of available-for- sale securities - (1,562,944) - -

Gain on valuation using the equity method (12,532,553) (2,856,020) - -

Equity method investment - (1,456,715) - -

Deemed dividends (403,269) (84,622) - -

Taxes and dues (6,465,491) (5,564,693) - -

Sub-total (89,048,838) (67,984,819) (1,238,157) (2,830,570)

Total ＼ (4,132,786) ＼ (21,391,131) ＼ 17,878,268 ＼ (813,493)


(3) Changes in deferred tax assets and liabilities during the years ended March 31, 2006 and 2005 are as follows


a. For the year ended March 31, 2006


Deductible temporary differences :

Allowance for bad debts ＼ 6,033,119 ＼ - ＼ - ＼ 6,033,119

Extinguishment of stock 2,095 - - 2,095

Deemed dividends 581,987 - 403,269 178,718

Provision for severance indemnities 16,998,859 5,254,225 4,577,676 17,675,408

Loss on impairment of Available-for-sale securities 2,657,744 - - 2,657,744

Dormancy of insurance money - 3,462,566 - 3,462,566

Available-for-sale bonds 99,807 - 62,632 37,175

Loss on impairment of membership 505,311 408,488 - 913,799

Taxes and dues 6,465,491 6,574,646 6,465,491 6,574,646

Loss on valuation of available-for-sale securities 2,099,022 - 2,099,022 -

Sub-total 35,443,435 15,699,925 13,608,090 37,535,270

Additional temporary differences :

Accrued income (14,474,409) (16,264,586) (14,474,409) (16,264,586)

Gain on rotational dealing (1,797,966) - - (1,797,966)

Provision for severance indemnities (16,973,233) (5,279,851) (4,577,676) (17,675,408)

Acquisition expenses (953,324) - (612,339) (340,985)

Accumulated depreciation (675,368) - (1,729) (673,639)

Gain on valuation of the trading securities (1,513,453) (1,778,717) (485,253) (2,806,917)

Compensation receivables (17,298,102) (17,974,131) (17,298,102) (17,974,131)

Gain on valuation using the equity method - (3,144,302) - (3,144,302)

Capital adjustments (available-for-sale securities) - (13,598,495) - (13,598,495)

Capital adjustments (derivatives) - (799,930) - (799,930)

Other additional capital surplus - (2,904,307) - (2,904,307)

Amortization of development costs (1,003,408) - (429,667) (573,741)

Land (279,103) - (732) (278,371)

Gain on valuation of derivatives (13,864,807) (4,311,402) (1,336,668) (16,839,541)

Sub-total (68,833,173) (66,055,721) (39,216,575) (95,672,319)

Total (33,389,738) ＼ (50,355,796) ＼ (25,608,485) (58,137,049)

Tax effect of temporary differences (9,182,178) (15,987,688)

Deferred income tax liabilities ＼ (9,182,178) ＼ (15,987,688)


b. For the year ended March 31, 2005

(Note 1) The marginal statutory tax rate for the year beginning April 1, 2005 was changed from 29.7% to 27.5% in accordance with the revision

of the Korean Tax Law. Accordingly, a tax rate of 27.5% was used for the temporary differences, which will be utilized after April 1,

2005, in the computation of deferred income taxes as of March 31, 2005.

(Note 2) The temporary differences of valuation using the equity method were not recognized because of its uncertainty of realization.



Deductible temporary differences :

Allowance for bad debts ＼ 6,210,778 ＼ - ＼ 177,659 ＼ 6,033,119

Extinguishment of stock 2,095 - - 2,095

Deemed dividends 666,299 310 84,622 581,987

Provision for severance indemnities 15,098,539 5,335,831 3,435,510 16,998,860

Present value discount 338,501 - 338,501 -

Loss on impairment of Available-for-sale securities 4,220,687 - 1,562,944 2,657,743

Loss on valuation of derivatives 859,658 - 859,658 -

Available-for-sale bonds 157,001 - 57,194 99,807

Taxes and dues - 505,311 - 505,311

Loss on valuation of trading securities 5,564,693 6,465,491 5,564,693 6,465,491

Loss on valuation of available-for-sale securities 2,099,022 - - 2,099,022

Stock options cost 56,681 - 56,681 -

Sub-total 35,273,954 12,306,943 12,137,462 35,443,435

Additional temporary differences :

Accrued income (11,062,372) (14,474,409) (11,062,462) (14,474,409)

Gain on rotational dealing (1,797,966) - - (1,797,966)

Provision for severance indemnities (15,098,539) (5,310,205) (3,435,510) (16,973,234)

Acquisition expenses (2,048,599) - (1,095,274) (953,325)

Accumulated depreciation (677,148) - (1,779) (675,369)

Gain on valuation of the trading securities (2,147,501) (1,031,306) (1,665,352) (1,513,455)

Compensation receivables (16,613,336) (17,298,102) (16,613,336) (17,298,102)

Amortization of development costs (1,273,956) - (270,548) (1,003,408)

Land (279,970) - (867) (279,103)

Gain on valuation of derivatives - (13,864,807) - (13,864,807)

Sub-total (50,999,387) (51,978,829) (34,145,038) (68,833,178)

Total (15,725,433) ＼ (39,671,886) ＼ (22,007,576) (33,389,743)

Tax effect of temporary differences (4,711,550) (9,182,178)

Deferred income tax liabilities ＼ (4,711,550) ＼ (9,182,178)


(4) Effective tax rates for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):

The Company has financing lease agreements with IBM Co., Ltd. for certain machinery and equipment (in thousands of Korean won).

(1) Financing leased assets

(2) Future annual payments under these capital lease agreements as of March 31, 2006 are as follows:

FY2005 FY2004

Income tax expense (A) ＼ 6,254,266 ＼ 5,283,132

Net income before income taxes(B) 32,670,768 26,396,553

Effective tax rate (A)/(B) 19.1% 20.0%

33. FINANCING LEASE

Acquisition Accumulated Depreciation

cost Depreciation Book value expense

Equipment:

March 31, 2006 ＼ 7,571,473 ＼ 4,609,570 ＼ 2,907,903 ＼ 1,412,300

March 31, 2005 4,226,688 3,197,270 1,029,418 1,151,553

Amount

Year ending March 31 Total Interest Principal

FY2006 ＼ 2,177,573 ＼ 82,159 ＼ 2,095,414

FY2007 1,234,164 5,405 1,198,759

FY2008 574,200 4,991 569,209

Total 3,985,937 122,555 3,863,382

Less current portion 2,177,573 82,159 2,095,414

Long-term portion ＼ 1,808,364 ＼ 40,396 ＼ 1,767,968


(1) Cash

Cash presented in the statements of cash flows includes cash, demand deposits and cash equivalents as follows (in thousands of Korean won):

(2) Non-cash transactions

The statements of cash flows are prepared using the indirect method. Significant non-cash transactions for the years ended March 31, 2006

and 2005 are summarized as follows (in thousands of Korean won):

34. CASH FLOW INFORMATION


Accounts March 31, 2006 March 31, 2005

Cash ＼ 27,115 ＼ 30,360

Demand deposits 23,154,740 20,413,151

Cash equivalents 98,730,822 36,654,300

Total ＼ 121,912,677 ＼ 57,097,811


Increase in available-for-sale securities from gain on

valuation of available-for-sale securities ＼ 7,675,869 ＼ 16,889,722

Decrease in available-for-sale securities from loss on

valuation of available-for-sale securities 19,641,113 1,774,206

Increase in equity securities from gain on valuation

using the equity method (741,805) 160,742

Increase in treasury stock from gain on valuation

of treasury stock fund 1,825,059 669,581

Increase in securities accounted for using the equity method

caused by change in retained earnings - 676,085

Transfer to securities accounted for using the equity method

from available-for-sale securities 953,955 -

Transfer to buildings from construction in-progress 175,397,623 -

Gain (Loss) on valuation of derivatives ＼ 1,253,233 ＼ (453,303)


Income per share amounts for the years ended March 31, 2006 and 2005 are as follows (in Korean won):

(1) Basic income per share

(Note) Weighted average number of shares outstanding

(2) Diluted income per share

Details of diluted income per share amounts are as follows (in Korean won):

(Note 1) Diluted income per share for the year ended March 31, 2006 is not presented as stock options have anti-dilative effect. Diluted net

income per share and ordinary amounts as of March 31, 2005 were ＼ 271.

35. INCOME PER SHARE


Net income ＼ 26,416,501,917 ＼ 21,113,420,213

Ordinary income 26,416,501,917 21,113,420,213

Weighted average number of shares outstanding 77,806,642 77,499,900

Ordinary income per share ＼ 340 ＼ 272

Net income per share ＼ 340 ＼ 272

FY2005

Basic ordinary income ＼ 26,416,501,917

Add: interest on convertible bonds (after tax) 379,641,465

Adjusted net income 26,796,143,382

Weighted average number of common shares outstanding 78,570,082

Diluted ordinary income per share (Note 1)

Diluted net income per share (Note 1)

Weighted number Weighted average

Description Number of shares Treasury stock Days of shares number of shares

FY2005 85,800,000 7,993,357 365 28,399,424,330 77,806,642

FY2004 85,800,000 8,300,100 365 28,287,463,500 77,499,900


(1) As of March 31, 2006, total stock options granted to purchase the Company’s common shares are summarized as follows :

(2) Changes in the number of stock options granted for the year ended March 31, 2006 are as follows (unit : shares) :

(3) Computation of stock option compensation

The Company used the fair value based method in valuing the stock options granted in FY2004 in accordance with revised interpretation of

Korean GAAP. However, for stock option granted before March 31, 2005, as permitted under Korean GAAP, the Company excluded the volatility

factor in estimating the value of its stock options, which resulted in measurement at minimum value. Stock price was calculated by price in

date of granted(1st: ＼ 13,800 2nd: ＼ 20,100). While, the compensation cost in current year and thereafter recorded to income statement are as

follows (in thousands of Korean won) :

Note 1) Option granted is decided by accumulation business performance from the date of grant to second business period.

36. STOCK OPTIONS


1st 2nd

Number of shares 2,570,000 1,500,000

Data of grant May 21, 2003 June 15, 2005

Method of grant New stock, treasury stock or difference compensation

Exercise price ＼ 1,220 ＼ 19,900

Exercise period May 21, 2005 ~ May 20, 2013 June 16, 2007 ~ June 15, 2015

1st 2nd Total

April 1, 2005 ＼ 2,570,000 ＼ 1,500,000 ＼ 4,070,000

Forfeited or expired 1,983,220 - 1,983,220

Exercised 586,780 - 586,780

March 31, 2006 ＼ - ＼ 1,500,000 ＼ 1,500,000

1st(Note 1) 2nd Total

April 1, 2005 ＼ 107,137 ＼ - ＼ 107,137

Compensation recorded for the year (79,128) 523,643 444,515

Compensation after this year - 733,101 733,101

March 31, 2006 ＼ 28,009 ＼ 1,256,744 ＼ 1,284,753


(4) Details of assumptions

(5) Computation of stock option compensation (On the fair value method of stock options) for 1st stock option

(in thousands of Korean won)

Details of assumptions

Risk free interest rate : 4.3%

Expected life of option : 6.0 years

Expected stock volatility : 79.88%

Expected dividend ratio : 15%

Expected ratios of no-exercise : 0%

Weighted average exercise price : ＼ 12,200

Weighted average fair value : ＼ 674.21

1st 2nd

Risk free interest rate 4.3% : 4.08%

Expected life of option 6.0 years : 6.0 years

Expected stock volatility 0.1% : 64.90%

Expected dividend ratio 15% : 20.00%

Expected ratios of no-exercise 0% : 0%

Weighted average exercise price ＼ 1,220 : ＼ 1,990

Weighted average fair value ＼ 49.47 : ＼ 837.83

Amount

April 1, 2005 ＼ 1,474,301

Compensation recorded for the year 64,100

Compensation after this year -

March 31, 2006 ＼ 1,538,401


(6) Details of last three years income statement are as follows (in Korean won):

Details of value-added information for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):

Note) Above depreciation does not include depreciation expenses of real properties. The amount of depreciation expenses of real properties

for the years ended March 31, 2006 and 2005 are ＼ 2,375 million and ＼ 893 million, respectively.

37. VALUE-ADDED INFORMATION


Accounts FY2004 FY2003 FY2002

Ordinary income ＼ 25,741,831,163 ＼ 27,746,493,939 ＼ 40,128,788,679

Net income 20,458,698,793 19,306,491,945 34,058,859,389

Ordinary income per share 2,640 2,491 3,627

Net income per share ＼ 2,640 ＼ 2,491 ＼ 4,396

Investment administration

Operating expenses expenses Total

Descriptions FY2005 FY2004 FY2005 FY2004 FY2005 FY2004

Wages and salaries ＼ 85,836,249 ＼ 74,357,537 ＼ 1,337,408 ＼ 1,275,429 ＼ 87,173,657 ＼ 75,632,966

Provision for severance indemnities 10,128,338 9,224,035 135,427 234,025 10,263,765 9,458,060

Employee welfare 18,736,800 16,525,878 259,883 185,893 18,996,683 16,711,771

Acquisition and collection expenses 24,986,592 (15,301,599) - - 24,986,592 (15,301,599)

Agent commissions paid 100,960,436 156,063,190 - - 100,960,436 156,063,190

Rent 15,763,030 13,909,108 1,569 1,630 15,764,599 13,910,738

Depreciation (Note) 6,941,897 5,221,694 2,064,977 1,356,555 9,006,874 6,578,249

Taxes and dues 18,272,102 16,594,736 693,884 490,407 18,965,986 17,085,143

Miscellaneous 3,332,456 3,024,173 - - 3,332,456 3,024,173

Total ＼ 284,957,900 ＼ 279,618,752 ＼ 4,493,148 ＼ 3,543,939 ＼ 289,451,048 ＼ 283,162,691


>>A. ReInsurance Agreements

The Company and 19 other insurance companies are engaged in mutual insurance agreements, which secure a part of their total insured

amounts. These insured amounts are additionally reinsured by Korean Reinsurance Company and any remaining amounts not covered by

Korean Reinsurance Company are reinsured by foreign insurance companies. In accordance with the reinsurance agreements, the Company

receives and pays commissions to Korean Reinsurance Company, via J&H Morsh & Mclennan Co. and other foreign insurance companies.

>>B. Outstanding Litigations

The Company is involved in litigation as a defendant in the aggregate amount of ＼ 81,681,537 thousand arising in the normal course of its

business related to policy coverage and claims disputes. The Company has provided reserves for the possible estimated losses resulting from

such litigations as of March 31, 2006.

>>C. Current Account Agreement

The Company has opened a current account with Woori Bank and others (within the limits of ＼ 2,000 million) and one-day current account

(within the limit of ＼ 16,000 million) as of March 31, 2006.

(1) Insurance contracts subject to insurance premium deficiency calculation are all contracts that are long-term or individual pension

insurance, which can normally incur premium income and claim payment as of February 28, 2006. According to the type of each

contract and the characteristics of coverage, the insurance contracts are classified as long-term insurance or pension insurance,

dividend insurance or non-dividend insurance, fixed interest type insurance or floating interest type insurance. To reflect characteristics

of insurance, it was divided into casualty-type, driver-type, property-type, illness-type, saving-type and pension-type and lump-sum

payment and installment payment in the calculation.

38. CONTINGENCIES AND SIGNIFICANT CONTRACTS

39. PREMIUM DEFICIENCY


Note) Although insurance contracts subject to insurance premium deficiency calculation should be based on contracts held as of the fiscal

year end according to the Financial Supervisory Service’s guide [Report on Examples of Accounting for Insurance Companies when

Insurance Premium Deficiency is Expected (April 12, 2003)], the calculation was based on the contracts held as of December 31, 2004

because there was no significant difference between the contracts held as of March 31, 2006 and February 28, 2006 and it was almost

certain that insurance premium deficit would not be incurred.

(2) As of February 28, 2006 the calculation of insurance premium deficit was based on the following:

Note) Surrender ratio (Persistency ratio) was based on the statistical analysis using past 5-year data, removing outliers that caused enormous

errors and fitting function to reflect the trend. The interest rate as of March 31, 2006 was used as the interest rate to apply to the

products.


Classification Criteria Calculation method

Discount rate(Interest rate) Last 3 years Asset management earning rate = asset management income ÷management asset × 100

Management asset = (Σmanagement asset at the end of previous month+Σmanagement

asset at the end of this month) ÷ 24

Asset management income = (investment income - unrealized gain on investment securities

and stocks - unrealized gain on derivatives)

Expense ratio Last 1 year Expected expense ratio = expected business expense ÷ direct premium

Actual expense ratio = actual business expense ÷ expected business expense

Surrender ratio Last 5 years Persistency ratio = Insurance premium of persisted contract ÷ insurance premium of new

(Persistency ratio) (note) contract

Surrendered ratio = Insurance premium of surrendered contract ÷ insurance premium of

new contract

Lapse ratio = Insurance premium of lapsed contract ÷ insurance premium of new contract

Extinction ratio = Insurance premium of extinct contract by accident ÷ insurance premium of

new contract

Insurance claim payment ratio Last 3 years Insurance claim payment ratio = insurance claim paid ÷ risk premium


(3) As of December 31, 2004, the calculations of insurance contract amount, expected interest rate and insurance premium surplus per

insurance contract type of the Company are as follows(In billions of Korean won, %):

(1) The Company did not issue 4th quarter interim financial statements and the following shows the Company’s major financial indicators for

the three months ended March 31, 2006 (in Korean won):

Insurance Deficit

premium allocation

Insurance contract Expected surplus per insurance

Classification amount interest rate (deficiency) contract

Dividend insurance ＼ - ＼ - ＼ -

Non-dividend insurance 640,260 3.5~8.0 (1,225) -

Individual pension 10,744 3.5~7.5 (989) -

Total 651,004 3.5~8.0 (2,214) -

Fixed interest type 494,312 3.5~8.0 (1,695) -

Floating interest type 156,692 3.5~8.0 (519) -

Operating Net income

Sales Operating income Net income income per share per share

＼ 551,599,561,388 ＼ 6,957,479,130 ＼ 8,013,055,928 ＼ 103 ＼ 103

40. INTERIM PERFORMANCE (UNAUDITED)


INTERNAL ACCOUNTING CONTROL SYSTEM REVIEW REPORT

To Representative of Meritz Fire & Marine Insurance Co., Ltd.

We have reviewed the report of management’s assessment of internal accounting control system (”IACS”) of Meritz Fire & Marine Insurance

Co., Ltd. (the “Company”) as of March 31, 2006. In accordance with Article 2-2 of the Act on External Audit for Stock Companies (the “External

Audit Law”) of the Republic of Korea, the Company’s management is responsible for assessing the design and operations of its IACS. Our

responsibility is to review management’s assessment and issue a report based on our review.

We conducted our review in accordance with Article 2-3 of the External Audit Law. Our review included inquiries of management and

employees, inspection of related documents and checking of the operations of the Company’s IACS. We did not perform an audit of the

Company’s IACS and accordingly, we do not express an audit opinion.

As this report is based on Interim Guidelines on Auditors’ Review and Report on Management’s Assessment of IACS, issued by the Korean

Audit Standards Committee on March 29, 2005, it applies only from that date until the date the Final Standard for Management’s Assessment

of IACS and Final Standard for Auditors’ Review and Report on Management Assessment of IACS becomes effective. A review performed

based on the final standards may have different results and accordingly, the content of our report may be different.

Based on our review, no material weakness in the design or operations of the Company’s IACS under Article 2-2 of the External Audit Law as of

March 31, 2006 has come to our attention.

This report applies to the Company’s IACS in existence as of March 31, 2006. We did not review the Company’s IACS subsequent to March 31,

2006. This report has been prepared for Korean regulatory purposes, pursuant to the External Audit Law, and may not be appropriate for other

purposes or for other users.

May 12, 2006

NOTICE TO READERS

This report is annexed in relation to the audit of the financial statements as of March 31, 2006 and the review of internal accounting

control system pursuant to Article 2-3 of the Act on External Audit for Stock Companies of the Republic of Korea.


February 2006 10:1 stock split (Par value changed from KRW 5,000 to KRW 500)

December 2005 Total assets surpassed KRW 3 trillion

November 2005 Acquired Meritz Securities as subsidiary

November 2005 Received “Prize for Excellence for Customer Value Innovation” of Korean Customer Service Management Awards

October 2005 Company headquarters relocated to Meritz Tower in Gangnam, southeastern Seoul

October 2005 Renamed as Meritz Fire & Marine Insurance Co., Ltd. from Oriental Fire & Marine Insurance Inc.

March 2005 Disaffiliated from the Hanjin Group

November 2004 Affirmed ‘B++ (Very Good’ credit rating from A.M. Best

November 2004 Received the best outstanding award for customer service renovation of Customer Service Management Awards

October 2004 Received a special award in child/youth division of Hankyung’s Financial Product Awards

November 2004 Product “Doctor Care” received a special award of 9th Maekyung Business Daily Financial Product Awards

July 2002 Total assets surpassed KRW 2 trillion

July 2002 Received top prize for new corporate culture at the Korea Best Corporate Image KMAC Association Consulting

December 2001 Product “Soldier Insurance” received ”Excellent New Financial Product” Prize by FSS

October 2001 Ranked first among financial institutions on “Korean Standard Service Quality Index”

December 1999 Ranked 1st among non-life insurers in National Customer Satisfaction Index survey by KPC, Chosun Ilbo and the

University of Michigan (for two years in a row)

September 1999 Awarded “Grand Prize” of Korea Customer Service Management Awards

September 1999 Ranked 1st among non-life insurers in National Customer Satisfaction Index survey by KPC, Chosun Ilbo and the

University of Michigan

December 1998 Ranked 1st among non-life insurers in the National Customer Satisfaction Index (NCSI) for 1998, Korea Productivity

Center (KPC) at Korea Customer Service Management Awards

November 1998 Received first prize as conferred by Korea’s Prime Minister for second year for “successful innovations in

management’ of 1998 Best Practice Awards

January 1997 Chosen as best company for customer service in auto Insurance by Korea Consumer Protection Board

May 1996 Total assets exceeded KRW 1 trillion

January 1995 Paid-in capital increased to KRW 42.9 billion

May 1950 Renamed as Oriental Fire & Marine Insurance Inc.

October 1922 Acquired incorporation charter with KRW 5 million in capital

History in Brief

Organization

Asset ManagementDivision

PRESIDENT & CEO

Personnel/General AffairsDivision

Marketing Division

Strategic PlanningDivision

Operation Division

IT Division

Commercial LineBusiness Division

Claims Division

Private Line BusinessDivision

Private Line Sales Unit

New Distribution Channel Unit

Seoul District Division

Gyeongin District Division

Jungbu District Division

Busan District Division

Gyeongbuk District Division

Private Line Operation Unit

Commercial Line Operation Unit

Commercial Line Sales Division Part 1



Organization 110

Shareholder Information

Establishment October 1, 1922

Head Office Meritz Tower, 825-2, Yeoksam-dong, Gangnam-gu, Seoul, Korea


Tel.82-2-3786-2114, Fax.82-2-3786-2115

Website www.meritzfire.com

Paid in capital KRW 42.9 billion

Total number of stocks 85,800,000 shares

Investor Relations Investor Relations Department

Tel. 82-2-3786-1037, Fax. 82-2-3786-1040

Status of Affiliates

Acquisition date Equity ratio(%)

Meritz Securities Nov. 24, 2005 28.78

PT. Asuransi Hanjin Korindo Nov. 18, 1998 51.00

Contents

01 Who We Are and What We Do

02 Financial Highlights

04 A Message to Shareholders

07 Board of Directors

08 Commitment to Our Stakeholders

16 Building Strong Momentum

17 Management Goals for FY2006

18 Meritz Fire Core Management

23 Business Overview

34 Financial Section

35 Management’s Discussion & Analysis



109 History in Brief

110 Organization

111 Shareholder Information

ANN

UAL R

EPOR

T 2005

Meritz Tower, 825-2, Yeoksam-dong,

Gangnam-gu, Seoul, Korea


Telephone : 82-2-3786-2114

Facsimile : 82-2-3786-2115

www.Meritzfire.com

Act on Innovation,Creating the New Paradigm

ANNUALREPORT 2005

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..

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