2012 Annual Report - corpasia.net Annual... · 1 I． Letter to Shareholders I. 2012 Business...

2012 Annual Report

Stock code: 2882

Websites for search:

http://newmops.tse.com.tw

http://www.cathayholdings.com.tw

Cathay Financial Holding Co., Ltd.

1. Contact Information of Spokesperson :

Spokesperson Deputy Spokesperson

Name/Title Alan Lee/Senior Executive Vice

President

Grace Chen/Chief Financial Officer

David P. Sun/Division Head

Phone (02) 2708-7698 Ext.7760 (02) 2708-7698 Ext.7730

(02) 2708-7698 Ext.7790

Email [email protected]

2. Contact information of CFH and its Subsidiaries:

Company Address

Website Phone


No.296, Sec. 4, Ren‟ai Rd., Da‟an Dist., Taipei City 106, Taiwan

(R.O.C.)

www.cathayholdings.com.tw (02) 2708-7698

Cathay Life Insurance Co., Ltd.


(R.O.C.)

www.cathaylife.com.tw (02) 2755-1399

Cathy United Bank Co., Ltd. No.7, Songren Rd., Xinyi Dist., Taipei City 110, Taiwan (R.O.C.)

www.cathaybk.com.tw (02) 8722-6666

Cathay Century Insurance Co., Ltd.


(R.O.C.)

www.cathay-ins.com.tw (02) 2755-1299

Cathay Securities Corporation


(R.O.C.)

www.cathaysec.com.tw (02) 2326-9888

Cathay Securities Investment Trust

Co., Ltd.


(R.O.C.)

www.cathaysite.com.tw (02) 2700-8399

Cathay Venture Inc.


(R.O.C.)

None (02) 7711-9889

3. Name of Institution for stock transfer, Address, Website and Telephone:

Institution for

stock transfer

Stock Registration, Administrative

Division of the Company Telephone (02) 2708-7698

Website www.cathayholdings.com.tw Address

No.296, Sec. 4, Ren‟ai Rd., Da‟an

Dist., Taipei City 106, Taiwan

(R.O.C.)

mailto:[email protected]

4. Contact Information of Credit Rating Agencies:

Agency Address Phone

Taiwan Ratings 49F No.7, Section 5, Xinyi Road, Taipei 110,

Taiwan (02) 8722-5800

Moody's Asia-Pacific Ltd. 24F, One Pacific Place 88 Queensway Admiralty,

Hong Kong 852-3758-1300

Standard & Poor‟s Unit 1, Level 69,International Commerce Centre, 1

Austin Road West, Kowloon, Hong Kong 852-2533-3500

5. Contact Information of independent accountants:

Names of

Auditors

James Huang, Andrew

Fuh

Telephone (02) 2720-4000

CPA Office Ernst & Young Address 9F, No. 333, Sec. 1, Keelung Road, Hsinyi

District, Taipei City, Taiwan (R.O.C.)

Website www.ey.com

6. Overseas Listings and Access to the Listing Information

Listing Bourse Luxembourg Stock Exchange, Singapore Exchange

Information Access Bloomberg

Table of Contents

I． Letter to Shareholders .......................................................................................................................... 1

II． Company Profile ................................................................................................................................... 4

I. Date of Establishment............................................................................................................................. 4

II. Company Profile ..................................................................................................................................... 4

III． Corporate Governance Report ............................................................................................................ 7

I. Organization ........................................................................................................................................... 7

II. Board Members, Supervisors and Top Managers from Each Division and Subsidiary ....................... 10

III. Corporate Governance .......................................................................................................................... 29

IV. Professional Fees to the Independent Auditor ...................................................................................... 33

V. Information of Independent Auditor replacement (Table III~II) .......................................................... 33

VI. The facts about the Company chairman, president, managerial officer in charge of financial or

accounting affairs having served with the CPA Office or the affiliation thereof over the past year .... 35

VII. Facts about the director or supervisor, managerial office, or a same person or a same affiliated

enterprise having held the equity of a same financial holding corporation with voting power

exceeding the specified ratio which should be declared under Article 11 of the Managerial

Regulations: The facts of equity transfer and change in equity pledge (Table IV).............................. 35

VIII. Information of Related Parties of the top ten shareholders (Table IV~I) ............................................. 40

IX. Total Shareholding Ratio in Each Invested Enterprise (Table 5) ......................................................... 42

IV． Capital Overview ................................................................................................................................ 43

I. Capital and Shares ................................................................................................................................ 43

II. Issuance of Corporate Bonds (Chart XII) ............................................................................................. 49

III. Issuance of Preferred Shares (Table XIII) ............................................................................................ 52

IV. Issuance of Global Depositary Receipts (Tabel XIV) .......................................................................... 52

V. Issuance of Employee Stock Option Plan (Tabele XV and Chart XVI) ............................................... 53

VI. Issuance of Issuance of New Restricted Employee Shares (Tabele XV-I and Chart XVI-I) ............... 53

VII. Mergerand Acquisitions or Transfers of other Financial Institutions (Table XVII) ............................. 53

VIII. Implementation of the Capital Utilization Plans .................................................................................. 54

V． Overview of Operations ..................................................................................................................... 57

I. The content of business ........................................................................................................................ 57

II. Cross-business & Cross-selling Benefits.............................................................................................. 81

III. Industry and Market Overview ............................................................................................................. 81

IV. Employee Profile .................................................................................................................................. 90

V. Corporate responsibility and moral conduct ....................................................................................... 100

VI. Information System ............................................................................................................................ 102

VII. Industrial Relations ............................................................................................................................. 110

VIII. Important contracts and commitments ................................................................................................ 111

VI． Financial Satus ................................................................................................................................... 116

I. Five Year Condensed Balance Sheet and Income Statement Summary (Table 20) ........................... 116

II. Five Year Financial Analysis (Table 21) ............................................................................................. 123

III. Audit Report from the Auditing Committee on the Latest Financial Statements ............................... 132

VII． Review and analysis of financial status and financial performance and risk management ...... 134

I. Analysis of Financial Status ............................................................................................................... 134

II. Analysis of Financial Performance .................................................................................................... 135

III. Analysis of Cash Flow........................................................................................................................ 135

IV. Major capital expenditures in the most recent year ............................................................................ 136

V. The investment Strategy in the most recent year, Main Causes for Profits or Losses, Improvement

Plans and the Investment Plans for the Coming Year ........................................................................ 136

VI. The analysis and assessment of risk management in the most recent year to the date this report was

printed by the analysis of the overall financial position and operation. ............................................ 137

VIII． Special Disclosure ............................................................................................................................. 143

I. Information on Affiliates .................................................................................................................... 143

II. Any private placement of securities in the recent years up to the publication of this annual report. . 143

III. The shares in the Financial Holding Company held or disposed of by subsidiaries in the recent years

up to the publication of this annual report: ........................................................................................ 143

IV. Other important supplementary information: ..................................................................................... 143

V. Events occurred in the previous year or up to the publication of this annual report, which significantly

affect shareholders' equity or price of shares pursuant to item2, paragraph3, article 36 of the

Securities and Exchange Act. ............................................................................................................. 143

Appendix ........................................................................................................................................................... 144

Appendix 1: Consolidated financial statements of the subsidiaries ............................................................ 144

Appendix 2: Consolidated Business Reports of 2012 ................................................................................. 458

Appendix 3: Affiliation report of 2012 ........................................................................................................ 481

Appendix 4: Statement on the Internal Control System of 2012 ................................................................. 490

1

I． Letter to Shareholders

I. 2012 Business Review 2012 was a challenging year for the financial industry. Slow economic recovery coupled with high

unemployment rate and fiscal contraction in advanced nations resulted in global weak demand. As the

global financial situation continued to be mired in uncertainty and vacillation, domestic economic growth

was also adversely affected.

In the midst of a difficult business environment, our company as a whole turned in a strong performance.

Cathay United Bank recorded pre-tax earnings of NT$14.54 billion (US$500 million) in 2012, the best

performance in the past eight years. The Bank also continued to maintain excellent asset quality. Cathay

Life recorded NT$267.17 billion (US$9.2 billion) and NT$561.35 billion (US$19.32 billion) in first-year

premium income and total premium income, respectively, in 2012. Its first-year premium equivalent that

better reflects the policy value amounted to NT$91.77 billion (US$3.16 billion) in 2012, making it a solid

industry leader. Cathay Century Insurance was able to secure its position as the second largest non-life

insurance company in the market in terms of premium income in 2012. Cathay Securities Investment Trust

reported NT$368.04 billion (US$12.67 billion) in assets under management in 2012, making it the largest

securities investment trust company in Taiwan. Cathay Securities recorded continuous growth and progress

in brokerage, underwriting and other businesses in the year.

In overseas expansion, we continued to expand our presence and develop new businesses in overseas

markets. With respect to our deployment in China, the Shanghai Branch of Cathay United Bank

experienced strong growth momentum in profit in 2012 and plans to expand its business scale and branch

network in China to provide more comprehensive services to customers. As of year-end 2012, Cathay Life

has 10 offices (head office and branches) and 32 sales & service agencies across China, while Cathay

Century Insurance has established 17 offices in China and extended business in major provinces in

Midwest China. With respect to our expansion in Southeast Asia, Cathay United Bank and its subsidiary

Indovina Bank had 38 offices in Vietnam, and has acquired 70% equity of Singapore Banking Corporation

Limited in Cambodia. Cathay Life Insurance (Vietnam) has established a presence in six major provinces

and municipalities in the country. Cathay Insurance (Vietnam) has also set up a head office and branch

offices in both Ho Chi Minh City and Hanoi. Looking forward, Cathay Financial Holdings will continue to

expand its network in Southeast Asia to further boost the offshore earnings contribution.

We have also made significant progress in asset management business. Cathay Conning Asset Management

Limited has commenced business in the third quarter of 2012 in Hong Kong. Our fund management

company in China under a joint venture agreement with China Development Bank Securities is slated to

begin operation this year. We will continue to evaluate the potential of other Southeast Asia markets under

our “Insurance + Bank + Asset Management” tri-engine strategy.

II. 2013 Business Plan Cathay Financial Holdings is committed to maximizing value for its shareholders, customers and

employees. Our future development strategies will focus on three areas to achieve our goal of being the

best financial institution serving Asia-Pacific: optimizing business structure to build up triple engines for

2

growth; strengthening distribution in China to grasp market opportunities; moving into Southeast

Asian markets to enhance overseas profit contribution. Our 2013 business plan is outlined below:

(1) Optimizing business structure to build up triple engines for growth

Aside from continuing to develop the core businesses of banking and insurance, Cathay Financial Holdings

is aggressively building up the third growth engine – asset management business. For the banking and

insurance businesses, we will, on the basis of existing foundation, optimize business structure to enhance

profitability. In addition, we have identified expansion of asset management business as the Group‟s

development focus at the current stage. Besides Cathay Securities Investment Trust in Taiwan, we have

established Cathay Conning Asset Management (CCAM) in Hong Kong and a fund management joint

venture with China Development Bank Securities in China. With our asset management platforms in

Taiwan, Hong Kong and China in place, Cathay Financial Holdings aims to become a full-fledged financial

institution built on three pillars - bank, insurance and asset management.

(2) Strengthening distribution channels in China to grasp market opportunities

Cathay Financial Holdings is the first financial institution in Taiwan that established a life insurance

subsidiary and a non-life insurance subsidiary in China. We have currently established a presence in the

coastal regions of China and will place greater emphasis on growing the local markets and build brand

recognition in the future. As for our plan of establishing presence in the banking markets in Greater China

Area, the Group is developing the money flow business serving mainly Taiwanese companies in Taiwan,

Hong Kong and China based on the main services offered by our Shanghai Branch, Hong Kong Branch,

and Cathay United Bank in Taiwan, respectively. We also actively vie for the opportunity to offer Chinese

companies financial services involving external trade and investment. In the long run as our banking

network expands and our life and non-life operations gain more brand recognition in China, we will try

step-by-step to duplicate our success experience of business integration and marketing in Taiwan to create

operational modes that are different from those at other financial institutions.

(3) Moving into Southeast Asian markets to enhance overseas profit contribution

Cathay Financial Group adopts the strategic direction of boosting overseas earnings. Apart from expanding

the China markets, the Southeast Asia has become a rapid-growth area that draws influx of capital and

accumulates wealth. As we continue to mull over how to grasp the business opportunities emerged from the

Southeast Asian markets, we must elevate our vision and horizon from the perspective of a local player to a

regional player. In the future, we will continue to employ a variety of approaches, such as setting up

branches, equity participation, merger and acquisition and strategic alliance to aggressively develop the

Southeast Asian markets, and increase the overseas profits contribution, making Cathay financial Group

gradually achieve the goal of becoming the “best financial institution in Asia-Pacific.”

III. Our business strategies and impacts of external competition, statutory

regulation and macro environment With eyes on the future and seeking momentum that will drive the continual growth of the Group in the

next fifty years, Cathay Financial Holdings will embark on the “Summit Plan” to further strengthen the

organizational culture and business development and achieve the goal of becoming the “best financial

3

institution in Asia-Pacific.” Cathay Financial Holdings will continue to work towards steady growth of all

businesses and maintaining its market leading position under the guiding principles of “Continue our

Heritage, Start from the Heart and Lead the Future” and the core values of “Integrity, Accountability and

Creativity” as we strive to create maximum value for our shareholders.

IV. Latest Credit Ratings

Rating results summary:

Rating Agency

Cathay

Financial

Holdings

Cathay Life

Insurance

Cathay Century

Insurance

Cathay United Bank

Cathay

Securities

Taiwan

Ratings

Rating Date 08/24/2012 08/24/2012 08/24/2012 08/24/2012 08/24/2012

Rating

Received twAA twAA+ twAA+ twAA+ twA+

Rating Outlook Negative Negative Negative Stable Stable

Moody's

Rating Date 01/15/2013 01/15/2013 01/15/2013 01/15/2013

None Rating

Received Baa3 Baa2 A3 A2

Rating Outlook Stable Stable Stable Stable

Standard &

Poor‟s

Rating Date 08/24/2012 08/24/2012 08/24/2012 08/24/2012

None Rating

Received BBB+ A- A- A-

Rating Outlook Negative Negative Negative Stable

4

II． Company Profile

I. Date of Establishment December 31, 2001.

II. Company Profile

Cathay Financial Holding Co., Ltd. (hereinafter referred to as the Company or the Group) was founded

on December 31, 2001 with paid-in capital of NT$ 58.386 billion through a share swap between the

Company and Cathay Life Insurances Co., Ltd. (or Cathay Life Insurance) that became a

wholly-owned subsidiary of the Company thereafter. All Cathay Life Insurances shares, TAIEX listed,

were transferred to the ownership of the Company on the same day.

In April 2002, Tong Tai Insurance Co., Ltd. (later renamed to Cathay Century Insurance Co., Ltd. or

Cathay Century Insurance) and United National Bank (Later changed to Cathay United Bank Co., Ltd.,

or Cathay United Bank) jointed the Group as wholly-owned subsidiaries through share swaps. The

conversion ratio between Cathay Century and the Company was 4.5 to 1 and 6 to 1 for the latter

transaction. After the transaction, the Company‟s total paid-in capital reached NT$ 60.959 billion.

In May 2002, the Company issued US$ 700 million in European Convertible Bond (ECB).

In December 2002, United World Chinese Commercial Bank converted every of its 1.6848 for one

share of the Company to become a 100% subsidiary under the Group. After the merger, total paid-in

capital reached NT$ 84.532 billion.

In January 2003, total paid-in capital was reduced to NT$ 83.075 billion, followed by the cancellation

of treasury stocks for 145.674 million shares.

In April 2003, the Company invested NT$ 600 million to establish Cathay Venture Co., Ltd..

In July 2003, the Company and Cathay Life Insurance issued US$ 522 million Global Depository

Receipts (GDRs) through a conversion of 448.5 million treasury shares.

In September 2003, the Company acquired 8.33% of Yitai Venture with NT$ 75 million.

In October 2003, United World Bank became the surviving entity after its merger with Cathay Bank

and changed its name to Cathay United Bank Co., Ltd (Cathay United Bank).

In April 2004, the Company invested NT$ 600 million to establish Yitai II Venture Investment Co.,

Ltd..

In May 2004, the Company invested NT$ 3.5 billion to found Cathay Securities Corporation (or

Cathay Securities).

In July 2004, the Company acquired 100% of Yitai Management Consultant Co., Ltd. with NT$ 16.56

million.

In November 2004, the Company issued US$ 495 million GDRs through a conversion of 254.911

million treasury shares.

5

In May 2005, the Company injected another NT$ 150 million into Yitai Venture for its secondary

equity offering. The ownership increased to 15% from the original 8.33% after the investment.

In June 2005, the Company solely participated in Cathay Securities‟ secondary equity offering of NT$

500 million, or NT$ 25/share for a total of 20 million shares. The securities arm‟s total paid-in capital,

hence, reached NT$3.7 billion from NT$ 3.5 billion.

In 2005, the Company acquired 81.35% of The Lucky Bank through insider transfer and public tender

offering. Later in June 2006, Shareholders‟ meetings from both sides together resolved a conversion

ratio of one common share of Cathay Financial Holdings to 3.8392 shares of the bank to make The

Lucky Bank a wholly-owned subsidiary under the Group, followed by the Company‟s Board decision

to proceed the share swap in March 2006. Cathay United Bank became the surviving company after the

reference merger date of January 01, 2007 based on a decision made in November 2006.

Rights to convert the ECB into common shares or GDRsbecame exercisable from October 2004. As of

April 30th

, 2007, a total of 461.242 million common shares were converted, which made the

Company‟s total paid-in capital NT$ 92.77 billion. ECB worth of US$ 13.926 million remained

outstanding thereafter.

All outstanding ECB (US$ 13.926 million) as of April 16, 2007 were paid off before the expiration day

of May 20, 2007.

In June 2008, the Company solely participated in Cathay Life Insurance‟s secondary equity offering of

NT$ 15 billion, or NT$ 75/share for a total of 2 billion shares. Total paid-in capital of the insurer thus

increased to NT$ 52.69 billion from NT$ 50.69 billion.

In August 2008, the total paid-in capital grew to NT$ 97.38 billion after stock dividend distributions.

On December 25th

, 2008, an investment of NT$ 15 billion on Cathy Life‟s preferred stock was made

through the issuance of the first unsecured subordinated debenture in 2008 (2008-1) for NT$ 20 billion

during the same month.The residual NT$ 5 billion was kept for working capital of the Company.

In August 2009, Cathay Venture, YitaiII Venture, Yitai Management Consultant, and Yitai Venture were

merged. Cathay Venture was the surviving company.

In October 2009, to stabilize the ownership, the Company paid NT$ 925 million for 49.97% of Cathay

Venture and incorporated the newly acquired a wholly-owned subsidiary.

On December 16th

, 2009, an investment of NT$ 10 billion on Cathy Life Insurance‟s Series-B preferred

stocks was made through the issuance of the first unsecured debenture in 2009 (2009-1) for NT$ 20

billion during the year.The residual NT$ 10 billion was kept for future merger/acquisition or capital

adequacy ratioimprovement.

In October 2009, the total paid-in capital was reduced to NT$ 96.709, after the cancellation of treasury

stocks for 66.66 million shares obtained through the share swap between the Company and The Lucky

Bank.

6

In September 2010, the total paid-in capital grew to NT$ 101.54 billion after the distribution of stock

dividends.

In June 2011, the Company paid NT$ 2.774 billion to acquire the entire Cathay Investment Trust to

establish an asset management platform.

In August 2011, the total paid-in capital grew to NT$ 103.58 billion after stock dividend distribution.

In September 2011, the Company injected additional capital of NT$ 715 million (NT$ 10/share) to

Cathay Investment Trust.

In September 2011, the Company acquired 9.9% shares of Conning Holdings Corp. for NT$ 507

million.

In September 2011, the Company and Conning Holdings Corp. together set up Cathay Conning Asset

Management (or CCAM). An investment proceeds of NT$ 89 million was made to own 50% of the

new venture in February 2012.

In October 2011, the Company bought back 200 million treasury shares (NT$ 35.9/share in average),

for future ECB conversion.

In July 2012, the Company invested another NT$ 199.992 million (NT$ 12/share) on Cathay Securities.

Total paid-in capital of the securities arm became NT$3,866.660 million then.

In August 2012, the Company issued US$ 254.4 million ECB that can be later converted to common

stocks out of the treasury shares bought back in October 2011.

In August 2012, the total paid-in capital grew to NT$ 108.65 billion after stock dividend distribution.

In January 2013, additional capital of US$ one million (or NT$ 29 million) was injected to Cathay

Conning Asset Management Ltd.. Ownership remained 50% after the transaction.

7

III． Corporate Governance Report

I. Organization

(I) Organizational Chart and Major Corporate Functions

Internal audit planning and processing compliance audit, designing auditing guidance, evaluating effectiveness of the

internal control system and supervising audit work in the

subsidiaries.

Accounting, budgeting, tax, financial statements

preparation/auditing, RBC calculation and management.

Capital structure forming and recommendation,

long/short –term funding proposing and execution, cash

(note) payment and management, receiving international

credit rating, vault operation and management.

Risk management policies and related guidelines making, Group risk management mechanism planning, assisting and monitoring execution of risk management in the subsidiaries, Group risk management reporting and calling Risk Management Committee meetings.

Managing and coordinating integrated or direct sales & marketing activities within the subsidiaries.

Obtaining and organizing timely information from Group companies, making related disclosures and responding to related inquires, maintaining effective communication between domestic and international institutional investors, updating market data and revenue figure with investor conference information from peers for internal reference, when needed.

Business strategies making, merger/acquisition proposing and execution, industry and competitor update and analysis (domestic and international). Setting Group public relations policy and directions (including

but not limited to social welfare activities, advertisement

campaigns, business promotions, media events, company news

publishing, press conferences, crisis management), co-working

with Corporate Responsibility Committee, and attending matters

about group visits from the Mainland area.

Group information hardware/software system designing, building, and management, blueprinting information system developments and integrating operation platforms for the subsidiaries, setting up and carrying out policies about information security, and coordinating matters regarding system procurement

Conducting macroeconomic and financial market research on Taiwan and major global markets, publishing research

reports, supporting related information and data to the

subsidiaries for business use, and building economic models. Providing legal service and advice to the Company, keeping company activities in strict compliance with statutory regulation, leading in corporate governance development, managing business logos, and administering Board Meeting affairs.

Attending to issues regarding personnel, employee safety/hygiene and general affairs for both the company and the subsidiaries, shareholders‟ meeting preparation, and stock affairs.

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8

(II) Organizational Chart of Affiliated Companies

(Note) A subsidiary other than those referred to in Article 4 of the Financial Holding Company Act.


Cathay Venture Inc. (Shareholding ratio: 100%)

Cathay Life Insurance Co.,

Ltd.

(Shareholding ratio: 100%)

Cathay Futures Co., Ltd. (Shareholding ratio: 99.99%)



Cathay Securities Investment

Trust Co., Ltd.



Consulting Co., Ltd. (Shareholding ratio: 100%)


Ltd. (China)

(Note)


Symphox Information Co.,

Ltd.

Cathay Insurance (Bermuda)

Co., Ltd.


Indovina Bank Limited (Note)


Seaward Card Co., Ltd. (Shareholding ratio: 100%)

Cathay Life Insurance

(Vietnam) Co., Ltd


Cathay Insurance Co., Ltd.

(China)

Cathay United Bank Co., Ltd.


Cathay Century Insurance

Co., Ltd.


Cathay Insurance (Vietnam)

Co., Ltd. (Shareholding ratio: 100%)

Lin Yuan (Shanghai) Real

Estate Co., Ltd. (Shareholding ratio: 100%)

Singapore Banking

Corporation Limited


39.88% 60.12% 50% 50%

9

03/31/2013

Subsidiary Company

Shares Heldy by Cathay Financial Holding Co., Ltd.

Percentage

(%) Number of Shares (thousand shares)

Original Investment (NT$ thousands)

Book Value (NT$ thousands)

Cathay Life Insurance Co., Ltd. 100% 5,306,527 82,009,366 139,675,105

Cathy United Bank Co., Ltd. 100% 5,227,703 65,300,240 105,923,066

Cathay Century Insurance Co., Ltd. 100% 252,295 2,570,964 4,748,533

Cathay Securities Corporation 100% 386,666 4,199,992 4,714,518

Cathay Securities Investment Trust Co.,

Ltd. 100% 150,000 3,488,754 3,689,885

Cathay Venture Inc. 100% 200,000 1,833,506 2,164,308

Crossholdings between the parent company and subsidiaries: none.

10

II. Board Members, Supervisors and Top Managers from Each Division and Subsidiary

(I) Board Members and Supervisors Information (Table 1)

Board Members and Supervisors Information (1)

04/16/2013

Title (Note. 1)

Name Date Elected Office Term

Date First Elected (Note. 2)

Shareholding

When Elected

Current Shareholding

(Note. 4)

Spouse & Minor

Shareholding (Note. 4)

Shares Held in the

Name of Others (Note. 4)

Education and Major Past/ Current Positions

Shares % Shares % Shares % Shares %

Chairman

Pai Hsing Investment Co., Ltd.

Representative: Hong-Tu Tsai

06/18/2010 3 Years 12/31/2001 78,665,053 0.813% 88,462,784 0.814% 0 0% 0 0%

Chairman, Cathay Life Insurance

(J.D., Southern Methodist University, USA)

Vice Chairman


Representative: Gregory K.H. Wang

06/18/2010 3 Years 11/28/2002 78,665,053 0.813% 88,462,784 0.814% 0 0% 0 0%

Vice Chairman, Cathay Financial

Holdings

Chairman, Cathay United Bank (B.A. in English Literature, Tam

Kang University)

Director Wan Ta Investment Co., Ltd. Representative: Cheng-Ta Tsai

06/18/2010 3 Years 06/15/2007 106,391,075 1.100% 119,642,082 1.101% 0 0% 0 0%

Executive Director, Cathay Life

Insurance (B.A., Chinese Culture

University)

Director

Chen-Sheng Industrial Co.,

Ltd. Representative: Cheng-Chiu Tsai

06/18/2010 3 Years 06/15/2007 21,570,057 0.223% 24,256,606 0.223% 0 0% 0 0%

Chairman, Cathay Century

Insurance (M.A., Keio University, Japan)

Director

Wan Ta Investment Co., Ltd.

Representative: Tiao-Kuei

Huang

06/30/2011

(Note 5)

3 Years 12/31/2001 (Note. 6)

106,391,075 1.100% 119,642,082 1.101% 0 0% 0 0%

Vice Chairman, Cathay Life

Insurance (M.S., National Tsing

Hua University)

Director Wan Ta Investment Co., Ltd.

Representative: Tsu-Pei Chen 06/18/2010 3 Years 06/15/2007 106,391,075 1.100% 119,642,082 1.101% 0 0% 0 0%

Vice Chairman, Cathay United Bank (B.A., National Chengchi

University)

Director

Cathay Life Employees'

Welfare Committee Representative: Chang-Ken

Lee

06/18/2010 3 Years 06/18/2010 27,407,727 0.283% 30,852,893 0.284% 0 0% 0 0%

President, Cathay United Bank

(M.B.A., University of

Pennsylvania, USA)

Director


Representative:

Ming- Ho Hsiung 06/18/2010 3 Years 06/15/2007 106,391,075 1.100% 119,642,082 1.101% 0 0% 0 0%

President, Cathay Life Insurance

(M.A., University of Iowa, USA)

Director


Representative:

Fa-Te Chang 06/18/2010 3 Years 06/15/2007 78,665,053 0.813% 88,462,784 0.814% 0 0% 0 0%

Chairman, Cathay Insurance Co.,

Ltd.(China) (B.A., National

Chung Hsing University)

11

Title

(Note. 1) Name Date Elected

Office

Term

Date First Elected

(Note. 2)

Shareholding

When Elected

Current Shareholding

(Note. 4)

Spouse & Minor Shareholding

(Note. 4)

Shares Held in the Name of Others

(Note. 4) Education and Major Past/

Current Positions

Shares % Shares % Shares % Shares %

Director Pai Hsing Investment Co., Ltd.

Representative: David P. Sun 06/18/2010 3 Years 06/18/2010 78,665,053 0.813% 88,462,784 0.814% 0 0% 0 0%

Vice President, Cathay Financial Holdings

Chairman, Cathay Conning Asset

Management (M.S. in Architecture and M.B.A.,

Harvard University, USA)

Independent

Director Min-Houng Hong 06/18/2010 3 Years 06/15/2007 0 0% 0 0% 0 0% 0 0%

Chairman, Panasonic Taiwan Co.,

Ltd. (Ph.D. in EE of Michigan State University, USA)

Independent

Director Tsing-Yuan Hwang 06/18/2010 3 years 06/15/2007 0 0% 0 0% 0 0% 0 0%

Supervisor, Hon Hai Precision

Industry Co., Ltd.

(Ph.D. Candidate, Business Graduate School, Nihon

University, Japan)

Independent

Director Andrew Ming-Jian Kuo 06/18/2010 3 years 06/15/2007 0 0% 0 0% 0 0% 0 0%

Senior Advisor for Greater China,

The Blackstone Group (HK) Limited (MBA, Baruch College,

City University of New York,

USA)

Note. 1: For representatives of institutional shareholders, the name of the institutional shareholder should be noted and filled in Chart 1 below.

Note. 2: Fill in “Date First Elected” of the financial holdings‟ directors and supervisors, and footnote any discontinuation.

Note. 3: The Company has established an audit committee in lieu of a supervisor since 06/15/2007 according to Article #14-4 of the Securities and Exchange Act.

Note. 4: Data date as of 04/16/2013.

Note. 5: Since 06/30/2011, Mr. Tiao-Kuei Huang has replaced Mr. J.H.Hsu and became the new representative of Wan Ta Investment Co., Ltd.

Note. 6: Mr. Tiao-Kuei Huang served as the Company‟s Director from 12/31/2001 to 02/18/2008.

12

Chart 1: Major Shareholders of Institutional Shareholders 04/16/2013

Institutional Shareholders (Note. 1) Major Shareholders of Institutional Shareholders (Note. 2)

Pai Hsing Investment Co., Ltd. Hong-Tu Tsai(92.07%), Lin Yuan Investment Co.,Ltd (4.32%), Wan Pao Development Co., Ltd. (3.61%)

Wan Ta Investment Co., Ltd. Cheng-Ta Tsai (92.99%), Lin Yuan Investment Co.,Ltd (3.55%), Wan Pao Development Co., Ltd. (3.05%),

Liang-Ting Industrial Co., Ltd. (0.41%)

Chen-Sheng Industrial Co., Ltd. Cheng-Chiu Tsai (77.17%), Su Hsiu-Mei (13.64%), Tsai Gui-Ching (4.55%), Lin Yuan Investment Co., Ltd

(2.50%), Wan Pao Development Co., Ltd. (2.14%)

Cathay Life Employees' Welfare Committee Non-company organization (Not applicble)

Note. 1: For directors and supervisors who are representatives of institutional shareholders, the name of the institutional shareholder should be filled.

Note. 2: Fill in the major shareholders (top-10 shareholdings) of the institutional shareholders and their individual holding percentage. Fill in Chart 2 below, if the major

shareholders are institutions/corporate.

Chart 2: Major Shareholders of the Entities from Chart 1 that Are Institutions/Corporate 04/16/2013

Institutional Shareholders (Note. 1) Major Shareholders of Institutional Shareholders (Note. 2)

Wan Pao Development Co., Ltd

Tung Kee Enterprise (19.96%), Chia Yi Capital Co., Ltd. (19.85%), Liang-Ting Industrial Co., Ltd. (17.85%), Lin Yuan

Investment Co., Ltd. (14.70%), Wan Ta Investment Co., Ltd. (12.89%), Pai Hsing Investment Co., Ltd. (9.18%),

Chen-Sheng Industrial Co., Ltd. (3.57%), Tsung-Lien Industrial Co., Ltd. (2.00%)

Lin Yuan Investment Co., Ltd.

Chia Yi Capital Co., Ltd. (19.75%), Tung Kee Enterprise (19.69%), Liang-Ting Industrial Co., Ltd. (17.74%), Wan Pao

Development Co., Lt (14.81%), Wan Ta Investment Co., Ltd. (13.01%), Pai Hsing Investment Co., Ltd. (9.45%),

Chen-Sheng Industrial Co., Ltd. (3.54%), Tsung-Lien Industrial Co., Ltd. (2.01%)

Liang-Ting Industrial Co., Ltd. Tsai Tsung-Yan (37.05%), Tsai Tsung-Nan (32.42%), Tsai Jia-Jen (23.16%), Cheng-Ta Tsai (7.37%)

Note. 1: The name of the institutional shareholder should be filled in for an institutional investor, like that in Chart 1.

Note. 2: Fill in the major shareholders (top-10 shareholdings) of the institutional shareholders and their individual holding percentage

13

Directors and Supervisors Information (2)

Criteria

Name

(Note. 1)

Possess at least Five Years Work

Experience and meet One of the Following

Professional Qualification Requirements

Independence Criteria (Note. 2)

Number of

Other

Taiwanese

Public

Companies

Concurrently

Serving as

an

Independent

Director

(Note. 3)

An Instructor

of Commerce,

Law, Finance,

Accounting,

or

Other Fields

Related to the

Business

Needs of the

Company in a

Public or

Private Junior

College,

College or

University

A Judge,

Public

Prosecutor,

Attorney,

Certified

Public

Accountant,

or Other

Professional

or

Technical

Specialists

Who Has

Passed a

National

Examination

and Been

Awarded a

Certificate in

a Profession

Necessary for

the Business

of the

Company

Have Work

Experience in

the Area of

Commerce,

Law, Finance,

or

Accounting,

or Otherwise

Necessary for

the Business

of the

Company 1 2 3

(Note. 4)

4 (Note. 4)

5 (Note. 4)

6 (Note. 4)

7 8 9 10

Hong-Tu

Tsai

Gregory K.

H. Wang

Cheng-Ta

Tsai

Cheng-Chiu

Tsai

Tiao-Kuei

Huang

(Note. 5)

Tsu-Pei

Chen

Chang-Ken

Lee

Ming- Ho

Hsiung

Fa-Te

Chang

David P.

Sun

Min-Houng

Hong

2

Tsing-Yuan

Hwang

3

Andrew

Ming-Jian

Kuo

3

Note. 1: Number of columns is adjusted for actual needs.

14

Note. 2: Directors or supervisors who, during the two years before being elected or during the term of office, meet any of

the following situations, please tick () the appropriate corresponding boxes:

(1) Not an employee of the company or any of its affiliates;

(2) Not a director or supervisor of the company or any of its affiliates. This does not include where the person is an

independent director of the company, its parent company, or any subsidiary in which the company holds,

directly or indirectly, more than 50% of the voting shares;

(3) Not a natural-person shareholder who holds shares, together with those held by the person‟s spouse, minor

children, or held by the person under others‟ names in an aggregate amount of 1% or more than the total

outstanding shares of the Company or ranked in the top-10 holdings;

(4) Not a spouse, relative within the second degree of kinship, or lineal relative within the third degree of kinship

of any of the persons in the preceding three subparagraphs;

(5) Not a director, supervisor, or employee of a institutional shareholder that directly holds 5% or more of the total

outstanding shares of the Company or that holds shares ranked in the top-five holdings;

(6) Not a director, supervisor, officer, or shareholder holding 5% or more of the total outstanding shares of a

specified company or institution that has a financial or business relationship with the Company;

(7) Not a professional individual who is an owner, partner, director, supervisor, or officer of a sole proprietorship,

partnership, company, or institution that, provides commercial, legal, financial, accounting services or

consultation to the Company or to any subsidiaries of the Company, or a spouse thereof. This does not include

members from a remuneration committee who exercises his/her power based on Article 7 of Regulations

Governing the Appointment and Exercise of Powers by the Remuneration Committee of a Company Whose

Stock is Listed on the Stock Exchange or Traded over the Counter.

(8) Not a relative within the second degree of kinship to any other director of the company.

(9) Not been a person of any conditions defined in Article 30 of the Company Act.

(10) Not a governmental, juridical person or its representative as defined in Article 27 of the Company Act.

Note. 3: Calculation is made per Order No. Financial-Supervisory-Securities-I-0960010070 of the Financial Supervisory

Commission, Executive Yuan

Note. 4: Data date as of 04/16/2013

Note. 5: Since 06/30/2011, Mr. Tiao-Kuei Huang has replaced Mr. J.H.Hsu and became the new representative of


15

(II) Management Team Information (Table 1-1)

March 15, 2013

Title

(Note 1) Name On-board Date

Shareholdings Spouse & Minors

Other

Controlling

Holdings

Education

(Note 2)

Selected Current

Positions at Other

Companies

Managers Who are Spouses or a

Second-degree Relative of

Consanguinity to Each Other

Shares % Shares % Shares % Title Name Relation

President Chang-Ken

Lee 02/25/2011 96,185 0.001% 0 0% 0 0%

M.B.A.,

University of

Pennsylvania,

USA

President,

Cathay United Bank

Consultant, Cathay

Life Insurance

Managing Director,

Cathay United Bank

Director,

Cathay Charity

Foundation, Culture

and Charity Foundation

of the CUB, Taiwan

Real-estate

Management Corp.,

and Development

International

Investment

- - -

Senior Executive

Vice President

Tzung-Han

Tsai 04/27/2011 3,159,450 0.029% 0 0% 0 0%

J.D., Georgetown

University, USA

Executive Vice

President,Cathay Life

Insurance

Director, Cathay Life

Insurance, Cathay

United Bank, and

Cathay Venture

Executive Vice

President, Tung Kee

Enterprise

Chairman Hong-Tu

Tsai Paternity

16

Title


Shareholdings Spouse & Minors

Other

Controlling

Holdings

Education

(Note 2)

Selected Current

Positions at Other

Companies

Managers Who are Spouses or a

Second-degree Relative of

Consanguinity to Each Other


Chief Auditor Ching-Ming

Pan 10/03/2012 95,275 0.001% 1,139 0% 0 0%

M.B.A,

National

Chengchi

University

- - - -

Chief Financial

Officer Grace Chen 01/09/2004 20,727 0% 0 0% 0 0%

M.B.A., National

Chengchi

University

Senior Executive Vice

President, Cathay

United Bank

Director, Cathay

United Bank, Taiwan

Finance and Ann Fong

Co.

Supervisor, Taipei

Forex Inc.

- - -

17

Title


Shareholdings Spouse & Minors Other Controlling

Holdings Education（Note 2） Current Positions at

Other Companies

Managers Who Are Spouses

or a Second-degree Relative

of Consanguinity to Each

Other


Division

Head David P. Sun 02/01/2008 0 0% 0 0% 0 0%

M.B.A. & M.S.,

Harvard University,

USA

Chairman, Cathay

Conning Asset

Management

Director, Foundation

for Scholarly

Exchange and Cathay

Charity Foundation

- - -

Chief

Investment

Officer

Sophia

Cheng 07/23/2012 0 0% 0 0% 0 0%

M. S. Golden Gate

University - - - -

Senior

Executive

Vice

President

Alan Lee 09/30/2008 0 0% 0 0% 0 0% M.B.A., National

Taiwan University


President / Managing

Director, Cathay

United Bank

Director, Cathay

Venture, Seaward

Card Co., Ltd. and

SBC

Supervisor, Taiwan

Real Estate

Management Corp.

- - -

Division

Head

Shun-Yu

Chuang 04/29/2009 283 0% 11,960 0% 0 0%

M.B.A.,

Massachusetts

Institute of

Technology, USA

Senior Vice

President , Cathay

Life Insurance

Director, Cathay

- - -

18

Title




Other Companies

Managers Who Are Spouses

or a Second-degree Relative

of Consanguinity to Each

Other


Securities Investment

Consulting

Supervisor, Cathay

Venture

Division

Head

Hsi-Lin Ho 06/29/2011 0 0% 0 0% 0 0% B.A., National Tsing

Hua University

Executive Vice

President, Cathay

United Bank

Director, Symphox

Information

- - -

19

Title（Note 1） Name On-board Date Shareholdings Spouse & Minors

Other Controlling


Other Companies

Managers Who Are

Spouses or a

Second-degree

Relative

of Consanguinity to

Each Other


Division Head Deh-Yen

Weng 06/29/2011 0 0% 0 0% 0 0%

M.B.A.,

Massachusetts

Institute of

Technology, USA

Director, Cathay

Conning Asset

Management - - -

Executive Vice

President

Shao-Chou

Huang 04/12/2004 58,389 0% 1,999 0% 0 0%

B.A.,

Feng Chia

University

President, Cathay

Securities Investment

Consulting - - -

Executive

Vice President

Chao-Chi

Tsai 03/15/2011 3,082 0% 0 0% 0 0%

B.A.

National Chiao Tung

University

- - - -

Senior

Vice President Shu-Ying Wu 04/10/2006 0 0% 0 0% 0 0%

M.B.A.,

Michigan State

University, USA

Director, Cathay

Investment

Consulting, Symphox

Information, and SBC

- - -

Senior Vice

President

Huan-Cheng

Chang 03/05/2009 57,202 0% 1,180 0% 0 0%

M.M.S.,

National Chung

Hsing University

- - - -

Senior Vice

President

Chang-Chao

Liao 04/06/2009 3,000 0% 0 0% 0 0%

LL.B. National

Chengchi University - - - -

Senior Vice

President

Shan-Chih

Liu 09/15/2010 0 0% 11,245 0% 0 0%

M.B.A.,

Massachusetts

Institute of

Technology, USA

- - - -

Senior Vice

President Yi-Fang Tsai 03/15/2011 0 0% 0 0% 0 0%

M.B.A.,

University of Illinois

Senior Vice President,

Cathay Life Insurance - - -

20

Title（Note 1） Name On-board Date Shareholdings Spouse & Minors

Other Controlling


Other Companies

Managers Who Are

Spouses or a

Second-degree

Relative

of Consanguinity to

Each Other


Senior Vice

President Pei-Ching Lin 03/15/2011 0 0% 15,049 0% 0 0%

E.M.B.A., National

Taiwan University

Manager, Cathay Life

Insurance - - -

Senior Vice

President

Wen-Chi

Chen 01/20/2012 0 0% 0 0% 0 0%

M.B.A., National

Taiwan University - - - -

Senior Vice

President

Hsiang Hsin

Tsai 12/21/2012 0 0% 0 0% 0 0%

M.B.A.,

Thunderbird School

of Global

Management


Insurance - - -

Senior Vice

President

Chao-Hsiang

Lin 02/07/2013 834 0% 0 0% 0 0%

M.B.A.,

National Chengchi

University /

M.B.A., Peking

University, China

- - - -

21

Note 1: This should include all Presidents, Executive Vice Presidents, Senior Vice Presidents, and those who hold the equivalent positions (regardless the job titles),

as well as, key managers from each department and branch entity

Note 2: Shareholding as of the book closing date of 04/16/2013.

Note 3: Experiences related with current position. Detailed job title and the working responsibilities should be described if previously worked for the auditing

accounting firm or its affiliated company.

Title

（Note 1） Name On-board Date


Holdings

Education

（Note 2）

Current Positions at

Other Companies

Managers Who Are

Spouses or a

Second-degree

Relative

of Consanguinity to

Each Other


Senior Vice

President Fu-Min Wang 02/07/2013 7,744 0% 0 0% 0 0%

B.A.,

Soochow University


Insurance - - -

Senior Vice

President

Chen-Tung

Chang 03/13/2013 24,235 0% 12,867 0% 0 0%

M.B.A.,

National Chiayi

University

Senior Vice President,

Cathay United Bank - - -

22

(III) Remuneration Paid to directors (including independent directors) and presidents and vice presidents, and bonuses paid to employees in 2012

1. Remuneration Paid to Directors (including independent directors) (Table 1-2)

12/31/2012; Unit: NT$ thousand

Title Name

(Note. 1)

Director‟s Remuneration

Sum of A, B, C

and D as percentage of

Net Income

(Note. 11)

Compensation Earned by a Director Who is an Employee of Cathay Financial Holdings or of the

Group Companies Sum of A, B, C ,D, E, F and

G as percentage

of Net Income

(Note 11)

Compensation

Received by

Directors

from Affiliates

Not Under the

Group

(12)

Compensation

(A) ( Note. 2)

Pension upon

retirement (B)

Allocated from

distribution of earnings © (Note. 3)

ServiceExpenses

(D) (Note. 4)

Base

Compensation,

Bonuses, and Allowances

(E) (Note. 5)

Pension upon

retirement (F)

Employee Bonus from

distribution of earnings (G) (Note. 6)

Exercisable

Employee

Stock Options (H)

(Note. 7)

Quantity of

shares acquired from restricted

employee share

option (Note. 13)

From

Cathay

Financial

Holdings

Consolidated

subsidiaries

(Note. 8)

From

Cathay

Financial

Holdings

Consolidated

subsidiaries

(Note. 8)

From Cathay

Financial

Holdings

Consolidated

subsidiaries (Note. 8)

From

Cathay

Financial

Holdings

Consolidated


From

Cathay

Financial

Holdings

Consolidated


From

Cathay

Financial

Holdings

Consolidated


From

Cathay

Financial

Holdings

Consolidated


From Cathay

Financial Holdings

Consolidated


From

Cathay

Financial

Holdings

Consolidated

subsidiaries

(Note. 8)

From

Cathay

Financial

Holdings

Consolidated

subsidiaries

(Note. 8)

From

Cathay

Financial

Holdings

Consolidated

subsidiaries

(Note. 8) Cash

Bonus

Stock

bonus

amount

Cash

Bonus

Stock

bonus

amount

Chairman

Pai Hsing Investment

Co., Ltd.

Representative:

Hong-Tu Tsai

23,062 61,887 0 1,458

1. P a i H s i n g

I n v e s t m e n t

C o . , L t d . :

N T $ 2 , 7 0 0

t h o u s a n d

2. W a n T a

I n v e s t m e n t

C o . , L t d . :

N T $ 1 , 2 0 0

t h o u s a n d

3. C h e n -

S h e n g

I n d u s t r i a l

C o . , L t d . :

N T $ 3 0 0

t h o u s a n d

4. T h e

F o u n d a t i o n o f

C a t h a y

E m p l o y e e

W e l f a r e

C o m m i t t e e :

N T $ 3 0 0

t h o u s a n d

5 . I n d e p e n d e n t

D i r e c t o r s :

N T $ 9 0 0

t h o u s a n d

1 . P a i H s i n g

I n v e s t m e n t

C o . , L t d . :

N T $ 2 , 7 0 0

t h o u s a n d

2 . W a n T a

I n v e s t m e n t

C o . , L t d . :

N T $ 1 , 2 0 0

t h o u s a n d

3 . C h e n -

S h e n g

I n d u s t r i a l

C o . , L t d . :

N T $ 3 0 0

t h o u s a n d

4 . T h e

F o u n d a t i o n

o f C a t h a y

E m p l o y e e

W e l f a r e

C o m m i t t e e :

N T $ 3 0 0

t h o u s a n d

5 .

I n d e p e n d e n t

D i r e c t o r s :

N T $ 9 0 0

t h o u s a n d

1,810 10,288 0.18% 0.47% 18,502 53,311 0 0 6 0 6 0 0 0 0 0 0.29% 0.78% 586

Vice

Chairman


Co., Ltd.

Representative:

Gregory K.H. Wang

Director

Wan Ta Investment

Co., Ltd.

Representative:

Cheng-Ta Tsai

Director

Chen-Sheng

Industrial Co., Ltd.

Representative:

Cheng-Chiu Tsai

Director

Wan Ta Investment

Co., Ltd.

Representative:

Tsu-Pei Chen

Director

Wan Ta Investment

Co., Ltd.

Representative:

Tiao-Kuei Huang

Director

Wan Ta Investment

Co., Ltd.

Representative: Ming-Ho Hsiung

Director


Co., Ltd.

Representative: Fa-Te Chang

Director

The Foundation of

Cathay Employee

Welfare Committee Representative:

Chang-Ken Lee

Director


Co., Ltd Representative: David

P. Sun

Independent

Director Min-Houng Hong

Independent

Director Tsing-Yuan Hwang

Independent

Director Andrew Ming-Jian

Kuo

23

Remuneration Range

Remuneration Paid to Directors by Range

Director Names

Total Remuneration from (A+B+C+D) Total Remuneration from (A+B+C+D+E+F+G)

From Cathay Financial Holdings (Note. 9)

Consolidated subsidiaries (Note. 10) I

From Cathay Financial Holding (Note. 9)

Consolidated subsidiaries (Note. 10) J

Under NT$2,000,000

Hong-Tu Tsai, Cheng-Ta

Tsia, Cheng-Chiu Tsai,

Tsu-Pei Chen, Fa-Te Chang,

Ming-Ho Hsiung, Tiao-Kuei

Huang, Chang-Ken Lee,

David P. Sun



Fa-Te Chang, Ming-Ho

Hsiung, Chang-Ken Lee,

David P. Sun



Tsu-Pei Chen, Fa-Te Chang,

Ming-Ho Hsiung, Tiao-Kuei

Huang


Tsia, Cheng-Chiu Tsai

NT$2,000,000 ~ NT$5,000,000 Gregory K.H. Wang None Gregory K.H. Wang None

NT$5,000,000 ~ NT$10,000,000

Min-Houng Hong,

Tsing-Yuan Hwang, Andrew

Ming-Jian Kuo

Min-Houng Hong,


Ming-Jian Kuo

Chang-Ken Lee, David P.

Sun, Min-Houng Hong,


Ming-Jian Kuo

Fa-Te Chang, David P. Sun,

Min-Houng Hong,


Ming-Jian Kuo

NT$10,000,000 ~ NT$15,000,000 None Tsu-Pei Chen, Tiao-Kuei

Huang None

Tsu-Pei Chen, Tiao-Kuei

Huang

NT$15,000,000 ~ NT$30,000,000 None Gregory K.H. Wang None

Gregory K.H. Wang,

Ming-Ho Hsiung,

Chang-Ken Lee

NT$30,000,000 ~ NT$50,000,000 None None None None

NT$50,000,000 ~ NT$100,000,000 None None None None

Over NT$100,000,000 None None None None

Total 13 13 13 13

Note. 1: Director names must be shown separately (for institutional directors, both the institution and the representative are required). All compensation paid must be added together. For directors who are also presidents

or vice presidents at the Company or the subsidiaries, Chart 2 below must be filled in.

Note. 2: This includes salary, compensation for professional services, severance pay, and all bonus and bounties paid to the director during the year.

Note. 3: The director‟s profit sharing of the latest fiscal year proposed and resolved by the Board but before the final approval of shareholders‟ meeting.

Note. 4: Payments to the director to cover business expenses (including travel expenditures, allowances, reimbursements, accommodation, company cars, in-kind supplies, etc.) If residences, cars (or other

transportations) or personal expenses are provided, information about the assets (including classification, cost, actual or fair market values of the rent, gasoline expenses, other perks) must be disclosed but not

24

included in the remuneration. Compensation paid to personal drivers must be noted, when applicable, but not accumulated under the remuneration received. Total compensation paid to the pertinent drivers by

the Group companies in the consolidated statement was NT$ 2,156 thousand for the period.

Note. 5: Payments to the director, who is also a president, vice president, manager, or employee, to cover business expenses (including travel expenditures, allowances, reimbursements, accommodation, company cars,

in-kind supplies, etc.) If residences, cars (or other transportations) or personal expenses are provided, information about the assets (including classification, cost, actual or fair market values of rent, gasoline

expenses, and perks must be disclosed but not included in the remuneration. Compensation paid to personal driver must be noted, when applicable, but not accumulated under the remuneration received. Total

compensation paid to the pertinent drivers by the Group companies in the consolidated statement was NT$ 2,167 thousand for the period.

Note. 6: Employee bonus (stock and cash bonus) to the director, who is also a president, vice president, manager, or employee. The rewarding amount is proposed and resolved by the Board but before the final approval

of shareholders‟ meeting of the fiscal years. If cannot be estimated, an amount = (the percentage received last year) x (net income this year) must be adopted and filled in Table 1-3.

Note. 7: Employee stock options granted (excluding exercised portion) to the director, who is also a president, vice president, manager, or employee, as of the printout date of this Report. The same information must be

disclosed in Table 15.

Note 8: Total remuneration paid by the Group companies (including the Company) in the consolidated statement to the director.

Note. 9: Disclose remuneration paid by the Company to the director under the suitable range. Name of the receiver must be shown under the suitable range.

Note. 10: Disclose remuneration paid by the Group companies (including the Company) in the consolidated statement to the director under the suitable range. Name of the receiver must be shown under the suitable

range.

Note. 11: Net income disclosed from latest financial statement of each company.

Note. 12: a. Remuneration amount received by directors from Non-group affiliates

b. For remuneration received by Company supervisors from Non-group affiliates, the amount must be shown in the Column E under the Remuneration Range Table. The Column must be renamed to “All

Investee Companies.”

c. Remuneration, including salary, compensation, employee bonus, business allowance, etc., received by directors from Non-group affiliates for being a director, supervisor, or managers.

Note. 13: Number of new restricted employee stock options granted (excluding exercised portion) to the director, who is also a president, vice president, manager, or employee, as of the printout date of this Report. The

same information must be disclosed in Table 16-1.

* Remuneration shown under the chart is for disclosure purpose. It is not subject to “income” under the Income Tax Act, and thereby is not taxable.

25

2. Remuneration Paid to Presidents and Vice Presidents

12/31/2012

Unit: NT$ thousand

Title Name

(Note. 1)

Salary (A)

(Note. 2)

Pension upon retirement

(B)

Bonuses & Allowance Paid

(C) (Note. 3)

Employee Bonuses from Profit Sharing

(D) (Note. 4)

Sum of A, B, C and D

as percentage of Net

Income (Note. 9)

Employee Stock Options Received

(Note. 5)

Quantity of shares

acquired from restricted employee

share option

(Note. 11)

Compensation

Received by Managers

from

Affiliates Not Under the

Group

(10)

From

Cathay

Financial Holdings

Consolidated subsidiaries

(Note. 6)

From

Cathay

Financial Holdings


(Note. 6)

From

Cathay

Financial Holdings


(Note. 6)

From Cathay

Financial Holdings

Consolidated

subsidiaries (Note. 6) From

Cathay

Financial Holdings


(Note. 6)

From

Cathay

Financial Holdings


(Note. 6)

From

Cathay

Financial Holdings


(Note. 6) Cash

Bonus

Stock

bonus amount

Cash

Bonus

Stock

bonus amount

President Chang-Ken Lee

30,354 57,419 729 729 17,775 38,851 39 0 39 0 0.29% 0.57% 0 0 0 0 439

Chief Auditor

Ching- Ming Pan

Senior

Executive Vice President

Tzung-

Han Tsai

Chief Financial Officer Grace Chen

Senior Executive

Vice President

David

P. Sun

Senior

Executive

Vice President

Alan Lee

Chief Investment Officer Sophia Cheng


Shun-Yu Chung

Executive

Vice President Xi-Lin Ho


Tsao-Chi Tsai

Executive

Vice President Deh-Yen Weng


Shao-Chou Huang

Former Chief

Auditor

Jing- Han Chen Retired on 10/03/2011

* All personnel who hold positions equivalent to president or vice president (such as chairman, executive, business director, etc) must be disclosed.

26

Remuneration Range

Remuneration Paid to all Presidents &

Vice presidents by Range

President & Vice President

From the Company

(Note. 7)


(Note. 8) (E)

Under 2,000,000

Ching-Ming Pan, Tzung-Han

Tsai, Shun-Yu Chuang,

Hsi-Lin Ho, Tsao-Chi Tsai

None

NT$2,000,000 ~ NT$5,000,000

Grace Chen, Sophia Cheng,

Deh-Yen Weng, Shao-Chou

Huang

Sophia Cheng, Shun-Yu Chuang,

Hsi-Lin Ho, Tsao-Chi Tsai,

Deh-Yen Weng, Shao-Chou Huang

NT$5,000,000 ~ NT$10,000,000

Chang-Ken Lee, David P.

Sun, Alan Lee, Jing-Han

Chen

Ching-Ming Pan, Tzung-Han Tsai,

David P. Sun, Jing-Han Chen

NT$10,000,000 ~ NT$15,000,000 None Grace Chen, Alan Lee

NT$15,000,000 ~ NT$30,000,000 None Chang-Ken Lee

NT$30,000,000 ~ NT$50,000,000 None None

NT$50,000,000 ~ NT$100,000,000 None None

Over NT$100,000,000 None None

Total 13 13

Note. 1: Names of the presidents and vice presidents must be shown separately. For managers who also serve as directors, both of this chart and

Chart 1 above must be filled in.

Note. 2: This includes salary, compensation for professional services, severance pay, and all bonus and bounties paid to the director during the

year.

Note. 3: Payments to presidents or vice presidents to reward or cover business expenses (including travel expenditures, allowances,

reimbursements, accommodation, company cars, in-kind supplies, etc.) If residences, cars (or other transportations) or personal

expenses are provided, information about the assets (including classification, cost, actual or fair market values of rent, gasoline expense,

and allowance) must be disclosed but not included in the remuneration. Compensation paid to personal driver must be noted, when

applicable, but not accumulated under the remuneration received. Total compensation paid to the pertinent drivers by the Group

companies in the consolidated statement was NT$ 3,332 thousand for the period.

Note. 4: Employee bonus (stock and cash bonus) to the president or the vice president. The rewarding amount is proposed and resolved by the

Board but before the final approval of shareholders‟ meeting of the fiscal years. If cannot be estimated, an amount = (the percentage

received last year) x (net income this year) must be adopted and filled in Table 1-3

Note. 5: Employee stock options granted (excluding exercised portions) to the president or vice president as of the printout date of this Report.

The same information must be disclosed in Table 15.

Note. 6: Aggregated amount of individual compensation paid by the Group companies (including the Company) in the consolidated statement to

the president or vice president.

Note. 7: Aggregated amount of individual compensation paid by the Company to the president or vice president. Names of the receivers must be

shown under the suitable range.

Note. 8: Aggregated amount of individual compensation paid by the Group companies (including the Company) in the consolidated statement to

the president or vice president. Names of the receivers must be shown under the suitable range.

Note. 9: Net income disclosed from latest financial statement of each company.

Note. 10: a. Remuneration amount received by the president or vice president from affiliates of the subsidiaries.

b. For remuneration received by the president or vice president from affiliates of the subsidiaries, the amount must be shown in the

Column E under the Remuneration Range Table. The Column must be renamed to “All Investee Companies.”

c. Remuneration, including salary, compensation, employee bonus, business allowance, etc., received by the president or vice president

from affiliates of the subsidiaries for being a director, supervisor, or manager.

Note. 11: Restricted employee stock options granted (excluding exercised portion) to the director, who is also a president, vice president,

manager, or employee, as of the printout date of this Report. The same information must be disclosed in Table 16-1.

＊ Remuneration shown under the chart is for disclosure purpose. It is not subject to “income” under Income Tax Act, and thereby is not

taxable.

27

3. Employee Bonuses Paid to Managers (Table 1-3) 12/31/2012

Unit: NT$ thousand

Title (Note. 1) Name (Note. 1) Stock Bonus

(Note. 2)

Cash Bonus

(Note. 2) Total

Total as a

Percentage of

Net Income (%)

Manager

(Note. 3)

President Chang-Ken Lee

0 66 66 0.0004%

Chief

Auditor Ching-Ming Pan

Senior Executive

Vice President Tzung-Han Tsai

Chief Financial

Officer Grace Chen

Chief Investment

Officer Sophia Cheng

Senior Executive

Vice President David P. Sun

Senior Executive

Vice President Alan Lee

Executive Vice

President Deh-Yen Weng

Executive Vice

President

Shao-Chou

Huang

Executive Vice

President Hsi-Lin Ho

Executive Vice

President Tsao-Chi Tsai

Executive Vice

President Shun-Yu Chuang

Senior Vice

President

Huan-Chen

Zhang

Senior Vice

President Shu-Yin Wu

Senior Vice

President Chang-Tsao Liao

Senior Vice

President Yi-Fang Tsai

Senior Vice

President Pei-Ching Lin

Senior Vice

President Ming-Huan Chen

Senior Vice

President Shan-Chi Liu

Senior Vice

President Chi-Ming Chen

Senior Vice

President Wen-Chi Chen

Senior Vice

President Shun-Xing Tsai

Note. 1: Individual name and title must be disclosed. Profit sharing awarded must be shown as an aggregated number.

Note. 2: Employee bonus (stock and cash bonus) to managers. The rewarding amount is proposed and resolved by the Board but before the final

28

approval of shareholders‟ meeting of the fiscal years. If cannot be estimated, an amount = (the percentage received last year) x (net

income this year) must be adopted. Net income disclosed from the latest financial statement of each company.

Note. 3: Managers subject to the rewarding (according to per 27 March 2003 Letter No. Securities and Futures Bureaus-III-0920001301 of the

Financial Supervisory Commission, Executive Yuan of the Taiwan Stock Exchange Corporation) are: 1) president or their equivalents 2)

executive vice president or their equivalents; 3) senior vice president or their equivalents; 4) chief financial officer; 5) chief accounting

officer; and 6) other persons authorized to manage affairs and sign documents on behalf of a company.

Note. 4: For directors, presidents, and executive vice presidents who received employee bonus (including stock and cash bonus), Table 1-2 must

be filled in other than this chart.

(IV) Compare respectively the ratio of the total amount of the remuneration paid to directors (including

independent directors), general manager and vice general managers of the Company and all

companies covered in the consolidated financial statements in the past two years to after-tax net

income shown through the individual or respective financial statements along with explanations of

the policies, standards and composition for remuneration payment, procedures to fix remunerations

and the interrelationship between the business performance and future risks

1. The Company paid remuneration paid to directors (including independent directors), president and

executive vicepresidents exactly on the grounds of their functions and general salary payroll criteria,

with reference to the results of performance evaluation.

2. Total remuneration paid during 2012 and 2011 was 199,448 thousand dollars and 167,549 thousand

dollars respectively, and the percentage of the after-tax net income during 2012 and 2011 was 1.2 %

and 1.5% respectively.

3. Based on the Company laws and articles of incorporation, the Company has set up a compensation

policy of officers and managers, which includes monthly salary, performance bonus, and retirement

benefits. The monthly salary is determined by taking into account the job duty, performance and

competence, as well as the industry compensation benchmark. Furthermore, the policy is proposed by

the Chairman, audited by the Compensation Committee, and taken effect after the Board‟s approval.

29

III. Corporate Governance

(I) Compensation Committee Member Information

Position

(Note. 1)

Criteria

Name

Possess at least Five Years‟ Work Experience

and Meet One of the Following Professional

Qualification Requirements

Independence Criteria (Note. 2)

Number of

Other Public

Companies in

which the

individual is

Concurrently

Serving as a

member of

Compensation

Committee

Notes

(Note. 3)

An instructor of

Commerce,

Law, Finance,

Accounting, or

other fields

related to the

business needs

of the

Company, in a

Public or

Private Junior

College,

College or

University

A judge, public

prosecutor,

attorney,

certified

public

accountant, or

other

professional or

technical

specialists who

has passed a

national

examination

and been

awarded a

certificate in

a profession

necessary for

the business of

the

Company

Have work

experience in

the areas of

Commerce,

Law, Finance,

or Accounting,

or otherwise

necessary for

the business of

the Company

1 2 3 4 5 6 7 8

Independent

Director

(Convener of

Compensation

Committee)

Tsing-

Yuan

Hwang

1 －

Independent

Director

(Member of

Compensation

Committee)

Min-

Houng

Hong

0 －

30

Independent

Director

(Member of

Compensation

Committee)

Andrew

Ming-

Jian Kuo

0 －

Note. 1: Please specify whether the individual is a director, independent director, or others; Note. 2: Please tick the corresponding boxes if members meet any of the following conditions during the two years before

being elected or during the term of office; (1) Not an employee of the Company or any of its affiliates; (2) Not a director or supervisor of the Companies. However, this does not include cases where the person is an

independent director of the Company, its parent company, or any subsidiary in which the Company holds, directly or indirectly, more than 50% of the voting shares;

(3) Not a natural-person shareholder who holds shares, together with those held by the person‟s spouse, minor children, or held by the person under others‟ names in an aggregate amount of 1% or more than the total outstanding shares of the Company or ranked in the top-10 holdings;

(4) Not a spouse, relative within the second degree of kinship, or lineal relative within the third degree of kinship, of any of the persons in the preceding three subparagraphs;

(5) Not a director, supervisor, or employee of a corporate shareholder that directly holds 5% or more of the total outstanding shares of a Company or that holds shares ranking in the top-5 holdings;

(6) Not a director, supervisor, officer, or shareholder holding 5% or more of the total outstanding shares of a specified company or institution that has a financial or business relationship with the Company;

(7) Not a professional individual who is an owner, partner, director, supervisor, or officer of a sole proprietorship, partnership, company, or institution that, provides commercial, legal, financial, accounting services or consultation to the Company, or to any affiliates of the Company, or a spouse thereof.

(8) Not been a person of any conditions defined in Article 30 of the Company Act; Note. 3: If the member‟s position is a director, please specify whether it meets conditions defined in #Article 6-5 under

“Regulations Governing the Appointment and Exercise of Powers by the Remuneration Committee of a Company Whose Stock is Listed on the Stock Exchange or Traded Over the Counter”.

31

(II) Implementation of Corporate Social Responsibility (CSR) (The systems, measures and implementation by the Company toward Environmental

Protection, Communities Participation, Social Contributions, Social Services, Social Welfare, Consumer Interests, Human Rights, Safety & Health

affairs and etc.) (Table 2-2-2)

Item Implementation Status

Deviation(s) from Corporate

Social Responsibility Best

Practice Principles for

TWSE/GTSM-Listed Companies

and Reason(s)

I. mplementation of Corporate Governance

(I) Corporate social responsibility policy or system

setup and performance evaluation

(I) A. In an attempt to strive for and fulfill the sacred mission to the society and to

assure balanced and sustained development in economy, society and

environmental ecology, Cathay Financial Holdings established the "Cathay

Financial Holding Corporation Corporate Social Responsibility Committee"

in November 2011. The Committee set up the "Cathay Financial Holding

Corporation Corporate Social Responsibility Code of Practice" according

to ”Listed Companies Corporate Social Responsibility Code of Practice” and

the business scope and operation activities of the Company and its

subsidiaries

B. To assure sound integrated management over the social responsibilities, our

Chairman assigned the ranking managerial officers of Cathay Financial

Holding Co., Ltd and its subsidiaries to serve as the Committee members of

the “Corporate Social Responsibility Committee”. Those Committee

members have dedicated themselves to study and work out a variety of

policies to fulfill the social responsibilities and superintend performance in

implementation by the subsidiaries of the Corporation.

None

32

Item Implementation Status

Deviation(s) from Corporate

Social Responsibility Best

Practice Principles for

TWSE/GTSM-Listed Companies

and Reason(s)

(II) Dedicated or adjunct unit for the promotion and

execution of corporate social responsibility

(II) A. The Company‟s Corporate Responsibility Committee set up the “Corporate

Responsibility Committee Objectives” based on the "Cathay Financial

Holding Corporation Corporate Social Responsibility Code of Practice".

The Committee includes the president of each subsidiary and is led by our

President as the chairman.

B. To carry out the work, five task forces, covering “Corporate Governance,”

“Customer Care,” “Employee Health,” “Environmental Protection” and

“Social Welfare,” were formed by staff from different subsidiaries and

departments. The Committee held four meetings in 2012 to verify the

operational status.

(III) Holding regular training and promotion of Business

Ethics among board of directors, supervisors and

employees, and integrating it with the employee

performance appraisal system for setting up a clear

and effective system of rewards and penalties.

(III) Honesty and Integrity are the core enterprise value of the Company and have

been established into the Work Rules with rewarding and disciplinary program

to outline all working requirements and supervising measures. In addition,

training and promotion of Money Laundering Control Act, Sexual Harassment

Prevention Act, Personal Information Protection Act and etc. are provided.

33

IV. Professional Fees to the Independent Auditor

(I) Range of Professional Fees to the Independent Auditor (Table 3)

Accounting Firm Name of CPA Audit Period Notes

Ernst & Young James Huang Andrew Fuh 2012/1/1~2012/12/31 None

Notes: If there‟s change/replacement of accounting firm or CPA, respective audit period should be listed under “Audit

Period” and the explanation must be made under “Notes”

Unit: NT$ thousands

Fee Item

Fee Range Audit Fee Non-audit Fee

1 Under 2,000 1,096

2 2,000~4,000

3 4,000~6,000

4 6,000~8,000 6,957

5 8,000~10,000

6 10,000 or more

(II) In Year 2012, the ratio of the non-audit fees paid to certifying CPAs, affiliated enterprise(s) of CPAs that

accounted for one quarter of the total audit fees: None.

(III) Facts of replacement of the Certificated Public Accountant(s) and the audit fee paid in the year of

replacement decreased from the year preceding the replacement: None.

(IV) Fact of audit fee decreased by more than 15% from the preceding year: None.

V. Information of Independent Auditor replacement (Table III~II)

(I) Information of the former CPAs:

Date of replacement March 15, 2012

Causes of replacement and the

explanation Adjustment of organization inside the CPA Office

Explanation about termination or

rejection to accept the appointment

by the Principal or the CPAs

The involved party

Facts

CPAs Principal

Taking the initiative to

terminate the appointment - -

No longer to accept the

(counterfeited) appointment - -

Opinions other than unqualified

opinion on the audit report over the

past two years, and the reasons

None

34

Date of replacement March 15, 2012

Causes of replacement and the

explanation Adjustment of organization inside the CPA Office

Any opinions with the Company

Yes

- About the accounting principles or

practices

- About disclosure of financial statements

- About the scope or steps of audit

- About other aspects

None

Explanation None

Other disclosures (The facts which

should be disclosed as required

under Article 10, Paragraph 5,

Subparagraph 1 (4) of the

Regulations Governing In

particulars Required for a Financial

Holding Company‟s Annual Report)

None

(II) Information of the succeeding Certificated Public Accountants

Name of the CPA Office Ernst & Young

Names of the CPAs James Huang, Andrew Fuh

Date of appointment 2012/3/15

Consultation about the

accounting methods or the

accounting principles over the

specifications transactions and

the potential opinions about the

financial statements before

appointment

None

Written opinions provided by

the succeedingCPAs

differing from the former

CPAs‟

None

(III) Written reply by the former CPAs about the disclosure as required under Article 10, Paragraph 5,

Subparagraph 1 (1, 2) Point 3 of the Regulations Governing In particulars Required for a Financial

Holding Company’s Annual Report: None.

35

VI. The facts about the Company chairman, president, managerial officer in

charge of financial or accounting affairs having served with the CPA Office

or the affiliation thereof over the past year

None of the Company chairman, president, managerial officer in charge of financial or accounting affairs

has served with the CPA Office or the affiliation thereof over the past year

VII. Facts about the director or supervisor, managerial office, or a same

person or a same affiliated enterprise having held the equity of a same

financial holding corporation with voting power exceeding the specified

ratio which should be declared under Article 11 of the Managerial

Regulations: The facts of equity transfer and change in equity pledge

(Table IV)

Facts of change in equity which should be declared as required (I)

Positions (Note 1) Names

Year 2012 The year till April 16, 2013

Increase (decrease) in the number of

shares held

Increase (decrease) in the number of shares

pledged

Increase

(decrease)

in the

number of

shares held

Increase (decrease)

in the number of

shares pledged

Major shareholder Wan Pao Development

Co., Ltd. 93,526,959 151,780,000 0

(225,006,000)

Major shareholder Lin Yuan Investment Co.,

Ltd. 80,682,937 160,901,550 0

(186,835,000)

Chairman Hong-Tu Tsai 2,171,201 0 0 0

Juristic (corporate)

person director and

the same related party

Pai Hsing Investment Co.,

Ltd. 4,212,513 0 0 0


person director and


Wan Ta Investment Co.,

Ltd. 5,697,242 1,000,000 0 0


person director and


Chen-Sheng Industrial

Co., Ltd. 1,155,076 0 0 0


person director

Cathay Life Employees'

Welfare Committee 1,469,185 0 0 0

As the same related

party

TUNG CHI CAPITAL

CO., LTD. 2,813,309 0 0 0

As the same related

party

Lin Chi Industrial Co.,

Ltd.

(Newly appointed on October

6, 2012) (Note. 5)

0 0 0 0

36




shares held


pledged

Increase

(decrease)

in the

number of

shares held

Increase (decrease)

in the number of

shares pledged

As the same related

party

Yi Ju Industrial Co., Ltd.

(Discharged from the post on

October 6, 2012)

173,232 0 (Note. 4) (Note. 4)

As the same related

party Chia Yi Capital Co., Ltd. 2,073,779 0 0 0

As the same related

party

Weng-Chuan Lin


6, 2012) (Note 5)

0 0 0 0

As the same related

party

Mei-Hui Wang


6, 2012) (Note 5)

0 0 0 0

As the same related

party

Weng-Chin Lin


6, 2012) (Note 5)

0 0 0 0

As the same related

party

Weng-Chen Lin


6, 2012) (Note 5)

0 0 0 0

As the same related

party

Hsiu-The Lin


6, 2012) (Note 5)

0 0 0 0

As the same related

party

Jen-Ching Yu


October 6, 2012)

0 0 (Note. 4) (Note. 4)

As the same related

party

Tsui-Chu Wu


October 6, 2012)

5 0 (Note. 4) (Note. 4)

As the same related

party

Fu-Tung Yu


October 6, 2012)

0 0 (Note. 4) (Note. 4)

As the same related

party

Min Yu


October 6, 2012)

13 0 (Note. 4) (Note. 4)

As the same related

party

Ching-Hui Yu


October 6, 2012)

0 0 (Note. 4) (Note. 4)

Vice Chairman Gregory K. H. Wang 13,713 0 0 0

37




shares held


pledged

Increase

(decrease)

in the

number of

shares held

Increase (decrease)

in the number of

shares pledged

Director Cheng-Ta Tsai 2,638,739 0 0 0

Director Cheng-Chiu Tsai 1,440,941 0 0 0

Director Tiao-kuei Huang 11,562 0 0 0

Director Tsu-Pei Chen 2,820 0 0 0

Director Fa-Te Chang 1,294 0 0 0

Director Ming-Ho Hsiung 1,775 0 0 0

Director

(Concurrent general

manager)

Chang-Ken Lee 4,580 0 0 0

Director David P. Sun 0 0 0 0

Independent director Min-Houng Hong 0 0 0 0

Independent director Tsing-Yuan Hwang 0 0 0 0

Independent director Andrew Ming-Jian Kuo 0 0 0 0


President Tzung-Han, Tsai 150,450 0 0 0

Chief Auditorl

Ching-Ming, Pan


3, 2012) (Note 7)

0 0 0 0

Chief Auditorl

Chin-Han Chen


October 3, 2012)

2,142 0 (Note. 4) (Note. 4)

Chief Financial

Officer Grace Chen 987 0 0 0

Chief Investment

Officer

Sophia Cheng

(Newly appointed on July 23,

2012) (Note 7)

0 0 0 0

Senior Executive

Vice President Alan Lee 0 0 0 0

Division Head Shun-Yu, Chuang 13 0 0 0

Division Head Hsi-Lin, Ho 0 0 0 0

Division Head Deh-Yen Weng 0 0 0 0

Executive Vice

President Shao-Chou Huang 2,780 0 0 0

Executive

Vice President Tsao-Chou Tsai 146 0 0 0

38




shares held


pledged

Increase

(decrease)

in the

number of

shares held

Increase (decrease)

in the number of

shares pledged

Senior Vice President

Shu-Ying Wu

(Newly appointed on

January 4, 2013)

(Note. 6) (Note. 6) 0 0

Senior Vice President Huan-Cheng Chang 2,723 0 0 0


Chang-Tsao Liao(Newly

appointed on January 4,

2013)

(Note. 6) (Note. 6) 0 0


Shan-Chi Liu

(Newly appointed on

January 4, 2013)

(Note. 6) (Note. 6) 0 0


Yi-Fang Tsai

(Newly appointed on

January 4, 2013)

(Note. 6) (Note. 6) 0 0


Pei-Ching Lin

(Newly appointed on

January 4, 2013)

(Note. 6) (Note. 6) 0 0


Wen-Chi Chen

(Newly appointed on

January 4, 2013)

(Note. 6) (Note. 6) 0 0


Shun-Xing Tsai(Newly

appointed on January 4,

2013)

(Note. 6) (Note. 6) 0 0


Tsao-Shun Lin(Newly

appointed on February 7,

2013)

(Note. 6) (Note. 6) 0 0


Fu-Ming Wang(Newly

appointed on February 7,

2013)

(Note. 6) (Note. 6) 0 0


Cheng-Dong Zheng

(Newly appointed on March.

13, 2013)

(Note. 6) (Note. 6) 0 0

Note. 1: Any of the aforementioned personnel who fill up this Table if holding over 1% of the total shares of the financial

holding corporation shall be remarked as a major shareholder and shall respectively enumerate such fact.

Note. 2: In the event that the opposite party of share transfer or share pledge is a related party, please additionally fill up

the following table.

Note. 3: As the same related party starting from February 2011 and thus no declaration was required as of January 2011.

Note. 4: Not required to declare information of change in equity.

Note. 5: As the same related party starting from October 2012 and thus no declaration was required between January to

39

September 2012

Note. 6: As an insider only starting from 2013 thus no declaration was required in 2012.

Note. 7: Not required to declare change in equity until new appointment.

Information of change in equity (II)

Name (Note. 1)

Causes leading to transfer in

equity (Note. 2)

Date of transaction

Counterparts of

transaction

The relationship between the transaction counterparts and the financial holding corporation‟s director, supervisor and shareholders over 10% in shareholding

Number of shares

Prices of transaction

None

Note. 1: Entries of the names of the financial holding corporation's directors and supervisors, managerial officers and

those where the same person or the same related party holds the voting powers of the issued shares which exceed

the ratios specified under Article 11 of the Managerial Regulations.

Note. 2: Entries of acquirement or disposal.

Information of equity pledge (III)

Name (Note. 1)

Causes leading to change in pledge (Note. 2)

Date of change

Counterparts of

transaction

The relationship between the transaction counterparts and the financial holding corporation‟s director, supervisor and shareholders over 10% in shareholding

Number of shares

Amount pledged

(redeemed)

None

Note. 1: Entries of the names of the financial holding corporation‟s directors and supervisors, managerial officers and

those where the same person or the same related party holds the voting powers of the issued shares which exceed

the ratios specified under Article 11 of the Managerial Regulations

Note. 2: Entries of pledge or redemption.

40

VIII. Information of Related Parties of the top ten shareholders (Table IV~I)

Name (Note 1)

Shares held by themselves

Shares held by

spouses, minor

children

Total of shares held

in the names of

others

Names and the relationship

among the top ten

shareholders in the

relationship of related

parties or spouses, blood

relatives within the second

degree of kinship (Note. 3)

Note

Number of

shares

Shareholding

ratio

(Note. 2)

Number

of

shares

Shareholding

ratio

(Note. 2)

Number

of

shares

Shareholding

ratio

(Note. 2)

Names or

titles Relationship

Wan Pao

Development

Co., Ltd.

Representative:

Weng-chuan Lin

1,964,066,155 18.08% 0 0% 0 0%

Lin Yuan

Investment

Co., Ltd

With the

same person

as the

representative

Wan Ta

Investment

Co., Ltd.

With the

same person

as the

representative

Pai Hsing

Investment

Co., Ltd.

Its

representative

is the

Company‟s

supervisor

Lin Yuan

Investment Co.,

Ltd

Representative:

Weng-chuan Lin

1,694,341,682 15.59% 0 0% 0 0%

Wan Pao

Development

Co., Ltd.

With the

same person

as the

representative

Wan Ta

Investment

Co., Ltd.

With the

same person

as the

representative

Pai Hsing

Investment

Co., Ltd.

Its

representative

is the

Company‟s

supervisor

Vanguard

Emerging

Markets Stock

Index Fund, A

Series Of

Vanguard

International

Equity Index

Funds

Representative:

Hui-hua Hsu

141,026,280 1.30% 0 0% 0 0% None

Labor Pension

Fund Supervisory

Committee-Labor

140,260,781 1.29% 0 0% 0 0% None

41

Retirement Fund

Representative:

Chao-his Huang

Citibank

(Taiwan) as

Directed Trustee

For GIC-

Government of

Singapore

120,265,008 1.11% 0 0% 0 0% None

Labor insurance

fund

Representative:

Wu-hu Lo

120,066,199 1.11% 0 0% 0 0% None

Wan Ta

Investment Co.,

Ltd.

Representative:

Weng-chuan Lin

119,642,082 1.10% 0 0% 0 0%

Wan Pao

Development

Co., Ltd.

With the

same person

as the

representative

Lin Yuan

Investment

Co., Ltd

With the

same person

as the

representative

Civil Servants

Pension Fund

Commission

Representative:

Che-chen Chang

92,283,387 0.85% 0 0% 0 0% None

Po Han

Investment Co.,

Ltd.

Representative:

Che-Hsien Su

91,466,691 0.84% 0 0% 0 0% None

Pai Hsing

Investment Co.,

Ltd.

Representative:

Teng-Ko Yeh

88,462,784 0.81% 0 0% 0 0%

Wan Pao

Development

Co., Ltd.

The

representative

is same as the

Company‟s

director

Lin Yuan

Investment

Co., Ltd

The

representative

is same as the

Company‟s

director

Wan Ta

Investment

Co., Ltd.

The

representative

is same as the

Company‟s

director

Note. 1: All top ten shareholders should be enumerated in full. In case of juristic (corporate) person shareholders, the

names of all such juristic (corporate) person shareholders and their representatives should be enumerated

respectively.

Note. 2: The shareholding ratios should be calculated based on the own names, names of spouses, minor children

42

respectively.

Note. 3: On the aforementioned shareholders, including juristic (corporate) persons and natural persons (individuals), the

relationship among them should be disclosed based on the rules for financial statements.

IX. Total Shareholding Ratio in Each Invested Enterprise (Table 5) 03/31/2013

Unit: thousand shares; %

Investees (Note. 1)

Held by the Company

Held by Directors,

Supervisors, Managers,

and Directly/Indirectly

Controlled Businesses

Total Investment

Shares % Shares % Shares %

Cathay Life Insurance Co., Ltd

5,306,527 100% 0 0 5,306,527 100%


5,227,703 100% 0 0 5,227,703 100%


252,295 100% 0 0 252,295 100%


386,666 100% 0 0 386,666 100%

Cathay Securities Investment Trust Co., Ltd.

150,000 100% 0 0 150,000 100%

Cathay Venture Inc. 200,000 100% 0 0 200,000 100%

Cathay Conning Asset Management Ltd.

31,200 50% 0 0 31,200 50%

Conning Holdings Corp.

101 9.9% 0 0 101 9.9%

Taiwan Depository and Clearing Corporation

1,331 0.41% 544 0.17% 1,875 0.58%

Note.1: Investees of Cathay Financial Holding Co., Ltd. and the subsidiaries

43

IV． Capital Overview

I. Capital and Shares (I) Capital Source (Table VI)

Unit: thousand shares; NT$ thousands

Date Issuing

Price

Registered Capital Total Paid-in Capital Notes

Shares Amount Shares Amount Source of Capital Other

Dec.

2001 None 12,000,000 120,000,000 5,838,615 58,386,157 Share swap with Cathay Life Insurance

None

Apr.

2002 None 12,000,000 120,000,000 6,095,872 60,958,728

Share swap with Cathay Century Insurance

and Cathay Bank

Dec.200

2 None 12,000,000 120,000,000 8,453,163 84,531,631 Share swap with United World Bank

Jan.

2003 None 12,000,000 120,000,000 8,307,489 83,074,891

De-capitalization due to cancelation of

treasury stocks

Tai-Tsai-Bao-No. 0920005950 (02/24/2003)

Feb.

2005 54.15 12,000,000 120,000,000 8,318,644 83,186,447 Corporate bond conversion

Apr.


Aug.


Oct.


Apr.


Aug.

2006 50.84 12,000,000 120,000,000 9,072,936 90,729,366

Corporate bond conversion and

capitalization of retained earnings

FSC,

Jin-Kuan-Yin-(6)-No.09500406660(09/21/

2006)

Oct.


Feb.


Apr.


Aug.

2008 None 12,000,000 120,000,000 9,737,537 97,375,372

Capitalization of retained earnings

FSC,

Jin-Kuan-Yin-(6)-No.09700330020(08/27/

2008)

Oct.

2009 None 12,000,000 120,000,000 9,670,877 96,708,774

De-capitalization through cancelation of

treasury

shares

FSC,

Jin-Kuan-Yin-Kong-No.09800513790(10/2

8/ 2009)

Spt.

2010 None 12,000,000 120,000,000 10,154,421 101,544,213


FSC,

Jin-Kuan-Yin-No.09900344130(09/14/

2010)

Aug.

2011 None 12,000,000 120,000,000 10,357,510 103,575,097


FSC,

Jin-Kuan-Yin-No.10000293110(08/25/

2011)

Sep.

2012 None 12,000,000 120,000,000 10,865,385 108,653,850


FSC,

Jin-Kuan-Yin-No.10100291270(09/12/

2012)

Note. 1: Data from the current year and before the printout date.

Note. 2: The effective date and the approval letter with reference number should be noted for capital increases.

Note. 3: If shares are issued at less than par value, such information shall be prominently indicated.

44

Note. 4: If monetary claims against the company or technology needed by the company are offset against share payments,

such information shall be specified and the type and amount of such offset shall also be noted.

Note. 5: If a private placement, such fact shall be prominently indicated.

Unit: thousand shares

Share Type

Registered Capital (Note. 1)

Notes Total Outstanding

Shares (Note. 2) Un-issued shares Total

Common Share 10,865,385 1,134,615 12,000,000 Listed Stocks

Note 1: At the 2009 shareholders‟ meeting, the proposal to increase the Company‟s registered capital from NT$120 billion

to NT$180 billion was resolved. The application was filed to the Financial Supervisory Commission for approval.

As the total paid-in capital of the Company is still under NT$120 billion, less than the previous registered capital,

the registration of the new capital amount, NT$ 180 billion, shall not be executed until the actual paid-in capital

reaches NT$120 billion.

Note. 2: Outstanding shares include 200 million treasury shares bought back on 10/07/2012.

(II) Shareholder structure (Table No. VII)

April 16, 2013

Shareholder

structure

Quantity

Government

authorities

Financial

institutions

Other juristic

(corporate)

persons

Individuals

Foreign

institutions and

juristic

(corporate)

persons

Total

Number of heads 19 310 1,209 428,122 1,178 430,838

Number of shares

held

396,108,457 525,756,858 4,665,886,653 3,184,690,695 2,092,942,409 10,865,385,072

Ratio of

shareholding

3.6456% 4.8388% 42.9427% 29.3104% 19.2625% 100%

(III) Fact of equity scattering (Table VIII)

Common shares

April 16, 2013; At NT$10 par value

Shareholding levels

Number of

shareholders

Number of shares held Ratio of shareholding

1 ~ 999 170,275 40,000,852 0.37%

1,000 ~ 5,000 162,770 365,269,776 3.36%

5,001 ~ 10,000 42,722 295,810,065 2.72%

10,001 ~ 15,000 20,780 246,204,918 2.27%

15,001 ~ 20,000 8,496 146,872,048 1.35%

45

Shareholding levels

Number of

shareholders

Number of shares held Ratio of shareholding

20,001 ~ 30,000 9,992 239,198,421 2.20%

30,001 ~ 50,000 7,101 271,400,856 2.50%

50,001 ~ 100,000 4,752 324,545,908 2.99%

100,001 ~ 200,000 2,052 276,184,387 2.54%

200,001 ~ 400,000 876 238,411,170 2.19%

400,001 ~ 600,000 291 142,263,158 1.31%

600,001 ~ 800,000 139 95,980,905 0.88%

800,001 ~ 1,000,000 95 86,888,778 0.80%

1,000,001 up 497 8,096,353,830 74.52%

Total 430,838 10,865,385,072 100.00%

Preferred shares

April 16, 2013

Shareholding levels Number of

shareholders Number of shares held Ratio of shareholding

Total None

(IV) List of major shareholders (Table IX)

Shares

Names of major shareholders

Number of shares

held Ratio of shareholding

Wan Bao Development Co., Ltd 1,964,066,155 18.08%

Lin Yuan Investment Co., Ltd. 1,694,341,682 15.59%

Vanguard Emerging Markets Stock Index Fund, A Series

Of Vanguard International Equity Index Funds 141,026,280 1.30%

Labor Pension Fund Supervisory Committee-Labor Retirement

Fund 140,260,781 1.29%

Citibank (Taiwan) as Directed Trustee For GIC-

Government of Singapore 120,265,008 1.11%

Labor insurance fund 120,066,199 1.11%

Wan Ta Investment Co., Ltd. 119,642,082 1.10%

Note: Shareholders enumerated above represent shareholders who held shares over 1% or shareholders ranking among the

top ten.

46

(V) Per share information (including market price, book value, earnings, share dividend) from 2011 to

2012 (Table X)

Year

Item 2011 2012 As of 03/31/2013

Market Share

Price (Note. 1)

Highest 55.40 37.00 42.60

Lowest 28.00 27.80 31.15

Average 41.59 30.96 37.18

Share Book

Value (Note. 2)

Ex-dividend 20.63 22.53 23.14

Post-dividend 19.20 (Note. 8) (Note. 9)

EPS

Weighted Average No of

Shares 10,809,707

thousand shares

10,665,385

thousand shares

10,665,385

thousand shares

EPS

(Note. 3)

Before

Adjustment 1.08 1.59 0.65

After Adjustment 1.03 (Note. 8) (Note. 9)

Per Share

Dividend

Cash Dividend 0.50 (Note. 8) (Note. 9)

Stock

Dividend

From Retained

Earnings 0.50 (Note. 8) (Note. 9)

From Special

Reserve 0 (Note. 8) (Note. 9)

Accumulated Unpaid Dividend

(Note. 4) 0 0 0

ROI Analysis

Price/Earnings Ratio (Note. 5) 40.38 19.47 (Note. 9)

Price/Dividend Ratio (Note. 6) 83.18 (Note. 8) (Note. 9)

Cash Dividend Yield (Note. 7) 1.20 (Note. 8) (Note. 9)

Note. 1: Please list the market share prices, including the highest, lowest and average for the year. Average market share

price should be calculated by applying the turnover value and the total turnover volume for the year.

Note. 2: Please use the number of the issuing shares in the year end as the base with the distribution decision resolved at

the shareholders‟ meeting held in the following year.

Note. 3: For retroactive adjustment made for stock dividends, both before and adjustments earnings per share should be

disclosed.

Note. 4: For securities issued with terms that entitle the holder to accumulate the unpaid dividend during the current year,

for receiving in an earning-generating fiscal year, the accumulated unpaid amount shall also be disclosed.

Note. 5: Price/Earnings Ratio = average share market price / earnings per share

Note. 6: Price/Dividend Ratio = average market price / cash dividends per share

Note. 7: Cash Dividend Yield = cash dividends per share / average share market price

Note. 8: Distribution for earning s in 2012 had not yet been resolved by the shareholder‟s meeting

Note. 9: Not applicable for quarterly data

(VI) Dividend Policy and Implementation

1. Dividend policies set under the Articles of Incorporation

(1) In order to continue the business expansion and to enhance the profit earning capability, as well as

to reserve the capital needed based on the long-term financial planning for perpetual operation and

stabilized development, the Company has adopted a residual dividend policy.

(2) The Company shall pay all the taxes, as required by the law and applicable regulations, from the

current year‟s earnings and make a regulatory required deduction for prior years‟ losses and

contributions to legal and special reserves when there are positive earnings shown on the approved

financial statements. The residual earnings shall then be added to the starting retained earnings as

the distributable base. The earnings distribution should be proposed by the Board and sent for

approval at the shareholders‟ meeting, at which allocation of employee bonuses should range from

47

0.01-0.05% of the total distribution.

(3) After the allocation of stock distribution, which is made based on the capital needed by the

Company‟s business plan, the residual earnings shall be distributed in cash with a portion no less

than 10% of the total distribution for that fiscal year.

2. Distribution of dividend proposed in the current shareholders‟ meeting: At NT$0.7 per share as cash

dividend and NT$0.7 per share as stock dividend.

(VII) Impact to 2012 Business Performance and EPS Resulting from the Proposal of Stock Dividend

Distribution Made at the Recent Shareholders’ Meeting

Per the Letter of Tai-Tsai-Cheng-(I) No. 00371 (02/01/2000), the Company need not disclose the impact

as no 2013 financial forecast was provided.

(VIII) Employee Bonus and Remuneration to the Directors and Supervisors

1. The percentage or range of profit sharing to the employees, directors and supervisors are delineated

under the Articles of Incorporation.

The Company shall pay all taxes, as required by the law and applicable regulations, from the current

year‟s earnings and make a regulatory required deduction for prior years‟ losses and contributions to

legal and special reserves when there are positive earnings shown on the approved financial statements.

Residual earnings shall then be added to the starting retained earnings as the distributable base. The

earnings distribution should be proposed by the Board and sent for approval at the shareholders‟

meeting, at which the allocation of employee bonuses should range from 0.01-0.05% of the total

distribution.

2. The basis for estimating the amount of employee bonuses, and director/supervisor compensation, shall

take into account the number of shares to be distributed as stock bonuses, and the accounting treatment

of any discrepancy between the actual distributed amount and the estimated figure for the current

period.

Two bases are used for the employee bonus estimate: the estimated figure 1) is taken from the average

of the actual bonus paid in the past three years and divided by number of months to derive a monthly

basis; or 2) applies the percentage stated under the Articles of Incorporation for expense recording.

Compensation paid to the directors shall follow the basis explained under “Cathay Financial Holdings

Co., Ltd., Regulations Governing Remuneration Paid to the Directors”. However, no such basis shall

be applied when there is a net loss. The estimated figure shall be accounted as an operation expense for

the current fiscal year. Accounting treatment for any discrepancy between the final approved figures

from the shareholders‟ meeting and the estimated figures shall follow the principles under the

Statements of Financial Accounting Standards.

3. Information Regarding Employee Bonuses Approved by the Board Meeting:

(1) If there are any discrepancies between the proposed value of the employee cash/stock bonuses,

and director/supervisor compensation approved by the board of directors, in relation to the

estimated figures in the period where the expenses are recognized, the discrepant value, its reasons,

and its status shall be disclosed: As estimated for the current term, the cash bonus to employees

would come to NT$1,493,843 and NT$5,400,000 as remuneration to directors.

(2) The value of any employee stock bonus proposal this term, its size as a percentage of the current

48

after-tax net income, and total employee bonuses shown through the individual or respective

financial statements: No employee stock bonus will be distributed for the current year.

(3) Earnings per share after taking into account any proposed distribution of employee bonuses and

director/supervisor compensation: NT$1.59/share.

4. The actual distribution of employee bonuses and director/supervisor remuneration for the previous

fiscal year (with an indication of the number, value and stock price of the shares distributed) shall be

declared. If there is any discrepancy between the actual distribution and the recognized employee

bonuses and director/supervisor compensation, the discrepancy, its cause, and its status must also be

listed.

(1) Employee bonuses: NT$1,016,093, which tallies with the original proposal from the board

meeting. In Year 2012, the Company had a total of 167 employees, with NT$6,084 distributed to

each and every employee.

(2) Board remuneration: NT$5,400,000, which tallies with the original proposal from the board

meeting.

(IX) Share Buyback by the Financial Holdings Company (Table XI)

03/31/2013

Number of buyback

(Note. 1) Fourth buyback

Purpose of buyback For share swap and corporate bond conversion

Buyback period 08/10/2011-10/07/2011

Buyback price range NT$33-45/share

Type and quantity of share buyback Type: Cathay Financial Holdings Common Stock

Quantity: 200,000,000 shares

Total amount paid for actual buyback NT$7,179,871,640

Group‟s capital adequency ratio before buyback (Note. 2) Base date: 06/30/2011

Ratio: 123.95%

Group‟s capital adequency ratio after buyback (Note. 2) Base date: 12/31/2011

Ratio: 130.96%

Number of shares annulled or transferred 0 shares

Cumulative number of company shares held 200,000,000 shares

Cumulative number of company shares held as a percentage

of total outstandingshares (%) 1.93%

Status of buyback shares transferred and exercised by

employees Not applicable

Restrictions if not completely transferred within three years

of buyback Not applicable

49

Note. 1: Number of columns is adjusted by the number of buybacks.

Note. 2: Please specify the base dates for capital adequency ratio calculation before/after the buybacks.

II. Issuance of Corporate Bonds (Chart XII)

Bond Type (Note. 2)

The first unsecured

subordinate debenture

in 2008 (2008-1) (Note.

6)

The first unsecured


in 2009 (2009-1)

The second unsecured

European Convertible

Bond

Issuing Date 12/24/2008 10/08/2009 08/14/2012

Face Value NT$1,000,000 NT$1,000,000 US$200,000

Issuing Place & Trading Exchange

(Note. 3) Not Applicable Not Applicable

Singapore Exchange

Securities Trading

Limited

Issue Price At par At par At par

Total Amount NT$20,000,000,000 NT$20,000,000,000 US$254,400,000

Interest rate 3.1%, fixed 2.65%, fixed 0%

Duration 7 years 7 years 2 years

Repayment Priority

The subordinate

bondholders are

repayable before the

residual claims of the

shareholders, but after

all other creditors in the

event of liquidation or

bankruptcy

The subordinate

bondholders are

repayable before the

residual claims of the

shareholders, but after

all other creditors in the

event of liquidation or

bankruptcy

The first priority

bondholders are

repayable before all

other bondholders of

the Company

Guarantor Not applicable Not applicable Not applicable

Trustee

Trust Department,

Mega International

Commercial Bank

Trust Department, The

Shanghai Commercial

& Savings Bank

The Bank of New York

Mellon

Underwriter Not applicable Not applicable JP Morgan Securities

Ltd.

Legal Counsel Counsel Chi-Chung Lin Counsel Chi-Chung Lin Baker & McKenzie

Auditor (Note. 4)

Accountant Chien-Che

Huang and Accountant

Rong-Huang Hsu

Accountant Chien-Che

Huang Ernst & Young

Repayment Bullet Bullet Bullet

Outstanding Amount NT$20,000,000,000 NT$20,000,000,000 US$254,400,000

Redemption or Early Repayment

Clause Not applicable Not applicable Note. 9

50

Bond Type (Note. 2)

The first unsecured


in 2008 (2008-1) (Note.

6)

The first unsecured


in 2009 (2009-1)



Bond

Covenants (Note. 5)

If the Group‟s capital

adequency ratio is

lower than the

regulatory

requirements, due to

payments of interest or

principal, all such

payments will be

suspended until the

capital adequency ratio

is recovered (the

overdue interest and

principal shall be

accrued at the coupon

rate)

If the Group‟s capital

adequency ratio is

lower than the

regulatory requirement

due to payments of

interest or principal, all

such payments shall be

suspended until the

capital adequency ratio

is recovered (the

overdue interest and

principal shall be

accrued at the coupon

rate)

None

Included in Eligible Capital Yes Yes No

Credit Rating

Credit Agency: Taiwan

Ratings

Rating Date:

04/29/2009

Rating:

twA+

Credit Agency: Taiwan

Ratings

Rating Date:

08/13/2009

Rating:

twA+

None

Other Rights

of

Bondholders

Amount Converted or

Exchanged to

Common Shares,

GDRs or Other

Securities as of the

Publication of this

Annual Report

Not applicable Not applicable None

Issuing and Conversion

Rights (Exchange or

Share Acquisition)

Not applicable Not applicable

Conversion Price

The initial conversion price

was NT$38.1 at the issuing

and was adjusted to

NT$36.29 after the stock

dividend was distributed on

08/14/2012. (Note. 9)

Dilution Effect and Other Effects on

Existing Shareholders from the

The effects of the

issuance are beneficial

The effects of the

issuance are beneficial Note. 10

51

Bond Type (Note. 2)

The first unsecured


in 2008 (2008-1) (Note.

6)

The first unsecured


in 2009 (2009-1)



Bond

Issuance, Conversion, Exchange,

Share Acquisition, or Issuing Terms

to the shareholders. The

proceeds are used to

strengthen the

self-capital, improve

the capital adequency

ratio, and to reinvest in

Cathay Life Insurance.

to the shareholders. The

proceeds are used to

reinvest in Cathay Life

Insurance and Cathay

Century Insurance, for

making future

mergers/acquisitions,

and for injecting into

other subsidiaries.

Custodian Agent for Objects

Exchanged

None None None

Note. 1: Corporate bonds include both public and private offerings. The publicly offered bonds are those approved byFSC.

The privately offered bonds are those approved by the Board.

Note. 2: The number of columns is adjusted by number of issuances or application approvals.

Note. 3: Please fill in for Overseas bonds.

Note. 4: The accountants responsible for reviewing legal compliance based on the relevant regulations for the issuance of

the bond.

Note. 5: Such as restrictions of cash distribution or outward investments, or for the maintenance of certain asset ratios.

Note. 6: If a private offering, please indicate prominently.

Note. 7: For convertible corporate bonds, exchange corporate bonds, shelf registration for issuing corporate bonds, and/or

corporate bonds with warrants, should be listed according to their features first followed by a detailed

description.

Note. 8: Outstanding bonds should be disclosed together with the approval document from the supervising government

authorities.

Note. 9: Regulations Governing Issuance and Transfer of the second unsecured European Convertible Bond of the

Company for details. (http://mopsov.twse.com.tw)

Note 10: The Offering Circular of the Company‟s Corporate Bonds for details (http://mopsov.twse.com.tw)

http://mopsov.twse.com.tw/

http://mopsov.twse.com.tw/

52

III. Issuance of Preferred Shares (Table XIII)

None.

IV. Issuance of Global Depositary Receipts (Table XIV) Issuing Date

Item 07/29/2003

Initial Issuance (Note. 4)

11/09/2004

Seasonal Issuance

(Note. 4)

2005~04/30/2009

(Through ECB conversion)

(Note. 4)

Issuance & Listing Issuance: Europe, Asia, and the U.S.A.

Listing: Luxembourg Stock Exchange

Total Amount US$521,605,500 US$494,528,116

The calculation of the number of

units is based on the conversion

price, ECB exchange rate, and the

GDR unit converted from the

ECB.

Issue Price Per GDR US$11.63 US$19.40 Based on the conversion price and

exchange rate of the ECB.

Units Issued 44,850,000 units 25,491,140 units 3,216,324 units

Underlying

Securities

Common and treasury shares

held by Cathay Life Insurance

Treasury shares of the

Company

New common shares issued by

the Company

Common Shares

Represented 448,500,000 shares 254,911,400 shares 32,163,240 shares

Rights &

Obligations of

GDR Holders

Same as those of the

common shareholders

Trustee The Bank of New York Mellon

Depositary Bank The Bank of New York Mellon

Custodian Bank Trust Department, Mega International Commercial Bank

Outstanding Balance

(Note. 5) 2,978,774 units

Apportionment of

Expenses for

Issuance &

Maintenance

Issuing expenses are paid by

Cathay Life Insurance and the

Company. Expenses (including

the listing fee, information

disclosure and other fees)

occurred during the listing

period are covered by the

Company in general.

Borne by the Company

Terms and

Conditions in

the Deposit

Agreement &

Custody Agreement

Based on the relevant laws and regulations of the R.O.C., the GDR holders have the rights and

responsibilities that are stipulated in the Deposit Agreement. The rights and responsibilities of

the depository and custodian agencies are stipulated under the custody agreement.

Closing Price Per

GDR

(note. 3)

2012

Highest US$12.18

Lowest US$9.32

Average US$10.47

As of 03/29/2013 Highest US$14.13

Lowest US$9.32

53

Issuing Date

Item 07/29/2003

Initial Issuance (Note. 4)

11/09/2004

Seasonal Issuance

(Note. 4)

2005~04/30/2009

(Through ECB conversion)

(Note. 4)

Average US$10.81

Note. 1: Corporate bonds include both public and private offerings. The publicly offered bonds are those approved byFSC

The privately offered bonds are those approved by the Board.

Note. 2: The number of columns is adjusted by the number of issuances or application approvals.

Note. 3: Those who have issuing Global Depositary Receipts, the market closing prices for the security in the current year

and before the printout date of this Report should be listed. If listed in multiple exchanges, all bourses should be

shown.

Note. 4: If a private offering, please indicate prominently.

Note. 5: Outstanding balance as of 03/29/2013.

V. Issuance of Employee Stock Option Plan (Table XV and Chart XVI)

None.

VI. Issuance of Issuance of New Restricted Employee Shares (Table XV-I and

Chart XVI-I)

None.

VII. Mergerand Acquisitions or Transfers of other Financial Institutions

(Table XVII)

(III) Merger/Acquisitions or Transfers of Other Financial Institution Carried Out in the Current Year

None.

(IV) Status of Mergers/Acquisitions or Transfers of Other Financial Institutions in the Past Five Years

Year Merged/Acquired or Transferred Institutions Means of Merger or

Acquisition Underwriter Opinion

2011 Cathay Securities Investment Trust Co., Ltd. Cash Purchase None

(V) Implementation Status of New Share Issuance in Connection with Mergers and Acquisitions or

Transfers of Other Financial Institutions Approved by the Board and Information Regarding

Merged or Acquired Institutions

The Company acquired, on 06/24/2012, 100% of Cathay Securities Investment Trust Co., Ltd. for a price

of NT$64.3/share and incorporated it as a wholly-owned company. Basic information about Cathay

Securities Trust Co., Ltd. is as follows:

Unit: NT$ thousands

Financial Institution Cathay Securities Investment Trust Co., Ltd.

Address No.296, Sec. 4, Ren‟ai Rd., Da‟an Dist., Taipei City

Responsible Person Yin-Feng Wu

Total Paid-in Capital 1,500,000

Core Business Securities investment trust, securities investment consulting,

discretionary investment, futures trust, other business approved by

54

the Financial Supervisory Commission of the R.O.C

Core Products Mutual Funds

Financials from

the Current

Year

Total Assets 2,315,431

Total Liabilities 283,595

Total Shareholders‟ Equity 2,031,836

Revenue 1,111,684

Operating Revenue 310,782

Operating Profit 333,615

Current Net Income 277,157

EPS 1.85

VIII. Implementation of the Capital Utilization Plans

(I) The Plan

I. Capital raised by the issuance of unsecured subordinate corporate debentures in 2009:

1. Capital utilization plan: strengthening the self-capital and the capital adequency ratio, and making

strategic investments or capital injection of subsidiaries.

2. Approval date and document: Jin-Kuan-Cheng-Fa-No. 0980046181 (09/16/2009)

3. Total capital needed for the plan: NT$20,000,000,000

4. Source of Capital: issuing unsecured subordinate corporate debentures for NT$20,000,000,000

5. Planned uses of capital and the planned schedule: Unit: NT$ thousands

Plan Item Completed

Date

Total Capital

Needed

Use of Capital

2009

1st Quarter 2

nd Quarter 3

rd Quarter 4

th Quarter

RBC improvement,

financial structure

strengthening, subsidiary

reinvestment, and future

merger/acquisition

4th

Quarter/2009 20,000,000 0 0 0 20,000,000

6. Effects:

(1) Investment return: 4.42% return on equity on average in the past five years

(2) Improved capital adequency ratio for the Group and the subsidiaries

II. Capital raised by the issuance of the second unsecured European Convertible Bonds in 2012:

1. Capital allocation plan: debt refinancing and strengthening self-capital

2. Approval date and document: Jin-Kuan-Cheng-Fa-No. 1010016452 (05/03/2012) and

Jin-Kuan-Cheng-Fa-No. 1010034219 (07/27/2012)

3. Total capital needed for the plan: US$300,000,000 (NT$8,850,000,000)

4. Source of Capital:

(1) Issuing the second unsecured European Convertible Bonds with a total issuing limit of

US$300,000,000

(2) The shortfall, if any, will be made up by bank borrowing

5. Planned uses of capital and the planned schedule:

55

Unit: NT$ thousands

Plan Item Completed

Date

Total Capital

Needed

Use of Capital

2012

1st Quarter 2

nd Quarter 3

rd Quarter 4

th Quarter

Debt refinancing 2nd

Quarter/2012

6,490,000 0 6,490,000 0 0

Strengthening self-capital 2,360,000 0 2,360,000 0 0

Total 8,850,000 0 8,850,000 0 0

6. Effects:

(1) Interest savings: interest expenses were cut down by NT$62 million after the repayment of

NT$6.49 billion

(2) Financial structure strengthening: as of the end of 2012, the debt-to-equity ratio was 21.9% and the

double-leverage ratio was 115.6%

(II) Implementation Status

The Company completed the raising of NT$20 billion in 10/08/2009 through the issuance of the first

unsecured subordinate corporate debentures in 2009 (2009-1). The proceeds were used for the

investments of: 1) Cathay Life Insurance‟s Series-B preferred stocks for NT$10 billion on December

16th, 2009; 2) Cathay Life Insurance‟s Series-C preferred stocks for NT$5 billion on November 11th,

2011; 3) Cathay Century Insurance‟s Series-A preferred stocks for NT$1 billion on November 11th,

2011. The residual NT$4 billion was kept for future merger/acquisitions or for capital adequency

ratio improvement. The use of the capital and the planned implementation status are as follows:

Plan Item Implementation Status As of 03/31/2012 Notes

Capital adequency

ratio improvement

and financial

structure

strengthening for the

Company,

reinvestments in

subsidiaries, and

future

merger/acquisitions

Capital used

(NT$ thousands)

Planned 20,000,000 The investments of: 1) NT$15

billion in Cathay Life

Insurance; 2) NT$1 billion in

Cathay Century Insurance have

been completed. The original

plan for the residual NT$4

billion in 2009 was put on hold

due to uncertain investment

yields and the market situation.

The remaining capital will be

kept from the original plan to

conduct merger/acquisitions or

for capital injection into the

subsidiaries for capital

adequency ratio improvement

when the market recovers.

Actual 16,000,000

Implementation

Status

Planned 100.00%

Actual 80.00%

Capital raised by the issuance of the second unsecured European Convertible Bonds in 2012:

The Company‟s second unsecured European Convertible Bonds were issued on 08/14/2012 and raised

56

US$254.4 million. The proceeds were used to refinance NT$6,490,000,000 of debt. The residual

capital will be used to expand the self-capital. The use of the capital and the planned implementation

status are as follows:

Plan Item Implementation Status As of 03/31/2013 Notes

Debt refinancing

and self-capital

expansion

Capital used

(NT$ thousands)

Planned 8,850,000 Use of capital completed:

The Company's corporate bonds were

already issued on August 14, 2012.

All funds so raised were used to

reimburse loans and to expand

working capitals in Quarter 3, Year

2012.

Actual 8,850,000

Implementation

Status

Planned 100.00%

Actual 100.00%

57

V． Overview of Operations

I. The content of business

(I) The scope of business


1. Main business services:

The Company is a financial holding company and the scope of its business is limited to investment in

and management of enterprises in which it has invested under the Financial Holdings Company Act.

Financial holding companies may invest in the following business:

(1) Banking

(2) Bills finance

(3) Credit cards

(4) Trust

(5) Insurance

(6) Securities

(7) Futures

(8) Venture capital investment

(9) Investment in foreign financial institutions at the approval of the competent authority.

(10) Other banking related business as recognized by the competent authority.

2. Revenue breakdown:

3. New financial products and services scheduled to develop

The main business of the Company is investment and management of investees. For information of the

development of new financial products and services, please refer to the following parts of the

subsidiaries.

Revenues in 2012 Amount

(in 1,000 NTD) Percentage (%)

Retu

rn o

n in

vestm

ent reco

gnized

under

equity

meth

od

Cathay Life Insurance 3,279,988 19

Cathay United Bank 13,068,125 75

Cathay Century Insurance 690,635 4

Cathay Securities Corporation 162,945 1

Cathay Venture 174,079 1

Cathay Securities Investment Trust 277,157 1

Cathay Conning Asset Management (67,401) -

Subtotal 17,585,528 101

Other incomes 1,195,048 7

Other expenses and losses (1,441,998) (8)

Total 17,338,578 100

58


I. The content of principal business:

Cathay Life Insurance Co., Ltd. is a life insurer and is engaged in the sales of life insurance policies

and related products.

II. Proportion of business:

Business type Percentage (%)

Life insurance 66

Accidental injury insurance 3

Health insurance 12

Annuity 2

Investment-linked

insurance 17

Total 100

III. New financial products and services under planning:

After half a century of operation, Cathay Life Insurance launched its three-year organizational

transformation plan in May 2012 for optimizing organizational efficacy. All of the Company shares the

core value of “integrity, accountability, innovation” in pioneering work and doing the best of the best.

In business operation, the Company will continue to take a proactive stance in providing service, visit

customers regularly, upgrade the competence of personnel, and vitalize the organization. In treasury

management, the Company will implement proper risk management, make timely adjustment of its

asset allocation in order to optimize the performance in the use of capital. In the area of integrated

marketing, the Company will continue its effort in the marketing of property insurance, credit card,

bank accounts, and repurchase of maturity benefit for the effective use of group resources and enhance

operation performance. The Company will continue its development in the markets of Mainland China

and Vietnam, and assess the feasibility of operation in other overseas markets. With a steady and stable

pace, the Company will approach the goal of being “the best financial institution in the Asia-Pacific

region.”


1. The content of principal business:

(1) Wealth management

(2) Consumer banking

(3) Corporate banking

(4) International banking

(5) Electronic banking

(6) Trust

(7) Investment and treasury marketing

2. Proportion of business:


Consumer banking 43

Corporate banking 30

Investment and other 13

Wealth management 14

Total 100

59

3. New financial products and services under planning:

(1) The Bank shall be conservative and pragmatic in action, and continue to vitalize the bank, to

realize a culture of corporate governance and risk management. With the proper use of the

internal system recourse and the integration of market information, the Bank shall exercise strict

control and monitor changes in asset quality and BSI ratio in order to surpass industry peers in

profitability and asset quality, and to optimize shareholders‟ equity.

(2) Upgrade the business performance of the Bank through organizational reengineering. The mode

of operation has been changed to “customer-oriented” through customer segmentation for

providing full-range financial service and bringing in momentum for growth.

(3) With the introduction of the performance-oriented management system, the Bank has attracted

and encouraged employees to accomplish the organizational goal. The Bank will continue to

optimize its internal regulations to attract talent, refine the professional skills of individual

employees, broaden their professional skills, and upgrade the overall competitiveness of the

organization.

(4) Integrate the resources of the Bank and the Group and make use of the densely constructed

virtual and physical network to realize the value of joint marketing and channel sales. Provide a

wide array and innovative products to satisfy the diverse needs of customers and one-stop

shopping.

(5) Make effort to develop overseas markets and expand business overseas. Explore the market in

Greater China and Southeast Asia and further cultivate interactions with customers. Starting from

Taiwan, the Bank shall make use of the deregulation of the financial markets and seek to emerge

as the best bank in the Asia-Pacific.



Cathay Century Insurance is a property insurer that sells different types of insurance policies

(including injury and health) and related products.



Automobile insurance 58

Fire insurance 17

Flood insurance 6

Construction insurance 4

Other insurance 15

Total 100

3. New financial products and services under planning:

(1) Personal insurance

(2) Commercial insurance

(3) Comprehensive insurance

(4) Special channel insurance

(5) Guaranteed renewable health insurance



(1) Securities underwriting

(2) Dealing of securities on central exchange

(3) Brokerage trading of securities on central exchange

60

(4) Dealing of over-the-counter securities

(5) Brokerage trading of over-the-counter securities

(6) Margin financing and stock lending

(7) Registrar and transfer services

(8) Sub-brokerage business on foreign exchanges

(9) Wealth management

(10) Introducing futures brokering

(11) Futures business

(12) Other securities-related business approved by the regulator



Brokerage 43

Proprietary trade 49

Underwriting 8

Total 100

3. New financial products and services under planning

(1) Integrate the electronic ordering platform and build up the brand identification image of “Cathay

Genie”. The Company initiated the news broadcasting service and hence helped to upgrade the

quality of the trade order system.

(2) Issue and promotion H shares-linked warrants. Issue or underwrite bonds and related instruments

denominated in CNY.

(3) Support the service quality plan of the Cathay Financial Holdings in launching the full-range

customer service improvement plan for enhancing customer satisfaction with service.

(4) Evaluate the development of offshore securities units (OSU) securities business to provide

customers with better product mix and tax advantage platform.



(1) Securities investment trust

(2) Discretionary investment

(3) Securities investment consulting

(4) Futures trust

(5) Other business approved by Financial Supervisory Commission


Business type Proportion (%)

Management fee income –

mutual funds 78

61

Business type Proportion (%)


private placement funds 0


futures trust funds 1


discretionary investment

21

Sales commission incomes 0

Total 100

3. New products and services under planning:

(1) Properly classify customers into appropriate categories for differentiated marketing and the

development of good quality accounts.

(2) Develop mobile financial services to provide customers more convenient channels for wealth

management.

(3) Develop products denominated in foreign currencies, and provide a wide array of product lines.

Cathay Venture Inc.


Cathay Venture is a venture capital investment firm principally engaged in the investment of

companies not yet listed on the exchange or OTC market but that are highly promising, and assists

investees in development for creating investment return.

2. Proportion:

Operating income Proportion (%)

Management consulting

income 9

Securities sales and

investment income 90

Interest and other

incomes 1

Total 100

(II) Business plan of the year

Cathay Financial Holdings

Cathay Financial Holdings is committed to maximizing value for its shareholders, customers and

employees. Our future development strategies will focus on three areas to achieve our goal of being

the best financial institution serving Asia-Pacific: optimizing business structure to build up triple

engines for growth; strengthening distribution in China to grasp market opportunities; moving

into Southeast Asian markets to enhance overseas profit contribution. Our 2013 business plan is

outlined below:

1. Optimizing business structure to build up triple engines for growth

62

Aside from continuing to develop the core businesses of banking and insurance, Cathay Financial

Holdings is aggressively building up the third growth engine – asset management business. For the

banking and insurance businesses, we will, on the basis of existing foundation, optimize business

structure to enhance profitability. In addition, we have identified expansion of asset management

business as the Group‟s development focus in the current stage. Besides Cathay Securities

Investment Trust in Taiwan, we have established Cathay Conning Asset Management (CCAM) in

Hong Kong and a fund management joint venture with China Development Bank Securities in

China. With our asset management platforms in Taiwan, Hong Kong and China in place, Cathay

Financial Holdings aims to become a full-fledged financial institution built on three pillars - bank,

insurance and asset management.

2. Strengthening distribution in China to grasp market opportunities

Cathay Financial Holdings is the first financial institution in Taiwan that established a life insurance

subsidiary and a non-life insurance subsidiary in China. We have currently established a presence in

the coastal regions of China and will place greater focus on growing the local markets and build

brand recognition in the future. As for our plan of establishing presence in the banking markets in

Greater China Area, the Group is developing the funds flow business serving mainly Taiwanese

companies in Taiwan, Hong Kong and China based on the main services offered by our Shanghai

Branch, Hong Kong Branch, and Cathay United Bank in Taiwan, respectively. We also actively vie

for the opportunity to offer Chinese companies financial services involving external trade and

investment. In the long run as our banking network expands and our life and non-life operations

gain more brand recognition in China, we will try step-by-step to duplicate our success experience

of business integration and marketing in Taiwan to create operational modes that is different from

other financial institutions.

3. Moving into Southeast Asian markets to enhance overseas profit contribution

Cathay Financial Group adopts the strategic direction of boosting overseas earnings. Apart from

expanding the Chinese markets, the Southeast Asia has become a rapid-growth area that draws

influx of capital and accumulates wealth. As we continue to mull over how to grasp the business

opportunities emerged from the Southeast Asian markets, we must elevate our vision and horizon

from the perspective of a local player to that of a regional player. In the future, we will continue to

employ a variety of approaches, such as setting up branches, equity participation, merger and

acquisition and strategic alliance to aggressively develop the Southeast Asian markets, and increase

the overseas profits contribution, making Cathay financial Group gradually achieve the goal of

becoming the “best financial institution in Asia-Pacific.”


1. Business development strategy

(1) Strengthen the sense of responsibility and positioning of executives at all levels and the

mechanism for the training of new employees, enhance the competence of the management staff

and quality of new employees, and enhance the development and productivity of the organization.

(2) Launch the mode of active marketing to strengthen customer relations and create sales

opportunities, and increase the opportunity of repurchase and profitability.

(3) Integrate group resources, reinforce integrated marketing, and upgrade the operational efficiency

of the whole group.

(4) Continue to explore the markets in Mainland China and Vietnam, train local people and develop

overseas business.

2. Product strategy

63

(1) Develop innovative products in line with market trends, provide a wide array of protection for the

policyholders, and stimulate customer needs.

(2) Analyze customer attributes and develop differentiated products for differentiated marketing and

customer bonding.

(3) Integrate the attached service of the group and form alliances with other industries to enhance

customer purchase incentives and to develop more business.

3. Customer service strategy

(1) Develop service-oriented sales, enhance customer relations and increase repetitive purchases.

(2) Provide channels for diverse coverage of the policyholders and enhance operational efficiency for

higher customer satisfaction.

(3) Develop mobile insurance service in line with mobile device and service trends to compress lead

time for the convenience of the insured.

4. Logistic support management

(1) Optimize the human resources development plan and reward program commensurate with

performance, upgrade the professional standing of the administrative and sales personnel, train a

professional team for stronger competitiveness.

(2) Construct a viable training system by using online and mobile learning platforms and GPS

technology to vitalize the mechanism of follow-up training and supervision that in turn contribute

to operational performance.

(3) Continue to implement e-Services and develop the mobile platform, simplify the operation

process and upgrade operational efficiency and customer satisfaction.

Cathay United Bank Co., Ltd

1. Wealth management

(1) Develop the clientele base in depth and in scope: Properly prepare different wealth management

products for different customer groups with special offers, get closer to customers and make

products user-friendly. Provide incentives for customers to do business with the Bank and launch

special theme for marketing on special occasions. Launch integrated marketing projects to draw

the attention of customers, and increase the market share of our products.

(2) Flexible use of innovative mindset: training and developing professional wealth management

staff is vital to the wealth management business. Develop innovative products with innovative

mindset and use flexible marketing strategy for promotion of business in order to build up a

healthy and viable channel management system and services, and to materialize full-range

wealth management consulting and planning services.

(3) Promotion of products with service: Integrate the resources of the group and continue to develop

a wealth management portfolio containing a wide array of products. Succeffully introduce

CNY bonds into DBU operation and promote the cross-trading of exchange rate to customers.

Accomplish the dual purpose of profitability at branches and client retention by improving

product selection and risk management mechanism, coupled with intensive

relationship-building with high-quality clients,

64

(4) Upgrade the wealth management system: Continue the upgrade of the information system,

integrate and simplify the process of sales and risk monitoring at the branches, and enhance

operation efficiency and service quality.

(5) Upgrade service quality with the objective of becoming the best financial institution in the

Asia-Pacific: Move towards family wealth management incrementally to help customers create

wealth and nurture their lives. Upgrade service quality and aim to emerge as the best financial

institution in the Asia-Pacific in order to provide better products and service quality for

customers.

2. Deposit and Remittances

(1) Develop local customers in depth. Engage in customer referrals, enhance operational synergy,

and increase the volume of transactions and contribution of customers by strengthening

cooperation between business units and other subsidiaries in the group.

(2) Develop customer segmentation in business operation, increase the diversity of products and

cultivate existing customers in depth to strengthen the bonds with customers.

(3) Make use of a variety of collection/ payment tools and the diversity of banking service channels

to satisfy the needs of customers of different businesses in cash flow services. These help to

increase the size of commission income and the base of current account deposits.

3. Lending

(1) Classify customers into different groups through database analysis. Provide suitable products to

customers of different attributes and at different life stages, and cultivate customer relations in

depth and enhance performance.

(2) Design and establish different policies for the management of product differentiation on the basis

of the operation environment of the market and the different kinds of risks inherent to customers

for the optimal asset portfolio and reasonable profit.

(3) Continue to develop the loan market of small and medium enterprises and lines of credit to

increase the balance of loan and thicken the spread of loan products, and continue to transform

branch channels.

(4) Integrate the products and services of the group for multilateral financial services, and upgrade

the volume of transactions with customers and enhance customer contributions.

4. ATM channeling

(1) Unveil various marketing activities to promote the use of ATMs.

(2) Increase digital multimedia advertising by using the MRT system to reduce the frequency of

changing advertising and enhance advertising effect, and attract MRT passengers to do business

with the Bank.

(3) Adjust ATM locations with reference to business performance and transaction volume in order to

upgrade the business performance of the ATM channels.

5. Credit card

(1) 7TContinue to improve on the issue rate of new cards. Design joint marketing by integrating the

advantages of other subsidiaries of the financial holding parent in clientele base, products, and

channels, and develop cross-marketing business opportunities.

(2) Make additional efforts to deal with high level customers of the Bank to strengthen the bond

between good quality customers and the Bank and stimulate the growth of credit card usage.

65

(3) Design product privileges in line with customer attributes to satisfy the consumption needs of

different customer groups. This will help to increase the rate of valid card users and attract more

customers to apply for credit cards and spend using credit cards.

(4) Mobile phone credit cards will be developed in strategic alliance with different business

sectors/fields and cross-border collection service will also be expanded to grasp seize other

payment opportunities.

(5) Strengthen relations with partner shops to strengthen the bond with good quality customers who

have a larger volume of transactions with the Bank, and increase the size of business in this area.

6. International Banking

(1) 7T Activate CNY related business and install a basic platform for CNY operation, including the

deposit, remittance, import and export, loans, and financing. Different promotion plans in CNY

will be launched to meet consumer needs and market dynamics.

(2) Continue the expansion of business in Taiwan, Mainland China, and Hong Kong.

(3) Continue the deployment of business in Southeast Asia.

(4) Continue the development of foreign exchange business and upgrade the service efficiency and

quality of the Bank.

7. E-commerce

(1) The Bank seeks to continue developing the platform for various forms of e-banking services

(including MyBank, the internet banking system; MyB2B, the global fund transfer system;

MyATM, the online teller machine system; MyMobiBank, the mobile banking system, and so

forth) and encourage customers to use digital services in banking transactions. This would help to

save the time and cost of customers in commuting between bank branches and their office or

home, and allow them to enjoy convenient banking services.

(2) The Bank adopted the latest technology to build up a new generation of online banking platform

to satisfy the banking needs of customers on a perpetual basis and prepare for the growth of

business in the Asia-Pacific as a whole.

(3) The Bank will continue its effort in protecting transactions through its e-banking system, and

broaden the scope of the application of One Time Password (OTP) by introducing an appropriate

OTP function according to the level of risk inherent to the transactions requested by customers.

This measure will help to enhance the security of e-banking transactions and protect the rights of

customers.

8. Trust

(1) As required by applicable laws and the contractual performance protection mechanism provided

in the industry, the Bank unveiled the “Real-time prepayment trust integrated service”, including

the functions of “real-time trust for virtual and physical gift certificate proceeds” and “Online

games virtual currency credit point trust” to assist branches to absorb current account deposits at

low interest rate, develop credit card acquisition service and WebATM business, and attract more

applications for corporate internet banking accounts.

(2) Continue the promotion of personal and institutional trust and educate the channels with the basic

concept of trust so that branch personnel may use this topic as a starter for soliciting business and

improve their professional image, which will eventually help to bring in more commission

incomes.

(3) Integrate resources of the group and make use of the “short-term accident insurance-linked life

66

policies” to provide the insured of group policies differentiated services. This would be a source

of trust business and help to keep the insurance trust of the Bank in a leading position in the

market in the long run.

(4) Fortify the wealth management system of the Bank with the input of the investment research team

on the insights of investment in the 18 types of markets into the system. Information in this

system will help the wealth management account executives to present the most suitable asset

portfolio plans to satisfy the needs of different customers through the most efficient business

process.

(5) Continue to optimize the system function and operation procedure of the over-the-counter and

internet banking system on fund products, and install the “Fund Information Transmission

Platform”. This platform allows for electronic ordering and confirmation and helps to enhance

operation efficiency and reduce the risk of human error in the operation procedure.

9. Investment and treasury marketing

(1) The primary concerns for investment in fixed-income securities are investment return and security.

With appropriate expansion of the scope of investment targets and increasing sensitivity to the

information on the financial market and proper control of such information, the Bank can take

timely action to adjust the investment portfolio and asset allocation.

(2) The primary concerns for investment in equity securities are stability in the long run with

reasonable return. The logic for selecting stocks would be the Bottom Up strategy for sorting out

stocks of the most competitive industry, with stable operation, healthy financial structure, high

dividend, and low BETA value for holding. The Bank seeks to expand the geographic scope for

research and investment with weighting in investment in the Asia-Pacific for higher overall

investment return.

(3) The Bank seeks to proactively develop TMU business among the targeted customer groups of

MM in corporate banking and SME in private banking, and will make additional effort in the

development and cooperation of offshore TMU business.

(4) Intensify the training and development of channel AO and wealth management account executives,

and enhance the legality of the internal code of the channels in banking products and services and

the suitability for customers.

(5) The Bank will continue its effort to establish a Product Management (PM) Team to assist in the

process of financial product innovation, keep abreast of market trends and customer needs, launch

the marketing of strategic products, and upgrade the competitiveness of products and profitability.


1. Organizational upsizing and channel diversification

(1) Take proactive action to attract good people in sales and marketing for expanding the

organization and increasing the share of proprietary business.

(2) Accelerate the development of new channels for more business sources. Expand the market in

depth and in scope and develop new products with high competitiveness according to the nature

of the channels.

(3) Make effort to solicit new business large in size, develop more sources of business, and

introduce good cases in fair sizes for stable profit.

2. Yield group synergy and promote branch image

67

(1) Continue channel integration, reinforce the supervisory mechanism, and upgrade service quality

to stimulate the cross-sales capacity of the sales team.

(2) With the development of the core system, the Company will optimize all operation procedures,

enhance work efficiency and quality, broaden the scope of new technology application, and

provide more service content to customers.

(3) Root the customer-oriented concept in the minds of all and provide greater product added-value

to the insured. With innovation in different areas and promotion through vibrant advertising, the

brand image of good quality of the Company could be enhanced.

3. Intensify human resources development for stable overseas deployment

(1) Clear all obstacles for the promotion of good people and assign them higher responsibilities as

incentives so as to enhance their identification with the organization. Provide suitable and

complete training for improving the quality and quantity of human resources.

(2) Actively seek and train good people with international views and build up a human resources

bank to meet the needs of moving into the international insurance market.

(3) Explore the market in Mainland China and Vietnam in greater depth and scope, stabilize the

overseas business territory, and enhance operation performance.

4. Upgrade profitability and strengthen capital management

(1) Continue the adjustment of business structure, make further effort to introduce good quality

business, and increase the size of operating income.

(2) Make proper arrangement in reinsurance for reducing the rate of loss and keep underwriting

income stable.

(3) Fortify the management of capital and keep the ability to pay debts strong, and maintain a

healthy financial structure.


1. Brokerage trading:

Make effort to launch the co-selling plan of Cathay Group and compile the handbook for SME and

VIP customers, increase the proportion of margin trade, accelerate the development in processing

trade orders of overseas securities and evaluate OSU securities operation, plan for business

development in Mainland China, fortify the development and operation of e-commerce, and

upgrade overall client service quality.

2. Dealing of securities:

As an international bond underwriter, the Company seeks to engage in bonds denominated in CNY

and related products, continue the issuance of H-share warrants and link to the stocks issued by

renowned state-owned enterprises of Mainland China to satisfy the needs of the customers in

68

investment in a shares with a small amount of capital. In addition the Company will add MSCI

traded in SIMEX and SIMEX A50 futures trade and hedging into its business portfolio and keep

abreast of any change in the investment market of Mainland China.

3. Securities underwriting:

Continue the development of the overseas market and attract overseas enterprises to list their

stocks in Taiwan for trading. Pay close attention to any business opportunity related to securities

denominated in CNY and requests for listing the stocks in TWSE by enterprises in Mainland

China under government deregulation. Establish an M&A Team to develop business of financial

consulting in third party listing, private placement, and merger and acquisitions of enterprises in

Greater China.

Cathay Securities Investment Trust Co., Ltd

1. Make the best use of the group resources to develop potential customers and upgrade overall operation

performance.

2. Provide a complete line of products for customers with a greater variety of choices.

3. Cultivate channels in depth (life insurance, banking, and securities) and in scope for larger business

volume.

4. Fortify the quantity and market shares of unit-link life insurance policies.

5. Continue the promotion of business in fixed-amount at regular intervals for accumulation of

momentum.

6. Develop overseas customers in mutual funds and discretionary investments.

Cathay Venture Inc.

1. Investment strategy: Explore companies with high potential for growth and deemed under-valuated

through industry research and on-site visits, hold investees for the long term, keep up with the growth

of investees, and seek the best moment to pull out.

2. Investment stage: Mostly focus on the expansion stage with gradual increase in investment in

particular projects.

3. Region of investment: Weight is in the companies of Greater China seeking stock listing in Taiwan.

69

(III) Industry Overview

In 2012, the Taiwan financial industry sought stable growth in a mix of European credit concerns, the

slowdown of economic growth in China and emerging markets, aggravating US deficit, as well as a range

of global financial turmoil. At the same time talks for improvement of cross-strait financial exchange

made remarkable progress. Not only did the Memorandum of Understanding (MoU) on Cross Strait Currency

Settlement was signed in August 2011 and became effective three months later but the Financial Supervisory Commission

R.O.C is blueprinting cross-strait-featured financial products/services promoting Taiwan as an offshore

Renminbi center to bring in new development opportunities. Outside the Greater China Area, international

expansion, especially to South East Asia, is another ongoing prime area on which the sector is working to

generate greater overseas profits and lay out a more comprehensive network. A review and an outlook on

domestic life insurance and banking business follows:

For life insurance, owing to decelerated domestic economic growth caused by the European

sovereign-debt crisis and dim global outlook, pressure from loss from difference of interest rate persisted

and the business environment remained severe for life insurers. Nevertheless, thanks to the liberalization

of the related policies and regulations (such as excluding foreign-currency-denominated policies from the

calculation of the limit on the total amount of foreign investment, establishment of foreign exchange

reserves, and recognizing unrealized gains on property), efficiency on insurance fund use, as well as

overall operation profitability have improved and strengthened greatly for the entire industry. Moreover

the implementation of premium equivalent policy, which spurred more regular-paid selling in the industry,

also helped to balance the product structure by an emphasis on long-term insurance products with benefit

to insurance business operations.

In banking operations, the spread between deposits and loan interest rates has steadily incrementally since

2009, although the spread is still narrower than what we would like to see. In 2012 all local banks

together earned a pre-tax income of NT$240.2 billion (or an average ROE of 10.41%) and made total

loans of NT$22.4 trillion (with a non-performing loan ratio of 0.40%). This indicates that operating

efficiency is improving steadily for the banking industry as business size grows and the risk level stays

under control. In cross-strait financial services, the banking industry can expect to expand the scopes of

its OBU and DBU operations due to deregulation and, as a result, provide more integrated cross-strait

financial services. This development is an upside to Taiwan banking industry.

(IV) Research and Development


1. The spending on research and development spending in the last 2 years and the results:

A. Spending on research and development

The budgets on research and development from 2011 to 2013 are shown below:

70

Currency unit: 1,000 NTD

Year 2013 2012 2011

Amount 36,482 32,788 32,553

Growth rate (%) 11% 1% 13%

B. Results of research and development

(1) Product innovation: In the wake of market demands and an aging society, the Company

developed products for the elderly for full-range protection and to make insurance more

meaningful. The Company is the only insurance company that has been conferred the

“Excellence in Product Innovation” for 4 consecutive years.

(2) Customer satisfaction: Ceaseless effort has been made to innovate and refine the business

process, enhance operational efficiency and service quality. These have helped to improve

customer satisfaction significantly. The Company is the first insurance company in Asia that

has passed the SGS Qualicert certification.

(3) Mobile insurance: In an age of mobile service, the Company is a pioneer in the industry by

launching the “Cathay App Market” to integrate all Apps of subsidiaries of the group for

providing mobile insurance, claim settlement, and preservation services. Customers can

complete applications for new contract, underwriting, and fee payment in 10 minutes. This is a

form of instant and full-range services for customers.

(4) Overseas expansion: The Company is an industry pioneer in exploring the insurance market in

Mainland China and Vietnam, and established the subsidiaries of Cathay Life Insurance in

2005 and 2008 in Mainland China and Vietnam, respectively.

2. Research and development plan in the future

(1) Business: The Company will continue providing services, visiting customers, and upgrading

the professional competence of its employees, and vitalize the organization.

(2) Finance: Implement proper risk management and adjust its asset allocation timely to enhance

the efficiency of capital utilization.

(3) Integrated marketing: Continue to promote its business in property insurance, credit cards, bank

accounts, repurchase of maturity benefit for the effective use of group resources in long-term

operation efficiency.

(4) Overseas operation: Continue to explore the market in Mainland China and Vietnam in depth,

and evaluate the feasibility of expanding to other overseas markets. Slowly but surely, the

Company will approach the goal of being the “the best financial institution in the Asia Pacific

region.”

The aforementioned plan is still in progress. A budget of NT$36.482 million will be allocated to

research and development.


1. Research and development spending in the last 2 years and the results:

(1) The budgets on research and development from 2011 to 2013 are shown in the table below:


Year 2013 2012 2011

Amount 443,925 394,790 396,476

71

Year 2013 2012 2011

Growth rate (%) 12% (1%) 24%

(2) Result of research and development in 2012

Name of major project Investment (1,000 NTD)

Upgrade of credit card mainframe and operating

system 128,070

New generation Data Center Core Exchange

Device Upgrade 25,800

Seal Impression Card System Upgrade 21,726

OTP Project 11,679


Plan/project in the most recent

year Progress

Additional

budget

required

(1,000 NTD)

Estimated

time of

completion

Factors critical to the

success of research

and development

Upgrade of ATM platform and

optimization of functions

In progress

(95% incomplete) 91,000 2013/12/31

Meet the needs of

users

Integration of the service desk

system and the zero inventory

of document project

In progress

(50% incomplete) 0 2013/12/31

Meet the needs of

users and

simplification

requirement

New Generation Private

e-Banking Framework Upgrade

Project

In progress

(50% incomplete) 51,471 2013/10/01 Meet the needs of

users

New Generation Corporate

e-Banking Framework Project

In progress

(78.5%

incomplete)

43,070 2013/10/31 Meet the needs of

users

Development of systems for

private banking

In progress

(55% incomplete) 9,593 2013/10/31

Compliance with the

requirement of the

competent authority

and meet the needs

of users

Direct marketing system In progress

(40% incomplete) 20,120 2013/03/31

Meet the needs of

users

New Generation Credit

Information Platform Upgrade

Project

In progress

(87% incomplete) 114,330 2014/04/14

Meet the needs of

users

Image scanning system for

outward remittance

In progress

(25% incomplete) 10,650 2013/06/30

Meet the needs of

users

72

Plan/project in the most recent

year Progress

Additional

budget

required

(1,000 NTD)

Estimated

time of

completion


success of research

and development

Onshore foreign exchange

clearing and settlement system Completed 600 2013/03/01

Compliance with the

requirement of the

competent authority

Installation of the marketing

activity management platform

In progress

(30% incomplete) 7,125 2013/06/01

Meet the needs of

users

Companywide ORM system

installation and assessment

project

In progress

(7% incomplete) 7,800 2013/03/31

Compliance with the

requirement of the

competent authority

Introduction of the new R6

banking mainframe for

optimization of the

infrastructure of the information

center

In progress

(90% incomplete) 20,923 2014/12/31

Meet simplification

requirement

Fortification of information

security and the protection of

personal information

In progress

(83% incomplete) 27,500 2013/12/31

Compliance with the

requirement of the

competent authority


1. Research and development spending in the last 2 years and the results:

(1) Research and development in the last 2 years

A. The data on the study of school safety and the experience of claim adjusting in the past

indicated that amusement facilities, staircases, and corridors are the places of frequent

accidents. From summer vacation 2012, the Social Concern Team of Cathay Century

Insurance started to visit school campuses to conduct a series of safety inspections on school

amusement facilities with reference to injury prevention and in accordance with the

requirement of amusement facilities for schoolchildren under CNS12642. The team

provided a complete inspection report as reference for preventive measures and allocated a

fund to subsidize the schools to make improvements to group padding as protective

measures. In addition, the team also designed the “Zero Accident School Campus

Campaign” with a view to educate schoolchildren on “safety and no accidents” through

lively events.

B. Cathay Century Insurance launched the App “My Mobicare” and “Facebook Fans Group” in

2012 for providing rapid and convenient services for the insured and broadening the horizon

of sales. In addition, the Company also made online policy renewal and quotation available

to mobile users, and accelerated the conversion of the CSR core system so that Cathay

Century Insurance can move towards full-fledged e-business.


Year 2013 2012 2011

Amount 9,842.5 9,792 9,949

Growth rate (%) 1% (2%) (17%)

73

(2) Research and development result in the last 2 years

A. Cathay Century Insurance has submitted 157 cases of new products for approval in 2012.

These new products are diverse and differentiated to satisfy the needs of different groups of

the insured and helped the Company to create product marketing advantages.

B. In the area of customer service, the Company has always treated the customers as the first

priority and has been recognized by customers. The Company has been crowned as the

“Consumer Ideal Brancd” by “Management Magazine” for 5 consecutive years.


(1) Work in conjunction with Cathay Financial Group in social charity and donation in the name of

corporate social responsibility. In 2012, the Company contributed to the following:

A. Arts and culture: Cloud Gate Dance Theatre Performance, National Painting Contest for

Children, New Century Potential Picture Exhibition, and Taipei International Choral

Festival.

B. Sports: SBL , Cathay Basketball Player Training Camp

(2) Property Insurance:

A. The Company has organized injury prevention seminars for corporate clients and these were

highly appreciated. The Company also voluntarily provided the means and techniques for

injury prevention to help enterprises to reduce operation risk and to maintain social stability.

B. Accident-free campus

The Company voluntarily provided the means and techniques for injury prevention and visited

school campuses to inspect amusement facilities to ensure the safety of schoolchildren and

maintain social stability.

Organized accident-free campus events to promote safety in schools so that schoolchildren can

be “free from accidents” and schools can reduce claims deriving from on-campus accidents;

parents can also have peace of mind. Accordingly, the probability of compensation by

insurance companies due to insurance claims can also be reduced, and Cathay Century

Insurance, the schools, the parents, and the school children can all emerge as winners. At the

same time, the Company can also meet its objectives of “peace of mind for parents and schools

and happiness for children”.

Plan in the most

recent year

Objective in

2013 Progress

Additional budget

required

(1,000 NTD)

Estimated time

of completion

Factors

critical to the

success of

research and

development

School campus

safety inspection 20 schools

In progress

(65% incomplete: 7 schools) 4,000.0 December 2013

Intent of the

school

School campus

safety events 20 events

In progress

(80% incomplete: 4 schools) 5,342.5 December 2013

Intent of the

school

74

Plan in the most

recent year

Objective in

2013 Progress

Additional budget

required

(1,000 NTD)

Estimated time

of completion

Factors

critical to the

success of

research and

development

Seminar 1 event

In progress

(100% incomplete) 500.0 December 2013 No

Total 9,842.5


1. Research and development result in the last 2 years:

(1) Established the data exchange platform.

(2) Established the institutional basket trading system

(3) Established the research resource management platform

(4) Speedy Ordering

(5) Established the e-statement system

(6) Established the e-News system

(7) iPad mobile office

(8) Established the “Cathay Genie” mobile ordering system

(9) Established the sub-brokerage system

(10) H share-linked warrants

(11) News broadcasting service

(12) Replacement of new core system for dealing of securities and futures.


Plan in the most recent

year Progress

Additional

budget

required

(1,000

NTD)

Estimated time

of completion


success of research

and development

Replacement of the

securities and futures core

system

In progress - December

2013

Meet the needs of

business units

Establish alternate site

backup In progress -

December

2013

Compliance with the

requirement of the

competent authority

Upgrade the functions of

the e-commerce platform In progress -

December

2013

Meet the needs of

business units

Establish the virtual

technology application

center In progress 2,000

December

2013 No

Development of the

Basket Trading system In progress - June 2013

Meet the needs of

business units

75

Plan in the most recent

year Progress

Additional

budget

required

(1,000

NTD)

Estimated time

of completion


success of research

and development

Trading system for

foreign institutional

investors In progress 2,000

September

2013

Meet the needs of

business units

Warrant market making

monitoring system In progress - June 2013

Meet the needs of

business units

Warrant speedy mid-end

system In progress - June 2013

Meet the needs of

business units

Risk asset platform In progress - June 2013 Meet the needs of

business units

Establish offshore funds

order system In progress - April 2013

Meet the needs of

business units

Sub-brokerage multiple

currencies trading system In progress - October 2013

Meet the needs of

business units

Design of OSU operation

and OSU system

Under

planning -

December

2013

Conform to the

schedule of business

units

CRM project system Under

planning -

December

2013

Meet the needs of

business units

Establish the warrant

network In progress 517 July 2013

Meet the needs of

business units

PC and

Win7 Upgrade Plan In progress 4,400 July 2013

Conform to the

schedule of business

units

The Four-in-one network

integration of TWSE In progress -

December

2013

Conform to the

schedule of the

competent authority

E-Trading system for

emerging stock market In progress 930 June 2013

Meet the needs of

business units

Bidding system of

individual stocks In progress -

December

2013

Conform to the

schedule of the

competent authority

Establish mid-end

account system

Under

planning -

December

2013

Meet the needs of

business units

Introduction of

information security

function

Under

planning 9,400

December

2013 No

Improvement and

upgrade of the network

for the partitioning of the

trading section

In progress 6,000 July 2013 No


76

1. Advance into the channels by using the overall marketing advantage of the financial holding parent to

increase the size of business.

2. Management of customers by category and refine customer-oriented service to satisfy the needs of

different channels.

3. Spending on research and development in the last two years and budget for the future.


Year 2013 2012 2011

Amount 11,380 6,000 5,000

Growth rate (%) 90% 20% 18%

4. Research and development result

A. Coupon/zero-coupon high yield bond funds.

B. Design for the installation of the My Mobi Fund.

C. Overseas e-Order system.


Plan in the most recent year Progress Additional

budget required (1,000 NTD)

Estimated time of

completion

Factors critical to the success of research and development

Online trading platform upgrade

In progress (10%

incomplete) 2,520 May 2013

Meet the needs of users

Revision of official website of the Company

In progress (70%

incomplete) 2,170

September 2013


Installation of the investment research management system

Under study and planning (100%

Incomplete)

4,340 October

2013 Meet the needs of

users

Installation of the ETF system


Incomplete)

700 September

2013 Meet the needs of

users

Installation of the system for funds denominated in CNY,

and multiple currencies.

In progress (80%

incomplete) 0 June 2013


Installation of the accounting system HA


Incomplete)

650 December

2013


Mobile communication device ordering function


Incomplete)

1,000 December

2013


(V) Long- and short-term business development plan


1. Short-term business development plan

The domestic economy picked up moderate momentum, but the interest rate still remained at low

levels. The change in the economic environment also affected the preference of consumers in

insurance. Moreover, both societal aging and the declining birth rate intensified. To keep abreast of

77

market trends, the Company mapped out its short-term business plan as follows:

(1) Focus on regular-premium products in both sales agents and bancassurance channels to boost

business structure and quality, and to remain consistent with the customer-oriented business

philosophy.

(2) Leverage resources within the financial holding group to provide a wide array of insurance

products, including:

A. Develop products for direct marketing and bancassuranceto strengthen business performance

in multiple distribution channels.

B. Design a comprehensive product line to satisfy the needs of customers in insurance

protection, such as products for retirement planning and long-term care due to the advent of

an aging society.

(3) Strengthen the activity management of sales agents. Launch activities to actively visit customers,

enhance customer satisfaction and create opportunities for repurchase. And develop potential

customers to increase the volume of new business.

2. Long-term business development plan

Cathay Life Insurance is the largest life insurance company in Taiwan with stable growth in revenue,

total assets and in-force policies. The Company has mapped out its long-term business plan for

maintaining its leading position as follows:

(1) Recruit high quality talents to increase company competence

Continue to recruit quality sales force, provide training for the development of prospective

management staff and enhance managerial function in order to develop a qualitative and

quantitative organization.

(2) Process restructure and efficient operation

Develop a mobile environment through the introduction of information technology; strengthen

the competitiveness by building a highly efficient systematic organization and marketing tools.

(3) Leverage group resources and increase cross-selling

Provide comprehensive financial service to the extensive customer base within the financial

holding group. With the wide and varied customer service network, the Company seeks to

increase opportunities for cross-selling, and enhance its market competitiveness and efficiency

of fund utilization through the professional specialization.

(4) Development new business in overseas markets

Grasping opportunities across growth market overseas, the Company continues to focus on

existing business in China and Vietnam, and keeps tabs on other overseas markets. We aspire to

become “the best financial institution serving Chinese communities.”



(1) Transform the organization of corporate banking, including the segmentation of customers in

marketing, building up team cooperation, vitalize the function of unit products and create

positions with designated duties in order to upgrade overall service to financial holdings and

good quality customers.

(2) Continue to provide better services in collection and payment, salary disbursement, automated

transaction platform, and other forms of capital flows for enhancing operation efficiency and

convenience for the customers in capital management.

(3) Upgrade the hardware function of the automated equipment for overall operation efficiency.

(4) Continue integrating group products and services for synergy in business development, and

increase the transaction volume and contribution value of customers.

(5) Establish policies for the differentiated management of different types of loans with reference to

78

the operation environment in the market and the level of risk inherent to customers, and

continue to increase the size of income from risk-free commission charges for optimum asset

portfolio and reasonable profit.

(6) Increase the number of channels for different types of loans and strengthen marketing skills for

better business development.

(7) Make use of database information to promote other products to existing customers (e.g., credit

card accounts, deposit accounts, and mortgage loan accounts) to enhance customer loyalty and

upgrade operation efficiency.

(8) Broaden the scope of foreign exchange by aligning with CNY business deregulation, and make

additional effort as a market pioneer in the development of business in Greater China.


(1) Strength the design and planning of products, and make further effort in brainstorming for

innovative and proactive ideas. Develop different segments of customers and loans of different

structures, create a competitive edge through differentiation and develop a new blue ocean of

corporate banking. Orient towards customers in developing automated equipment and function,

increase the utilization rate of customers and enhance customer satisfaction, and make the Bank

the most efficient bank with automated transaction channels.

(2) Continue to organize different types of training programs, and intensify professional training of

personnel in order to buttress the development of corporate banking. Further to resources

internal to the organization, external resources, like lawyers and certified public accountants,

could also be employed to provide in-depth professional knowledge in finance, including

knowledge in taxation, law, and industry. These will be essential for the development of new

products and the ability to be attuned to the growth of wealth and financial trends in the

Asia-Pacific, and to enhance the competitiveness of the Bank internationally.

(3) Integrate the resources of the group to demonstrate the sales advantages of the group. Package

portfolios containing a wide array of products with high purchase incentive, provide customers

one-stop shopping service, enhance bonds with customers and make them more willing to do

business with the Bank. This would help to enhance the profit position of the Bank and create a

win-win situation for both the bank and the customers

(4) Transform distribution channels through resource integration to upgrade the sales capacity of the

channel platform.

(5) Trade financing: Continue to fortify and enhance services through e-channels, and strengthen the

core professional team to upgrade the overall efficiency and effectiveness of the Bank in foreign

exchange.

(6) Offshore banking service: Continue to evaluate and establish appropriate overseas business

locations per the needs of targeted customers and in compliance with applicable laws and

government policies. Slowly expand the number of business locations with the enlargement of

the scale of operation. Continue the cultivation of relations with industry peers for the

development of related business.

79



(1) Business strategy

A. Continue to increase market share and stay firmly in the number two position in the market,

and challenge others for industry domination.

B. Upsize the front-line sales force and develop diversified channels or broaden the sales

horizon.

C. Adjust the business structure of insurance, and increase the proportion of preferred types of

products for higher profitability.

(2) Product strategy

A. Determine the most competitive products in the market with reference to diversified

marketing channels, and avoid cut-throat competition. Develop products with high

added-value for strengthening the competitive power of Cathay Century Insurance.

B. Package new product portfolios in line with dynamic changes in market and the overall

interest of the group, and to satisfy the needs of customers in insurance protection.

(3) Service strategy

A. Introduce the functions of a mobile insurance system with the application of a mobile

platform and technology to strengthen the advantages of marketing and services currently

provided.

B. Provide professional and detail-oriented service to ensure customers always come first and

enhance customer satisfaction.


(1) Continue to enlarge market size and aim for leadership in the industry.

(2) Develop overseas markets and build a worldwide reputation.

(3) Align with the development strategy of the financial holding parent and aim to be the best

financial institution in the regions of Asia Pacific worldwide.


1. Short-term business development plan：

(1) Launch the “Peak Project”, and explicitly state the core value of “integrity, accountability,

innovation”, review the quality of service and improve performance regularly, and create a

positive work environment for higher performance.

(2) Make effort to recruit good people in securities, launch the Channel Sales Representative (CSR)

training program, continue to establish business locations at securities service desks at branches

of the bank and securities branches, and design for development in Mainland China.

(3) Improve the quality of research reports, develop further business with domestic and foreign

institutional investors, and intensify co-selling with the bank.

(4) Make effort to engage OSU securities business in line with the deregulation of the competent

authority, and continue to develop the business in warrants for bringing in stable profit stream.

(5) Continue the development of IPO business in the primary market and SPO business in the

secondary market, and make additional effort in the development of potential customers.

Continue to monitor the situation of the emerging stock market, and promote fixed-income

80

products to enhance value from the diverse nature of underwriting.

2. Long-term business development plan:

(1) Leverage group resources to increase the penetration rate of group customers in integrated

marketing of securities.

(2) Look for niche business opportunities to fortify the platform for securities and financial products

and services of the group.

(3) Look for overseas business opportunities, and expand the business territory to Greater China.



(1) All subsidiaries of the group will launch fixed-rate business at regular intervals and interweave it

with all channels for in-depth business development.

(2) Consider the integrity of products and launch new funds in due time.

(3) Advance to the Mainland China market, and establish a fund management company in a joint

venture with China Development Bank Securities, a wholly-owned subsidiary of China

Development Bank.


(1) Continue to make the best use of resources of all subsidiaries of the group, cultivate the channels

of the subsidiaries in depth and upgrade overall business performance.

(2) Aim for long-term, stable and good quality investment performance, and provide customers the

best channels for wealth management.

(3) Development of Renminbi (RMB) priced products to satisfy the need of general investors.

Cathay Venture Inc.


(1) Fully understand the operation of investees and dispose of investees at the best moment.

(2) Participate in assessing stocks issued overseas applying for listing on TWSE and the TDR cases

for thicker profit and better understanding of overseas markets.


(1) Continue to develop more sources of business and strengthen post-investment management, and

create different investment opportunities with strategic partners of the group.

(2) Choose the most suitable industry for investment in consideration of overall domestic and

international economic conditions and the P/E ratio and flexibility of the capital market.

81

II. Cross-business & Cross-selling Benefits

The Financial Holding Company Act has provided the legal origin that governs cross-business operation in

the financial industry and encourages consolidation among industry players through shareholding in order to

increase the synergy of financial institutions. Since its incorporation in December 2001, Cathay Financial

Holdings has been making use of the advantages of each subsidiary to reduce operating costs and enhance

capital efficiency. Moreover, the company has promoted the marketing integration possible by providing greater

shared resource and cross-selling opportunities among the group. Consequently, our customer satisfaction,

together with shareholder value, has been maximized.

Cathay Financial Holdings has built a completed financial service platform - covering insurance, banking,

securities brokerage, and other related business - that makes cross-selling transactions an important operational

measure and it has been successful accordingly. Taking the 2012 results as examples, 23% of Cathay Life

Insurance‟s first-year-premium was from the bancassuance of Cathay United Bank. For the credit card business

of Cathay United Bank, 27% of new card holders were from Cathay Life Insurance. Moreover, Cathay Life

Insurance and Cathay United Bank together contributed to 62% of Cathay Century Insurance‟s overall business

for the period. In the structure of financial holding, customers are no longer satisfied with products distributed

only through the channel of a single company. Cathay Financial Holdings will continue to strengthen better

integration between channels and products, so as to provide customized services and generate diversified added

value for our customers. In the product development, we will continue to introduce suitable products via

ongoing research on domestic/international financial development and regulations. In terms of marketing

channels, to ensure cooperation with all subsidiaries, we review product items periodically, so as to promote

cross-selling and cross-services among subsidiaries in the market planning. Also, to create a one-stop-shopping

service platform for customers, we advocate the consolidation of information, resource, and operation

procedures.

In short, Cathay Financial Holdings will focus on a more customer-oriented strategy in the future, and

provide suitable products and services on the best-access channels accordingly through the analysis on the

patterns of customer behavior and life stages. We expect to create high synergy with group resources through a

more systematic and efficient cross-selling procedure.

III. Industry and Market Overview

82

(I) Major financial products (services) and market locations

Major products (services) Major market locations

Life Insurance (including life, endowment,

health/medical, annuity, accident, group, etc.) Taiwan, China, and Vietnam

Banking (deposits, loans, credit cards, foreign

exchange, trusts, etc.)

Taiwan, China, USA, Hong Kong, Malaysia,

Vietnam, Singapore, and Cambodia

Property and Casualty Insurance (automobile, fire,

marine, engineering, etc.) Taiwan, China, and Vietnam

Securities (brokerage, propriety, underwriting, and

other related financial products) Taiwan

Investment Trusts Taiwan

Venture Capital Taiwan, China, and other Asian countries

(II) Future market supply and demand

Looking into 2013: with the temporary reliefs from the US fiscal cliff and adversities brought by the

European sovereignty credit crisis, and the stabling China economy, we expect a turnaround in Taiwan‟s

economy. Directorate General of Budget, Accounting and Statistics, Executive Yuan, R.O.C. estimates a

2013 GDP growth of 3.59%, a rebound from 2012. Nevertheless, global recovery and its scale are still

contingent upon future developments of US fiscal issues and the European debt crisis plus other related

global financial uncertainty.

Since the signing of ECFA, the economic exchange between Taiwan and the Mainland have increased. For

the finance industry, the agreement has lifted the bans on Chinese banks making equity investments in

Taiwanese banks, allowing Taiwanese banks to add more business locations in China, with approvals to

undertake Renminbi business with Taiwan businessmen in China, as well as the official commencement of

offshore Renminbi business in Taiwan. Therefore, Taiwan financial industry is exploring every chance to

co-operate with the industry players across the strait and penetrate the China market. Cathay Financial

Holdings currently have several insurance subsidiaries (both life and non-life) and banking branches set up

and already in operation. More developments that are under evaluation will soon be on the way to market

involvement.

Life insurance

1. Supply

With the liberalization of the related policies and regulations (such as the exclusion of

foreign-currency-denomination policies from the calculation of the limit on the total amount of

foreign investment and establishment of a foreign exchange reserve, efficiency on insurance fund use

83

has greatly improved. This means more products with greater diversity are becoming available to

satisfy customer needs.

2. Demand

Due to the uncertain economical outlook, local investor‟s risk tolerance has remained conservative

and favors stable income-generating products, such as annuities. Also demands for long-term nursing

and retirement- planning products are escalating as we move towards to an aging society.

3. Future prospect

Compared with 2012, we believe the prospect should be brighter due to improved efficiency of fund

use (coming from the set up of foreign volatility reserves, the exclusion of foreign-currency

denominated policy from the calculation of the limit on the total amount of foreign investment, and

loosened criteria for becoming Qualified Foreign Institutional Investors in China) and a pick-up in

business growth. However, the operation challenges remain for expected impact on premium income

due to changes in regulations and the continued low-interest environment.

Banking business

1. Supply

Domestic competition is intense due to an over-saturated market. Thanks to the speed-up in the

liberalization of cross-strait economic policy, the battlefield has expanded overseas to China. An

increasing number of Taiwanese banks are either starting their first branch or broadening existing

operations in China. Needless to say, fierce industry competition in the greater China region is

foreseeable.

2. Demand

Corporate lending needs will increase steadily as Taiwan‟s exports are now less dependant on

Western orders due to the emergence and rise of Asian economies. Furthermore, more regional

business and financial activities is anticipated as a result of greater financing flexibility and available

banking products/service, such as Renminbi-based deposit/loan, remittance, wealth management, due

to the establishment of the Cross Strait Currency Settlement.

3. Future perspective

Although various international uncertainties continue due to on-going concerns over the European

sovereignty debt crisis, the domestic economy is expected to head up modestly (Directorate General of

Budget, Accounting and Statistics, Executive Yuan, R.O.C.,DGBAS, estimated a GDP growth of 3.59%, better

than that GDP growth of 1.25% in 2012). We believe the total customer lending and wealth

management volume will grow steadily and investment income should perform above the normal

level. Moreover, in view of the newly-added business streams from cross-strait transactions, we hold

a rather optimistic view for 2013.

Property and Casualty Insurance

84

1. Supply

As of 2012 end, the top-five insurers accounted for more than 60% of market share with more than

half of the players took a less-than 5% pie. For Cathay Century Insurance, it achieved an outstanding

premium growth of 11.2% (versus 6.6% industry average), number-one in the industry, during the

year.

2. Demand

We think non-life insurance demand will benefit from the pick-up of the domestic economy in 2013.

Moreover, despite the slow recovery of the global economy, intensifying business exchanges as well

as expanding sales & marketing channels in China and Vietnam will soon make a contribution to our

non-life revenue growth.

3. Future prospect

We expect a bullish TAIEX market in 2013 (as a result of stronger investor confidence plus

quantitative easing from various countries) to bring back insurers‟ investment activities and the

income that this will generate. In the meantime, the insurance demands will be further spurred by

increasing corporate spending and customer buying.

Securities Business

1. Supply

Brokerage revenue has long accounted for more than 50% of the revenue of Taiwan securities

business. In terms of competition, the market is dominated and controlled by the big houses: in 2012

the “top-ten” brokers, mostly formed through recent mergers, took more than 50% of the market

share. However, Cathay Securities made a breakthrough by adopting strategies such as expanding

their existing network, leveraging the Group‟s integrated marketing platform, and extensively

promoting mobile trading services. The result was rewarding as the market share improved from

0.5% in 2007 (27th

place) to 1.02% in 2012 (19th

place).

2. Demand

The market index closed at a higher level with shrinking total turnover in 2012. The market volatized

during the year but it got consolidated at a high level in t0068e second half by complex reasons,

including the shadow of the continued talks about capital gains tax during the first half (which had

pressured market transactions), the quantitative easing from western countries, together with

benefiting developments from cross-strait policies and government funds in support of buying

activities. Although the market volume remains low, there are no signs of a reversion and the

negative impact of the new tax has not come to an end, we hold an optimistic but cautious view for

the industry from the standpoint of current market trends.

3. Future prospect

Regardless of the chilling effect the capital gains tax has had on some investors in 2013; confidence

in the stock market has in fact bottomed out due to the dawn of global recovery and the on-going low

interest environment forged by major central banks. Furthermore, the increasing needs for direct

85

finance will also benefit the brokerage and underwriting business for the industry. Across the border,

there have been several exciting developments after the first meeting of the Cross-strait Securities

and Futures Supervisory Cooperation at the beginning of the year. Not only will Taiwanese

brokerages be allowed to undertake joint ventures with their mainland Chinese counterparts,

investment quotas will be available for Taiwan under the RQFII and upcoming RQFII2 programs.

Moreover, the group assets pool can be counted into the threshold requirement of the asset under

management when applying to QFII quotas. These, together with the inauguration of the Offshore

Securities Unit, will enhance creativity and competitiveness and add new business growth drivers for

the industry.

Investment Trust

1. Supply

At the end of 2012 there were 38 local investment trust companies with an AUM (Assets under

management) of NT$2.82 trillion (an NT$110 billion increase from domestic funds and NT$80

billion decrease in discretionary accounts), or a 2% growth. Of which the top-ten players controlled

63% of the market, this is a „winner takes it all‟ and highly-concentrated market trend.

2. Demand

All major global stock ended 2012 in positive territory due to affluent idle capital with improved

fundamentals from the major economies (US ISM index, Institute of Supply Management

Manufacturing Index, showed visible upswing and so did the GDP), despite a turbulent global

financial market caused by concerns about European credit issues, a slowdown of the China economy

and the US fiscal cliff. Therefore, the collective fund size increased by 6.3% to NT$1.84 trillion from

NT$1.73 trillion. Total managed assets inched to NT$2.83 trillion from NT$2.77 trillion.

3. Future prospects

We expect bonds and fixed income products to remain favored by investors in a rather conservative

and crawling global economy. On the other hand, demand for Reminbi products will surface as more

bans on related transactions are removed.

(III) Operation directions: Cathay Financial Holdings consistently commits to operation as a going concern,

in order to maximize value for shareholders, customers, and employees. The future development strategy

is three pronged: 1) development of a third growth engine; 2) enroot the Mainland market to embrace

cross-strait opportunities; 3) expansion into the Southeast Asian market, to strengthen the group‟s market

power and become one of the best financial institutions in the Asian region. Our future business

guidelines are as follows:

1. Shaping a three pronged operation and refining each of the three growth engines in the Group

into a multifaceted financial institution: In addition to maintaining the current leading positions in the

banking and insurance sectors, Cathay Financial Holdings is endeavoring to build a third anchoring

business in assets management. The business will include the Cathay Securities Investment Trust,

Cathay Conning Asset Management (opened in Q3 2012), and CDBS Cathay Asset Management CO.,

86

LTD. (slated to open in 2013) to form an asset management platform across China, Hong Kong and

Taiwan. These plans are being made to position Cathay Financial Holdings as a comprehensive financial

service provider that can cover all the life stages of a customer, including wealth management, family

and asset protection and retirement planning, with abundant product choices through a single platform.

2. Strengthening the existing network and seizing the China market: The Cathay Financial Group was

the first Taiwanese insurance (both life and non-life) company to enter the China market. We have

completed our location layout plans for the coastal area and are in the early process of brand building

and in-depth market enrooting. For the banking business deployment, we will now rely on respective

specialties and the cooperation among our Shanghai, Hong Kong, and Cathay United Bank of Taiwan to

broaden financial exchanges in the three-place-across-two-shore region and to take care of Chinese

customer‟s growing needs on trade finance and investment financing. Also, we will continue

establishing new branches to serve our growing customer base. In the mid-to-long term, we plan to

replicate the success of cross selling experience in Taiwan to the Mainland to differentiate ourselves

from the local Chinese financial institutions.

3. Tap into the Southeast Asian market to enhance overseas profit contribution: Raising overseas

profit is Cathay Financial Group‟s important development strategy. The emerging SE Asia market has

become an important area, which is going through high growth and the accumulation of capital and

wealth. After long-time analysis and planning, Cathay Financial Group now views the market as a

crucial step towards a move from being a local player to a regional one. We plan to enter the market

from several different directions, including the setting up of branches, local equity participation, and

merger/acquisition, so as to rapidly boost our contribution outside the island and become one of the best

financial institutions in Asia.

(IV) Future threats and opportunities

Life Insurance

1. Opportunities

(1) Cathay Life is a highly-recognized brand and ranked No. 1 by FYPEin the local market. This

means we will benefit from a rising average of amount of insurance, advanced retirement and

medical plannings resulting from an aging population and a low fertility rate. Moreover, with the

help of rich product offerings and thorough channels from the Group, Cathay Life will be able to

magnify the cross-selling synergy and ensure customer loyalty by fulfilling their extended

needs.

(2) The Financial Supervisory Commission announced in December, 2012, that recognition of

unrealized gains on property with a NT$10 billion cap over a five-year horizon would be

allowed (Recognition plan for recovery special reserve of unrealized gains on property). This

amendment will help to enlarge the company‟sequity value.

87

2. Threats

(1) Due to the two life insurance policy reserve rate cuts in the second half 2012 and premium

hikes for NT$ and US$ policies, the difficulty of designing and selling our products increased

significantly life insurance policy reserve..

(2) Interest loss remains, due to unlikely upward adjustment in the short run with lingering concerns

over the European debt crisis and a blurry global economy. In addition, quantitative easing put

forth by the central banks of various counties may cause volatility in the exchange rate of the

NTD, adding to the hedging costs and exchange loss pressure of the overseas investments of life

insurance companies.

Banking

1. Opportunities

(1) As one of the earliest Taiwanese banks to establish a cross-strait foothold, we believe

increasingly close ties between the two sides will benefit our Shanghai branch, which already

occupies the leading position among the local peers. For the S E Asian market, we have

successfully turned the Singapore Banking Corporation in Cambodia into our subsidiary and

made application for setting up a Jakarta office in 2012. We foresee overseas revenue growth

along the way to overseas development.

(2) We believe, under the controllable risk levels, an increasing business volume and a bigger

market share to come with the cross-strait currency settlement mechanism came to effect in

November 2012 and the imminent greenlights from Financial Supervisory Commission for

various Renminbi businesses, including DBU.

2. Threats

(1) We expect intensified industrial rivalry from local peers‟ aggressive expansion activities in

China, either through merger/acquisition or branch opening. Also our lending business in the

Mainland area is still heavily restrained by regulation that will hinder growth potential.

(2) Abundant liquidity continues to compress lending rates and aggravate pricing competition.

(3) Lending to the construction industry is still limited by The Banking Act of The Republic of

China, Article 72-2.

Property and Casualty Insurance

1. Opportunities

(1) We have accomplished the first step of our geographical layout plan from the Bohai Sea Ring

Area to the Pearl River Delta. In addition, the Sichuan and Hubei branches were opened in May

and October 2012, meaning we have successfully extended the operating territory from the east

coastal area to the West inland.

(2) The Vietnam branch, inaugurated business at the end of 2000 and achieved premium revenue of

88

VND$50.2 billion (or NT$71.73 million) in 2012, up by 126.6%. Our operation in the country is

entering the stage of stable growth.

2. Threats

(1) An escalating loss ratio from Compulsory Automobile Liability Insurance in recent years has

had an effect on profits. The situation eased in 2012 as the industry players adjusted the

premium upwards.

(2) In Year 2012, 62% of the business of Cathay Century Insurance Co., Ltd. came from references

via Cathay Life Insurance Co., Ltd., Cathay United Bank and significantly performed

competitors in the markets. But Cathay Century Insurance Co., Ltd. still sees a significant room

to further grow. In the days and years ahead, Cathay Century Insurance Co., Ltd. will

continually expand its business horizons and develop business of its own sales channels.

Securities Business

1. Opportunities

(1) The subsidiary‟s market recognition is expected to improve further by leveraging the Cathay

Financial Holdings brand image.

(2) A rich potential customer database can be leveraged through the banking and life insurance

channels.

(3) Increasing opportunities in underwriting deals and new financial product developments through

internal resources integration, including, but not limited to, professional supports and

information on potential customers from the Group companies.

2. Threats

(1) A relative small number of branches and, compared with the top-ten players, which limits our

reachable customer base

(2) Although under the solid expansion strategies, business developments are deeply affected by

fierce local competition coupled with cut-throat price wars and promotion activities.

Investment trust

1. Opportunities

(1) Plentiful internal resources are available for business development, including the Group‟s brand

name, diverse channels, and a broad client base.

(2) Utilization of the Group research platform, which is complete and professional, to boost

investment performance.

(3) AUM of the Cathay Securities Investment Trust is the biggest in Taiwan

(4) The Cathay Securities Investment Trust is actively seeking Renminbi- based business

opportunities. In addition to a joint venture with China Development Bank Securities, a

wholly-owned subsidiary of the China Development Bank, in setting up an investment trust

89

company, the trust subsidiary plans to introduce Reminbi-settled products for both existing and

new funds.

2. Threats

(1) Shrinking margin due to inflated channel rebate charges.

(2) The business is still highly-regulated and there is not much room for sophisticated products. The

current available products are homogeneous and highly replaceable from an investors‟

standpoint.

(3) Domestic players are less competitive with the foreign ones because the international fund

houses normally have complete product lines with long-run performance tracking information,

and they operate under more liberal regulations that allow more diverse product design.

90

IV. Employee Profile


1. Employee profile (population, years of service, age and educational attainment) for the last two years

and before the printing date of the Report.

Year 2011 2012 As of 02/28/2013

Em

plo

yee

Populatio

n

Upper Managers 13 14 14

Managers 21 28 28

Specialists 89 105 92

Junior Specialists 16 20 21

Total 139 167 155

Avg. Age 35.47 35.59 36.18

Avg. Years of Service 9.34 9.05 9.59

Hig

hest

Educatio

n

Doctorate 0.95% 0.74% 0.80%

Masteral 53.33% 64.71% 63.2%

Collegiate 43.82% 32.35% 33.6%

High School 1.90% 2.20% 2.4%

Certifications or Qualifications

Received by Employees See chart below

91

2. Certifications and Qualifications Received by Employees

Certifications and Qualifications Exam Administrator # of

employees

Qualification Exam for Securities

Specialist Securities and Futures Institute 4

Qualification Exam for Senior

Securities Specialist Securities and Futures Institute 5


Investment Analyst Securities and Futures Institute 4

Qualification Exam for Futures



Investment Trust and Consulting

Professional

Securities and Futures Institute 5

Qualification Exam for Stock Affair


Proficiency Test for Financial

Planning Personnel

Taiwan Academy of Banking and

Finance 13

Basic Proficiency Test for Bank

Lending Personnel


Finance 1


Internal Controls


Finance 3

Qualification Exam for Life

Insurance Representative

The Life Insurance Association of the

R.O.C. 70

Qualification Exam for

Intermediate Professional Courses

for Personal Insurance

Representative


R.O.C. 1

Qualification Exam for Foreign

Currency Non-Investment Type

Insurance


R.O.C. 9

Qualification Exam for Non-Life


The Non-Life Insurance Association of

the R.O.C. 21

Proficiency Test for Trust

Operations Personnel Trust Association of R.O.C. 31


Investment-orientated Insurance

Product Representative

Taiwan Insurance Institute 14

Fellow of Life Management

Institute Life Office Management Association 6

Chartered Financial Analyst (CFA) CFA Institute 1

Financial Risks Manager (FRM)

GARP

Global Association of Risk

Professionals

2

Taiwan Certified Public Accountant The Examination Yuan of R.O.C. 2

92

3. Continuing Professional Training Received by Employees

Training Types Number of Training Received by

Employees

General Management 43

Professional Courses 392

Auditor Continuing Training 10

2012 Total Training Expense NT$ 407,397




Year 2011 2012 As of 02/28/2013

Employee

Population

Back-Office

Personnel 4,771 4,864 4,904

Front-Office

Personnel 26,386 26,229 26,253

Total 31,157 31,093 31,157

Avg. Age 42.03 42.49 42.73


Highest

Education

Doctorate 0.01% 0.02% 0.03%

Masteral 4.99% 5.29% 5.32%

Collegiate 41.63% 42.63% 42.83%

High School 47.55% 46.59% 46.43%

Others 5.82% 5.47% 5.39%

Certifications or

Qualifications Received

by Employees See chart below


Certifications and Qualifications Exam Administrator # of employees



Proficiency Test for Financial

Planning Personnel


Finance 1290




R.O.C. 27272




the R.O.C. 13111

Proficiency Test for Trust Operations

Personnel Trust Association of R.O.C. 5920

Insurance Assessor for Life

Insurance

Life Insurance Management Institute of

the R.O.C. 169

93


Claim Adjuster for Life Insurance Life Insurance Management Institute of

the R.O.C. 241




Taiwan Insurance Institute 20407

Fellow of Life Management Institute Life Office Management Association 137


Financial Risk Manager (FRM) GARP

20


Architect The Examination Yuan of R.O.C. 3

Fire Protection Engineer The Examination Yuan of R.O.C. 1

Real Estate Appraiser The Examination Yuan of R.O.C. 6

Taiwan Bar Exam The Examination Yuan of R.O.C. 6

The Associate, Life and Health

Claims (ALHC) International Claim Association 6

Fellow of The Institute of Actuaries

of Japan The Institute of Actuaries of Japan 2

Fellow of the Society of Actuaries Society of Actuaries 2

Associate of the Society of Actuaries Society of Actuaries 13

Administration Personnel for Life

Insurance

Life Insurance Management Institute

R.O.C. 19

Fellow of The Actuarial Institute of

R.O.C. The Actuarial Institute of the R.O.C. 8

Associate of The Actuarial Institute

of R.O.C. The Actuarial Institute of the R.O.C. 29

Certified Internal Auditors (CIA) Institute of Internal Auditors (IIA) 6

Certified Information Systems

Auditor (CISA)

Information Systems Audit and Control

Association (ISACA) 2

Certified Financial Planner (CFP) Financial Planning Association of

Taiwan 26



Employees

General Management 6,022

Professional Courses 70,056


Language Courses 21

2012 Total Training Expense NT$ 129,203,959

94

Cathy United Bank Co., Ltd.



Year 2011 2012 As of 02/28/2013

Employee

Population

Bank Associates 6,456 6,772 6,871

Drivers,

mechanics,

guards

11 10 0

Total 6,467 6,782 6,871

Avg. Age 35.32 36.05 36.15


Highest

Education

Doctorate 0.03% 0.04% 0.04%

Masteral 13.27% 14.49% 14.61%

Collegiate 84.35% 83.26% 83.18%

High School 2.29% 2.15% 2.11%

Others 0.06% 0.06% 0.06%

Professional Certifications

or Qualifications Received




Proficiency Test for Financial Planning

Personnel


Finance 1,655


Lending Personnel


Finance 2,314


Internal Controls


Finance 5,294

Basic Proficiency Test for International

Banking Personnel


Finance 2,058

Qualification Exam for Life Insurance

Representative


R.O.C. 5,193




the R.O.C. 5,424


Personnel Trust Association of R.O.C. 4,712




Taiwan Insurance Institute 2,497

95

3. Continuing Professional Trainings Received by Employees


Employees








Year 2011 2012 As of 02/28/2013

Employee

Population

Head Office 462 500 496

Branches 1,087 1,190 1,193

Total 1,549 1,690 1,689

Avg. Age 35.83 36.42 36.60


Highest

Education

Masteral or

Above 12.20% 11.72% 11.84%

Collegiate 74.50% 74.61% 74.54%

High School 12.91% 13.37% 13.26%

Others 0.39% 0.30% 0.36%

Certifications or

Qualifications Received by

Employees See chart below








the R.O.C. 1614


Insurance Representatives


R.O.C. 1112

Underwriter and Claim Adjuster for

Property Insurance

The Non-Life Underwriters

Society of R.O.C. 311

Insurance Assessor for Life Insurance Life Insurance Management Institute of

the R.O.C. 23

Claim Adjuster for Life Insurance Life Insurance Management Institute of

the R.O.C. 12

Associated Chartered Insurance

Institute (ACII) The Chartered Insurance Institute (CII) 1

Fellow of Life Management Institute Life Office Management Association 3

96


Fellow of The Actuarial Institute of


Associate of The Actuarial Institute of


Fellow of China Association of

Actuaries China Association of Actuaries 1

Associate of the Society of Actuaries Society of Actuaries 5


Certified Financial Planner (CFP) Financial Planning Association of

Taiwan 1

Financial Risk Manager (FRM) GARP 1

Certified Internal Auditors (CIA) Institute of Internal Auditors (IIA) 2

Project Management Professional

(PMP) Project Management Institute 2

Certified Public Accountant (CPA) American Institute of Certified Public

Accountants 2

Occupational Safety and Hygiene

Officer

Council Of Labor Affairs Executive

Yuan 4


Taiwan Bar Exam The Examination Yuan of R.O.C. 2

Fire Protection Engineer The Examination Yuan of R.O.C. 4

Fire Protection Technician The Examination Yuan of R.O.C. 18

Structural Engineer The Examination Yuan of R.O.C. 1

Hydraulic Engineer The Examination Yuan of R.O.C. 1

Civil Engineer The Examination Yuan of R.O.C. 3



Employees




Language Courses 59


97




Year 2011 2012 As of 02/28/2013

Employee

Population

Administration staff 87 128 123

Sales Personnel 271 332 325

Total 358 460 448

Avg. Age 36.30 36.66 36.97


Highest

Education

Masteral or Above 19.27% 23.70% 23.21%

Collegiate 72.91% 69.35% 69.87%

High School 7.82% 6.95% 6.92%

Others 0.00% 0.00% 0.00%

Certifications or Qualifications

Received by Employees See chart below


Certification and Qualification Exam Administrator # of employees









Employees





98


1. Employee profile (population, years of service, age and highest educational attainment) for the last

two years and before the printing date of the Report.

Year 2011 2012 As of 02/28/2013

Employee

Population

Managers 37 34 34

Associates 186 193 192

Total 223 227 226

Avg. Age 37.00 37.40 37.10


Highest

Education

Masteral 41.70% 42.30% 42.50%

Collegiate 56.50% 55.90% 55.80%

High School 1.80% 1.80% 1.70%

Certifications or

Qualifications Received



Certification and Qualification Exam Administrator # of employees





trading Analyst Securities and Futures Institute 4

Certified Financial Planner (CFP) Financial Planning Associate of Taiwan 1

Certified Internal Auditor, R.O.C. The Institute of Internal Auditors,

R.O.C. 3

Financial Risk Manager (FRM) GARP 1







Professional




Regulations



Personnel Trust Association of R.O.C 113



99



Employees




Language Courses 35


Cathay Venture Inc.

1. Employee profile (population, years of service, age, and education) for the last two years and before

the printing date of the Report.

Year 2011 2012 As of 02/28/2013

Employee

Population

Managers 2 2 2

Associates 11 12 12

Total 13 14 14

Avg. Age 37.34 39.70 39.90


Highest

Education

Masteral 84.62% 78.57% 78.57%

Collegiate 15.38% 21.43% 21.43%

Professional Certifications

or Qualifications Received








Employees

Professional Courses 5

Conferences 2

2012 Total Training Expense NT$ 4,655

100

V. Corporate responsibility and moral conduct


Our corporate image and social responsibility are both very important to the Company and we view these as

our operation principals and always make our best effort to support and arrange social welfare events,

including:

1. “Volunteer for Love” program, one-day volunteer visits to the underprivileged sectors of society,

arranged by Ling Yuan;

2. The “Care for the new immigrants” campaign, provides a range of related courses and activities;

3. Mr Tsai, Wan Lin Scholarship, study grants for eligible graduate students;

4. Group blood donations;

5. Cloudgate: sponsoring of outdoor performances, and community and campus tours;

6. Cathay Life Plaza: a series of activities;

7. Nationwide children‟s drawing contest;

8. “Giving Winter Warmth”: care for senior citizens and economically disadvantaged children in remote

areas;

9. Work with NBA to promote basketball;

10. Sponsor “Chen, Wei Yin Baseball Camp” to advocate baseball.


The bank is a devoted supporter of social responsibility and engages in many social events through the

Culture & Charity Foundation.

1. The “Grand Tree Plan” held two scholarship donation ceremonies (for the fall and spring semesters in

2011 and 2012) to hand out NT$10 million to 7,719 Elementary and Junior High School students from

poor families to cover their tuition and miscellaneous fees. The Plan has donated NT$904.5 million

since 2004 and helped more than 50,000 students.

2. To promote the “Grand Tree Plan” spirit – In March 2012, nurturing future talent for the nation, the

Foundation supported an excursion for 100 students from the Taipei School for the Hearing Impaired

to enjoy nature and gardens to broaden their horizon and improve their mental and bodily health.

3. The “Pay it forward, children's book donation, “Seeding Composition Award” and other writing

contests were sponsored to encourage children to open their vision and enjoy literature by reading

more.

4. Seventeen parenting lectures were given to more than 3000 parents and audience in Taipei City, New

Tapei City, Taichung City and Kaohsiung City, under the auspices of “Grand Tree Planting”. The

number of lectures given since the launch has now reached 71.

5. Arranged two “Forever Classic- Super Star Concerts” in Cathay Plaza 7 which attracted an audience of

101

more than a thousand. A total of 20 concerts have been held over the years.

6. Participated in Art Taipei 2012

7. More than ten free themed exhibitions and art lectures were organized to provide art learning and

appreciation opportunities to the public.

8. Continued to facilitate the “Cathay Children Nurturing Camp,” a social welfare camp sponsored by the

Group to offer an all-round kid‟s program that combines humanity, art, culture, wealth management

and other related subjects. “Giving Winter Warmth” expresses benevolence to young learners in

remote areas.

The Bank has exerted social responsibility by attending as many charitable events as possible. In the future,

we will continue to operate under three principals: 1) honesty and truth; 2) kindness and the exercise of

benevolence and contribution to the public good; 3) elegance and the appreciation of art and culture. We not

only work and coordinate with our own Group of companies but also with others to sponsor different kinds

of public welfare activities to foster a harmonious society.


1. Work with Group companies to sponsor various charity events, making and fulfilling corporate citizen

responsibilities, including:

(1) Art events: Cloudgate, nationwide children's drawing contest, New Century Potential painting

exhibition, the Taipei International Choral Festival

(2) Sports events: Super Basketball League matches, the Jeremy Lin Basketball Camp

2. Our organized damage prevention seminars for corporate customers have been very well received. In

addition, related technical services were provided with onsite checks to rest areas in campuses to

reduce corporate operational risks and to enhance campus safety and foster a stable and orderly society

3. The promulgation of safety and insurance publications and applications to assist in boosting public

awareness of insurance knowledge, such as the driving luck app, vehicle safety kit, tips for automobile

insurance claims, quick guides for getting automobile insurance, and short films (available on VCD)

about buying property insurance, brochures about fire prevention with escape plans, and shopping

safety checklists.


1. The company encourages employees to be compassionate with others and get involved in public

welfare activities by participating in visits arranged by the Group charity foundation.

2. Responds to the Group‟s social welfare events, such as “Giving Winter Warmth”and various

endowments to accomplish our responsibilities as a corporate citizen.


1. Every year, we participate in the Taipei Foundation of Finance give back to society events, donated

transportation facilities for rescue.

2. Investor training, free investment forums and wealth management conferences targeting different

market issues were provided island wide from time to time.

102

3. Following the global greening trend, Cathay Investment Trust has discovered good business

opportunities within, and successfully raised the “Cathay Global Eco-Friendly Fund”in 2008, which

contains holdings of various environmental industries, encompassing alternative energy, agriculture

crops, scrap management, eco water etc.

4. Work with the Group in various social welfare events and encourage employee participation in

“Giving Winter Warmth”. The attendance rate was 97.80%.

VI. Information System


(I) Key information system setup and maintenance:

1. IBM AIX R6:

(1) Hardware: one P6-595, three P5-595, and five P5-590.

(2) Software: AIX, WebSphere, DB2, MQ, and AMOS audit application.

(3) Storage: two DS8300, two DS8100, and two XIV.

2. Microsoft Windows:

(1) Hardware: 352 servers including models of IBM X346, X3650, X3850, HS21, and HP X1600.

Two IBM N6240 NAS. Four Radware load balance sets.

(2) Software: Windows operation system, SQL database, WWW system, ClearCase software

configuration management system, and Windows network management system.

(II) Future Development and Purchase:

1. Mainframe:

(1) R6 mainframe upgrade.

(2) Virtual tape library assessment.

(3) Difficult character verification program for mobile access.

(4) Data Center refinement.

2. Microsoft platform:

(1) Windows server virtualization buildup.

(2) MS SQL database consolidation and upgrading.

(3) Continue Win 7 upgrade for individual users.

(4) Desktop Cloud construction.

(5) Introduction of file server audit application implementation.

3. Network:

(1) Facility upgrade and obsolescence for Information Center Building.

103

(2) Broadband management system for main data center in Neihu.

(3) Upgrade and obsolescence for network access control management.

4. Information security:

(1) Information System Journal control platform assessment and implementation.

(2) Network Data Loss Prevention (NDLP) assessment and implementation.

(3) USB control system upgrade.

(4) Email system upgrade.

(III) Emergency backup and safety protection:

1. The backup data center's facilities were built according to that in the main data center. Furthermore,

business continuity plans were also drafted to ensure critical business procedures remain intact after

major breakdowns and disasters. Apply DWDM high-speed fiber optics network to synchronize

information changes from main data center to backup data center to ensure all data is up to date. In

the mean time, periodical simulation tests will be held to test the effectiveness of the plan.

2. To enhance information security, protection systems including three layers of fire wall, intrusion

detection & prevention system, website vulnerability scanning, automatic weakness remedy, and the

latest anti-virus software are already in place. Moreover, additional investments and efforts are made

on the server security system, periodical intrusion and vulnerability scanning by outside vendors,

content control system, network server efficiency management and Security Information and Event

Management (SIEM). Also social engineering training is provided to the staff to enhance employees‟

awareness of information safety and minimize the risk of information leakage as well as to protect

the company‟s information assets and customer rights.

Cathay United Bank Co., Ltd

(I) Key information system setup and maintenance

1. Mainframe:

(1) Core banking system hardware: models of IBM RS/6000 P595, P570 and P770.

(2) Core banking system software: use IBM RS/6000 as the operating system, and Oracle plus IBM

DB2 for database.

(3) Credit card system hardware: IBM 2818-S01

(4) Credit card system software: IBM Z/OS, CICS TS and VTAM/NCP

(5) Foreign exchange system hardware: IBM P770

(6) Foreign exchange system software: IBM OS/400 and DB2/400

104

2. Microsoft open system platform:

(1) Hardware:

a. Microsoft open-system server: IBM X3650M4 and HP DL380G7 multi-core servers.

b. Midrange and high-end storage: Hitachi Data Systems.

(2) Software: Windows operating system, SQL database, WWW system, and email program.

(II) Future Development and Purchase

1. Mainframe:

(1) RS/6000 operating system upgrade

(2) Database version upgrade

(3) Implementation of open-platform database audit application

(4) Fiber optics storage switch upgrade/replacement

(5) Storage capacity expansion

2. Microsoft open-system platform:

(1) Refine in-time monitor and alert functions on the database system

(2) Privileged Identity Management (PIM) project

(3) MS SQL database consolidation & upgrade

(4) Introduction of Windows server virtualization

(5) Enhanced domain account management mechanism

(6) Hardware & software upgrade for e-mail system

3. Network:

(1) Structure upgrade for local area networks (LAN)

(2) Internet dual-entrance structure refinement

4. Information security:

(1) Gateway network data loss prevention (NDLP) system assessment and implementation

(2) Intrusion detection system upgrade

(3) Information security training

(4) E-mail security system upgrade (outbound mail encryption)

(5) Log management system assessment and the implementation

105


1. Employ IBM PPRC remote backup solution to ensure minimum data lag by synchronizing all data

changes from the origin to the remote backup data center over Wavelength-Division Multi-plexing

and DenseWavelength-Division Multiplexing (DWDM) through high-speed fiber optics channels.

2. Use Storage Area Network (SAN) for important MS platform servers to ensure in-time remote data

backup and no-interruption operation procedures.

3. Use high-end firewall system, coupled with, anti-virus programs, vulnerability scanning, and Security

Information and Event Management (SIEM) to construct a complete information security platform to

safeguard information assets.

4. Information security certification: receive ISO 27001:2005 certification.



1. Core information system:

(1) IBM RS/6000 mainframe

Model: two P570

Software: AIX, DB2, and JAVA

Primary applications: all insurance quotes, claim handling, financial & accounting procedures,

image processing, etc....

(2) IBM AS/400 mainframe

Model: 9406-550 and 9406-810

Software: OS/400, DB2/400, COBOL, RPG, and CLP

Primary applications: reinsurance, premium, and commission calculation. These used to be

developed and maintained by COBOL and RPG but will be gradually transferred to the new

RS/6000 mainframe system.

2. Open-system deployment and maintenance

(1) Hardware:

a. IBM HS21/HS22 blade servers, and X3550/ X3650 servers

b. HP DL360 and DL380 series servers

c. IBM DS4800 and IBM DS5300 storage

(2) Software:

106

a. Operating system: MS Windows Server for the servers

b. Database: SQL Server

Primary uses: internal file transfer, employee attendance, corporate website, e-commerce,

and B2B information exchange between bank channels and insurance agent companies


1. Continuous new core information system development and replacement for RS/6000 mainframes.

2. Remote backup data center construction, including RS/6000 mainframe purchases.

3. Work closely with all channels on new application development for B2B, B2C, and mobile

operations.

4. Plans for centralized journal collection platform and obtaining information system certification, ISO

27001.


1. Additional mainframe for the IBM AS/400 system and restoration plan has been set up for the remote

backup data center.

2. High availability (HA) design contained in the IBM RS/6000 mainframe system for emergency

backup.

3. To enhance Internet security, solutions including firewall, vulnerability scanning, intrusion protection,

SSL VPN program, Security Information and Event Management (SIEM), along with anti-virus

software and Trojan remover, have been acquired and installed.



1. IBM AIX R6:

(1) Hardware: IBM RS6000-P740/P720/P560/ P650/P615/ P520

(2) Software: AIX Version 5, AIX Version 6, and ACUCobol

(3) Storage: IBM DS5300, V7000, FastT700, and FastT600

2. Microsoft Windows System:

(1) Hardware:

IBM X3250/X3550/X3650 and HS22 blade server

107

(2) Software:

a. Operating system: use Microsoft Windows 2003 and 2008 for servers with WSUS for

system renewal. Use AD domain for centralized management, except for special-purpose

servers.

b. Database: Microsoft SQL and Oracle database systems

c. WWW: Websites are divided into external and internal types. All external sites are set at the

Demilitarized Zone (DMZ) of the firewall.

3. Network:

(1) Hardware:

a. Routers in the information center: use Cisco3745 for communication among the head office

and the nine branches. Use Cisco2621 for Internet connection.

b. Switches in the information center: adopt Cisco 2950 for the Local Area Network

connection and Cisco 3750 for server linkage.

c. PIX Firewall: use two layers of CISCO PIX firewall in Neihu computer room with

automatic backup connection to control Internet linkage for the entire company.

d. Load balance routing: use Radware Link proof with three ISPs with five circuits for

backup.

(2) Software:

a. Use NetIQ Security Report for CISCO PIX firewall log analysis program to derive network

loading report.

b. Use Websense Enterprise to control all website browsing in the head office and the

branches.

c. Use Symantec anti-virus program for PCs and Symantec IM Manage to control instant

messaging.


1. Replacement and deployment of new core systems for security and futures dealings, including

proprietary, brokerage, and electronic trading.

2. Remote backup mechanism: Construct main trading center in Chunghwa IDC computer room to

support alternate Internet-order and core-trading processing in remote locations.

3. E-commerce platform upgrades, including Android trading APPs, Push Notification Service, and

customer management.

108

4. New system development ordered by Taiwan Stock Exchange and Taiwan Futures Exchange.

5. Continued enhancement of information protection mechanism to ensure personal information safety

and compliance with amended Personal Information Protection Act.

6. Establish virtualized technology application center.


1. Mainframe: dual-mainframe remote backup currently in place.

2. Network:

(1) For network backup, employ high availability (HA) design for important routers and switches

with dedicated E1 connecting to the remote backup data center. Also, alternate connection lines

are installed in the remote backup data center and available to all business locations to ensure

minimum interruption for important operation procedures. Several ISPs are subscribed with load

balance control to guarantee high-quality customer connections.

(2) For Internet security: use high-end firewalls with network management and anti-virus programs

to construct a complete and effective Internet security management system and ensure

customer-trading quality.



1. Server/System

(1) Windows system: the core operation system, covering fund managers‟ decision-making

assistance, trader order placement, client buy/sell order processing, fund and discretionary

accounting, customer service, company website, order management system, electronic billing,

document scanning, etc…

a. Hardware: 22 servers, including models from HP DL360, DL380, and DL385

b. Operating systems: Microsoft Windows server 2003 and Windows server 2008

c. Database: Microsoft SQL Server 2005 and SQL Server 2008

d. Storage: EMC HA (including CX4-120, VNX5300, and VPLEX), NetApp FAS2020 and

NetApp FAS2240-2

(2) Linux system: for network monitor & control and email sending system.

2. Network and information security

(1) Internal network: two dedicated E1 lines with load balance control to connect the head office

109

and each branch directly. Each line is the backup for the other to ensure smooth linkage.

(2) Internet: subscribe to three connection lines from two ISPs to support all internal operations and

customer connections.

(3) Firewall: use CheckPoint firewall to control all Internet communication and set up the

Demilitarized Zone (DMZ) for outward websites. Employ Juniper firewall to control

transmission to the Holding company.

(4) Network Security: install Websense to control internal Internet use and Symantec Endpoint

Protection to prevent virus.

(II) Future Development and Purchase

1. Apply high availability (HA) design for the accounting system: Move data from the local hard disk to

the EMC storage system for data security improvement. Construct high availability (HA) design to

achieve dual database backup.

2. Mobile business application development: add in single buy/sell trading function on the mobile

channel.

3. Network trading and company official website upgrades: improve website content, renew user

interface, as well as, add new functions.

4. Investment research management system buildup: provide a platform that will facilitate the

production/browsing of research reports by the research team, gather data sources, and

update/evaluate performance.

5. System construction for Renminbi-based funds, multi-currency funds, and ETFs.


1. In addition to daily disk/tape backup, an alternate system is set up in the Neihu computer room. More

refinement work will be made on backup facilities and tools to tie in operation expansion. Our goal is

to duplicate the entire system to ensure information completeness and continued operation during

major disasters and breakdowns.

2. Introduce basic firewall protection, Websense Internet access management, and automatic anti-virus

system to strengthen information security. Also, continue future enhancement of information

protection mechanism to safeguard company assets, ensure customer rights and ongoing company

operation, and comply with the Personal Information Protection Act.

110

VII. Industrial Relations

(1) Employee benefit programs, retirement system, related agreements and rights protection:

Besides the labor and health insurance coverage as required by the government, additional benefits such

as group insurance, various subsidies, festival allowances, hiking activities, internal training,

exam-taking reimbursements, etc. are part of our employees‟ benefits. In terms of retirement payments,

all benefits are paid in accordance with Labor Standards Act and Labor Pension Act.

To protect employee rights, policies regarding but not limited to compensation payments, working hours,

leave benefits, performance appraisals, rewarding plans, promotion programs and pension benefits are

detailed in the Group‟s employee handbooks and approved by the supervising units for internal

distribution. Also to promote a non-harassment and gender-equality employment, measures for

preventing/correcting sexual harassment with related complaint procedures and disciplinary measures

were established. A dedicated Committee was set up to execute the above-mention policies, including

investigating and resolving on any complaint.

To ensure a safe working environment to guarantee employee personal safety, the following Group

measures are created:

1. First-aid personnel are required to take the related professional training. First-aid kits are provided

in all working locations;

2. Regular tests for illumination and carbon level of working environment;

3. Health checkups and pre-job safety and health training for new hires;

4. Health checkups and safety and health training for on-job employees on a regular basis.

(2) Losses or potential obligations arousing from labor disputes measured at the best estimates of the

expenditures required to settle the liabilities as of end of 2012 and before the printing date of this

Report. Obligations that are not probable or not reliably measurable should be disclosed to state

such facts: none.

(3) Employee Code of Conduct:

All employees are required to follow the codes below as a part of their contributions to the Company‟s

future development and to the common welfare of the entire employee population.

1. All employees must abide by applicable government laws, rules and regulations, and the

Company‟s regulations and policies. Team spirit is highly encouraged within the Company but

behavior relating to disturbances in the working environment or common welfare, such as being

opinionated, agitating, quarreling, fighting physically, misleading others, etc are strictly

prohibited.

2. All work should be carried out in accordance with the instructions given, if no such instruction is

available, a request for related guidance from the upper managers should be sought before further

execution.

3. Instructions given by the working supervisors shall be implemented, any refusal, dodging or

disagreement should be forward to the department/divisional supervisor for resolution.

4. Unless approved by the Company, no outside employment is allowed. Activities relating to jobbery

will not be tolerated.

5. Other than serving for his/her departments, employees are expected to assist in the work of others

when necessary and as requested by the direct supervisors. Buck passing is not allowed in this

situation.

6. Unless for Company holidays or other holidays as designated by the central government,

employees are required to arrive at work on time for working days. Absences without prior notice

or leaving early/arriving late are disallowed.

7. All duties, unless otherwise specified, should be completed during the day without delay.

8. Absence without permission during working hours is prohibited.

9. New job assignments or relocation should be accepted without refusal.

10. All work settings should be kept in good order. Riotous activities or disturbing others or any forms

111

of misconduct are prohibited.

11. No going through other‟s data including statements, documents, phone calling history, and

computer files (including any storage). No document is to be taken outside or revealed to others

without the supervisor‟s permission.

12. Company customers should be treated with kindness and respect. Attitudes associated with

negligence or arrogance are strictly prohibited. All customer requests should be served with full

effort without delay. Explanations should be made patiently when misunderstood. Inquires should

be answered or transferred to the suitable personnel, whether in charge or not. An answer of “I do

not know” is not acceptable.

13. Business intelligence and commercial data should be kept confidential and not disclosed to others.

14. Employees are not permitted to guarantee a loan or contract for others in the name of the Company

or the job position.

15. All Company facilities or supplies should be used with care and without waste. Wanton damage

and misappropriation for personal use outside of the Company is not allowed.

16. Avoid bad addictions, such as gambling and excessive business entertainment.

17. Contraband or hazardous goods are banned from all the office areas. No safekeeping of personal

belongings in the warehouses. No smoking or leaving ignitable goods in the file rooms.

18. Under unusual circumstances, all important documents, statements, commercial bills, cash and

computer files (including any storage) should be placed and handled properly. And notice should

be sent to the nearby supervising units as soon as possible.

19. Supervising responsibility should be divided into various layers according to the nature of the

transaction. Managers in all levels should properly look after the business under his/her

supervision.

VIII. Important contracts and commitments


Contract

Type Contracting Party Valid Period Purpose

Restriction

Clauses

Reinsurance

Contracts

Central Reinsurance

Corporation 09/30/1970~

Reinsurance contracts (for

traditional life, casualty insurance,

group insurance, and catastrophe

insurance policies) and retrocession

contracts

None

Swiss Reinsurance Group 09/30/1970~ Reinsurance contracts for traditional

life policies

Munich Reinsurance Company 04/01/1975~


traditional life, casualty insurance

and catastrophe insurance policies)

Assicurazioni Generali S.p.A. 01/01/1978~ Reinsurance contracts for group

insurance policies

Nippon Life Insurance 08/01/1978~ Reinsurance contracts for group

insurance policies

112

Contract


Restriction

Clauses

The Dai-ichi Life Insurance

Company, Limited 10/31/1991~

Reinsurance contracts for traditional

life policies

Scor Global Life Reinsurance

Company 01/01/1998~


life policies

Reinsurance Group of America 09/01/1998~ Reinsurance contracts for traditional

life policies

Transamerica Life Ins. Co., 09/01/1998~ Reinsurance contracts for traditional

life policies

Hannover Re 01/01/2003~

Reinsurance contracts for casualty

insurance and group insurance

policies

Swiss Reinsurance Group 01/01/2005~ Reinsurance contracts for casualty

insurance policies

Scor Global Life Reinsurance

Company 01/01/2006~

Reinsurance contracts for casualty

insurance policies

Hannover Re 01/26/2006~ Reinsurance contracts for traditional

life policies

Caisse Centrale De

Reassurance 01/01/2011~

Reinsurance contracts for group

insurance policies

Cologne Reinsurance Company

plc. 01/01/2012~


life policies

Note: Under no demur from either side, reinsurance contracts are automatically renewable every year when they expire.


Contract Type Contracting Party Valid Period Purpose Restriction

Clause

Reinsurance

Contracts

(domestic)

Central Reinsurance

Corporation 08/19/1993~


fire, catastrophe, liability,

marine and casualty policies)

Special

exclusions

and coverage

113


Clause

Reinsurance

Contracts

(international)

EVEREST REINSURANCE

COMPANY 01/01/2001~


fire, catastrophe, marine,

engineering, liability, and

casualty policies)

limitation

listed under

the

reinsurance

contracts.

KOREAN REINSURANCE

COMPANY 01/01/2002~


fire, catastrophe, liability,

marine, engineering and

casualty policies)

MUNICH REINSURANCE

COMPANY 08/19/1993~

Reinsurance contracts for

catastrophe policies

TOA REINSURANCE

COMPANY 01/01/2001~


catastrophe, engineering,

marine and casualty

policies)

TRANSATLANTIC

REINSURANCE

COMPANY

01/01/2001~

Reinsurance contracts for

engineering and casualty

policies

Cathay SecuritiesCorporation.


Clause

Trading Facility

Maintenance Taiwan IBM

09/01/2009~

12/31/2013

Maintenance for R6 Trading

mainframes and servers

None

Networking Facility

Maintenance Ring Line Co.

02/06/2012~

02/05/2014

Maintenance for networking

connection facilities

Software Writing

Service Da Cho Digital Service

12/30/2011

~ One-year

warranty at the

Futures new-core system

building

114


Clause

completion

Purchase Agreement Pershing Systems Co.

12/15/2011~

One-year

warranty at the

completion

Computer hardware and

authorized software purchase

Program

Maintenance

Grand Tech C.G. Systems

Inc.

11/24/2012~

12/31/2014 Maintenance for Oracle system

Program Writing

Agreement Dimerco Data System Co.

05/2012 ~

One-year

warranty after

online

Trading placement system for

re-consigned overseas

stocks/mutual funds

Program

Maintenance Yi Tung Digital Technology

12/10/2012~1

2/09/2013

Maintenance agreement for

Speedy_Options (professional)

trading system

Program

Maintenance Netstock

01/01/2011~

02/28/2013


Net Bridge trading system

Program

Maintenance K Way Information

08/01/2010~

08/01/2013

HTS ASP application program

development

Program

Maintenance Sys Just

08/01/2012~

07/31/2014

License agreement (XQ

information system)

Program

Maintenance Mitake

12/01/2012~

11/30/2013


mobile trading system on iPad

platform

Software Writing

Service

Global Mixed-mode

Technology Inc.

08/01/2012~

07/31/2015

APPLE iPAD mobile stock

trading system


Contract


Restriction

Clause

115

Contract


Restriction

Clause

Fund

Custodian

Hua Nan Bank 03/09/1994~ Cathay Dragon

None

Fubon Financial 06/23/2000~ Cathay Cathay

Fubon Financial 8/7/2000~ Cathay Taiwan Money Market

Fubon Financial 1/10/2001~ Cathay Small & Med Cap.

Chang Hwa Bank 1/31/2002~ Cathay Greater China

Bank SinoPac 6/11/2001 Cathay Assets Allocation Neutral

Fubon Financial 7/18/2002~ Cathay Technology

Fubon Financial 12/15/2005~ Cathay Glbl Aggressive FoFs

Fubon Financial 12/15/2005~ Cathay Glbl Balance FoFs

Chang Hwa Bank 10/25/2007~ Cathay Taiwan Quantitative

Hua Nan Bank 3/14/2008~ Cathay Global Ecology

Hua Nan Bank 8/18/2006~ Cathay Global Money Market

Bank SinoPac 12/27/2006~ Cathay Global Infrastructure

Bank SinoPac 8/27/2009~ Cathay Man AHL Futures Trust Fd of

Fds

Mega International

Commercial Bank 11/30/2009~ Cathay Mandarin

Chinatrust Bank 5/6/2010~ Cathay High Income Fund of Funds

Bank of Taiwan 8/19/2010~ Cathay Emerging Market Fund

Fubon Financial 12/20/2010~ Cathay Global Resources

E.Sun Bank 6/23/2011~ Cathay China Domestic Demand

Growth

E.Sun Bank 9/9/2011~ Cathay Emerging Market High Yield

Hua Nan Bank 4/30/2012~ Cathay China Industries Fund

Shin Kong Bank 7/4/2012~ Cathay Value and Superior

E.Sun Bank 101/10/26~ Cathay Capital Protected Fund-NZD

Note: Contract effects on the funding date of the investment fund. The contracting party is the fund‟s custodian bank.

116

VI． Financial Satus

I. Five Year Condensed Balance Sheet and Income Statement Summary

(Table 20)

(I) Condensed Balance Sheet of Cathay Financial Holdings and Subsidiaries (First quarter of 2013)


Year

Title

Financial information in

2013 to March 31 (Note 3)

Cash and cash equivalents, due from Central Bank and

call loans to banks 343,391,570

Financial assets at fair value through profit or loss 174,615,322

Available-for-sale financial assets 1,389,852,577

Derivative financial assets for hedging 2,196,659

Securities purchased under agreements to resell 12,465,467

Receivable-net 130,699,964

Current tax assets 9,693,440

Assets pending for sale-net 0

Loans - net 1,546,886,562

Reinsurance contract assets 12,102,562

Held to maturity financial assets 51,691,033

Investments accounted for using the equity method - net 1,597,196

Assets subject to restriction 0

Other financial assets - net 1,664,248,110

Property andand equipment -net 71,473,211

Investment property -net 213,799,683

Intangible assets -net 9,324,806

Deferred income tax assets -net 16,841,553

Other assets 23,367,307

Total assets 5,674,247,022

Due to Central Bank and other banks 73,996,201

Funds Borrowed from Central Bank and Banks 1,493,750

Financial liabilities at fair value through profit or loss 24,377,181

Derivative financial liabilities for hedging 0

Securities sold under repurchase agreement 36,380,124

Commercial papers payable 3,360,000

Payable 65,731,116

Current tax liabilities 670,456

Liabilities directly related to assets pending for sale 0

Deposit and remittances 1,466,687,367

117

Year

Title

Financial information in

2013 to March 31 (Note 3)

Bonds payable 90,196,450

Preferred share liabilities 0

Other financial liabilities 378,882,142

Provisions 3,246,964,264

Deferred income tax liabilities 14,474,644

Other liabilities 15,557,603

Total liabilities Before payout 5,418,771,298

After payout (Note. 4)

Total stockholder's equity attributable to equity

holders of the parent 251,473,106

Capital stock 108,653,851

Capital surplus 78,508,148

Retained earnings Before payout 45,665,347


Other equity 25,825,632

Treasury stocks (7,179,872)

Non-controlled equity 4,002,618

Total of equity Before payout 255,475,724


Note 1: Financial statements of the Company in respective years were audited.

Note 2: The Company did not conduct any revaluation of assets over the years.

Note 3: Financial information covering current period to March 31 2013 has been audited.

Note 4: The proposal for distribution of earnings in 2012 has not been passed by the General

Shareholders‟ Meeting.

(II) Condensed Consolidated Income Statement of Cathay Financial Holding Co., Ltd. and Its Subsidiaries

(Quarter 1 of Year 203)


Year

Title

Financial information

in 2013 to March 31

(Note 2)

Interest income 32,051,153

Less: Interest expenses (3,360,950)

Net interest income 28,690,203

Net gain other than interest 59,134,763

Net gain 87,824,966

Allowances lodged for bad debt expenses and

guarantee responsibilities (89,058)

118

Year

Title

Financial information

in 2013 to March 31

(Note 2)

Net change in allowance for insurance liabilities (67,123,878)

Operating expenses (12,779,271)

Net profit before tax of the units in continued business

operation 7,832,759

Income tax (expense) benefit (768,339)

Net profit this term of the units in continued business

operation 7,064,420

Profit (loss) of the unit discontinued from business

operation 0

Net profit (net loss) this term 7,064,420

Other comprehensive income (loss) this term (net

amount after tax) 122,056

Total comprehensive profit (loss) this term 7,186,476

Net profitattributable to the parent 6,929,169

Net profit belonging to non-controlled equity 135,251

Total amount of comprehensive profit (loss)

attributable to the parent 6,930,883

Total amount of comprehensive profit (loss) belonging

to non-controlled equity 255,593

Earnings per share (EPS) 0.65


Note 2: Financial information covering current period to March 31 2013 has been audited.

Note 3: Incomes of discontinued operations, extraordinary gains/loss, and accumulated

effort of change in accounting principle shall be presented net of income tax.

Note 4: The information contained in the annual financial report of the Company has not

been added, corrected, or revised.

119

(III) Five Year Condensed Consolidated Balance Sheet of Cathay Financial Holding Co., Ltd. and Its

Subsidiaries-Gazette of Financial Accounting Standards of the Republic of China


Year

Title

Financial information from Jan 1 2008 to Mar 31 2012 (Note 1)

2008 2009 2010 2011 2012

Cash and cash equivalents, due

from Central Bank and

placement to other banks 448,608,000 723,547,229 742,594,390 814,156,223 806,579,023

Financial assets at fair

value through income

statement

126,885,744 143,643,937 170,119,242 84,697,424 147,145,050

Investment in R/S bonds

and bills 11,748,246 43,401,815 48,984,492 11,820,837 18,517,498

Receivable 84,700,588 98,362,165 118,523,421 97,164,171 115,796,856

Loans 1,362,904,646 1,328,020,679 1,383,122,211 1,492,075,402 1,520,005,053

Financial assets available

for sale 486,527,019 553,416,933 662,880,442 1,336,579,892 1,284,920,865

Financial assets held to

maturity 653,143,459 672,357,520 631,827,811 21,955,565 24,380,985

Equity investment under the

equity method 2,616,092 2,614,981 2,500,997 1,287,843 1,146,326

Other financial assets 359,673,019 519,336,540 691,669,727 855,616,113 1,184,785,896

Fixed assets (Note 2) 40,496,973 39,657,723 37,940,551 38,605,554 48,821,416

Intangible assets 7,790,572 8,227,881 8,390,821 9,692,897 9,734,376

Other assets 161,070,163 171,439,710 190,635,405 241,750,859 273,469,460

Total assets 3,746,164,521 4,304,027,113 4,689,189,510 5,005,402,780 5,435,302,804

Due to Central Bank and

other banks 62,866,360 45,571,009 45,351,211 62,275,073 56,934,246

Funds Borrowed from

Central Bank and Banks 1,643,000 1,601,500 1,456,500 1,514,500 1,456,800

Financial liabilities at fair

value through income

statement

73,030,548 21,458,739 18,514,516 23,136,143 8,718,702

Liabilities in R/P bonds

and bills 20,712,416 8,745,465 22,139,556 14,686,609 22,046,517

Deposit and remittances 1,090,441,845 1,288,413,420 1,329,506,860 1,414,421,828 1,458,587,976

Payable bonds 38,865,978 61,437,209 63,654,684 76,023,825 89,831,007

Provisions for operation

and liabilities 2,076,705,192 2,329,096,524 2,614,801,278 2,822,627,363 3,117,676,956

Other financial liabilities 193,940,126 274,580,400 277,109,339 304,662,085 346,983,437

Preferred share liabilities 0 0 0 0 0

Other liabilities 42,460,101 57,642,067 94,148,634 68,343,781 84,482,715

Total liabilities 3,600,665,566 4,088,546,333 4,466,682,578 4,787,691,207 5,186,718,356

Shareholders‟

equity of parent

Capital stock 97,375,372 96,708,774 101,544,213 103,575,096 108,653,851

Capital surplus 81,971,213 78,240,933 78,508,148 78,508,148 78,596,121

Retained

earnings

Before

payout 19,380,812 30,756,696 25,393,833 28,743,040 35,587,271

After payout 19,380,812 20,818,603 17,270,297 18,585,530 Note. 3

Others under

shareholders‟ equity (56,373,904) 6,546,446 13,130,013 2,834,651 21,995,591

Minority shareholding 3,145,462 3,227,931 3,930,725 4,050,638 3,751,614

120

Year

Title


2008 2009 2010 2011 2012

Total shareholders‟

equity

Before payout 145,498,955 215,480,780 222,506,932 217,711,573 248,584,448

After payout 145,498,955 210,645,341 216,414,280 212,632,818 Note. 3



Note 3: The proposal for distribution of earnings in 2012 has not been passed by the General Meeting.

Note 4: The information contained in the annual financial report of the Company has not been added, corrected, or

revised.

(IV) Five Year Condensed Balance Sheet of Cathay Financial Holding Co., Ltd. -Gazette of Financial

Accounting Standards of the Republic of China


Year

Title


2008 2009 2010 2011 2012

Cash and cash

equivalents 2,299,386 10,812,475 14,561,773 4,121,526 7,141,598

Financial assets at fair

value through

income statement

0 0 0 0 0

Financial assets

available for sale 0 0 0 0 0

Receivable 4,077,241 5,275,322 5,534,108 5,207,033 6,454,364

Financial assets

held to maturity 15,000,000 25,000,000 25,000,000 31,000,000 31,000,000

Equity

investment under

the equity

method

144,936,489 216,308,807 218,795,298 223,253,372 252,085,633

Fixed assets

(Note 2) 4,467 4,022 4,346 3,645 4,739

Intangible assets 533 0 123 62 0

Other financial

assets 31,720 31,720 31,720 538,407 538,407

Other assets 2,238,933 2,309,690 1,983,651 2,110,428 1,122,807

Total assets 168,588,769 259,742,036 265,911,019 266,234,473 298,347,548

Financial

liabilities at fair

value through

income

statement

0 0 0 0 182,100

Payables 6,212,178 7,461,881 7,299,540 12,533,726 5,940,874

Payable

corporate bonds 20,000,000 40,000,000 40,000,000 40,000,000 47,312,376

Preferred share

liabilities 0 0 0 0 0

Other financial

liabilities 0 0 0 0 0

Other liabilities 23,098 27,306 35,272 39,812 79,364

121

Year

Title


2008 2009 2010 2011 2012

Total

liabilities

Before

payout 26,235,276 47,489,187 47,334,812 52,573,538 53,514,714

After

payout 26,235,276 52,324,626 53,427,464 57,652,293 Note. 3

Capital stock 97,375,372 96,708,774 101,544,213 103,575,096 108,653,851

Capital surplus 81,971,213 78,240,933 78,508,148 78,508,148 78,596,121

Retained

earnings

Before

payout 19,380,812 30,756,696 25,393,833 28,743,040 35,587,271

After

payout 19,380,812 20,818,603 17,270,297 18,585,530 Note. 3

Others under

shareholders‟

equity

(56,373,904) 6,546,446 13,130,013 2,834,651 21,995,591

Total Shareholders‟

equity

Before

payout 142,353,493 212,252,849 218,576,207 213,660,935 244,832,834

After

payout 142,353,493 207,417,410 212,483,555 208,582,180 Note. 3



Note 3: The proposal for distribution of earnings in 2012 has not been passed by the General

Shareholders Meeting.

Note 4: The information contained in the annual financial report of the Company has not been added,

corrected, or revised.

(V) Five Year Condensed Consolidated Income Statement of Cathay Financial Holdings Corporation

and Its Subsidiaries-Gazette of Financial Accounting Standards of the Republic of China Currency unit: 1,000 NTD

Year

Title


2008 2009 2010 2011 2012

Net interest

income 98,575,912 88,068,596 92,740,739 105,055,460 112,816,241

Net non-interest

income 64,951,204 216,143,206 188,701,520 149,731,259 265,946,167

Bad debt

expenses (926,248) (74,900) 0 (1,062,613) (3,172,002)

Provisions for

insurance

liabilities

(109,826,456) (245,673,496) (235,133,912) (196,217,221) (307,361,510)

Operating

expenses (52,565,551) (42,162,162) (43,743,608) (47,888,945) (51,208,522)

Consolidated

pre-tax gain

from continued

business

operations

208,861 16,301,244 2,564,739 9,617,940 17,020,374

Consolidated

after tax gain

from

continued

business

operations

1,973,057 10,821,162 4,282,888 11,284,530 17,058,037

122

Year

Title


2008 2009 2010 2011 2012

Income of

discontinued

business

operations

(after taxation)

0 0 0 0 0

Extraordinary

gains/loss

(after taxation)

0 0 0 0 0

Accumulated

effects of

change in

accounting

principle (after

taxation )

0 0 0 0 0

Consoli

dated

total

earnings

Attributable

to

shareholders

of parent

2,196,229 11,040,338 4,575,230 11,128,898 17,001,741

Attributable

to minority

shareholders (223,172) (219,176) (292,342) 155,632 56,296

Earnings per

common share

(NTD)

0.18 0.99 0.39 1.04 1.60


Note 2: incomes of discontinued operations, extraordinary gains/loss, and accumulated effort of change in

accounting principle shall be presented net of income tax.



(VI) Five Year Condensed Income Statement of Cathay Financial Holding Co., Ltd. -Gazette of

Financial Accounting Standards of the Republic of China


Year

Title


2008 2009 2010 2011 2012

Investment income under

the equity method 2,858,167 12,173,553 5,306,264 11,591,873 17,585,528

Other incomes 866,367 614,385 928,352 965,557 1,195,048

Investment loss under the

equity method 0 0 0 0 0

Operating expenses (486,983) (318,836) (328,544) (344,844) (466,002)

Other expenses and loss (1,112,802) (751,896) (1,154,757) (1,169,077) (1,441,998)

Pre-tax income (loss) 2,124,749 11,717,206 4,751,315 11,043,509 16,872,576

After-tax income (loss) 2,196,229 11,040,338 4,575,230 11,128,898 17,001,741

Pre-tax EPS (NTD) 0.19 1.08 0.44 1.02 1.58

After-tax EPS (NTD) 0.20 1.01 0.42 1.03 1.59




123

(VII) Names of external auditors and audit opinions in recent years

Year Names of Auditors Audit opinions of Auditors

2008 James Huang, J. H. Hsu Audit Report with unqualified

opinion


opinion


opinion

2011 James Huang, J. H. Hsu

Audit Report with amended

unqualified (unreserved) opinion

(Note. 1)

2012 James Huang, Andrew Fuh Audit Report with unqualified

opinion

Note 1: Effective January 1 2011, the Company and its subsidiaries are subject to SFAS No. 41 (Operating Segments) and

SFAS No. 40 (Insurance Contract) in accounting in accordance with the requirements of the 3rd

amendment to

SFAS No. 34 (Financial Instruments: Recognition and Measurements on Taiwan Security Prices) after

announcement.

II. Five Year Financial Analysis (Table 21) (I) Financial Analysis (First quarter 2013)

Year

Title (Note2)

Financial information in 2013 to March 31

(Note 1)

Operational

ability

Total assets turnover

(times) 0.02

Deposit to loan ratio of

subsidiary bank (%) 64.34

NPL ratio of subsidiary

bank (%) 0.35

Average revenues per

employee (group) 1,959

Average earnings per

employee (group) 158

Profitability

ROA (%) 0.18

ROE (%) 2.77

Net Profit margin (%) 8.04

EPS (NTD) 0.65

Ability to repay

debts and

financial

structure

Liabilities to assets ratio

(%) 95.50

Liabilities to net worth

ratio (%) 2121.05

Financial holding double

leverage ratio (%) 116.10

Financial ratios of

financial holding pursuant

to Article 42 of the

Financial Holding

Company Act (%)

None

Leverage

Operation leverage 9.72 Financial leverage of

financial holding 1.43

124

Year

Title (Note2)


(Note 1)

Growth rate

Asset growth rate (%)

Note. 4

Profitability growth rate

(%) Note. 4

Cash flow

Cash flow ratio (%) (29.07)

Net Cash flow adequacy

rate (%) Note. 4

Cash flow coverage ratio

(%) 3008.32

Scale of

operation

The market share of asset

(%) Note. 4

Market share of net worth

(%) Note. 4

Market share of the deposit

at subsidiary bank (%) Note 4

Market share of lending at

subsidiary bank (%) Note 4

Capital

adequancy

capital

adequacy

ratio set forth

by respective

subsidiaries

at industry

standard (%)

Cathay Life

Insurance Note. 4

Cathay

United Bank Note. 4

Cathay

Century

Insurance

Note. 4

Cathay

Securities

Corporation

Note. 4

Cathay

Securities

Investment

Trust

(Note 6)

Note. 4

Cathay

Venture Note. 4

Qualified

capital of

respective

subsidiaries

Cathay Life

Insurance Note. 4

Cathay

United Bank Note. 4

Cathay

Century

Insurance

Note. 4

Cathay

Securities

Corporation

Note. 4

Cathay

Securities

Investment

Trust

(Note 6)

Note. 4

Cathay

Venture Note. 4

Net qualified capital of the

group Note. 4

125

Year

Title (Note2)


(Note 1)

Capital

adequancy

Mandatory

capital

requirements

of respective

subsidiaries

Cathay

Life

Insurance

Note. 4

Cathay

United

Bank

Note. 4

Cathay

Century

Insurance

Note. 4

Cathay

Securities

Corporation

Note. 4

Cathay

Securities

Investment

Trust

(Note 6)

Note. 4

Cathay

Venture Note. 4

Mandatory total capital

requirements of the whole

group Note. 4

Capital

Adequancy ratio of the

group (%) Note. 4

All subsidiaries the financial holding

company and counterparties as stated

in Paragraph 1 of Article 46 of the

Financial Holding Company Act

engaged in business transaction as

stated in Paragraph 2 of the same

article shall declare the total balance

with the declaration form provided.

Note. 4

Specify the reasons that caused the changes in the financial ratios in the last 2 years

(analysis is not required for changes of less than 20%):

Note. 4: Not applicable to a quarterly statement

Note 1: Financial holding companies that have their stocks listed in the exchange or traded

in the OTC market shall include the financial information as stated in the financial

statement covering the period to the quarter prior to the date the financial report

was printed in the financial analysis.

Note 2: The equations for calculation are shown below:

1. Operational ability

(1) Total assets turnover = net profit/average total assets

(2) Deposit to loan ratio = Subsidiary bank total loans/total deposits

(3) Subsidiary bank NPL ratio = Subsidiary bank total overdue loans/total

loans

(4) Average revenues per employee = net income/total number of employees

(5) Average earnings per employee=corporate earnings/ total number of

employees

2. Profitability

(1) Return on Assets (ROA)= [Corporate earnings + interest expenses x (1- tax

rate)]/average total assets

(2) Return on shareholders‟ equity = corporate earnings/average net

126

shareholders‟ equity

(3) Net profit margin= Corporate earnings/net income

(4) Earnings per share (EPS) = (attributable to shareholders‟ equity of the

parent – preferred stock dividends)/weighed average quantity of

outstanding shares (Note 3).

3. Ability to repay debts and financial structure

(1) Liabilities to assets ratio = total liabilities/ total assets

(2) Liabilities to net worth ratio = total liabilities/ net worth

(3) Financial holding company double leverage ratio = equity investment

under paragraph 2 of Article 36 and Article 37 of this law/net worth

4. Leverage

(1) Operation leverage ratio = (Net income – variable expenses)/ earnings

before taxation

(2) Financial holding company financial leverage = (earnings before taxation +

interest expenses)/earnings before taxation

5. Growth rate

(1) Asset growth rate = (total assets in current period – total assets in previous

period)/total assets in previous period

(2) Profitability growth rate = (earnings before taxation in current period –

earnings before taxation of previous period)/earnings before taxation in

previous period

6. Cash flows

(1) Cash flow ratio = net cash flow from operation / (call loans and overdrafts

from banks and financial institutions + payable commercial papers +

financial liabilities at fair value through income statement + R/P bonds and

bills liabilities + payables due in one year)

(2) Net cash flow adequacy ratio = net cash flows from operation in the last 5

years/ (capital expenditure + cash dividend) in the last 5 years

(3) Cash flow coverage ratio = net cash flow from operation / net cash flow

from investment

7. Scale of operation

(1) Market shares of assets = total assets/ total assets of the whole financial

holding company

(2) Market share of net worth = net worth/total net worth of the whole

financial holding company

(3) Market share of the deposit at subsidiary bank= total deposits/ total

deposits at financial institutions entitled to engage in lending and deposits

business

(4) Market share of the loans at subsidiary bank= total loans/ total loans at

financial institutions entitled to engage in lending and deposits business

8. Capital adequancy ratio

(1) Net qualified capital of the group = qualified capital of the financial

holding company + (proportion of shareholding by financial holding

company x the qualified capital of respective subsidiaries) – required

deductible items

(2) Total statutory capital requirement of the group = statutory capital

requirement of the financial holding company + proportion of shareholding

by financial holding company x statutory capital requirement of respective

subsidiaries

(3) Capital adequancy ratio of the group = Net qualified capital of the

group/statutory capital requirement of the group

Note 3: Attention to the following is required when the aforementioned equations for the

calculation of EPS are applied to assessment:

1. The weighted average quantity of outstanding common shares shall be used as

the standard, not the quantity of outstanding shares at the end of the year.

2. In case of raising capital through issuing new shares or transactions of treasury

stocks, calculate also the weighted average quantity of outstanding shares in the

period of circulation.

3. In case of capitalization of retained earnings or capitalization of capital surplus

into new shares, adjustment shall be made in retrospect to the size of

127

capitalization for each instance when calculating the earnings per shares

annually or semi-annually. The time of issuance can be neglected.

4. If the preferred shares are non-convertible accumulated preferred shares, the

dividend declared in current period (whether paid or unpaid) shall be deducted

from corporate earnings or as addition to earnings after taxation. If the

accumulated preferred shares are not accumulative in nature, dividend for

preferred shares shall be deducted from earnings after taxation, if any. In case of

loss, no adjustment shall be made.

Note 4: Not applicable to the quarters.

Note 5: Capital adequancy ratio of the group and the financial holding company double

leverage ratio are KPI of the Company.

Note 6: Cathay Securities Investment Trust became a subsidiary of the Company in June

2011.

(II) Five Year Financial analyses-Gazette of Financial Accounting Standards of the Republic of

China

Year

Title (Note2)

Financial information from Jan 1 2008 to Dec 31 2012

2008 2009 2010 2011 2012

Operational

ability

Total assets

turnover (times) 0.02 0.05 0.02 0.04 0.06

Deposit to loan

ratio of subsidiary

bank (%) 73.28 61.21 65.48 66.57 64.73

NPL ratio of

subsidiary bank

(%) 0.93 0.55 0.28 0.28 0.34

Average revenues

per employee

(group) 3,873 7,019 6,606 5,803 8,519

Average earnings

per employee

(group) 47 250 101 257 384

Profitability

ROA (%) 1.25 5.44 2.11 4.55 6.38

ROE (%) 1.19 6.23 2.12 5.15 7.42 Net profit margin

(%) 84.09 91.73 90.07 97.72 98.06

EPS (NTD) 0.20 1.01 0.42 1.03 1.59

Ability to

repay debts

and

financial

structure

Liabilities to assets

ratio (%) 15.56 18.28 17.80 19.75 17.94

Liabilities to net

worth ratio (%) 18.43 22.37 21.66 24.61 21.86

Financial holding

double leverage

ratio (%) 112.35 113.69 111.54 119.00 115.62

Financial ratios of

financial holding

pursuant to Article

42 of the Financial

Holding Company

Act (%)

None None None None None

Leverage

Operation leverage 1.00 1.00 1.00 1.00 1.00 Financial leverage

of financial holding 1.19 1.06 1.24 1.11 1.07

128

Year

Title (Note2)


2008 2009 2010 2011 2012

Growth

rate

Asset growth rate

(%)

(26.77) 54.07 2.38 0.12 12.06

Profitability growth

rate (%) (93.17) 451.46 (59.45) 132.43 52.78

Cash

flow

Cash flow ratio (%) 373.30 (14.66) 117.64 51.28 118.22

Net cash flow

adequency rate (%) 91.95 88.24 105.61 94.07 103.58

Cash flow coverage

ratio (%) 186.92 10.94 432,586.90 64.11 2,761.32

Scale of

operation

The market share of

asset (%) 15.32 15.86 16.25 15.10 15.40

market share of net

worth (%) 8.92 11.31 11.18 9.88 10.16

Market share of the

deposit at

subsidiary bank

(%)

4.10 4.61 4.44 4.73 4.72

Market share of

lending at

subsidiary bank

(%)

4.42 4.36 4.49 4.73 4.61

Capital

adequancy

ratio

Cap

ital

adeq

uan

cy r

atio

set

fo

rth b

y r

esp

ecti

ve

sub

sid

iari

es a

t in

du

stry

sta

nd

ard

(%

) Cathay

Life

Insurance 254.07 283.14 294.81 274.87 258.01

Cathay

United

Bank 11.03 12.11 11.17 11.78 12.38

Cathay

Century

Insurance 362.45 428.00 271.1 301.07 314.45

Cathay

Securities

Corporation 1023.16 617.00 538.81 546.56 318.15

Cathay

Securities

Investment

Trust (Note

6)

- - - 92.42 87.75

Cathay

Venture 100.48 99.91 100.07 100.00 99.99

Yi Tai II

Venture

Capital 98.88 Merged with Cathay Venture in October 2009

Yi Tai

Management

Consulting 76.49 Merged with Cathay Venture in October 2009

Qu

alif

ied

cap

ital

of

resp

ecti

ve

sub

sid

iari

es

Cathay

Life

Insurance 117,616,367 137,334,168 174,723,103 184,204,532 191,600,492

Cathay

United

Bank 91,511,737 96,624,673 96,090,408 110,304,187 124,681,317

Cathay

Century

Insurance 4,022,635 4,963,791 3,600,682 4,418,382 5,693,618

Cathay

Securities

Corporation 2,875,554 3,094,069 3,172,750 2,985,352 3,312,268

129

Year

Title (Note2)


2008 2009 2010 2011 2012

Cathay

Securities

Investment

Trust (Note

6)

- - - 2,047,819 2,031,836

Cathay

Venture 512,580 1,880,742 2,479,422 2,197,781 2,187,120

Yi Tai II

Venture

Capital 724,522 Merged with Cathay Venture in October 2009

Yi Tai

Management

Consulting 60,314 Merged with Cathay Venture in October 2009

Net qualified

capital of the group 205,661,972 241,291,671 282,250,730 284,654,656 305,332,744

Capital

adequancy

ratio

Man

dat

ory

capi

tal

requ

irem

ents

of

resp

ecti

ve s

ubsi

diar

ies

Cathay Life

Insurance 92,584,080 97,007,188 118,532,556 134,031,086 148,523,334

Cathay

United

Bank

66,362,261 63,816,619 68,833,108 74,908,271 80,594,040

Cathay

Century

Insurance 2,219,664 2,319,540 2,656,368 2,935,140 3,621,278

Cathay

Securities

Corporation 421,569 752,205 883,268 819,315 1,561,653

Cathay

Securities

Investment

Trust

(Note 6)

- - - 1,107,852 1,157,716

Cathay

Venture 255,055 941,245 1,238,862 1,098,851 1,093,671

Yi Tai II

Venture

Capital 366,368 Merged with Cathay Venture in October 2009

Yi Tai

Management

Consulting 39,428 Merged with Cathay Venture in October 2009

Mandatory total

capital

requirements of the

whole group

163,742,528 167,241,997 195,232,874 217,356,147 240,114,995

Capital

Adequancy ratio of

the group (%) 125.60 144.28 144.57 130.96 127.16

130

Year

Title (Note2)


2008 2009 2010 2011 2012

All subsidiaries the

financial holding

company and

counterparties as stated

in Paragraph 1 of Article

46 of the Financial

Holding Company Act

engaged in business

transaction as stated in

Paragraph 2 of the same

article shall declare the

total balance with the

declaration form

provided.

Year 2012: Please refer to Appendix I annexed hereto. [Notes to Consolidate

Financial Statements 2012].

Specify the reasons that caused the changes in the financial ratios in the last 2 years (analysis is not required for changes

of less than 20%):

1. The difference between the financial ratios of operational ability in the two accounting periods was mainly caused by

the increase of net profit and corporate earnings in current period.

2. The difference in the financial ratios of profitability in the two accounting periods was mainly caused by the increase

of corporate earnings in current period.

3. The difference between the growth rates of the two periods was mainly caused by the increase of return on investment

recognized under the equity method in current period.

4. The different between the cash flow ratios of the two periods was mainly caused by the decrease of net cash flow

from operation in current period.

5. The difference between the cash flow coverage ratios in the two periods was mainly caused by increase in net cash

outflow from investment in current period.

Note 1: Financial holding companies that have their stocks listed in the exchange or traded in the OTC market shall

include the financial information as stated in the financial statement covering the period to the quarter prior to the

date the financial report was printed in the financial analysis.

Note 2: The equations for calculation are shown below:

1. Operational ability

(1) Total assets turnover = net profit/ total assets

(2) Deposit to loanratio = Subsidiary bank total loans/total deposits

(3) Subsidiary bank NPL ratio = Subsidiary bank total overdue loans/total loans

(4) Average revenues per employee = net income/total number of employees

(5) Average earnings per employee=corporate earnings/ total number of employees

2. Profitability

(1) Return on Assets (ROA)= [Corporate earnings + interest expenses x (1- tax rate)]/average total assets

(2) Return on shareholders‟ equity = corporate earnings/average net shareholders‟ equity

(3) Net profit margin= Corporate earnings/net income

(4) Earnings per share (EPS)= (Net profit after tax－preferred stock dividends)/weighed average quantity of

outstanding shares (Note 3).

3. Ability to repay debts and financial structure

(1) Liabilities to assets ratio = total liabilities/ total assets

(2) Liabilities to net worth ratio = total liabilities/ net worth

(3) Financial holding company double leverage ratio = equity investment under paragraph 2 of Article 36

and Article 37 of this law/net worth

4. Leverage

(1) Operation leverage ratio = (Net income – variable expenses)/ earnings before taxation

(2) Financial holding company financial leverage = (earnings before taxation + interest expenses)/earnings

before taxation

5. Growth rate

131

(1) Asset growth rate = (total assets in current period – total assets in previous period)/total assets in

previous period

(2) Profitability growth rate = (earnings before taxation in current period – earnings before taxation of

previous period)/earnings before taxation in previous period

6. Cash flows

(1) Cash flow ratio = net cash flow from operation / (call loans and overdrafts from banks and financial

institutions + payable commercial papers + financial liabilities at fair value through income statement +

R/P bonds and bills liabilities + payables due in one year)

(2) Net cash flow adequacy ratio = net cash flows from operation in the last 5 years/ (capital expenditure +

cash dividend) in the last 5 years

(3) Cash flow adequacy ratio = net cash flow from operation / net cash flow from investment

7. Scale of operation

(1) Market shares of assets = total assets/ total assets of the whole financial holding company

(2) Market share of net worth = net worth/total net worth of the whole financial holding company

(3) Market share of the deposit at subsidiary bank= total deposits/ total deposits at financial institutions

entitled to engage in lending and deposits business

(4) Market share of the loans at subsidiary bank= total loans/ total loans at financial institutions entitled to

engage in lending and deposits business

8. Capital adequancy ratio

(1) Net qualified capital of the group = qualified capital of the financial holding company + (proportion of

shareholding by financial holding company x the qualified capital of respective subsidiaries) – required

deductible items

(2) Total statutory capital requirement of the group = statutory capital requirement of the financial holding

company + proportion of shareholding by financial holding company x statutory capital requirement of

respective subsidiaries

(3) Capital adequancy ratio of the group = Net qualified capital of the group/statutory capital requirement of

the group

Note 3: Attention to the following is required when the aforementioned equations for the calculation of EPS are applied to

assessment:

1. The weighted average quantity of outstanding common shares shall be used as the standard, not the quantity of

outstanding shares at the end of the year.

2. In case of raising capital through issuing new shares or transactions of treasury stocks, calculate also the

weighted average quantity of outstanding shares in the period of circulation.

3. In case of capitalization of retained earnings or capitalization of capital surplus into new shares, adjustment

shall be made in retrospect to the size of capitalization for each instance when calculating the earnings per

shares annually or semi-annually. The time of issuance can be neglected.

4. If the preferred shares are non-convertible accumulated preferred shares, the dividend declared in

current period (whether paid or unpaid) shall be deducted from corporate earnings or as addition to

earnings after taxation. If the accumulated preferred shares are not accumulative in nature, dividend for

preferred shares shall be deducted from earnings after taxation, if any. In case of loss, no adjustment

shall be made.

Note 4: Not applicable to the quarters.

Note 5: Capital adequancy ratio of the group and the financial holding company double leverage ratio are KPI of the

Company. Note 6: Cathay Securities Investment Trust became a subsidiary of the Company in June 2011.

132

III. Audit Report from the Auditing Committee on the Latest Financial

Statements

Audit Report from the Auditing Committee

To: 2013 Annual General Shareholders‟ Meeting of Cathay Financial Holdings

The financial statements of Cathay Financial Holdings (including the

consolidated financial statements) covering the period of January 1 to December 31,

2012, and the business report and earning distribution plan have been prepared and

submitted by the Board of Directors of the Company. The financial statements were

reviewed and certified by James Huang, CPA, and Andrew Fuh, CPA, of Ernst and

Young, who issued an auditors‟ report with no qualified opinion.

The Auditing Committee has appointed Kyky Lin, CPA, of Ernst and Young to

review the aforementioned financial statements and documents pursuant to Article

14-4 of the Securities and Exchange Act and Article 219 of the Company Act. In her

opinion, the aforementioned financial statements and documents are fairly presented

as stated.

Auditing Committee

Min-Houng Hong, Independent Director

Tsing-Yuan Hwang, Independent Director

Andrew Ming-Jian Kuo, Independent Director

April 30, 2013

133

I. Audited consolidated financial reports of the parent and subsidiaries in the

most recent year

(Refer to Appendix I).

II. In case of insolvency of the financial holding company and its subsidiaries

in the most recent year to the date this report was printed, specify the effect

on the financial position of the Company:

None.

134

VII． Review and analysis of financial status and financial

performance and risk management

I. Analysis of Financial Status Currency unit: 1,000 NTD

Year

Title 2011 2012 Change in amount

Change in

proportion (%)

Cash and cash equivalents 4,121,526 7,141,598 3,020,072 73.28

Receivables -net 5,207,033 6,454,364 1,247,331 23.95

Financial assets held to maturity 31,000,000 31,000,000 0 -

Equity investment under the equity method

-net 223,253,372 252,085,633 28,832,261 12.91

Other financial assets 538,407 538,407 0 -

Fixed assets-net 3,645 4,739 1,094 30.01

Intangible assets –net 62 0 (62) (100.00)

Other assets-net 2,110,428 1,122,807 (987,621) (46.80)

Total assets 266,234,473 298,347,548 32,113,075 12.06

Financial liabilities at fair value through

income statements 0 182,100 182,100 -

Payables 12,533,726 5,940,874 (6,592,852) (52.60)

Payable bonds 40,000,000 47,312,376 7,312,376 18.28

Other liabilities 39,812 79,364 39,552 99.35

Total liabilities 52,573,538 53,514,714 941,176 1.79

Common shares 103,575,096 108,653,851 5,078,755 4.90

Capital surplus 78,508,148 78,596,121 87,973 0.11

Statutory reserve 14,105,459 15,222,599 1,117,140 7.92

Special reserve 333,598 333,598 0 -

Retained earnings 14,303,983 20,031,074 5,727,091 40.04

Appreciation through revaluation 1,461 1,461 0 -

Adjustment of accumulated conversion (378,126) (1,082,092) (703,966) 186.17

Unrealized gains/loss of financial products 11,816,355 31,349,676 19,533,321 165.31

Treasury stocks (7,179,872) (7,179,872) 0 -

Unrecognized pension cost (1,425,167) (1,093,582) 331,585 (23.27)

Total shareholders‟ equity 213,660,935 244,832,834 31,171,899 14.59

Analytical explanations about the changes in the increase/decrease ratios:

1. The gaps of cash and cash equivalents between the two terms primarily resulted from the increase of the earnings paid upward

from subsidiaries this term.

2. The gaps of accounts receivable between two terms primarily resulted from increase of the interest receivable this term.

3. The gaps of other assets between two terms primarily resulted from decrease in the deferred income tax assets this term.

4. The gaps of accounts payable between two terms primarily resulted from decrease in the short-term bills payable this term.

5. The gaps of unappropriated retained earnings between two terms primarily resulted from increase of the net earnings this term

over the preceding terms.

6. The gaps of cumulative translation adjustment between two terms primarily resulted from the effect of change in exchange rates

in the outward investment abroad.

7. The gaps of net losses which were not recognized as pension costs between two terms primarily resulted from restoration of the

fair values of the assets calculated by subsidiaries as pension funds.

135

II. Analysis of Financial Performance


Year

Title 2011 2012 Change in amount

Change in

proportion (%)

Net revenue 11,388,353 17,338,578 5,950,225 52.25

Expenses and loss (344,844) (466,002) (121,158) 35.13

Pre-tax income (loss) 11,043,509 16,872,576 5,829,067 52.78

After-tax income (loss) 11,128,898 17,001,741 5,872,843 52.77

Notes to changes in the ratios of the analysis:

1. The difference in net revenue between the two periods was mainly caused by the increase of the return on

investment recognized under the equity method in the current period.

2. The gaps of expenses and losses between two terms primarily resulted from increase in personnel fees, etc.

3. The difference between the pre-tax income (loss) and after-tax income (loss) between the two periods was

mainly caused by the increase of the return on investment recognized under the equity method in the current

period.

III. Analysis of Cash Flow

(1) Liquidity Analysis in 2011 and 2012


Year

Title 2011 2012

Change in proportion

(%)

Cash flow ratio (%) 51.28 118.22 66.94

Cash flow adequacy ratio (%) 94.07 103.58 9.51

Cash flow coverage ratio (%) 64.11 2,761.32 2,697.21

Notes to changes in the ratios of the analysis:

1. The difference of cash flow ratios between the two periods was mainly caused by the increase of net cash

flow from operation in the current period.

2. The difference of cash flow coverage ratios between the two periods was mainly caused by the decrease of

net cash outflow from investment in the current period.

(2) Cash flow analysis of the year ahead


Cash balance at

beginning

Projected net cash

flow from

operating

activities in

current period

Projected cash

outflow in current

period

Projected amount

of cash surplus

(deficit)

＋－

Remedy for cash deficit

Investment plan Financing plan

7,141,598 5,447,874 7,942,564 4,646,908 None None

136

IV. Major capital expenditures in the most recent year

None.

V. The investment Strategy in the most recent year, Main Causes for Profits or

Losses, Improvement Plans and the Investment Plans for the Coming Year

For direct investments in the most recent year, refer to “VIII. Implementation of the Capital Utilization

Plans”, on page 54.

In the past, Cathay Financial Holdings initiated the twin-engine of the insurance and banking service,

which yielded excellent complementary effects. Many in the industry learned from the Company and

launched similar products. Cathay Financial Holdings decided to make its asset management operation as

the third engine for further development of the twin-engine of insurance and banking for providing

full-range financial services and further enhance brand value. In the future, the business policy will be

focused in the development in other countries with the triple-engine of “insurance + banking+ asset

management” as the core strategy for development. With its base in Asia-Pacific and the triple-engine as

its strategy, Cathay Financial Holdings is dedicated to be the best financial institution in Asia.

137

VI. The analysis and assessment of risk management in the most recent year to

the date this report was printed by the analysis of the overall financial

position and operation.

(I) Group Risk Management Framework

1. Risk Management Governance Structure:

The FHC has set up an independent Risk Management Division to implement governance and control the

comprehensive risks. The division is responsible for establishing the related policies and guidelines and

also for executing risk management practices.

Each subsidiary has set up its risk management department based on the regulatory laws or business nature

to carry on the establishment and execution of the risk control mechanism for its operation as well as the

making of related policies and guidelines according to the business feature and the FHC‟s risk control

policy.

In addition, risk management committees are formed in both the FHC and the major subsidiaries to

oversee the Group‟s risk exposure and ensure normal operation of the risk control activities..

2. Risk Management Policies:

The risk management policy and the related guidelines clearly delineate the responsibilities of risk

management activities. Our employees are required to follow the policies and the guidelines, especially for

the transactions related to investment and loan business.

(1) The Risk Management Division is in charge of setting up criteria for each major risk of the FHC,

including market, credit, operation, liquidity, and capital adequacy. The subsidiaries also set the

criteria based on the policies set by the FHC and authority for risk management activities.

(2) To monitor the concentrations of credit exposure by loans, investment and related transactions, we

have established the guidance to manage the concentrations.

(3) To enhance the management of credit and operation risk events, we apply the information system for

monitoring those events among the FHC and the subsidiaries.

Market Risk Management

Credit Risk Management

Operation Risk Management

Liquidity Risk Management

Capital Adequacy Management

Market Risk

Credit Risk

Operation Risk

Liquidity Risk Interested Party Transactions

Management

Risk Management Policy Risk Factors Group Risk Management Mechanism

Emerging Risk

FHC

Risk

Management

Information

System

Cathay Life

Insurance


Cathay Venture Capital

Cathay Securities

Cathay United Bank

Firewall Policy

Cathay Investment Trust

138

(II) Risk Management Processes and Methods

1. Risk Management Procedures and Reporting

(1) Risk Management Procedure

A. Market risk management: We manage market risk by building a set of prudent control processes,

including investment decision approval procedures, stop-loss limit, a VaR Model, and exception

management, sensitivity analysis and stress testing.

B. Credit risk management: We manage credit risk by establishing a set of credit policies, including

credit analysis procedure, collateral requirement, non-performing-loan management, assets

valuation and provision. In order to diversify credit risk exposure, we set limits on industry and

country concentrations.

C. Liquidity risk management: We maintain liquidity reserve to meet regulatory requirements. To

measure liquidity risk, we use several quantitative analysis methods, including liquidity gap and

cash flow analysis. In addition, each subsidiary maintains contingency funding plans that outline

our potential responses to liquidity stress events at various levels of severity.

D. Operational risk management: We accomplish operational risk management from two

perspectives within the structure of the Group: (1) All operations are divided into front, middle,

and back desks based on their functions. Each subsidiaries applies timely and accurate

information system for their operation procedures. (2) Operational risk is properly monitored

through internal and external audits together with regulatory requirements.

E. Capital adequacy: Currently the FHC and the subsidiaries all maintain a capital adequacy ratio

superior to the regulation requirement. In addition, non-scheduled calculation will be held to test

the impact of the ratio based on future merger & acquisition plans or expansion investment from

the Group to ensure the ratio stays above an appropriate level, and in the meantime, to provide

references for funding plans in the future .

(2) Risk Management Reporting

A. All risk management units are required to submit reports to the authoritative supervisors on a

regular basis to disclose risk exposures and risk management implementation status. Major risk

events will be summarized and reported to supervisors to reinforce risk management practices.

B. Risk management reporting should be based on quantitative risk assessments. Risks that cannot

be quantified will require special disclosure in the report.

C. All risk management reports from the Group should be submitted to the risk management

committee and the Board on a regular basis. Subsidiaries are required to notify the FHC‟s risk

management division prior to submission.

(3) Risk Management Committee

The FHC and the subsidiaries hold risk management committee meetings periodically to ensure all

risk control systems are working properly and review the consequence of the risk control. Impromptu

meetings are called for emergency events.

(4) Exception Management Process

When subsidiaries deviate from the risk management policies, subsidiaries should make the exception

report which disclose the reasons, the related rules and following procedures. In addition, the report

should forward to the FHC after approved by subsidiaries‟ supervisor.

2. Risk Management System

The FHC and the subsidiaries have developed or applied risk management information systems for VaR

calculation, credit scoring, credit risk alerting, conglomerate credit/investment limit, and operational event

reporting.

3. Risk Hedging/Reduction Policy

Please refer to “e. Financial risk management objectives and policies” in Appendix I on page 344

139

(III) Major impact on the Cathay Financial Holdings financial position caused by changes in technology

and industry and remedial action

4TCathay Financial Holdings is a solid development-oriented company. In addition to attending to

industry transitions we make risk control and quality enhancement our first priorities when seeking new

business and income growth. Our subsidiaries are devoted to the adaption of convenient and safe virtual

products, such as those for financial transactions using mobile devices and Internet trading and commerce

systems that offer easy and timely access as well as secured services for greater customer satisfaction. Our

internal system is continually updated and developed to provide for our increasing business needs and to

improve working efficiency.

(IV) Major impact on FHC brought by company image change ofe FHC and the subsidiaries and

remedial actions

The Group has long held the belief of “Growing a Grand Tree, Culturing Public Welfare” and exercising

corporate power to put together various kinds of charity events, including public interest, child care,

academic, culture and art. We believe in fulfilling our responsibilities as a corporate citizen and providing

growing stamina for society as an important missions in addition to that of core business growth.

(V) Potential effects and risks associated with mergers and acquisitions and remedial action

On June 15th

, 2012, the Board approved the acquisition of 70% equity of the Singapore Banking

Corporation Limited (SBC bank) by our banking unit, Cathay United Bank, for a total of US$ 22.5 million,

to accelerate our expansion into SE Asia. The related effects and risks and remedial action are listed

below:

1. Post-acquisition effects

(1) Cambodia has become one of the rising stars in East Asia, due to low labor costs and an

improving investment environment. Average growth of the economy was 5.8% between 2007

and 2011. As a result the financial industry expanded rapidly and the average growth rate for

banking assets during this period was 24%. The IMF forecast a GDP growth of 7% from 2012 to

2017, which will mean continuous prosperity for the financial sector in the country.

(2) The acquisition is another important milestone for Cathay Financial Holdings, after the Indovina

Bank in Vietnam, on the road to becoming a regional financial institution. Our presence in S E

Asia now covers Cambodia, Vietnam, Singapore, Malaysia, Hong Kong and China.

(3) This transaction puts us way ahead of our local opponents who also have an eye on the market

potential and are attempting to set up Cambodian locations. The SBC platform allows us to enter

the market without delay.

(4) Country, Taiwan ranks No. 5 in terms of foreign direct investment in Cambodia. Moreover, due

to the rising labor costs in Vietnam and China, Cambodia has become one of the most popular

locations for new manufacturing sites. Under Taiwan business‟ eagerness for financial service,

Cathay Financial Holdings is ready to accommodate these needs through SBC with our superior

industrial experience and all-round services.

2. Potential risks and the remedial actions are listed as follows below:

(1) Country risk: despite its earlier tumultuous political situation, the country became the 10th

ASEAN member in 1999, and has made serious efforts to lower risk through political reform,

140

market liberalization, and cooperation in ASEAN projects.

(2) Potential bank risks: The investment of US$22.5 million, a small amount compared with the size

of our assets, has minimal impact on our banking operation.

(3) Risks associated with overseas operations and remedial action: Our international locations which

include the subsidiary Indovina Bank in Vietnam, the Singapore branch and the Labuan branch

in Malaysia and representative offices in Bangkok and Manila have all allowed us to accumulate

ample offshore experience and the skills needed to manage the new site.

(VI) Concentration risk

To lower the concentration risk, We leverage our comprehensive platform to provide a broad range of

financial products and services – life insurance, banking, property and casualty insurance, securities and

asset management – to individual and corporate customers in Taiwan and abroad.

(VII) Impact and risks brought by significant shareholdings transfer by the Directors, Supervisors, or

shareholders with more than 1% ownership, and the remedial actions.

Currently there is no massive shareholdings transfer or change from our directors or supervisors. Any

share disposition from shareholders with more than 1% ownership shall not bring impacts or risks to us.

(VIII) Impacts and risks on Cathay Financial Holdings brought about by change of operating

concessions and remedial action

The Company‟s operating concession is stable with no significant change.

(IX) Litigations or non-contentious matters: List the directors, supervisors, general managers, the

persons in charge, and major shareholders with more than 1% of shareholding of the Financial

Holding Company and its subsidiaries; major lawsuits, non-contentious matters or administrative

procedures involving the subsidiaries with a determined court ruling or that are still pending, that

may significantly affect the shareholders’ equity or the stock price of the Financial Holding

Company. Disclose the factual accounts of the cases, the amount involved, the date of the

commencement of judiciary proceeding, the parties concerned, and the status of the cases as of the

date this report was printed.

1. As of April 16 2013, subsidiary Cathay Life Insurance Co., Ltd. (hereinafter, “Cathay Life”) was

involved in a major lawsuit which is still unsettled due to normal business relations. The details are

elaborated below:

For the pursuit of its investment objective in the period of 2003 to 2007, Cathay Life subscribed to

shares from Fairfield Sentry Limited, and redeemed the shares as agreed for USD 24,496,798.58.

Bernard L. Madoff Investment Securities LLC (Madoff‟s asset management company), and investee

of Fairfield Sentry Limited, was allegedly involved in a Ponzi Scheme, and is in liquidation

procedures at BVI (Madoff‟s asset management company is also in liquidation procedures). The

liquidator of Fairfield Sentry Limited and the official receiver of Madoff‟s asset management

company filed a lawsuit against Cathay Life at the United States Bankruptcy Court of New York State

in March 2011 and December 2011, respectively. They claimed that Cathay Life must return the

proceeds from the redemption of shares to the liquidation panel. Cathay Insurance has already

retained lawyers to defend the charge. Both Cathay Life and the attorneys hold that this case will not

cause significant impact on the financial position of Cathay Life.

141

2. As of April 29 2013, a subsidiary Cathay United Bank Co., Ltd. (hereinafter, “Cathay Bank”) was

involved in a major lawsuit which is still unsettled due to normal business relations. The details are

elaborated below:

Lee & Li, Attorneys-at-Law and SanDisk Corporation of USA claimed that the “Embezzlement of

Liu Wei-Chieh on October 2003, an employee of Lee & Li” was caused by the negligence of Cathay

Bank in its operation and demanded damages ranging from NT$991.002 million to NT$3,090 million.

The case started judiciary proceedings in July 2007 and is now under the Taipei District Court of

Taiwan. The claim for damages by SanDisk is now in the process of mediation and is not yet filed for

judicial procedure. Both Cathay Bank and the attorneys hold that this case will not cause significant

impact on the financial position of Cathay Bank.

(X) Other material risks and the remedial action

None.

142

I. Special Event Management

(I) Major Event Control

1. To reduce adverse impact, we take a comprehensive approach to major event control. We have set

guidelines and established procedures for major events. When a major event occurs, the subject unit

should immediately report to its direct supervisor and then notify the FHC. If the major events are

special and required preventive actions from all business units, the Risk management Division should

provide solutions.

(II) Credit Event Control

1. To refine our risk management and minimize adversity caused by sudden credit events among our

debtors or investees, we have developed “the Credit Emergency Reporting Guideline” for appropriate

reporting procedures.

2. Reporting items: warning event reporting and major event reporting.

3. Reporting procedure:

The business unit should report to both the subsidiary‟s risk management department and the FHC‟s

risk management division immediately when warning or major event occurs among debtors or

investees. The Risk Management Division should aggregate the Group‟s exposure amount and

provide solution, when needed.

VI. Other Major Events

None.

143

VIII． Special Disclosure

I. Information on Affiliates (I) Consolidated business reports

Refer to Appendix II.

(II) Consolidated financial statements of the subsidiaries

Refer to Appendix I.

(III) Affiliation report

Refer to Appendix III.

II. Any private placement of securities in the recent years up to the

publication of this annual report.

None.

III. The shares in the Financial Holding Company held or disposed of by

subsidiaries in the recent years up to the publication of this annual report:

None.

IV. Other important supplementary information:

None.

V. Events occurred in the previous year or up to the publication of this annual

report, which significantly affect shareholders' equity or price of shares

pursuant to item2, paragraph3, article 36 of the Securities and Exchange

Act.

None.

Appendix 1

Cathay Financial Holding Co., Ltd. and Subsidiaries

Consolidated Financial Statements

As of December 31, 2012 and 2011

With Independent Auditors’ Report

Address: 296, Jen Ai Road, Sec. 4, Taipei, Taiwan, ROC Telephone: 886-2-2708-7698

The reader is advised that these consolidated financial statements have been prepared originally in Chinese. These consolidated financial statements do not include additional disclosure information that is required for Chinese-language reports under the Regulations Governing the Preparation of Financial Reports by Financial Holding Companies. If there is any conflict between these consolidated financial statements and the Chinese version or any difference in the interpretation of the two versions, the Chinese language consolidated financial statements shall prevail.

144

English Translation of Report Originally Issued in Chinese Independent Auditors’ Report

To: Board of Directors

Cathay Financial Holding Co., Ltd. We have audited the accompanying consolidated balance sheets of Cathay Financial Holding Co., Ltd. (the “Company”) and its subsidiaries (“Subsidiaries”) as of December 31, 2012 and 2011, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the year ended December 31, 2012 and 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the “Rules Governing Auditing and Certification of Financial Statement by Certified Public Accountants” and auditing standards generally accepted in the Republic of China (“ROC”). Those rules and standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for the year ended December 31, 2012 and 2011 in conformity with requirements of the “Regulations Governing the Preparation of Financial Reports by Securities Issuers”, “Regulations Governing the Preparation of Financial Reports by Financial Holding Companies” and accounting principles generally accepted in the ROC. As described in Note 3 to the financial statements, effective from January 1, 2011, the Company and its subsidiaries adopted the third revision of the ROC Statement of Financial Accounting Standards (“SFAS”) No. 34, “ Financial Instruments: Recognition and Measurement”, the newly issued SFAS No. 41, “Operating Segments”, and SFAS No. 40, “Insurance Contracts”. Ernst & Young Taipei, Taiwan The Republic of China March 15, 2013

Notice to Readers The accompanying consolidated financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdiction. The standards, procedures and practices to audit such consolidated financial statements are those generally accepted and applied in the Republic of China.

145

English Translation of Financial Statements Originally Issued in Chinese

December 31, 2012

Notes NT $ US $ NT $ US $

Assets Cash and cash equivalents 2, 4 $702,403,376 $24,179,118 $726,749,401 $24,008,900

Due from the Central Bank and call loans to banks 104,175,647 3,586,081 87,406,822 2,887,573

Financial assets at fair value through profit or loss 2, 5 147,145,050 5,065,234 84,697,424 2,798,065

Securities purchased under agreements to resell 18,517,498 637,435 11,820,837 390,513

Receivables -net 115,796,856 3,986,122 97,164,171 3,209,916

Loans -net 2, 6 1,520,005,053 52,323,754 1,492,075,402 49,292,217

Available-for-sale financial assets -net 2, 7 1,284,920,865 44,231,355 1,336,579,892 44,155,266

Held-to-maturity financial assets -net 2, 8 24,380,985 839,277 21,955,565 725,324

Investments under equity method 2, 9 1,146,326 39,460 1,287,843 42,545

Other financial assets -net 2, 10 42,087,293 1,448,788 32,586,387 1,076,524

Investments in debt securities with no active market 2, 11 813,141,357 27,991,097 528,978,714 17,475,346

Separate account products assets 329,557,246 11,344,484 294,051,012 9,714,272

Investments in real estate 2, 12 163,887,441 5,641,564 146,173,482 4,828,989

Property and equipment -net 48,821,416 1,680,600 38,605,554 1,275,373

Goodwill and intangible assets -net 2, 13 9,734,376 335,090 9,692,897 320,215

Other assets -net 109,582,019 3,772,187 95,577,377 3,157,495

Total assets $5,435,302,804 $187,101,646 $5,005,402,780 $165,358,533

Liabilities & stockholders' equity

Liabilities Due to the Central Bank and call loans from banks $56,934,246 $1,959,871 $62,275,073 $2,057,320 Bankers acceptances and funds borrowed 1,456,800 50,148 1,514,500 50,033 Commercial paper payable 2, 14 5,540,000 190,706 8,720,000 288,074 Financial liabilities at fair value through profit or loss 2, 15 8,718,702 300,127 23,136,143 764,326 Securities sold under agreements to repurchase 5, 7 22,046,517 758,916 14,686,609 485,187 Payables 61,147,624 2,104,910 48,074,475 1,588,189 Deposits 16 1,458,587,976 50,209,569 1,414,421,828 46,726,853 Bonds payable 2, 17 89,831,007 3,092,289 76,023,825 2,511,524 Other financial liabilities 2, 18 17,426,191 599,869 10,611,073 350,547 Separate account products liabilities 2, 19 329,557,246 11,344,484 294,051,012 9,714,272 Reserve for operations and liabilities 3,117,676,956 107,321,066 2,822,627,363 93,248,343 Other liabilities 17,795,091 612,567 11,549,306 381,543Total liabilities 5,186,718,356 178,544,522 4,787,691,207 158,166,211

Stockholders' Equity attributable to equity holders of the parent Stock

Common stock 20 108,653,851 3,740,236 103,575,096 3,421,708

Capital surplus 21 78,596,121 2,705,546 78,508,148 2,593,596

Retained earnings 22

Legal reserve 15,222,599 524,014 14,105,459 465,988

Special reserve 333,598 11,483 333,598 11,021 Unappropriated retained earnings 20,031,074 689,538 14,303,983 472,547

Other stockholders' equity

Land revaluation increment 1,461 50 1,461 48

Cumulative conversion adjustments (1,082,092) (37,249) (378,126) (12,492)

Unrealized gains or losses on financial instruments 31,349,676 1,079,163 11,816,355 390,365

Treasury stock 23 (7,179,872) (247,156) (7,179,872) (237,194)

Net loss not yet recognized as net pension cost (1,093,582) (37,645) (1,425,167) (47,082)

Total stockholder's equity attributable to equity holders of the parent 244,832,834 8,427,980 213,660,935 7,058,505

Minority interest 3,751,614 129,144 4,050,638 133,817

Total stockholders' equity 248,584,448 8,557,124 217,711,573 7,192,322

Total liabilities and stockholders' equity $5,435,302,804 $187,101,646 $5,005,402,780 $165,358,533

The accompanying notes are an integral part of these consolidated financial statements.

December 31, 2011

(The exchange rates provided by the Federal Reserve Bank of New York on December 31, 2012 and 2011 were NT$29.05 and NT$30.27 to US$1.00,respectively)

Cathay Financial Holding Co., Ltd. and SubsidiariesConsolidated balance sheets

As of December 31, 2012 and 2011(Expressed in thousands of dollars)

146


Notes

Interest income 2

Less: Interest expenses 2

Net interest incomeNet income other than interest Net commission and handling fee Net premiums from insurance business Gains (losses) on financial assets and liabilities at fair value through profit or loss Realized gains on available-for-sale financial assets Realized (losses) gains on held-to-maturity financial assets (Losses) gains on investments under equity method Gains on investments in real estate (Losses) gain on foreign exchange Impairment losses Net other non-interest gains

Total incomeBad debt expenses Provision for premiums reserveOperating expenses 24 Personnel expenses Depreciation and amortizations expenses Other general and administration expenses

Income from continuing operations before income taxesIncome taxes benefit 2, 25

Income from continuing operations after income taxesConsolidated net incomeInclude: Parent company Minority interest Consolidated net income

Earnings per share (expressed in dollars) : 26 Primary earnings per share:

Before taxes After taxes Before taxes After taxes Before taxes After taxes Before taxes After taxes

Income from continuing operations $1.60 $1.60 $0.06 $0.06 $0.89 $1.04 $0.03 $0.03 Consolidated net income $1.60 $1.60 $0.06 $0.06 $0.89 $1.04 $0.03 $0.03

Diluted earnings per share:Before taxes After taxes Before taxes After taxes Before taxes After taxes Before taxes After taxes

Income from continuing operations $1.59 $1.59 $0.05 $0.05 $0.89 $1.04 $0.03 $0.03 Consolidated net income $1.59 $1.59 $0.05 $0.05 $0.89 $1.04 $0.03 $0.03

$372,796

372,796$372,796

$367,6545,142

356,5378,417,136

(35,104)

(1,022,079)(135,943)(424,038)

$11,284,530

317,73855,058

(2,215,201)724,218

1,9753,523

214,4381,253,491

(8,468)

21,922,07459,781

106,6386,491,035

37,943,163

$11,284,530

2011US $

$3,886,847(416,234)

3,470,613

30,4004,585,610

$11,128,898155,632

1,666,590

(4,114,981)(12,835,637)

(30,938,327)

(256,318)

(1,062,613)

9,617,940

10,792,386254,786,719

920,221138,806,406(67,054,127)

11,284,530

(139,230)

(7,758)342,328

13,038,293(109,191)

(1,132,671)

3,883,519

76,5987,860,758

(28) (1,707)

210,944(1,187,044)

913,612947,071

(The exchange rates provided by the Federal Reserve Bank of New York on December 31, 2012 and 2011 were NT$29.05 and NT$30.27 to US$1.00,respectively) The accompanying notes are an integral part of these consolidated financial statements.

9,944,622378,762,408

(3,172,002)

(32,904,098)

56,296$17,058,037

(4,044,630)

$585,2581,938

$587,196

585,8991,297

587,196$587,196

(490,871)

$17,058,037

$17,001,741

(14,259,794)17,020,374

37,66317,058,037

Cathay Financial Holding Co., Ltd. and SubsidiariesConsolidated statements of income

For the years ended December 31, 2012 and 2011(Expressed in thousands of dollars, except earnings per share)

US $ NT $

$117,654,870(12,599,410)

2012

$4,357,848(474,329)

(307,361,510) (10,580,431) (196,217,221) (6,482,234)

112,816,241

NT $

$126,595,497(13,779,256)

105,055,460

2,225,172

26,540,42527,512,408

(805)

228,355,016

(225,360)

(49,589)6,127,915

(34,483,637)

147


Common stock Capital surplus Legal reserve Special reserve Total

NT $ US $ NT $ US $ NT $ US $ NT $ US $ NT $ US $ NT $ US $ NT $ US $ NT $ US $ NT $ US $ NT $ US $ NT $ US $ NT $ US $

Balance on January 1, 2011 $101,544,212 $3,354,616 $78,508,148 $2,593,596 $13,645,400 $450,790 $- $- $11,748,433 $388,121 $1,461 $48 $(893,051) $(29,503) $14,672,597 $484,724 $- $- $(650,993) $(21,506) $3,930,725 $129,855 $222,506,932 $7,350,741

Minority interest $(35,719) (1,180) (35,719) (1,180)

Appropriations and distribution for 2011 (Note1)

Legal reserve 460,059 15,198 (460,059) (15,198) - -

Cash dividends (6,092,652) (201,277) (6,092,652) (201,277)

Stock dividend to be distributed 2,030,884 67,092 (2,030,884) (67,092) - -

Cumulative conversion adjustments 514,925 17,011 514,925 17,011

Unrealized gains or losses of financial instruments (2,856,242) (94,359) (2,856,242) (94,359)

Purchase of treasury stock (7,179,872) (237,194) (7,179,872) (237,194)

Adjustments made by subsidiaries 333,598 11,021 10,247 339 343,845 11,360

Net loss not yet recognized as net pension cost (774,174) (25,576) (774,174) (25,576)

Consolidated net income for the year ended December 31, 2011 11,128,898 367,654 155,632 5,142 11,284,530 372,796

Balance on December 31, 2011 $103,575,096 $3,421,708 $78,508,148 $2,593,596 $14,105,459 $465,988 $333,598 $11,021 $14,303,983 $472,547 $1,461 $48 $(378,126) $(12,492) $11,816,355 $390,365 $(7,179,872) $(237,194) $(1,425,167) $(47,082) $4,050,638 $133,817 $217,711,573 $7,192,322

Balance on January 1, 2012 $103,575,096 $3,565,408 $78,508,148 $2,702,518 $14,105,459 $485,558 $333,598 $11,483 $14,303,983 $492,392 $1,461 $50 $(378,126) $(13,016) $11,816,355 $406,759 $(7,179,872) $(247,156) $(1,425,167) $(49,059) $4,050,638 $139,437 $217,711,573 $7,494,374

Minority interest (355,320) (12,231) (355,320) (12,231)


Legal reserve 1,117,140 38,456 (1,117,140) (38,456) - -

Cash dividend (5,078,755) (174,828) (5,078,755) (174,828)

Stock dividend 5,078,755 174,828 (5,078,755) (174,828) - -

Cumulative conversion adjustments (703,966) (24,233) (703,966) (24,233)

Unrealized gains or losses of financial instruments 19,533,321 672,404 19,533,321 672,404

Embeded conversion options derived from convertible bonds 87,973 3,028 87,973 3,028

Net loss not yet recognized as net pension cost 331,585 11,414 331,585 11,414

Consolidated net income for the year ended December 31, 2012 17,001,741 585,258 56,296 1,938 17,058,037 587,196

Balance on December 31, 2012 $108,653,851 $3,740,236 $78,596,121 $2,705,546 $15,222,599 $524,014 $333,598 $11,483 $20,031,074 $689,538 $1,461 $50 $(1,082,092) $(37,249) $31,349,676 $1,079,163 $(7,179,872) $(247,156) $(1,093,582) $(37,645) $3,751,614 $129,144 $248,584,448 $8,557,124

######### ######### 524,013.73 11,483.58 689,537.83 50.29 (37,249.29) ######### (247,155.66) (37,644.82) 129,143.34 #########

Note1：The remuneration of directors and supervisors NT $5,400 (US$178) thousands, employee bonus NT $813 (US$27) thousands were recorded as operating cost and expense in 2011.

Note2：The remuneration of directors and supervisors NT $5,400 (US$186) thousands, employee bonus NT $1,016 (US$35) thousands were recorded as operating cost and expense in 2012.


Minority interest

Summary

(The exchange rates provided by the Federal Reserve Bank of New York on December 31, 2012 and 2011 were NT$29.05 and NT$30.27 to US$1.00,respectively)

Unrealized gains or losseson financial instruments

Net loss not yet recognized

earnings increment adjustments Treasury stock as net pension cost

Unappropriated retained Land revaluation

Cathay Financial Holding Co., Ltd. and SubsidiariesConsolidated statements of changes in stockholders' equity

For the years ended December 31, 2012 and 2011(Expressed in thousands of dollars)

Cumulative conversion

Retained earnings Other stockholders' equityStock

148


Cathay Financial Holding Co., Ltd. and SubsidiariesConsolidated statements of cash flows


NT $ US $ NT $ US $Cash flows from operating activities Consolidated net income $17,058,037 $587,196 $11,284,530 $372,796 Adjustments: Income and other adjustments with no cash flow effects

Depreciation and amortization expenses 4,044,630 139,230 4,114,981 135,943Investment income recognized by equity method less than cash dividends received 132,142 4,549 27,066 894Bad debt expenses 3,172,002 109,191 1,062,613 35,104Revaluation Gain on bonds payable (207,604) (7,146) - - Amortization of discounts on bonds payable 23,352 804 - - Provision for premiums reserve from insurance business 295,253,475 10,163,631 206,594,611 6,825,061Gain on disposal of property and equipment (1,804,705) (62,124) (521,647) (17,233)Impairment loss 225,360 7,758 256,318 8,468Other adjustments 105,370 3,627 (83,513) (2,759)

Decrease (increase) on operating assets and liabilities(Increase) decrease in receivables (15,776,300) (543,074) 24,021,637 793,579Increase in deferred income tax assets (2,312,714) (79,612) (6,821,178) (225,345)(Increase) decrease in financial assets at fair value through profit or loss (62,168,705) (2,140,059) 85,473,977 2,823,719(Increase) decrease in other financial assets (10,338,099) (355,873) 21,140,733 698,405Increase in other assets (1,003,121) (34,531) (3,245,624) (107,222)Increase (decrease) in payables 11,480,832 395,209 (37,092,747) (1,225,396)(Decrease) increase in financial liabilities at fair value through profit or loss (14,856,527) (511,412) 4,849,259 160,200(Decrease) increase in deferred income tax liabilities (132,463) (4,560) 97,092 3,208Decrease in other financial liabilities - - (227,154) (7,504)Increase (decrease) in other liabilities 6,074,609 209,109 (704,670) (23,280)

Net cash provided by operating activities 228,969,571 7,881,913 310,226,284 10,248,638

Cash flows from investing activitiesIncrease in restricted assets (412,100) (14,186) (587,900) (19,422)Increase in loans (39,023,845) (1,343,334) (109,573,869) (3,619,884)(Increase) decrease in due from the Central Bank and call loans to banks (9,287,352) (319,702) 11,683,743 385,984Decrease (increase) in available-for-sale financial assets 71,814,088 2,472,086 (85,454,514) (2,823,076)(Increase) decrease in held-to-maturity financial assets (2,470,022) (85,027) 19,314,312 638,068(Increase) decrease in investments under equity method (7,742) (266) 26,618 879Increase investments in real estate (26,993,558) (929,210) (22,406,131) (740,209)Acquisition of property and equipment (4,674,157) (160,900) (1,085,496) (35,860)Disposal of property and equipment 2,579,911 88,809 150,934 4,986(Increase) decrease in securities purchased under agreements to resell (6,696,661) (230,522) 37,163,656 1,227,739Increase in other financial assets (296,163,322) (10,194,951) (175,173,136) (5,787,021)Decrease (increase) in other assets 566,216 19,491 (3,709,901) (122,560)Acquisition of subsidiary (654,930) (22,545) (1,563,961) (51,667)

Net cash used in investing activities (311,423,474) (10,720,257) (331,215,645) (10,942,043)

Cash flows from financing activities(Decrease) increase in due to the Central Bank and call loans from banks (1,754,388) (60,392) 13,987,497 462,091Increase in deposits 42,950,993 1,478,519 84,337,746 2,786,183Increase (decrease) in securities sold under agreements to repurchase 7,366,152 253,568 (7,463,518) (246,565)(Decrease) increase in banker's acceptances and funds borrowed (3,272,752) (112,659) 2,620,951 86,586Increase in bonds payable 6,561,928 225,884 12,256,715 404,913Increase in other financial liabilities 3,635,118 125,133 10,033,454 331,465Increase (decrease) in other liabilities 546,295 18,805 (120,985) (3,997)Issue convertible bonds 7,623,096 262,413 - - Issue costs of convertible bonds (38,497) (1,325) - - Cash dividends (5,078,757) (174,828) (6,092,653) (201,277)Purchase of treasury stock - - (7,179,872) (237,194)

Net cash provided by financing activities 58,539,188 2,015,118 102,379,335 3,382,205Effects of exchange rate changes (1,118,671) (38,508) 1,151,612 38,045Effects on merger of subsidiaries 687,361 23,661 672,969 22,232 (Decrease) increase in cash and cash equivalents (24,346,025) (838,073) 83,214,555 2,749,077Cash and cash equivalents at the beginning of period 726,749,401 25,017,191 643,534,846 21,259,823Cash and cash equivalents at the end of period $702,403,376 $24,179,118 $726,749,401 $24,008,900Supplemental disclosure of cash flows information

Interest paid during the period (excluding capitalized interest) $12,508,382 $430,581 $10,518,205 $347,480Income tax paid $3,676,652 $126,563 $2,586,889 $85,460

Investing and financing activities with no cash flow effectsReclassification of property and equipment to other assets $- $- $590,598,621 $19,511,022


January 1 ~ December 31, 2012 January 1 ~ December 31, 2011

(The exchange rates provided by the Federal Reserve Bank of New York on December 31, 2012 and 2011 were NT$29.05 and NT$30.27 to US$1.00, respectively)

149


Cathay Financial Holding Co., Ltd. and Subsidiaries Notes to audited Consolidated Financial Statements

December 31, 2012 and 2011 (Expressed in thousands of dollars except

for share and per share data and unless otherwise stated)

1. Organization and business scope

On December 31, 2001, Cathay Life Insurance Co., Ltd. (“Cathay Life”) was reincorporated as Cathay Financial Holding Co., Ltd. (the “Company”) through stock conversion pursuant to the provisions of the Republic of China (“ROC”) Financial Holding Company Act (“Financial Holding Company Act”) and its shares were listed on the Taiwan Stock Exchange Corporation (TSE) on the same day. On April 22, 2002, Cathay Century Insurance Co., Ltd. (“Cathay Century”) and Cathay United Bank Co., Ltd. (“Cathay United Bank”) became subsidiaries of the Company through stock conversion approved by the government. On December 18, 2002, United World Chinese Commercial Bank Co., Ltd. (“UWCCB”) also became a subsidiary of the Company through stock conversion approved by the government. UWCCB and Cathay United Bank merged on October 27, 2003, in accordance with the relevant laws and regulations. UWCCB was the surviving company and was re-named to Cathay United Bank Co., Ltd. (“Cathay United Bank”). On May 12, 2004, the Company established Cathay Securities Corporation (“Cathay Securities”) as a wholly owned subsidiary. On June 30, 2005, the Company has invested Lucky Bank, Inc. (“Lucky Bank”) which was approved as a strategic investment by the Financial Supervisory Commission, Executive Yuan. Lucky Bank became a subsidiary of the Company by stock conversion on August 25, 2006. Cathay United Bank absorption merged with Lucky Bank on January 1, 2007. Cathay United Bank acquired specific assets, liabilities, and business of China United Trust & Investment Corporation (“CUTIC”) on December 29, 2007 to improve competitiveness. Cathay Venture Inc. (“Cathay Venture”) was incorporated on April 16, 2003, under the Company Act. Cathay Venture is the surviving company for the merger with Cathay Venture, Cathay II Venture and Cathay Capital management on August 10, 2009. On June 13, 2011, the Company obtained the acquisition approval of Cathay Securities Investment Trust Co., Ltd. (Cathay Securities Investment Trust) from Financial Supervisory Commission of Executive Yuan and acquired all shares of Cathay Securities Investments Trust by cash purchase on June 24, 2011. Since July 29, 2003, the Company listed a portion of its common shares on the Luxembourg Stock Exchange (LSE) in the form of Global Depositary Shares (GDSs). The Company mainly engages in financial holding business activities. As of December 31, 2012 and 2011, the total numbers of the employees of the Company and its subsidiaries were 44,461 and 43,904, respectively.

As of and for the years ended December 31, 2012 and 2011, the consolidated financial statements include the following entities:

150

English Translation of Financial Statements Originally Issued in Chinese (Expressed in thousand of dollars except for share and per

share data and unless otherwise stated)

Investor Investee Business

2012.12.31 Ownership

interest


interest Notes The Company Cathay Life

Insurance Co., Ltd. (“Cathay Life”)

Life insurance 100.00% 100.00%

Cathay Life was incorporated in Taiwan on October 23, 1962 under the provisions of the ROC Company Act (the “Company Act”).

The Company Cathay United Bank Co., Ltd. (“Cathay United Bank”)

Commercial banking operations

100.00% 100.00% UWCCB was enfranchised by the ROC government on January 4, 1975. On October 27, 2003, UWCCB was merged with the former Cathay United Bank which was dissolved after the merger; the merged entity was renamed Cathay United Bank. The new Cathay United Bank absorption merged with Lucky Bank on January 1, 2007.

The Company Cathay Century Insurance Co., Ltd. (“Cathay Century”)

Property and casualty insurance

100.00% 100.00% Cathay Century was incorporated in Taiwan on July 19, 1993, under the provisions of the Company Act. Cathay Century changed its name from “Tong Tai Insurance Co., Ltd.” to “Cathay Century Insurance Co., Ltd.” on August 2, 2002.

The Company Cathay Securities Corporation (“Cathay Securities”)

Securities 100.00% 100.00% Cathay Securities was incorporated on May 12, 2004, under the Company Act. The securities department and the securities agent (Taipei branch) of Cathay United Bank were transferred to Cathay Securities using operating assignment along with its business, assets and liabilities. The assignment date was August 13, 2004.

151





interest


interest Notes The Company Cathay Venture Inc.

(“Cathay Venture”) Venture capital investment

100.00% 100.00% Cathay Venture was incorporated on April 16, 2003, under the Company Act. Cathay Venture is the surviving company for the merger with Cathay Venture, Cathay II Venture and Cathay Capital Management on August 10, 2009.

The Company Cathay Securities Investment Trust Co., Ltd. (“Cathay Securities Investment Trust”)

Securities investment trust

100.00% 100.00% Cathay Securities Investment Trust was incorporated on February 11, 2000.

Cathay Life Cathay Life Insurance Co., Ltd. (China) (“Cathay Life (China)”)

Life insurance 50.00% 50.00% Cathay Life (China) was incorporated on December 29, 2004. Cathay Life and China Eastern Airlines Corporation Limited each owns 50% interest in Cathay Life (China).

Cathay Life、 Cathay Venture

Symphox Information Co., Ltd. (“Symphox Information”)

Type II telecom service, data processing service, information supply service

100.00% 100.00% Symphox Information was incorporated on December 12, 1999, under the Company Act. Cathay Life and Cathay Venture own 60.12% and 39.88% interest in Symphox Information, respectively.

Cathay Life Cathay Life Insurance (Vietnam) Co., Ltd. (“Cathay Life (Vietnam)”)

Life insurance 100.00% 100.00% Cathay Life (Vietnam) was incorporated on November 21, 2007.

Cathay Life Lin Yuan (Shanghai) Real Estate Co., Ltd (“Lin Yuan”)

Office equipment leasing company

100.00% - Lin Yuan was incorporated on August 15, 2012.

152





interest


interest Notes Cathay Life、Cathay Century

Cathay Insurance Co., Ltd. (China) (“Cathay Century (China)”)


100.00% 100.00% Cathay Century (China) was incorporated on August 26, 2008. Cathay Life and Cathay Century each owns 50% interest of Cathay Century (China).

Cathy Century Cathay Insurance (Vietnam) Co., Ltd. (“Cathay Century (Vietnam)”)


100.00% 100.00% Cathay Century (Vietnam) was incorporated on November 2, 2010.

Cathay United Bank

Indovina Bank Limited (“Indovina Bank”)

Wholesale banking

50.00% 50.00% Indovina Bank was incorporated in Vietnam on October 29, 1992. Cathay United Bank and Vietinbank each owns 50% interest of Indovina Bank.

Cathay United Bank

Singapore Banking Corporation Limited (“SBC Bank”)

Wholesale banking

70.00% - SBC Bank was incorporated in Cambodia on 1993. Cathay United Bank、Kun Swee Tiong and Kun Swee Yi Diaz each owns 70%、20% and 10% interest of SBC Bank.

Cathay Securities

Cathay Futures Corp. (“Cathay Futures”)

Futures related business

99.99% 99.99% Cathay Futures, former Seaward Futures Agency Co., Ltd., was incorporated on December 29, 1993 under the Company Act and renamed to Seaward Futures Corp. on March 6, 1998. On December 24, 2003, Seaward Futures Corp. changed its name to Cathay Futures Corp. On February 10, 2006, Cathay United Bank sold all the stocks of Cathay Futures to Cathay Securities.

153



As of and For the year ended December 31, 2012 and 2011, the consolidated financial statements excluded the following subsidiaries due to the respective total assets and operating revenues were considered immaterial to the Company.



interest


interest Notes Cathay life Cathay Insurance

(Bermuda) Co., Ltd. (“Cathay Insurance (Bermuda)”)

Reinsurance 100.00% 100.00% Cathay Insurance (Bermuda) was incorporated on January 24, 2000.

Cathay life Cathay Securities Investment Consulting Co., Ltd. (“Cathay Securities Investment Consulting”)

Securities investment research analysis

100.00% 100.00% Cathay Securities Investment Consulting was incorporated on November 25, 2002.

Cathay United Bank

Seaward Card Co., Ltd. (“Seaward Card”)

Credit card service

100.00% 100.00% Seaward Card was incorporated on April 9, 1999.

2. Summary of significant accounting policies

The financial statements were prepared in accordance with requirements of the Regulations Governing the Preparation of Financial Reports by Securities Issuers, Regulations Governing the Preparation of Financial Reports by Financial Holding Companies and generally accepted accounting principles. A summary of significant accounting policies is as follows:

(1) Principles of consolidation

A. In accordance with the “Regulations Governing the Preparation of Financial Reports by

Financial Holding Companies”, the preparation of consolidated financial statements shall comply with the Statements of Financial Accounting Standards of Republic of China (“ROC SFAS”) No. 7, except for subsidiaries in the industries of banking, insurance and securities which are required to be consolidated.

B. All significant inter-company transactions were eliminated in the consolidated financial

statements.

154



(2) Cash and cash equivalents

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, and so near their maturity that they present insignificant risk of changes in values from fluctuations of interest rates. Cash and cash equivalents include cash on hand, unrestricted bank deposits, checks for clearance, due from commercial banks and all other highly liquid investments with maturities of less than three months.

(3) Financial assets and financial liabilities

In accordance with the ROC SFAS No.34 “Accounting for Financial Instruments”, “Regulations Governing the Preparation of Financial Reports by Securities Issuers” and “Regulations Governing the Preparation of Financial Reports by Financial Holding Companies”, financial assets are categorized as “financial assets at fair value through profit or loss”, “held-to-maturity financial assets”, “investments in debt securities with no active market”, “available-for-sale financial assets”, “derivative financial assets for hedging”, “financial assets carried at cost”, and “loans and receivables (loans and receivables originated by the enterprise are included in the ROC SFAS No.34 since January 1, 2011.)”. Upon initial recognition, financial assets are measured at fair value, plus in some cases, transaction costs that are directly attributable to the acquisition or issue of the financial assets. Financial liabilities are categorized as “financial liabilities at fair value through profit or loss”, “derivative financial liabilities for hedging”, or “financial liabilities carried at cost”. The Company and its subsidiaries purchase and sell their financial assets in a “regular way”. “Regular way” purchases or sales are transactions that require the delivery of assets within the period established by regulation or convention in the marketplace. A. Financial assets or liabilities at fair value through profit or loss

Financial assets or liabilities fallen into this category are measured at fair value through profit or loss after recognition. Such assets or liabilities are classified into financial assets and liabilities with trading purpose and financial assets and liabilities designed as at fair value through profit or loss. Apart from derivatives and financial instruments designated as at fair value through profit or loss, financial instruments may be reclassified out of the fair value through profit or loss category if the financial instruments are no longer held for the purpose of selling or repurchasing them in the near term, and the following requirements are met:

155



a. Financial assets that would have met the definition of loans and receivables may be

reclassified out of the fair value through profit or loss category if the entity has the intention and ability to hold the financial assets for the foreseeable future or until maturity.

b. Financial instruments that would not have met the definition of loans and receivables

may be reclassified out of the fair value through profit or loss category only in rare circumstances.

The financial instrument shall be reclassified at its fair value on the date of reclassification. Any gain or loss already recognized in profit or loss shall not be reversed. The fair value of the financial instrument on the date of reclassification becomes its new cost or amortized cost, as applicable.

Financial instrument shall not be reclassified into the fair value through profit or loss category after initial recognition.

B. Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or not classified in any of the three preceding categories. Gain or losses on available-for-sale financial assets shall be recognized in equity until the assets are derecognized, except for impairment losses and foreign exchange gains or losses upon translation of the assets. When the financial asset is derecognized, at which time the cumulative gains or losses previously recognized in equity shall be recognized in profit or loss. Available-for-sale financial assets that would have met the definition of loans and receivables may be reclassified out of the available-for-sale category to the loans and receivables category if the entity has the intention and ability to hold the financial assets for the foreseeable future or until maturity. Upon reclassification, the fair value on the date of reclassification becomes its new cost or amortized cost, as applicable. Any previous gain or loss on the assets that has been recognized in stockholders’ equity shall be amortized over the remaining life of the assets.

156



C. Held-to-maturity financial assets

Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity financial assets when the Company has both the intention and ability to hold to maturity. Such investments are subsequently measured at amortized cost. Gains and losses from changes in fair values are recognized in profit or loss when the investments are derecognized or impaired, as well as through the amortization process. The amortized cost is computed as the cost (amount initially recognized) minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the cost and the maturity amount, and less any impairment loss or amount unrecoverable. The calculation of effective interest rate includes all fees and points paid or received between parties, transaction costs and all other premiums and discounts.

D. Derivative financial assets or liabilities for hedging

Derivative financial assets or liabilities for hedging are derivative financial assets or liabilities that have been designated as hedging instruments and meet the criteria for hedge accounting. These assets or liabilities are measured at fair value.

E. Financial assets carried at cost

Financial assets measured at cost are investments not measured at fair value because fair value cannot be reliably measured. They are either holdings in non-listed companies or emerging stocks, which have no significant influence or derivative assets that are linked to and must be settled by delivery of the above-mentioned equity instruments. If there is objective evidence that an impairment loss has been incurred on the investment, an impairment loss will be recognized. Such impairment loss shall not be reversed.

F. Investments in debt securities with no active market

Investments in debt securities with no active market are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortized cost using the effective interest method. Gains or losses from changes in fair values are recognized when investments in debt securities with no active market are derecognized, impaired, or amortized.

157



G. Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other then: 1 those that the entity intends to sell immediately or in the near term, which shall be

classified as held for trading; 2 those that the entity upon initial recognition designates as at fair value through profit

or loss; � those that the entity upon initial recognition designates as available-for-sale; or � those for which the holder may not recover substantially all of its initial investment,

other than because of credit deterioration. Gains and losses are recognized when the investments are derecognized or impaired, as well as through the amortization process.

H. Financial liabilities

The financial liabilities of the Company and its subsidiaries are subsequently measured at amortized cost after initial recognition, except for “financial liabilities at fair value through profit or loss” and “derivative financial liabilities for hedging”, which are both measured at fair value.

The fair value of investments is determined by reference to the close price at the balance sheet date for listed shares, the net assets value for open-ended funds, and the quoted price by the Taiwan Gre Tai Securities Market for bond. Valuation techniques for debt securities with no active market, hybrid instruments and derivative instruments.

(4) Derecognition of financial assets and liabilities

A. Derecognition of financial assets

A financial asset (or a portion of the assets) is derecognized when the control over the assets (or a portion of the assets) is surrendered. Transferring or surrendering control over a financial asset (or a portion of the assets) in exchange of consideration received is deemed a sale.

158



If a transfer of financial asset does not meet the criteria for a sale, the transfer is accounted for as a borrowing with collateral.

B. Derecognition of financial liabilities

A financial liability (or a portion) is derecognized when the obligation under the liability agreement is discharged or cancelled or expires. Where an existing financial liability is replaced by another one from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability. The difference between the respective carrying amounts is recognized in the current period income statement.

(5) Accounting for impairment of financial assets

The Company and its subsidiaries assesses at each balance sheet date whether a financial asset or a group of financial assets is impaired. A. Financial assets carried at amortized cost

If there is objective evidence that an impairment loss on financial assets carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial assets’ original effective interest rate (i.e. the effective interest rate computed at initial recognition). The carrying amount of the assets shall be reduced through use of an allowance account. The amount of the loss shall be recognized in profit or loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease relates to an event occurs after the impairment is recognized, the previously recognized impairment loss is reversed by adjusting an allowance account. Any subsequent reversal of an impairment loss is recognized in profit or loss, to the extent that the carrying value of the assets do not exceed what its amortized cost would have been had the impairment not been recognized at the reversal date.

159



B. Financial assets carried at cost

If there is objective evidence that an impairment loss on an unquoted equity instrument, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument has been incurred, then the amount of the loss is determined as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss cannot be reversed.

C. Available-for-sale financial assets

If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortization) and its current fair value, less any impairment loss previously recognized in profit or loss, is transferred from equity to the income statement. Reversals in respect of equity instruments classified as available-for-sale are not recognized in profit or loss but through equity. Reversals of impairment losses on debt instruments are reversed through profit or loss if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognized in profit or loss.

D. Loans and receivables

Since January 1, 2011, the Company and its subsidiaries first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant. If there is objective evidence that an impairment loss on individual loan or receivable has been incurred, the amount of impairment loss should be assessed individually. If there is objective evidence that an impairment loss on a loan or receivable that is not individually significant has been incurred, the Company and its subsidiaries shall include the asset in a group of financial assets with similar credit risk characteristics and collectively assess them for impairment. Similarly, for loans and receivables with no objective evidence that an impairment loss has been incurred, those assets shall be collectively assessed for impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is recognized and measured as the difference between the loan or receivable’s carrying amount and the present value of estimated future cash flows discounted at its original effective interest rates (excluding future credit losses that have not been incurred). If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.

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If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss shall be reversed by adjusting an allowance account. The reversal shall not result in a carrying amount of the financial asset that exceeds what the amortized cost would have been had the impairment not been recognized at the date the impairment is reversed. The amount of the reversal shall be recognized in profit or loss.

(6) Derivative financial instruments The Company and its subsidiaries enter into derivative financial instrument transactions such as forward foreign exchange, interest rate swap, cross-currency swap, option and futures to hedge its risks associated with interest rates and foreign currency fluctuations. These derivative financial instruments are initially recognized at fair value on the date of which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Any gains or losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are taken directly to profit or loss for the period. For the purpose of hedge accounting, hedges are classified as:

A. Fair value hedges: to hedge the exposure to changes in the fair value of a recognized asset or liability.

B. Cash flow hedges: to hedge the exposure to variability in cash flows that is both

attributable to a particular risk associated with a recognized asset or liability (such as all or some future interest payments on variable rate debt) or a highly probable forecast transaction, and could affect profit or loss.

C. Hedge of a net investment in a foreign operation: to hedge the exchange rate variability

risk for a net investment in a foreign operation.

At the inception of a hedge relationship, the Company and its subsidiaries formally designate and document hedge relationship to which the Company and its subsidiaries wish to apply hedge accounting, the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

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Hedges in compliance with hedge accounting requirements are accounted for as follows:

A. Fair value hedges

Fair value hedges are hedges of the Company’s exposure to changes in fair value of a recognized asset or liability or an unrecognized firm commitment, or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk which could impact profit or loss. The carrying amount of the fair value hedged item is adjusted for gains and losses attributable to the risk being hedged and the underlying derivative is remeasured at fair value. Gains or losses from both are recognized in profit or loss. For fair value hedge relating to items carried at amortized cost, the adjustment to carrying value is amortized through profit or loss over the remaining term to maturity. Any adjustment to the carrying amount of a hedged financial instrument for which the effective interest method is used is amortized to profit or loss. Amortization may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. The Company and its subsidiaries discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or the Company revokes the designation. Hedging instruments are subsequently measured at fair value and the gains (losses) resulting from the exchange rate changes are recognized in current period profit or loss in accordance with the ROC SFAS No.14 “Accounting for Foreign Currency Transactions and Translation of Foreign Financial Statements”.

B. Cash flow hedges

Cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction and could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognized directly in equity, while the ineffective portion is recognized in profit or loss.

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Amounts taken to equity are transferred to the income statement when the hedged transaction affects profit or loss, such as when hedged financial income or financial expense is recognized or when a forecast sale or purchase occurs. Where the hedged item is the cost of a non-financial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non-financial asset or liability. If the forecast transaction is no longer expected to occur, amounts previously recognized in equity are transferred to profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognized in equity remain in equity until the forecast transaction occurs. If the related transaction is not expected to occur, the amount is taken to profit or loss.

C. Hedges of a net investment in a foreign operation

Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on the hedging instruments relating to the effective portion of the hedges are recognized directly in equity while any gains or losses relating to the ineffective portion are recognized in profit or loss. On disposal of the foreign operation, the cumulative value of any such gains or losses recognized directly in equity is transferred to profit or loss.

(7) Allowance for bad debts

Allowance for bad debts on bills, bill purchased, acceptances, guarantees loans, delinquent accounts, receivables of credit card and other receivables are determined based on the aging analysis of outstanding balances of such accounts and past experience.

(8) Investments under equity method

Investments in equity securities are accounted for under the equity method where the Company owns more than 20% of the investee’s voting stocks or the Company has significant influence over the investee company. The difference between the investment cost and the Company’s share of net assets of the investee company was amortized. However, started from January 1, 2006, such difference is no longer amortized. Newly acquired difference is analyzed and accounted for in inconformity with the acquisition cost allocation as provided in ROC SFAS No.25 “Business Combination-Accounting Treatment under Purchase Method.”, resulting goodwill is no longer amortized.

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If the investee company issues new shares and original shareholders do not purchase or acquire new shares proportionately, then the investment percentage and the equity in net assets of the investee that the Company has invested will be changed. Such difference shall be used to adjust both the capital surplus and the investment in the investee company accounted for under the equity method. If the adjustment stated above is to debit the capital surplus account and the book balance of capital surplus from long-term investments is not enough to be offset, the difference shall be debited to the retained earnings account. Unrealized intercompany gains or losses are eliminated under the equity method. Gains or losses from sales of depreciable assets between the Company and its subsidiaries are amortized to profit or loss over the economic service life of the asset. Gains or losses from other types of intercompany transactions are recognized when realized.

(9) Investments in real estate

Investments in real estate are stated at cost when acquired. Improvements and major renovation of investments in real estate are capitalized, while repairs and maintenance are expensed immediately. Upon disposal, the related cost, accumulated depreciation and accumulated impairment are eliminated and gains and losses are recorded in operating gains and losses accounts. Depreciation is calculated using the straight-line method in accordance with the “Estimated Useful Life of Fixed Assets Table” published by the Executive Yuan of the ROC (the “Executive Yuan Depreciation Table”). Real estate investment primarily is for commercial leasing purposes; rents can be paid annually, semi-annually, quarterly, monthly or in a lump sum.

(10) Property and equipment Property and equipment are stated at cost or cost plus appreciation. When revaluing property and equipment, land and other properties shall be revalued separately. Property appreciation shall be recorded under “land revaluation adjustments” of shareholders’ equity. Major improvements, additions, and renewals are capitalized, while repairs and maintenance are expensed when incurred.

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Upon the sale or disposal of properties and equipment, their cost, related accumulated depreciation and accumulated impairment are removed from respective accounts. Depreciation is calculated using the straight-line method over the estimated service lives prescribed by the Executive Yuan Depreciation Table. Property and equipment that continue to be in use after reaching its originally estimated useful life are depreciated based on the residual value and the newly estimated remaining useful lives.

(11) Goodwill and intangible assets

A. Goodwill

Goodwill is recognized when the purchase price exceeds the fair value of identifiable net assets acquired in a business combination. After initial recognition, goodwill is measured at cost less any accumulated impairment losses.

B. Intangible assets

The Company and its subsidiaries adopted the ROC SFAS No. 37 “Accounting for Intangible Assets” on January 1, 2007. Intangible assets are initially recognized at cost except the intangible assets granted by government which are recognized at fair value. After the initial recognition, the intangible assets shall be carried at the costs plus statutory revaluation increment less accumulated amortization and accumulated impairment losses. The useful lives of intangible assets of the Company and its subsidiaries are deemed finite. The amortization amounts of the intangible assets with finite useful lives are allocated on a systematic basis over their useful lives. Impairment testing is performed when there are indications of impairment on intangible assets with finite useful lives. The Company and its subsidiaries revaluates the amortization periods and amortization methods for the intangible assets with finite useful lives at each balance sheet date and any resulting changes are treated as changes in accounting estimates. The intangible assets of the Company and its subsidiaries are computer software and are amortized over the estimated useful lives of three to five years using the straight-line method.

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(12)Non-financial assets impairment

Pursuant to ROC SFAS No. 35, “Accounting for Asset Impairment” the Company and its subsidiaries assess indicators of impairment for all its assets within the scope of ROC SFAS No. 35 on each balance sheet date. If impairment indications exist, the Company and its subsidiaries shall then compare the carrying amount with the recoverable amount of the assets or the cash-generating unit (“CGU”) and write down the carrying amount to the recoverable amount where applicable. Recoverable amount is defined as the higher of fair values less costs to sell and the values in use. For previously recognized impairment losses, the Company and its subsidiaries shall assess, at each balance sheet date, whether there is any indication that the impairment loss may no longer exist or may have decreased. If there is any such indication, the Company and its subsidiaries have to recalculate the recoverable amount of the asset. If the recoverable amount increases as a result of the increase in the estimated service potential of the assets, the Company and its subsidiaries shall reverse the impairment loss to the extent that the carrying amount after the reversal would not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the assets in prior years. In addition, a goodwill-allocated CGU or group of CGUs is tested for impairment at the same day of each year, regardless of whether an impairment indicator exists. Any impairment loss is recognized by reducing the carrying amount of the assets of the CGU or the group of CGUs in the following order:

A. First, to reduce the carrying amount of any goodwill allocated to the CGU or group of

CGUs. B. If the goodwill has been written off, to reduce the other assets of the CGU or group of

CGUs pro rata to their carrying amount. The write-down in goodwill cannot be reversed under any circumstances in subsequent periods.

(13) Real Estate Investment Trust (REIT) Cathay Life has adopted “Accounting Treatment under Real Estate Securitization” issued by the Accounting Research and Development Foundation.

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Once the sales process is complete and the transferor has transferred his risk and ownership of the real estate property to the transferee, gain on disposal of real estate shall be recognized under “total amount accrual method”. If the originator and its related parties do not participate in the initial offering but subsequently acquire the REIT beneficiary securities of less than 20% of its outstanding shares from the TSE at fair market value within nine months after the issue date, the transfer and purchase transaction are deemed two independent transactions due to the subsequent purchase transaction has no significant influence over the transfer transaction. However, if the originator and its related parties subsequently acquire the REIT beneficiary securities of over 20% of its outstanding shares within nine months after the issue date, the subsequently acquired portion is not deemed a sale and therefore gain or loss on disposal of real estate for the originator related to the subsequently acquired portion shall be deferred.

(14) Convertible bonds Convertible bonds payable is calculated by fully issued price after reducted the amount of liability component which is evaluated individually is allocated to equity component (Additional Paid In Capital-stock warrants). The liability component of non-embedded derivative financial products is measured by its cost after being amortized with effective interest method. The liability component of Embedded derivative financial products (non-equity) is measured at its fair value. The fully issued price of bonds payable is allocated to liability and equity components in proportion with each originally recognized amount. When the holders of convertible bonds ask to exercise the right of conversion prior to the due date, we should adjust the carrying amount of liability component to the carrying amount at transition date, and combine with the carrying amount of equity component to generate the recording base of issuing common stock, instead of recognizing transferring gain or loss.

(15) Reserve for operations and liabilities The subsidiaries in banking, insurance and securities industries are required by the government to provide operating and loss reserves.

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(16) Treasury stock

The stock that the Company repurchases is recorded in the “treasury stock account”. The book value of the treasury stock is determined based on the reason of purchase and stock type (common or preferred stock) using the weighted average method. At the time of writing off treasury stock, the Company should debit common stock and capital surplus on stock issuance proportionally. As long as the book value of the retired treasury stock is higher than the sum of its par value and capital surplus on stock issuance, the excess should be debited to other capital surplus or retained earnings when capital surplus-treasury stock is insufficient. When the book value of the retired treasury stock is lower than the sum of its par value and capital surplus on stock issuance, the difference is credited to capital surplus-treasury stock. According to the Ministry of Finance-Securities and Future Commission (91) article 108164: A. In accordance with Article 38 of the Financial Holding Company Act which provides

strict prohibitions on cross-holdings, all the prior share buybacks conducted by listed or over-the-counter traded financial institutions (in accordance with Article 28-2 of Securities Exchange Act), upon the conversion of such institutions into wholly-owned subsidiaries of a financial holding company, must be converted into treasury shares of the financial holding company to be held by such subsidiaries for a period of no more than three years. If such subsidiaries fail to dispose such treasury shares within this period, those shares will be deemed as un-issued share capital of the financial holding company and shall be cancelled accordingly.

B. Treasury shares of a financial holding company held by its subsidiaries as described

above are also treated as their own treasury shares and therefore such subsidiaries may not exercise shareholders rights with respect to those stocks in accordance with Article 28-2 of the Securities Exchange Act.

According to the Securities and Futures Commission (91) article 111467, shares previously bought back by listed or over-the-counter traded financial institutions (in accordance with Article 28-2 of Securities Exchange Act), upon conversion of the institutions into wholly-owned subsidiaries of a financial holding company and the conversion of such shares into treasury shares of the financial holding company, must be treated by such subsidiaries as their own treasury shares and a deduction of shareholders’ equity and must be treated as treasury shares of the financial holding company. If the financial institutions hold shares of other financial institutions whose shares are also converted into the shares of the same financial holding company, the principle of equity investment shall apply. The Company follows ROC SFAS NO.30 “Accounting for Treasury Stocks” and treats shares held by its subsidiaries as treasury stock in its financial statements.

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(17) Recognition of interest income and handling fees

Interest income is recognized on an accrual basis except for loans classified as delinquent accounts. The accrual of income from delinquent accounts is discontinued; subsequent interest payments are credited to income when received. Handling fees are recognized on an accrual basis.

(18) Insurance premiums income and expenses

Direct premiums are recorded as income at the time of cash receipts. Related expenses (commissions, brokerage fees, etc.) are recognized on an accrual basis. Reinsurance premiums and reinsurance commission expenses are recognized upon the assumption of reinsurance. Claim expenses for assumed reinsurance policies are recognized upon notification that claim payments are due. Adjustments are made at year-end based on past experience.

(19) Pension plan

The Labor Pension Act of ROC (“the Act”), which adopts a defined contribution scheme, takes effect from July 1, 2005. In accordance with the Act, employees of the Company may elect to be subject to either the Act, and maintain their seniority before the enforcement of the Act, or the pension mechanism under the Labor Standards Act. For employees choosing the pension scheme under the Act, the Company shall make monthly contributions to individual pension accounts on a basis no less than 6% of the employees’ monthly wages. In compliance with SFC regulations, the Company and its subsidiaries follow the ROC SFAS No. 18, “Accounting for Pensions”. When providing defined benefit plans, an actuarial valuation of pension liability is performed on the balance sheet date, and a minimum pension liability is recorded in the financial statements based on the difference between the accumulated benefit obligation and the fair value of plan assets; when providing defined contribution plans, an enterprise should recognize the amounts to be contributed as current expense over the employee’s employment period.

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(20) Foreign currency transactions

A. Translation of foreign currency transactions

Monetary assets or liabilities denominated in foreign currencies shall be translated using the applicable rate at each balance sheet date and exchange differences shall be recognized in profit or loss for the period. Non-monetary assets or liabilities denominated in foreign currencies that are measured at fair value shall be translated using the exchange rates at the date when the fair value was determined. When a gain or loss on a non-monetary asset or liability measured at fair value is recognized directly in equity, any exchange component of that gain or loss shall be recognized in equity. Conversely, when a gain or loss on a non-monetary item measured at fair value is recognized in profit or loss, any exchange component of that gain or loss shall be recognized in profit or loss. Non-monetary assets or liabilities denominated in foreign currencies that are measured in terms of historical cost shall be translated using the exchange rate at the date of the transaction.

B. Translation of foreign subsidiaries’ financial statements

Financial statements of foreign subsidiaries under the equity method are translated into NT dollars on the following basis: all assets and liabilities denominated in foreign currencies are translated into NT dollars at the exchange rate prevailing on the balance sheet date. Shareholders’ equity items are translated based on the historical rates except for the opening balance of retained earnings, which is the translated amount from prior period carried forward. Income statement items are translated using a weighted-average exchange rate of the fiscal year. Differences arising from above translation are recorded under cumulative translation adjustments under shareholders’ equity.

(21) Income taxes

The Company adopted ROC SFAS No. 22, “Accounting for Income Taxes”, which requires inter-period and intra-period tax allocations in addition to computing current period income tax payable. Deferred income tax liabilities are recognized for taxable temporary differences; while deferred income tax assets are recognized for deductible temporary differences, tax losses and investment tax credits. An allowance is provided based on an assessment of the reliability of deferred tax assets. Adjustment of prior years’ income tax payable is included in the current period income tax expense.

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In accordance with Article 49 of the Financial Holding Company Act, the Company and its qualifying Subsidiaries have selected the consolidated income tax return for tax filings and pay a 10% surcharge on their undistributed retained earnings under the consolidated income tax return. If there are any tax effects due to the adoption of the consolidated tax system, the Company can proportionately allocate the effects on tax expense (benefit), deferred income tax and tax payable (tax refund receivable) among the Company and its subsidiaries. The Company adopted ROC SFAS No. 12, “Accounting for Income Tax Credits,” for income tax deductions. The income tax deductions resulting from the expenditure on the purchase of equipment, research and development, education, training and investment in equity are accounted for under the current period recognition method. The additional 10% income tax imposed on undistributed earnings is recognized as expenses on the date when the shareholders resolve that the earnings shall be retained. Effective from January 1, 2006, the Company and its subsidiaries have considered the impact of the “Alternative Minimum Tax Act” to estimate their income tax liabilities.

(22) Capital expenditure

Capital expenditure is capitalized and amortized over its useful life if it involves a significant amount and may generate revenues in future periods. Otherwise, it is expensed in the year as incurred.

(23)Employee bonus and remuneration of directors

Pursuant to Article No.52 issued by the Accounting Research and Development Foundation in March 2007, employee bonus and remuneration of directors are accounted for as expenses and not distribution of earnings.

(24) Operating segment information

An operating segment is a component of an entity that has the following characteristics: (1) engaging in business activities from which it may earn revenues and incur expenses, (2) whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and (3) for which discrete financial information is available.

(25) The interim financial statement

The interim financial statements are prepared according to the ROC SFAS No.23, “Interim Financial Reporting and Disclosures”.

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(26) Translation to U.S. dollars

The Company’s consolidated financial statement are stated in NT dollars. Translation of the December 31, 2012 and 2011 NT dollar amounts into US dollar amounts are provided solely for the convenience of the readers. The noon buying rate of NT$29.05and NT$30.27to US$1.00 on December 31, 2012 and 2011, respectively, were provided by Federal Reserve Bank of New York. The translation amounts are unrelieved. Such currency transition should not be construed as representations that the NT dollar amount have been, could have been, or could in the future be, converted in to US dollars at this rate or any other rate of exchange.

3. Change in accounting and its effects

(1) Effective from January 1, 2011, the Company and its subsidiaries adopted the third revision of the SFAS No.34 “Financial Instruments: Recognition and Measurement”. This change in accounting principles has no significant impact on net income or earnings per share for the year ended December 31, 2011.

(2) Effective January 1, 2011, the Company and its subsidiaries adopted SFAS No.41,

“Operating Segments”, to present operating segment information. The new SFAS No.41 replaces SFAS No.20, “Segment Reporting”.

(3) Insurance subsidiaries apply SFAS No.40 “Financial Accounting Standard on Insurance

Contract” and “Regulations Governing the Preparation of Financial Reports by Insurance Enterprises” issued on December 30, 2009 according to FSC Insurance Interpretation No. 09802506492 from January 1, 2011. The change in accounting principle has no significant effect on the income or earnings per share for the year of 2011.

4. Cash and cash equivalents

December 31,

2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Petty cash and cash on hand $13,493,295 $464,485 $12,198,819 $403,000

Cash in banks 67,388,184 2,319,731 78,141,312 2,581,477

Time deposits 572,813,996 19,718,210 599,968,048 19,820,550

Cash equivalents 22,185,867 763,713 5,616,951 185,562

Checks for clearance 8,326,316 286,620 8,641,570 285,483

Due from commercial banks 18,195,718 626,359 22,182,701 732,828

Total $702,403,376 $24,179,118 $726,749,401 $24,008,900

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As of December 31, 2012 and 2011, the amounts of time deposits with maturities beyond one year were NT$18,879,381 (US$649,893) thousands and NT$4,995,000 (US$165,015) thousands, respectively.

5. Financial assets at fair value through profit or loss

December 31, 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Common stock $14,311,243 $492,642 $9,438,440 $311,808 Beneficiary certificates 35,688,503 1,228,520 31,159,640 1,029,390 Exchange traded funds 999,111 34,393 1,869,134 61,749 Corporate bonds 2,967,573 102,154 2,147,354 70,940 Government bonds 4,641,252 159,768 2,616,279 86,432 Treasury bills 29,096,621 1,001,605 14,859,330 490,893 Structured time deposits 18,600,000 640,275 11,000,000 363,396 Commercial papers and certificate of deposit 30,057,822 1,034,692 10,019 331 Margin for futures trading-own funds - - 44,197 1,460 Derivative financial instruments 522,151 17,974 385,791 12,745 Overseas financial instruments 1,667,935 57,416 3,920,965 129,533 Valuation adjustment 8,592,839 295,795 7,246,275 239,388

Total $147,145,050 $5,065,234 $84,697,424 $2,798,065

(1) As of December 31, 2012, certain financial assets at fair value through profit or loss was

sold under repurchase agreements with notional amounts of NT$2,950,500 (US$101,566) thousands. Such repurchase agreements amounting to NT$3,252,317 (US$111,956) thousands was recorded in the account “Securities sold under agreements to repurchase” on the balance sheets. Repurchase agreements entered prior to December 31, 2012 was settled at NT$3,255,003 (US$112,048) thousands prior to March 31, 2013.

(2) Please refer to Note 29 for related information on the above financial assets at fair value

through profit or loss being pledged as collaterals as of December 31, 2012 and 2011. 6. Loans-net

December 31, 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Inward-outward documentary bills $1,764,969 $60,756 $355,418 $11,742 Loans 1,528,758,257 52,625,069 1,498,068,492 49,490,205 Overdrafts 594,231 20,456 497,530 16,436 Delinquent accounts 3,973,372 136,777 3,305,219 109,191

Subtotal 1,535,090,829 52,843,058 1,502,226,659 49,627,574 Adjustment for discounts and premiums 1,097,491 37,779 866,690 28,632 Less: Allowance for bad debts (16,183,267) (557,083) (11,017,947) (363,989)

Total $1,520,005,053 $52,323,754 $1,492,075,402 $49,292,217

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7. Available-for-sale financial assets-net

December 31,

2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Common stock $221,242,107 $7,615,907 $222,412,389 $7,347,618

Beneficiary certificates 4,681,725 161,161 3,483,376 115,077

Exchange traded funds 7,228,313 248,823 7,067,933 233,496

Collateralized loans obligation and

collateralized bonds obligation

7,128,861 245,400 9,997,863 330,289

Government bonds 212,828,175 7,326,271 185,410,287 6,125,216

Corporate bonds 69,980,542 2,408,969 64,235,350 2,122,080

Financial debentures 198,061,710 6,817,959 192,324,937 6,353,648

Overseas financial instruments 521,615,977 17,955,799 633,467,061 20,927,224

Real estate investment trust beneficiary 7,962,682 274,103 9,127,429 301,534

Accumulated impairments (735,000) (25,301) (735,000) (24,281)

Valuation adjustment 34,925,773 1,202,264 9,788,267 323,365

Total $1,284,920,865 $44,231,355 $1,336,579,892 $44,155,266

(1) As of December 31, 2012 and 2011, certain available-for-sale financial assets were sold

under repurchase agreements with notional amounts of NT$15,936,600 (US$548,592) thousands and NT$13,088,400 (US$432,389) thousands, respectively. Such repurchase agreements amounting to NT$17,116,932 (US$589,223) thousands and NT$13,546,462 (US$447,521) thousands, respectively, were recorded in the account “Securities sold under agreements to repurchase” on the balance sheets. Repurchase agreements entered prior to December 31, 2012 and 2011 are settled at NT$17,125,290 (US$589,511) thousands and NT$13,557,277 (US$447,878) thousands, prior to June 30, 2013 and March 31, 2012, respectively.

(2) An impairment provision is recognized as some objective evidences are identified showing

impairment indicators associated with collateralized loans obligation held by Cathay Life. As of December 31, 2012 and 2011, Cathay Life recognized impairment losses amounting to NT$735,000 (US$25,301) thousands and NT$735,000 (US$24,281) thousands, respectively. Cathay Life had reclassified held to maturity financial assets to available-for-sale financial assets in the ended of 2011. Please refer to Note 8 for the reclassification of held-to-maturity financial asset information.

(3) Please refer to Note 29 for related information on the above available-for-sale financial

assets being pledged as collaterals as of December 31, 2012 and 2011.

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8. Held-to-maturity financial assets-net

December 31,

2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Government bonds $962,740 $33,141 $1,275,423 $42,135 Financial debentures 200,000 6,885 200,000 6,607 Overseas financial instruments 23,218,245 799,251 20,480,142 676,582

Total $24,380,985 $839,277 $21,955,565 $725,324

(1) Cathay Life in response to the increase in the financial market fluctuation and downgrade of

the sovereign rating in the recent days, the requirement for investment operating flexibility is increased and it leads to the relevant investment exposures need to be adjusted for a quick response to the market and credit outlook changes. Nevertheless, the investment intention for held-to-maturity financial assets has been changed. In accordance with the R.O.C SFAS No.34 “Financial Instruments: Recognition and Measurement,” held-to-maturity financial assets NT$ 590,598,621 (US$19,511,022) thousands are reclassified to available-for-sale financial assets measured at fair value on December 31, 2011.

(2) Please refer to Note 29 for related information on the above held-to-maturity financial assets

being pledged as collaterals as of December 31, 2012 and 2011. 9. Investments under equity method

December 31,

Investee 2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Cathay Securities Investment Consulting $170,659 $5,875 $161,913 $5,349 Seaward Card 39,752 1,368 39,202 1,295 Cathay Insurance (Bermuda) 101,761 3,503 126,730 4,187 WK Technology Fund VI Co., Ltd 279,441 9,619 336,538 11,118 Vista Technology Venture Capital Corp. 10,533 362 38,265 1,264 Omnitek Venture Capital Corp. 31,694 1,091 63,705 2,104 Taiwan Real-estate Management Corp. 105,357 3,627 98,115 3,241 Taiwan Finance Corp. 1,418,699 48,836 1,405,308 46,426 IBT Venture Capital Corp. 56,435 1,943 77,733 2,568 Cathay Conning Asset Management Ltd. 21,543 742 - -

Subtotal 2,235,874 76,966 2,347,509 77,552 Prepayment for investment-Cathay Conning

Assets Management Ltd.

- - 29,882 987 Less: Unrealized gain from intercompany

transactions

(1,089,548) (37,506) (1,089,548) (35,994)

Total $1,146,326 $39,460 $1,287,843 $42,545

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10. Other financial assets-net

December 31,

2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Derivative financial assets for hedging $2,362,366 $81,321 $3,425,140 $113,153 Financial assets carried at cost 16,744,794 576,413 16,542,000 546,482 Structured time deposits 23,500,000 808,950 13,300,000 439,379 Customer’s margin accounts 595,088 20,485 227,773 7,525 Other miscellaneous financial assets 250,715 8,630 371,664 12,277 Accumulated impairment (1,365,670) (47,011) (1,280,190) (42,292)

Total $42,087,293 $1,448,788 $32,586,387 $1,076,524

(1) As of December 31, 2012 and 2011, Cathay Life recognized impairment losses amounting to

NT$924,434 (US$31,822) thousands and NT$894,058 (US$29,536) thousands, respectively, due to the existence of objective impairment evidence of its investees.

(2) Cathay United Bank has recognized accumulated impairment loss for the equity instruments

in the amount of NT$441,236 (US$15,189) thousands and NT$386,132 (US$12,756) thousands as of December 31, 2012 and 2011, respectively. Due to the existence of objective impairment evidence.

11.Investments in debt securities with no active market

December 31,

2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Preferred stocks $8,481,017 $291,946 $3,091,730 $102,138 Corporate bonds 23,045,586 793,308 16,095,586 531,734 Overseas financial instruments 783,267,255 26,962,728 511,732,752 16,905,608

Subtotal 814,793,858 28,047,982 530,920,068 17,539,480 Less: accumulated impairment (1,652,501) (56,885) (1,941,354) (64,134)

Net balance $813,141,357 $27,991,097 $528,978,714 $17,475,346

(1) A CDO impairment is recognized as objective impairment evidence exists for some overseas

bonds held by Cathay Life. As of December 31, 2012 and 2011, Cathay Life recognized impairment losses amounting to NT$378,768 (US$13,039) thousands and NT$393,770 (US$13,009) thousands, respectively.

(2) Cathay United Bank recognized impairment losses amounting NT$1,167,518 (US$40,190) thousands and NT$1,425,790 (US$47,102) thousands as of December 31, 2012 and 2011, respectively, due to the credit deterioration of certain securitization and financial debentures.

176



Cathay United Bank recognized impairment losses amounting NT$106,215 (US$3,656) thousands and NT$121,794 (US$4,023) thousands as of December 31, 2012 and 2011, respectively, due to the default on certain conversable bonds.

(3) Please refer to Note 29 for related information on the above investments in debt securities

with no active market being pledged as collaterals as of December 31, 2012 and 2011. 12. Investments in real estate

December 31, 2012

Cost Revaluation increment Accumulated depreciation Accumulated impairment Net value

Item (NT$) (US$) (NT$) (US$) (NT$) (US$) (NT$) (US$) (NT$) (US$)

Investments in

real estate

$178,567,661 $6,146,907 $4,329 $149 $(23,901,456) $(822,769) $(140,701) $(4,844) $154,529,833 $5,319,443

Construction 7,519,477 258,846 - - - - - - 7,519,477 258,846

Prepayments

for building

and land

1,581,767 54,450 - - - - - - 1,581,767 54,450

Lease 263,880 9,084 - - (7,516) (259) - - 256,364 8,825

Total $187,932,785 $6,469,287 $4,329 $149 $(23,908,972) $(823,028) $(140,701) $(4,844) $163,887,441 $5,641,564

December 31, 2011

Cost Revaluation increment Accumulated depreciation Accumulated impairment Net value

Item (NT$) (US$) (NT$) (US$) (NT$) (US$) (NT$) (US$) (NT$) (US$)

Investments in

real estate

$162,931,160 $5,382,595 $4,329 $143 $(22,357,900) $(738,616) $(140,701) $(4,648) $140,436,888 $4,639,474

Construction 5,459,223 180,351 - - - - - - 5,459,223 180,351

Prepayments

for building

and land

20,469 676 - - - - - - 20,469 676

Lease 263,880 8,718 - - (6,978) (230) - - 256,902 8,488

Total $168,674,732 $5,572,340 $4,329 $143 $(22,364,878) $(738,846) $(140,701) $(4,648) $146,173,482 $4,828,989

(1) The real estate investments are held mainly for lease business. (2) All the lease agreements of the Company’s lease business are operating leases. The primary

terms of lease agreements are the same with general lease agreement.

177



(3) Rents from real estate investment are received annually, semiannually, quarterly, monthly or

in a lump sum. (4) No investments in real estate were pledged as collaterals as of December 31, 2012 and 2011.

13. Goodwill and intangible assets-net

January 1, 2012 Increase Decrease December 31, 2012

Item (NT$) (US$) (NT$) (US$) (NT$) (US$) (NT$) (US$)

Acquired cost

Goodwill $8,263,272 $284,450 $307,980 $10,602 $- - $8,571,252 $295,052

Computer

software

3,498,841 120,442 196,773 6,774 (142,062) (4,890) 3,553,552 122,326

Land use right 369,220 12,709 - - (14,066) (484) 355,154 12,225

Subtotal 12,131,333 417,601 504,753 17,376 (156,128) (5,374) 12,479,958 429,603

Amortization and

impairment

Amortized (2,438,436) (83,939) (444,886) (15,315) 137,740 4,741 (2,745,582) (94,513)

Book value $9,692,897 $333,662 $59,867 $2,061 $(18,388) $(633) $9,734,376 $335,090

January 1, 2011 Increase Decrease December 31, 2011


Acquired cost

Goodwill $6,673,084 $220,452 $1,590,188 $52,534 $- $- $8,263,272 $272,986

Computer

software

3,490,029 115,297 288,322 9,525 (279,510) (9,234) 3,498,841 115,588

Land use right 355,081 11,730 14,139 467 - - 369,220 12,197

Subtotal 10,518,194 347,479 1,892,649 62,526 (279,510) (9,234) 12,131,333 400,771

Amortization and

impairment

Amortized (2,127,373) (70,280) (463,545) (15,314) 152,482 5,038 (2,438,436) (80,556)

Book value $8,390,821 $277,199 $1,429,104 $47,212 $(127,028) $(4,196) $9,692,897 $320,215

The intangible assets of computer software are amortized using the straight-line method over the estimated useful lifes of three to five years.

178



14. Commercial paper payables

December 31, 2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Commercial paper payable $5,540,000 $190,706 $8,720,000 $288,074 Less: Discount on commercial paper

payable

- - - - Total $5,540,000 $190,706 $8,720,000 $288,074

For the year ended December 31, 2012 and 2011, the average interest rates for the commercial paper payables were 0.74%~0.93% and 0.47 %~ 0.938 %, respectively.

15. Financial liabilities at fair value through profit or loss

December 31, 2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Derivative financial instruments $868,607 $29,900 $303,981 $10,042 Security lending payables hedging 284,579 9,796 399,868 13,210 Security lending payables non-hedging 1,164,536 40,087 958,256 31,657 Valuation adjustment 6,400,980 220,344 21,474,038 709,417

Total $8,718,702 $300,127 $23,136,143 $764,326

(1) On July 8 and July 15, 2004, Cathay United Bank issued five-year to seven-year dominant

financial debentures amounting to NT$1,000,000 (US$34,423) thousands, NT$3,500,000 (US$120,482) thousands, NT$2,000,000 (US$68,847) thousands, and NT$1,000,000 (US$34,423) thousands, respectively, with floating interest rates, inverse floating interest rates or specific structure rates. These dominant financial debentures are repaid at maturity, and the interest is paid quarterly or semi-annually. On November 10, November 25, November 26, December 9, December 10, December 22, December 23 and December 29, 2004, and on January 14 and February 22, 2005, Cathay United Bank issued five-year to seven-year dominant financial debentures amounting to NT$2,500,000 (US$86,059) thousands, NT$1,500,000 (US$51,635) thousands, NT$1,500,000 (US$51,635) thousands, NT$2,500,000 (US$86,059) thousands, NT$1,500,000 (US$51,635) thousands, NT$2,500,000 (US$86,059) thousands, NT$1,000,000 (US$34,423) thousands and NT$1,000,000 (US$34,423) thousands, NT$2,000,000 (US$68,847) thousands, NT$1,500,000 (US$51,635) thousands, respectively, with fixed interest rates. These dominant financial debentures are repaid at maturity and the interests are paid quarterly. These dominant financial debentures are matured before December 31, 2011.

179



(2) These dominant financial debentures are senior in priority to the subordinated financial

debentures and common shares, but are equal to other debts of Cathay United Bank.

16. Deposits

December 31,

2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Check deposits $15,960,965 $549,431 $14,256,906 $470,991

Demand deposits 250,331,641 8,617,268 224,538,902 7,417,869

Demand savings deposits 576,919,684 19,859,542 559,952,874 18,498,609

Time deposits 613,815,928 21,129,636 615,086,850 20,320,015

Remittances 1,559,758 53,692 586,296 19,369

Total $1,458,587,976 $50,209,569 $1,414,421,828 $46,726,853

17. Bonds payable

December 31,

2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Subordinated bonds payable-net $40,000,000 $1,376,936 $40,000,000 $1,321,440

Convertible bonds 7,412,199 255,153 - -

Subordinated financial debentures 41,438,544 1,426,456 34,724,925 1,147,173

Discount in financial debentures (23,666) (815) (32,218) (1,064)

Discount in convertible bonds (99,823) (3,436) - -

Valuation adjustment 1,103,753 37,995 1,331,118 43,975

Total $89,831,007 $3,092,289 $76,023,825 $2,511,524

(1) To strengthen the financial structure, with the approval (No.1010016452) of financial

supervisory commission, the Company issued the secondary Euro-Convertible bonds at Singapore Exchange Limited. The following are the main clauses of issuance:

A. The total amount of issuance: US$254,400 thousand. B. The amount of par-value and the price of issuance: each par-value is US$200, issued by

fully par-value. C. Coupon rate: The annual interest rate is zero percentage. D. The period of outstanding: From August 14, 2012 to August 14, 2014.

180



E. The method of redemption :

(a) From August 15, 2013 to the due date, if the closing price, transferred into US currency at certain exchange rate, of common stock issued at Taiwan Stock Exchange Corporation over 120% of the amount generated from the amount of call provision divided by ratio of conversion (the ratio after par value of bonds payable is divided by price conversion at that date) within contiguous 20 operating days; The Company are entitled to notify the holders of bonds payable that the Company will fully redeem the bonds payable, partly redemption is not allowed, by the par value, plus the interest calculated by annual rate(0.25%).

(b) The company is entitled to redeem all of the bonds payable with the price of call

provision when the value of redemption or cancellation prior to due date is over ninety percent of bonds payable.

(c) The company is entitled to redeem all of the bonds payable with the price of call

provision, if our cost rises up due to the change of R.O.C Taxes. (d) The holders of the bonds payable are able to ask the Company to redeem fully or

partly of bonds payable with the price of call provision, if the Company’s common stock issued at Taiwan Stock Exchange Corporation is delisting or is prohibited to trade in market continuously thirty days or more.

(e) The holders of the bonds payable are able to ask the Company to redeem fully or

partly of bonds payable with the price of call provision, if the change of controlling right specified in the entrusted contract.

F. The redemption at the due date: Unless prior to due date, the Company redeem bonds

payable by par-value adding to annual interest rate, point twenty five percentage of rate of return.

(a) The situation that the holders of bonds payable or the Company exercise the right of

conversion. (b) The holders of bonds payable already executed the conversion of bonds payable. (c) The Company redeemed or repurchased and retired our outstanding bonds payable.

181



G. The treatment of conversion:

(a) Objective of conversion: Common stock of the Company (b) The period of conversion: The holders of bonds payable are able to convert bonds

payable into issued common stock from September 24, 2012 to August 4, 2014. (c) The price of conversion was set to NT$38.10 per share. The exchange rate used when

conversion is 1:29.938. The conversing price is adjusted by the formula specified in issuance treatment, if events identified in clause of issuance occurred related to the Company’s common stock.

The Company separated the amount of bonds payable into the right of conversion and liability component when issued convertible bonds payable based on ROC GAAP No.36. The carrying amount of Additional-Paid-In-Capital-stock warrants is NT$87,973 (US$3,028) thousands (already reduced allocated amount of cost of issuance (NT$455 (US$16) thousands)). According to R.O.C GAAP No.34” Financial Instruments: Recognition and Measurement” and No.36” Financial Instruments: Disclosure and Presentation”, the secondary Euro-Convertible bonds issued by the Company recognized the discount amortization expense of bonds payable which is NT$23,352 (US$804) thousands in the year, 2012. The loss on valuation of financial liabilities is recorded as NT$182,862 (US$6,295) thousands, which is separately recorded under items between “Interest Expense” and “Loss on valuation of trading financial assets”. Until December 31, 2012, none of holder of bonds payable exercised the right of conversion.

(2) Cathay United Bank issued a 15-year US$500,000 thousands subordinated financial

debenture with a stated interest rate of 5.5% on October 5, 2005, and the interest is payable semiannually. Cathay United Bank can redeem the bond after 10 years by exercising the call option. Cathay United Bank has adopted hedge accounting to account for its subordinated financial debentures. Cathay United Bank has bought back the bonds amounting to US$172,620 thousands on May 12, 2009.

(3) Cathay United Bank issued a ten-year subordinated financial debenture totaling

NT$5,600,000 (US$192,771) thousands with a stated interest rate of 1.65% in August 2011, and the interest is payable quarterly.

182




NT$4,200,000 (US$144,578) thousands with a stated interest rate of 1.65% in June 2011, and the interest is payable annually.

(5) Cathay United Bank issued a ten-year subordinated financial debentures totaling

NT$200,000 (US$6,885) thousands with a stated interest rate of 1.48% in June 2011, and the interest is payable annually.


NT$2,500,000 (US$86,059) thousands with a stated interest rate of 1.72% in June 2011, and the interest is payable quarterly.

(7) Cathay United Bank issued a seven-year subordinated financial debenture totaling



NT$1,500,000 (US$51,635) thousands with a stated interest rate of 1.72% in March 2011, and the interest is payable quarterly.

(9) Cathay United Bank issued a seven-year subordinated financial debenture totaling

NT$3,850,000 (US$132,530) thousands with a stated interest rate of 1.65% in March 2011, and the interest is payable quarterly.

(10) On September 16, 2009, the Company issued a seven-year subordinated bond totaling

NT$20,000,000 (US$688,468) thousands with a stated interest rate of 2.65%. The subordinated bonds and repayable at maturity and the interest is payable annually.


NT$1,500,000 (US$51,635) thousands with a stated interest rate of 2.60% in July 2009, and the interest is payable quarterly.

(12) Cathay United Bank issued an eight-year subordinated financial debenture totaling


(13) On December 8, 2008, the Company issued a seven-year subordinated bond totaling

NT$20,000,000 (US$688,468) thousands with a stated interest rate of 3.10%. The subordinated bonds and repayable at maturity and the interest is payable annually.

183



(14) Cathay United Bank issued a seven-year subordinated financial debentures totaling

NT$2,800,000 (US$96,386) thousands with a stated interest rate of 2.95% in October 2008 and the interest is payable quarterly.


NT$1,000,000 (US$34,423) thousands with a floating interest rate in September 2008 and the interest is payable quarterly.


NT$1,200,000 (US$41,308) thousands with a stated interest rate of 2.95% in September 2008 and the interest is payable quarterly.

(17) Each subordinated financial debentures has a lower priority claim on assets and income than

other debts. That is, its principal and interest are repayable only after more senior debt with higher priority has been satisfied. These subordinated financial debentures are, however, more senior to common stock.

(18) Indovina Bank issued a two-year subordinated financial debentures totaling

VND$2,000,000,000 thousands in 2010 with the first year interest rate of 13.50% and the second year interest rate of average interest rate of VND deposit plus 2.50%.

18. Other financial liabilities

December 31,

2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Borrowed funds $85,500 $2,943 $135,518 $4,477

Principle received from the sale of structured

products 17,340,691 596,926 10,475,555 346,070

Total $17,426,191 $599,869 $10,611,073 $350,547

19. Reserve for operations and liabilities

December 31,

2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Reserve for insurance business $3,117,652,064 $107,320,209 $2,822,602,471 $93,247,521

Reserves for losses on guarantees 24,892 857 24,892 822

Total $3,117,676,956 $107,321,066 $2,822,627,363 $93,248,343

184



(1) Life insurance subsidiaries

A. Cathay Life

a. Reserve for life insurance liabilities:

December 31, 2012

(NT$)

December 31, 2011

(NT$)

Insurance contract

Financial

instruments with

discretionary

participation

feature Total Insurance contract

Financial

instruments with

discretionary

participation

feature Total

Life insurance $2,540,691,009 $44,435,855 $2,585,126,864 $2,262,171,695 $44,410,268 $2,306,581,963

Injury insurance 7,888,169 - 7,888,169 7,663,561 - 7,663,561

Health insurance 270,513,728 - 270,513,728 228,602,480 - 228,602,480

Annuity insurance 1,226,217 124,300,017 125,526,234 1,468,242 149,221,880 150,690,122

Investment-linked

insurance 1,059,809 - 1,059,809 1,217,774 - 1,217,774

Recover from major

incident reserve

63,292 - 63,292

-

-

-

Total $2,821,442,224 $168,735,872 $2,990,178,096 $2,501,123,752 $193,632,148 $2,694,755,900

December 31, 2012

(US$)

December 31, 2011

(US$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total

Life insurance $87,459,243 $1,529,634 $88,988,877 $74,733,125 $1,467,138 $76,200,263

Injury insurance 271,538 - 271,538 253,174 - 253,174

Health insurance 9,312,004 - 9,312,004 7,552,114 - 7,552,114

Annuity insurance 42,211 4,278,830 4,321,041 48,505 4,929,695 4,978,200

Investment-linked

insurance

36,482 - 36,482 40,230 - 40,230

Recover from major

incident reserve

2,179 - 2,179 - - -

Total $97,123,657 $5,808,464 $102,932,121 $82,627,148 $6,396,833 $89,023,981

185



Reserve for life insurance liabilities is summarized below:

For the year ended December 31, 2012

(NT$)


(NT$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total

Beginning balance $2,501,123,752 $193,632,148 $2,694,755,900 $2,254,981,751 $241,995,513 $2,496,977,264

Reserve 466,361,698 1,012,224 467,373,922 399,124,484 7,788,150 406,912,634

Recover (140,671,956) (25,790,701) (166,462,657) (156,150,107) (56,357,179) (212,507,286)

(Gains) losses on

foreign exchange

(5,371,270) (117,799) (5,489,069) 3,167,624 205,664 3,373,288

Ending Balance $2,821,442,224 $168,735,872 $2,990,178,096 $2,501,123,752 $193,632,148 $2,694,755,900


(US$)


(US$)

Insurance contract

Financial

instruments with

discretionary

participation

Feature Total Insurance contract

Financial

instruments with

discretionary

participation

feature Total

Beginning balance $86,097,203 $6,665,479 $92,762,682 $74,495,598 $7,994,566 $82,490,164

Reserve 16,053,759 34,844 16,088,603 13,185,480 257,290 13,442,770

Recover (4,842,408) (887,804) (5,730,212) (5,158,576) (1,861,817) (7,020,393)

(Gains) losses on

foreign exchange

(184,897) (4,055) (188,952) 104,646 6,794 111,440

Ending Balance $97,123,657 $5,808,464 $102,932,121 $82,627,148 $6,396,833 $89,023,981

186



b. Unearned premium reserve:

December 31, 2012

(NT$)

December 31, 2011

(NT$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total

Individual life

insurance

$286,321 $- $286,321 $209,502 $4 $209,506

Individual injury

insurance

4,528,407 - 4,528,407 4,346,188 - 4,346,188

Individual health

insurance

6,135,137 - 6,135,137 5,762,270 - 5,762,270

Group insurance 780,294 - 780,294 1,579,244 - 1,579,244

Investment-linked

insurance

118,616 - 118,616 120,773 - 120,773

Total 11,848,775 - 11,848,775 12,017,977 4 12,017,981

Less ceded unearned premium reserve:

Individual life

insurance

3,686,613 - 3,686,613 2,513,030 - 2,513,030

Individual injury

insurance

4,690,419 - 4,690,419 4,807,267 - 4,807,267

Group insurance 89 - 89 826 - 826

Investment-linked

insurance

- - - 1,289,194 - 1,289,194

Total 8,377,121 - 8,377,121 8,610,317 - 8,610,317

Net $3,471,654 $- $3,471,654 $3,407,660 $4 $3,407,664

187



December 31, 2012

(US$)

December 31, 2011

(US$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total

Individual life

insurance

$9,856 $- $9,856 $6,921 $- $6,921

Individual injury

insurance

155,883 - 155,883 143,581 - 143,581

Individual health

insurance

211,192 - 211,192 190,362 - 190,362

Group insurance 26,861 - 26,861 52,172 - 52,172

Investment-linked

insurance

4,083 - 4,083 3,990 - 3,990

Total 407,875 - 407,875 397,026 - 397,026


Individual life

insurance

126,906 - 126,906 83,021 - 83,021

Individual injury

insurance

161,460 - 161,460 158,813 - 158,813


Investment-linked

insurance

- - - 42,590 - 42,590

Total 288,369 - 288,369 284,451 - 284,451

Net $119,506 $- $119,506 $112,575 $- $112,575

188



Unearned premium reserve is summarized below:


(NT$)


(NT$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total

Beginning balance $12,017,977 $4 $12,017,981 $11,743,204 $2 $11,743,206

Reserve 11,848,775 - 11,848,775 12,017,977 4 12,017,981

Recover (12,017,977) (4) (12,017,981) (11,743,204) (2) (11,743,206)

Ending Balance 11,848,775 - 11,848,775 12,017,977 4 12,017,981


Beginning balance-net 8,610,317 - 8,610,317 6,263,909 - 6,263,909

Increase 1,283 - 1,283 2,413,153 - 2,413,153

Decrease (234,479) - (234,479) (66,745) - (66,745)

Total 8,377,121 - 8,377,121 8,610,317 - 8,610,317

Ending Balance-Net $3,471,654 $- $3,471,654 $3,407,660 $4 $3,407,664


(US$)


(US$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total

Beginning balance $413,700 $- $413,700 $387,949 $- $387,949

Reserve 407,875 - 407,875 397,026 - 397,026

Recover (413,700) - (413,700) (387,949) - (387,949)

Ending Balance 407,875 - 407,875 397,026 - 397,026


Beginning balance-net 296,396 - 296,396 206,935 - 206,935

Increase 44 - 44 79,721 - 79,721

Decrease (8,071) - (8,071) (2,205) - (2,205)

Total 288,369 - 288,369 284,451 - 284,451

Ending Balance-Net $119,506 $- $119,506 $112,575 $- $112,575

189



c. Reserve for claims:

December 31, 2012

(NT$)

December 31, 2011

(NT$)

Insurance

contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total

Individual life insurance

－Reported but not paid

claim

$105,856 $797 $106,653 $139,018 $3,242 $142,260

－Unreported claim 49,750 - 49,750 33,877 - 33,877

Individual injury insurance


claim

147,062 - 147,062 192,822 - 192,822

－Unreported claim 1,024,487 - 1,024,487 789,273 - 789,273

Individual health insurance


claim

124,100 - 124,100 116,876 - 116,876

－Unreported claim 1,535,223 - 1,535,223 1,321,690 - 1,321,690

Group insurance


claim

36,141 - 36,141 18,972 - 18,972

－Unreported claim 1,124,644 - 1,124,644 1,252,450 - 1,252,450

Investment-linked insurance


claim

4,210 - 4,210 10,510 - 10,510

Total 4,151,473 797 4,152,270 3,875,488 3,242 3,878,730

Less ceded reserve for claims:

Individual injury insurance 780,831 - 780,831 549,591 - 549,591

Net $3,370,642 $797 $3,371,439 $3,325,897 $3,242 $3,329,139

190



December 31, 2012

(US$)

December 31, 2011

(US$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total



claim

$3,644 $27 $3,671 $4,593 $107 $4,700




claim

5,062 - 5,062 6,370 - 6,370




claim

4,272 - 4,272 3,861 - 3,861


Group insurance


claim

1,244 - 1,244 627 - 627


Investment-linked insurance


claim

145 - 145 347 - 347

Total 142,908 27 142,935 128,031 107 128,138


Individual injury insurance 26,879 - 26,879 18,156 - 18,156

Net $116,029 $27 $116,056 $109,875 $107 $109,982

191



Reserve for claims is summarized below:


(NT$)


(NT$)

Insurance contract

Financial

instruments with

discretionary

participation feature Total Insurance contract

Financial

instruments with

discretionary

participation feature Total

Beginning balance $3,875,488 $3,242 $3,878,730 $3,444,087 $211 $3,444,298

Reserve 4,151,480 797 4,152,277 3,875,488 3,242 3,878,730

Recover (3,875,488) (3,242) (3,878,730) (3,444,087) (211) (3,444,298)

Gains on foreign exchange (7) - (7) - - -

Ending balance 4,151,473 797 4,152,270 3,875,488 3,242 3,878,730


Beginning balance-Net 549,591 - 549,591 497,707 - 497,707

Increase 231,240 - 231,240 51,884 - 51,884

Total 780,831 - 780,831 549,591 - 549,591

Net $3,370,642 $797 $3,371,439 $3,325,897 $3,242 $3,329,139


(US$)


(US$)

Insurance contract

Financial

instruments with

discretionary

participation feature Total Insurance contract

Financial

instruments with

discretionary

participation feature Total

Beginning balance $133,408 $112 $133,520 $113,779 $7 $113,786

Reserve 142,908 27 142,935 128,031 107 128,138

Recover (133,408) (112) (133,520) (113,779) (7) (113,786)

Gains on foreign exchange - - - - - -

Ending balance 142,908 27 142,935 128,031 107 128,138


Beginning balance-Net 18,919 - 18,919 16,442 - 16,442

Increase 7,960 - 7,960 1,714 - 1,714

Total 26,879 - 26,879 18,156 - 18,156

Net $116,029 $27 $116,056 $109,875 $107 $109,982

192



d. Special reserve:

December 31, 2012

(NT$)

December 31, 2011

(NT$)

Insurance

contract

Financial

instruments

with

discretionary

participation

feature Other Total

Insurance

contract

Financial

instruments

with

discretionary

participation

feature Other Total

Statutory special reserve：

Individual life insurance $62,075 $- $- $62,075 $121,785 $- $- $121,785

Individual injury

insurance

1,102,231 - - 1,102,231 2,336,788 - - 2,336,788

Individual health

insurance

1,829,374 - - 1,829,374 3,728,497 - - 3,728,497

Group insurance 1,384,203 - - 1,384,203 2,835,742 - - 2,835,742

Participating policies

dividends reserve

1,971 - - 1,971 227 - - 227

Total $4,379,854 $- $- $4,379,854 $9,023,039 $- $- $9,023,039

December 31, 2012

(US$)

December 31, 2011

(US$)

Insurance

contract

Financial

instruments

with

discretionary

participation

feature Other Total

Insurance

contract

Financial

instruments

with

discretionary

participation

feature Other Total

Statutory special reserve：


Individual injury

insurance

37,943 - - 37,943 77,198 - - 77,198

Individual health

insurance

62,973 - - 62,973 123,174 - - 123,174

Group insurance 47,649 - - 47,649 93,682 - - 93,682

Participating policies

dividends reserve

68 - - 68 7 - - 7

Total $150,770 $- $- $150,770 $298,085 $- $- $298,085

193



Special reserve is summarized below:


(NT$)


(NT$)

Insurance

contract

Financial

instruments with

discretionary

participation

feature Other Total

Insurance

contract

Financial

instruments with

discretionary

participation

feature Other Total

Beginning balance $9,023,039 $- $- $9,023,039 $10,556,945 $- $- $10,556,945

Reserves for major incidents over 15

years

(63,292) - - (63,292) (169,922) - - (169,922)

Actual claims payment less offsets of

reserves for major incidents exceed

expected claims payment

(18,925) - - (18,925) (769,214) - - (769,214)

Accumulated provision for special

reserves for fluctuation of risks is

more than 30 percent of the retained

earned premium for the current year

(51,306) - - (51,306) (594,997) - - (594,997)

Reserves for participating policies

dividends reserve

2,065 - - 2,065 1,401 - - 1,401

Recovery from participating policies

dividends reserve

(321) - - (321)

(285) - - (285)

Reserves dividends risk reserve - - - - (889) - - (889)

Reclassify to foreign exchange

volatility reserve

(4,511,406) - - (4,511,406) - - - -

Ending balance $4,379,854 $- $- $4,379,854 $9,023,039 $- $- $9,023,039

194




(US$)


(US$)

Insurance

contract

Financial

instruments with

discretionary

participation

feature Other Total

Insurance

contract

Financial

instruments with

discretionary

participation

feature Other Total

Beginning balance $310,604 $- $- $310,604 $348,759 $- $- $348,759

Reserves for major incidents over 15

years

(2,179) - - (2,179)

(5,614) - - (5,614)




(651) - - (651)

(25,412) - - (25,412)

Accumulated provision for special

reserves for fluctuation of risks is

more than 30 percent of the retained

earned premium for the current year

(1,766) - - (1,766)

(19,656) - - (19,656)

Reserves for participating policies

dividends reserve

71 - - 71

46 - - 46

Recovery from participating policies

dividends reserve

(11) - - (11)

- - - -

Participating policies dividends reserve - - - - (9) - - (9)

Reserves dividends risk reserve - - - - (29) - - (29)

Reclassify to foreign exchange

volatility reserve

(155,298) $- $- (155,298)

- - - -

Ending balance $150,770 $ $ $150,770 $298,085 $- $- $298,085

e. Special surplus (Special reserves for major incidents and special reserve for fluctuation

of risks)：

December 31, 2012

(NT$)

December 31, 2011

(NT$)

Insurance

contract

Financial

instruments

with

discretionary

participation

feature Other Total

Insurance

contract

Financial

instruments

with

discretionary

participation

feature Other Total


Individual injury insurance 279,581 - - 279,581 157,782 - - 157,782

Individual health insurance 842,680 - - 842,680 509,244 - - 509,244

Group insurance 711,767 - - 711,767 55,463 - - 55,463

Total $1,861,678 $- $- $1,861,678 $741,951 $- $- $741,951

195



December 31, 2012

(US$)

December 31, 2011

(US$)

Insurance

contract

Financial

instruments

with

discretionary

participation

feature Other Total

Insurance

contract

Financial

instruments

with

discretionary

participation

feature Other Total

Individual life insurance $952 $- $- $952 $644 $- $- $644

Individual injury insurance 9,624 - - 9,624 5,212 - - 5,212

Individual health insurance 29,008 - - 29,008 16,823 - - 16,823

Group insurance 24,501 - - 24,501 1,832 - - 1,832

Total $64,085 $- $- $64,085 $24,511 $- $- $24,511

f. Premium deficiency reserve:

December 31, 2012

(NT$)

December 31, 2011

(NT$)

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total

Individual life insurance $16,389,516 $- $16,389,516 $12,872,878 $- $12,872,878

Individual health insurance 690,546 - 690,546 673,880 - 673,880

Group insurance 41,573 - 41,573 52,969 - 52,969

Total $17,121,635 $- $17,121,635 $13,599,727 $- $13,599,727

December 31, 2012

(US$)

December 31, 2011

(US$)

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total

Individual life insurance $564,183 $- $564,183 $425,269 $- $425,269


Group insurance 1,431 - 1,431 1,750 - 1,750

Total $589,385 $- $589,385 $449,281 $- $449,281

196



Premium deficiency reserve is summarized below:


(NT$)


(NT$)

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total

Beginning balance $13,599,727 $- $13,599,727 $10,064,101 $- $10,064,101

Reserve 3,754,578 - 3,754,578 3,366,593 - 3,366,593

Recover - - - - - -

Gains on foreign exchange (232,670) - (232,670) 169,033 - 169,033

Ending balance $17,121,635 $- $17,121,635 $13,599,727 $- $13,599,727


(US$)


(US$)

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total


Reserve 129,245 - 129,245 111,219 - 111,219

Recover - - - - - -

Gains on foreign exchange (8,009) - (8,009) 5,584 - 5,584

Ending balance $589,385 $- $589,385 $449,281 $- $449,281

g. Liability adequacy reserve

December 31, 2012 (NT$) December 31, 2012 (US$) Insurance contract and

financial instruments with discretionary participation

feature

Insurance contract and financial instruments with discretionary participation

feature Reserve for life insurance liabilities $2,990,178,096 $102,932,121 Unearned premium reserve 11,848,775 407,875 Premium deficiency reserve 17,121,635 589,385 Total $3,019,148,506 $103,929,381 Book value of insurance liabilities $3,019,148,506 $103,929,381 Estimated present value of cash flows $2,174,379,434 $74,849,550 Balance of liability adequacy reserve $- $-

197





feature


feature Reserve for life insurance liabilities $2,694,755,900 $89,023,981 Unearned premium reserve 12,017,981 397,026 Premium deficiency reserve 13,599,727 449,281 Total $2,720,373,608 $89,870,288

Book value of insurance liabilities $2,720,373,608 $89,870,288

Estimated present value of cash flows $2,368,148,220 $78,234,167

Balance of liability adequacy reserve $- $-

Note 1: Shown by liability adequacy test range (integrated contract). Note 2: Reserve for claims and special reserve are not included in liability adequacy

test. Reserve for claim is determined based on claims incurred before valuation date (December 31, 2012 and 2011, respectively), therefore, not included in the test.

Note 3: There are no instances of merge or transfer of insurance contract portfolio for

Cathay Life. As such, the book value of related intangible assets shall not be deducted from book value of insurance liability for liability adequacy reserve test.

Liability adequacy testing methodology are listed as follows:

December 31, 2012 Test method Gross premium valuation method (GPV) Groups Integrated testing Assumptions (1) Information of policies: Include insurance contracts and financial

instruments with discretionary participation feature as of December 31, 2012.

(2) Discount rate: Under assets allocation plan of current semi-annual report,

discount rates are calculated using the best estimated scenario investment return based on actuary report of 2011, with neutral assumption for discount rates after 30 years (after 2042).

198





(2) Discount rate: Under assets allocation plan of current semi-annual report,

discount rates are calculated using the best estimated scenario investment return based on actuary report of 2010, with neutral assumption for discount rates after 30 years (after 2041).

h. Reserve for insurance contract with feature of financial instruments:

Cathay Life issues non-investment-linked insurance contract without discretionary participation feature of financial instruments. As of December 31, 2012 and 2011 reserve for insurance contract with feature of financial instruments are summarized below:

December 31, 2012 2011 (NT$) (US$) (NT$) (US$) Life insurance $56,461,371 $1,943,593 $60,624,750 $2,002,800


(NT$)


(NT$) Beginning balance $60,624,750 $55,083,796 Premiums (return) receipt this period (5,532) 6,757,906 Insurance claim payments this period (5,118,417) (2,214,416) Net provision of statutory reserve this period 960,570 997,464 Ending balance $56,461,371 $60,624,750


(US$)


(US$) Beginning balance $2,086,910 $1,819,749 Premiums (return) receipt this period (190) 223,254 Insurance claim payments this period (176,193) (73,155) Net provision of statutory reserve this period 33,066 32,952 Ending balance $1,943,593 $2,002,800

199



B. Cathay Life (China)

a. Reserve for life insurance liabilities:

December 31, 2012

(NT$)

December 31, 2011

(NT$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total

Life insurance $2,875,460 $- $2,875,460 $2,417,929 $- $2,417,929

Health insurance 58,989 - 58,989 44,343 - 44,343

Investment-linked

insurance 50,436 - 50,436 19,226 - 19,226

Total $2,984,885 $- $2,984,885 $2,481,498 $- $2,481,498

December 31, 2012

(US$)

December 31, 2011

(US$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total

Life insurance $98,983 $- $98,983 $79,879 $- $79,879

Health insurance 2,031 - 2,031 1,465 - 1,465

Investment-linked

insurance 1,736 - 1,736 635 - 635

Total $102,750 $- $102,750 $81,979 $- $81,979

Reserve for life insurance liabilities are summarized below:


(NT$)


(NT$)

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total

Beginning balance $2,481,498 $- $2,481,498 $3,083,702 $- $3,083,702

Reserve 955,020 - 955,020 1,007,504 - 1,007,504

Recover (377,675) - (377,675) (1,837,146) - (1,837,146)

(Gains) losses on foreign

exchange

(73,958) - (73,958)

227,438 - 227,438

Ending Balance $2,984,885 $- $2,984,885 $2,481,498 $- $2,481,498

200




(US$)


(US$)

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total


Reserve 32,875 - 32,875 33,284 - 33,284

Recover (13,001) - (13,001) (60,692) - (60,692)


exchange (2,546) - (2,546)

7,514 -

7,514

Ending Balance $102,750 $- $102,750 $81,979 $- $81,979


December 31, 2012

(NT$)

December 31, 2011

(NT$)

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total

Individual injury insurance $6,787 $- $6,787 $8,653 $- $8,653

Individual health insurance 624 - 624 682 - 682

Group insurance 245,310 - 245,310 229,383 - 229,383

Total 252,721 - 252,721 238,718 - 238,718


Individual life insurance 61 - 61 62 - 62

Individual injury insurance 66 - 66 68 - 68


Group insurance 4,171 - 4,171 4,280 - 4,280

Total 7,160 - 7,160 7,347 - 7,347

Net $245,561 $- $245,561 $231,371 $- $231,371

201



December 31, 2012

(US$)

December 31, 2011

(US$)

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total

Individual injury insurance $234 $- $234 $286 $- $286


Group insurance 8,444 - 8,444 7,578 - 7,578

Total 8,700 - 8,700 7,886 - 7,886


Individual life insurance 2 - 2 2 - 2

Individual injury insurance 2 - 2 2 - 2



Total 246 - 246 242 - 242

Net $8,454 $- $8,454 $7,644 $- $7,644



(NT$)


(NT$)

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total


Reserve 269,698 - 269,698 206,999 - 206,999

Recover (248,736) - (248,736) (198,970) - (198,970)

(Gains) losses on foreign exchange (6,959) - (6,959) 19,200 - 19,200

Ending Balance 252,721 - 252,721 238,718 - 238,718



Increase 24 - 24 - - -

(Gains) losses on foreign exchange (211) - (211) 598 - 598

Total 7,160 - 7,160 7,347 - 7,347

Ending Balance-net $245,561 $- $245,561 $231,371 $- $231,371

202




(US$)


(US$)

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total


Reserve 9,284 - 9,284 6,838 - 6,838

Recover (8,562) - (8,562) (6,573) - (6,573)


Ending Balance 8,700 - 8,700 7,886 - 7,886


Beginning balance-net 253 - 253 223 - 223

Increase - - - - - -


Total 246 - 246 242 - 242

Ending Balance-net $8,454 $- $8,454 $7,644 $- $7,644


December 31, 2012

(NT$)

December 31, 2011

(NT$)

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total


－Reported but not paid claim $2,899 $- $2,899 $19 $- $19



－Reported but not paid claim 3,613 - 3,613 2,509 - 2,509

－Unreported claim 3,020 - 3,020 286 - 286


－Reported but not paid claim 3,285 - 3,285 499 - 499


Group insurance

－Reported but not paid claim 66,165 - 66,165 21,878 - 21,878


Total 396,449 - 396,449 420,564 - 420,564


Individual health insurance 523 - 523 1,178 - 1,178

Net $395,926 $- $395,926 $419,386 $- $419,386

203



December 31, 2012

(US$)

December 31, 2011

(US$)

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total

Insurance

contract

Financial

instruments with

discretionary

participation

feature Total


－Reported but not paid claim $100 $- $100 $1 $- $1

－Unreported claim 81 - 81 70 - 70


－Reported but not paid claim 124 - 124 83 - 83



－Reported but not paid claim 113 - 113 16 - 16


Group insurance

－Reported but not paid claim 2,278 - 2,278 723 - 723


Total 13,648 - 13,648 13,894 - 13,894



Net $13,630 $- $13,630 $13,855 $- $13,855



(NT$)


(NT$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total


Reserve 743,155 - 743,155 520,001 - 520,001

Recover (755,230) - (755,230) (338,925) - (338,925)


exchange

(12,040) - (12,040) 28,732 - 28,732

Ending balance 396,449 - 396,449 420,564 - 420,564




Decrease (624) - (624) - - -


exchange

(31) - (31) 96 - 96

Total 523 - 523 1,178 - 1,178

Net $395,926 $- $395,926 $419,386 $- $419,386

204




(US$)


(US$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total


Reserve 25,582 - 25,582 17,179 - 17,179

Recover (25,997) - (25,997) (11,197) - (11,197)


exchange

(414)

- (414)

949

-

949

Ending balance 13,648 - 13,648 13,894 - 13,894


Beginning balance-net 40 - 40 36 - 36


Decrease (21) - (21) - - -


exchange

(1)

- (1)

3

-

3

Total 18 - 18 39 - 39

Net $13,630 $- $13,630 $13,855 $- $13,855

d. Liability adequacy reserve



feature


feature Reserve for life insurance

liabilities $2,984,885 $102,750 Unearned premium reserve 252,721 8,700 Total $3,237,606 $111,450 Book value of insurance liabilities $3,237,606 $111,450 Estimated present value of cash

flows $2,319,570 $79,848 Balance of liability adequacy

reserve $- $-

205





feature


feature Reserve for life insurance

liabilities $2,481,498 $81,979 Unearned premium reserve 238,718 7,886 Total $2,720,216 $89,865 Book value of insurance liabilities $2,720,216 $89,865 Estimated present value of cash

flows $2,312,185 $76,385 Balance of liability adequacy

reserve $- $-

Note 1: Shown by liability adequacy test range (integrated contract).

Note 2: Reserve for claims is not included in liability adequacy test. Reserve for claims is determined based on claims incurred before valuation date (December 31, 2012 and 2011, respectively); therefore, is not included in the test.


Cathay Life (China). As such, the book value of related intangible assets shall not be deducted from book value of insurance liability for liability adequacy reserve test.

Liability adequacy testing methodology are listed as follows:



(2) Discount rate: Discount rates are calculated using the best estimated

scenario investment return based on actuary report of 2011 with neutral assumption for discount rates after 30 years.

206





(2) Discount rate：Under assets allocation plan of annual report of 2010,

discount rates are calculated using the best estimated scenario investment return based on actuary report of 2009.

e. Reserve for insurance contract with feature of financial instruments:

Cathay Life (China) issues non-investment-linked insurance contract without discretionary participation feature of financial instruments. As of December 31, 2012 and 2011 reserve for insurance contract with feature of financial instruments are summarized below:

December 31, 2012 2011 (NT$) (US$) (NT$) (US$) Life insurance $4,889,501 $168,313 $6,259,962 $206,804


(NT$)


(NT$) Beginning balance $6,259,962 $5,518,921 Premiums receipt this period 1,248,957 76,026 Insurance claim payments this period (704,024) (322,325) Net provision of statutory reserve this period (1,740,740) 484,711 (Gains) losses on foreign exchange (174,654) 502,629 Ending balance $4,889,501 $6,259,962


(US$)


(US$) Beginning balance $215,489 $182,323 Premiums receipt this period 42,993 2,511 Insurance claim payments this period (24,235) (10,648) Net provision of statutory reserve (recover)

this period (59,922) 16,013 (Gains) losses on foreign exchange (6,012) 16,605 Ending balance $168,313 $206,804

207



C. Cathay Life (Vietnam)

a. Reserve for life insurance liabilities: December 31, 2012

(NT$)

December 31, 2011

(NT$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total

Life insurance $299,490 $- $299,490 $231,165 $- $231,165

Investment-linked

insurance

9 - 9 - - -

Total $299,499 $- $299,499 $231,165 $- $231,165

December 31, 2012

(US$)

December 31, 2011

(US$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total

Life insurance $10,309 $- $10,309 $7,637 $- $7,637

Investment-linked

insurance

- - - - - -

Total $10,309 $- $10,309 $7,637 $- $7,637

Reserve for life insurance liabilities are summarized below:


(NT$)


(NT$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total


Reserve 77,228 - 77,228 115,585 - 115,585

Recover - - - - - -

Gains on foreign

exchange

(8,894) - (8,894)

(2,851) -

(2,851)

Ending Balance $299,499 $- $299,499 $231,165 $- $231,165

208




(US$)


(US$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total


Reserve 2,658 - 2,658 3,818 - 3,818

Recover - - - - - -

Gains on foreign

exchange (306) - (306) (94) -

(94)

Ending Balance $10,309 $- $10,309 $7,637 $- $7,637


December 31, 2012

(NT$)

December 31, 2011

(NT$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total

Individual injury

insurance

$1,666

$- $1,666 $1,484

$-

$1,484

Individual health

insurance

1,614

-

1,614

1,850

-

1,850

Total $3,280 $- $3,280 $3,334 $- $3,334

December 31, 2012

(US$)

December 31, 2011

(US$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total

Individual injury

insurance $57

$- $57 $49

$- $49

Individual health

insurance 56

- 56 61

- 61

Total $113 $- $113 $110 $- $110

209





(NT$)


(NT$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total


Reserve 54 - 54 1,330 - 1,330

Recover - - - - - -

Gains on foreign

exchange

(108) - (108) (57) - (57)

Ending Balance $3,280 $- $3,280 $3,334 $- $3,334


(US$)


(US$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total

Beginning balance $115 $- $115 $68 $- $68

Reserve 2 - 2 44 - 44

Recover - - - - - -

Gains on foreign

exchange

(4) - (4) (2) - (2)

Ending Balance $113 $- $113 $110 $- $110

210




December 31, 2012

(NT$) December 31, 2011

(NT$)

Insurance contract

Financial instruments with

discretionary participation




feature Total


－Reported but not paid claim

$1,251 $- $1,251

$302 $-

$302

－Unreported claim - - - - - - Individual injury insurance

－Reported but not paid claim

231 - 231

139 -

139

－Unreported claim 163 - 163 141 - 141 Individual health insurance －Reported but not

paid claim

206 - 206

98 -

98

－Unreported claim 294 - 294 109 - 109 Investment-linked insurance －Reported but not

paid claim

390 - 390 -

- -

Total $2,535 $- $2,535 $789 $- $789

December 31, 2012

(US$) December 31, 2011

(US$)

Insurance contract






feature Total

Individual life insurance －Reported but not

paid claim

$43 $- $43 $10 $- $10 －Unreported claim - - - - - -

Individual injury insurance －Reported but not

paid claim

8 - 8 4 - 4 －Unreported claim 6 - 6 5 - 5

Individual health insurance －Reported but not

paid claim

7 - 7 3 - 3 －Unreported claim 10 - 10 4 - 4

Investment-linked insurance －Reported but not

paid claim

13 - 13 - - -

Total $87 $- $87 $26 $- $26

211





(NT$)


(NT$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total


Reserve 1,804 - 1,804 260 - 260

Recover - - - - - -

Gains on foreign exchange (58) - (58) (16) - (16)

Ending balance $2,535 $- $2,535 $789 $- $789


(US$)


(US$)

Insurance contract

Financial

instruments with

discretionary

participation


Financial

instruments with

discretionary

participation

feature Total


Reserve 62 - 62 9 - 9

Gains on foreign exchange (2) - (2) (1) - (1)

Ending balance $87 $- $87 $26 $- $26

d. Special reserve:

December 31, 2012

(NT$)

December 31, 2011

(NT$)

Insurance

contract

Financial

instruments

with

discretionary

participation

feature Other Total

Insurance

contract

Financial

instruments

with

discretionary

participation

feature Other Total

Others $516 $- $- $516 $533 $- $- $533

212



December 31, 2012

(US$)

December 31, 2011

(US$)

Insurance

contract

Financial

instruments

with

discretionary

participation

feature Other Total

Insurance

contract

Financial

instruments

with

discretionary

participation

feature Other Total

Others $17 $- $- $17 $18 $- $- $18

Special reserve is summarized below:


(NT$)


(NT$)

Insurance

contract

Financial

instruments

with

discretionary

participation

feature Other Total

Insurance

contract

Financial

instruments

with

discretionary

participation

feature Other Total

Beginning balance $533 $- $- $533 $551 $- $- $551

Reserves for major incidents over 15 years - - - - - - - -




- - - - - - - -

Accumulated provision for special reserves

for fluctuation of risks is more than 30

percent of the retained earned premium

for the current year

- - - - - - - -

Reserves participating policies dividends

reserve

- - - - - - - -

Participating policies dividends reserve - - - - - - - -

Reserves dividends risk reserve - - - - - - - -

Other - - - - - - - -

Loss (gains) on foreign exchange (17) - - (17) (18) - - (18)

Ending balance $516 $- $- $516 $533 $- $- $533

213




(US$)


(US$)

Insurance

contract

Financial

instruments

with

discretionary

participation

feature Other Total

Insurance

contract

Financial

instruments

with

discretionary

participation

feature Other Total

Beginning balance $17 $- $- $17 $18 $- $- $18

Reserves for major incidents over 15 years - - - - - - - -




- - - - - - - -

Accumulated provision for special reserves

for fluctuation of risks is more than 30

percent of the retained earned premium

for the current year

- - - - - - - -

Reserves participating policies dividends

reserve

- - - - - - - -

Participating policies dividends reserve - - - - - - - -

Reserves dividends risk reserve - - - - - - - -

Other - - - - - - - -

Gains on foreign exchange - - - - - - - -

Ending balance $17 $- $- $17 $18 $- $- $18

e. Liability adequacy reserve

December 31, 2012


(US$) Insurance contract and

financial instruments with discretionary

participation feature

Insurance contract and financial instruments

with discretionary participation feature

Reserve for life insurance liabilities $299,499 $10,309 Unearned premium reserve 3,280 113 Total $302,779 $10,422 Book value of insurance liabilities $302,779 $10,422 Estimated present value of cash flows Negative amount Negative amount Balance of liability adequacy reserve $- $-

214



December 31, 2011


(US$) Insurance contract and

financial instruments with discretionary


Insurance contract and financial instruments

with discretionary participation feature

Reserve for life insurance liabilities $231,165 $7,637 Unearned premium reserve 3,334 110 Total $234,499 $7,747 Book value of insurance liabilities $234,499 $7,747 Estimated present value of cash flows Negative amount Negative amount Balance of liability adequacy reserve $- $-

Note 1: Shown by liability adequacy test range (integrated contract).

Note 2: Outstanding reserve for claims (NT$2,535 (US$87) and NT$789 (US$26)

thousands, respectively) and special reserve (NT$516 (US$17) and NT$533 (US$18) thousands, respectively) are not included in liability adequacy test. Reserve for claims is determined based on claims incurred before valuation date (December 31, 2012 and 2011, respectively) and therefore not included in the test.

Note 3: As the loss ratio of one-year injury medical insurance is less than 100%,

unearned premium reserve is included in the calculation of estimate present value of cash flows.

Note 4: Extended contracts are calculated based on maximum possibility of loss,

which assumes the insured immediately death of the insured to calculate estimated present value of cash flows.


Cathay Life (Vietnam). As such, the book value of related intangible assets shall not be deducted from book value of insurance liability for liability adequacy reserve test.

215



(2) Property and casualty insurance subsidiaries

1 Cathay Century

A. Unearned premium reserve:

a. Unearned premium reserve and ceded unearned premium reserve are summarized

as follows: December 31, 2012

(NT$)

Item

Unearned premium reserve

Ceded unearned premium reserve

Retained business Direct

business

Assumed reinsurance

business

Ceded reinsurance

business

Fire insurance $1,972,331 $56,473 $855,032 $1,173,772 Marine insurance 238,464 17,431 206,953 48,942 Land and air insurance 2,941,983 13,196 158,590 2,796,589 Liability insurance 418,457 104 139,733 278,828 Bonding insurance 25,634 537 8,976 17,195 Other property insurance 877,925 12,708 501,920 388,713 Accident insurance 1,526,552 3,431 84,690 1,445,293 Health insurance 88,102 - 1,154 86,948 Compulsory automobile

liability insurance 1,198,010 186,904 479,228 905,686 Total $9,287,458 $290,784 $2,436,276 $7,141,966

December 31, 2012

(US$)

Item



Retained business Direct

business

Assumed reinsurance

business

Ceded reinsurance

business

Fire insurance $67,894 $1,944 $29,433 $40,405 Marine insurance 8,209 600 7,124 1,685 Land and air insurance 101,273 454 5,459 96,268 Liability insurance 14,405 4 4,810 9,599 Bonding insurance 882 19 309 592 Other property insurance 30,221 437 17,278 13,380 Accident insurance 52,549 118 2,915 49,752 Health insurance 3,033 - 40 2,993 Compulsory automobile

liability insurance 41,240 6,434 16,497 31,177 Total $319,706 $10,010 $83,865 $245,851

216



December 31, 2011

(NT$)

Item



Retained business

Direct

business

Assumed reinsurance

business

Ceded reinsurance

business

Fire insurance

$1,679,353

$40,221

$669,948

$1,049,626 Marine insurance

251,445

1,395

216,229

36,611

Land and air insurance

2,469,728

5,322

149,756

2,325,294 Liability insurance

334,740

119

93,384

241,475

Bonding insurance

22,532

397

6,418

16,511 Other property insurance

794,357

13,615

480,928

327,044

Accident insurance

1,508,445

25,845

73,958

1,460,332 Health insurance

147,642

-

2,417

145,225

Compulsory automobile liability insurance 1,147,140 182,070 458,858 870,352

Total

$8,355,382

$268,984

$2,151,896

$6,472,470

December 31, 2011

(US$)

Item



Retained business

Direct

business

Assumed reinsurance

business

Ceded reinsurance

business

Fire insurance

$55,479 $1,329 $22,133 $34,675 Marine insurance

8,307 46 7,143 1,210


81,590 176 4,947 76,819 Liability insurance

11,058 4 3,085 7,977

Bonding insurance

744 13 212 545 Other property insurance

26,242 450 15,888 10,804

Accident insurance

49,833 854 2,443 48,244 Health insurance

4,878 - 80 4,798

Compulsory automobile liability insurance 37,897 6,015 15,159 28,753

Total

$276,028 $8,887 $71,090 $213,825

217



b. Reconciliation statement of unearned premium reserve and ceded unearned

premium reserve:


Item Unearned premium reserve


(NT$) (US$)

(NT$) (US$)

Beginning balance

$8,624,366 $296,880

$2,151,896 $74,075 Reserve

9,578,242 329,716

2,436,276 83,865

Recover

(8,624,366) (296,880)

(2,151,896) (74,075) Ending balance

$9,578,242 $329,716

$2,436,276 $83,865


Item Unearned premium reserve


(NT$) (US$)

(NT$) (US$)

Beginning balance

$7,448,272 $246,061

$1,773,103 $58,576 Reserve

8,624,366 284,915

2,151,896 71,090

Recover

(7,448,272) (246,061)

(1,773,103 ) (58,576) Ending balance

$8,624,366 $284,915

$2,151,896 $71,090

B. Special reserve:

a. Special reserve- Compulsory car insurance:

For the year ended December

31, 2012


Item

(NT$) (US$)

(NT$) (US$) Beginning balance

$2,434,891 $83,817

$2,335,811 $77,166

Reserve

199,736 6,876

264,722 8,745 Recover

(327,036) (11,258)

(165,642) (5,472)

Ending balance

$2,307,591 $79,435

$2,434,891 $80,439

b. Special reserve- Non-compulsory car insurance:

For the year ended December 31, 2012 (NT$)

Liability

Item

Major incidents

Fluctuation of risks Total Beginning balance

$1,172,396

$1,153,815 $2,326,211

Reserve

-

- - Recover

(59,328)

(118,836) (178,164)

Ending balance

$1,113,068

$1,034,979 $2,148,047

218



For the year ended December 31, 2012 (US$)

Liability

Item

Major incidents


$40,358

$39,718 $80,076

Reserve

-

- - Recover

(2,042)

(4,091) (6,133)

Ending balance

$38,316

$35,627 $73,943


Liability

Item

Major incidents


$1,183,609

$1,643,828 $2,827,437

Reserve

-

- - Recover

(11,213)

(490,013) (501,226)

Ending balance

$1,172,396

$1,153,815 $2,326,211


Liability

Item

Major incidents


$39,102

$54,306 $93,408

Reserve

-

- - Recover

(371)

(16,188) (16,559)

Ending balance

$38,731

$38,118 $76,849


Special reserve

Item

Major incidents


$169,987

$292,493 $462,480

Reserve

145,997 266,768 412,765 Recover

-

(5,267) (5,267)

Ending balance

$315,984

$553,994 $869,978


Special reserve

Item

Major incidents


$5,852

$10,069 $15,921

Reserve

5,025 9,183 14,208 Recover

-

(181) (181)

Ending balance

$10,877 $19,071 $29,948

219




Special reserve

Item

Major incidents


$-

$- $-

Reserve

169,987 292,493 462,480 Recover

-

- -

Ending balance

$169,987

$292,493 $462,480


Special reserve

Item

Major incidents


$-

$- $-

Reserve

5,616 9,663 15,279 Recover

-

- -

Ending balance

$5,616 $9,663 $15,279

C. Reserve for claims:

a. Claim reserve and ceded claim reserve:

December 31, 2012

(NT$)

Item

Claim reserve Ceded claim reserve

Retained business

(4)=(1)+(2)-(3)

Direct business

(1)

Assumed reinsurance

business

(2)

Ceded reinsurance

business

(3)

Claim reported but not paid off

$3,619,176

$293,676

$1,555,454

$2,357,398

Unreported claim

1,072,918

39,442

218,506

893,854

Total

$4,692,094

$333,118

$1,773,960

$3,251,252

December 31, 2012

(US$)

Item


Retained business

(4)=(1)+(2)-(3)

Direct business

(1)

Assumed reinsurance

business

(2)

Ceded reinsurance

business

(3)


$124,584

$10,109

$53,544

$81,149

Unreported claim

36,934

1,358

7,522

30,770

Total

$161,518

$11,467

$61,066

$111,919

220



December 31, 2011

(NT$)

Item


Retained business

(4)=(1)+(2)-(3)

Direct business

(1)

Assumed reinsurance

business

(2)

Ceded reinsurance

business

(3)


$3,892,767

$196,680

$1,841,574

$2,247,873

Unreported claim

904,613

44,432

202,725

746,320

Total

$4,797,380

$241,112

$2,044,299

$2,994,193

December 31, 2011

(US$)

Item


Retained business

(4)=(1)+(2)-(3)

Direct business

(1)

Assumed reinsurance

business

(2)

Ceded reinsurance

business

(3)


$128,601

$6,497

$60,838

$74,260

Unreported claim

29,885

1,468

6,697

24,656

Total

$158,486

$7,965

$67,535

$98,916

b. Net changes for claim reserve and ceded claim reserve:

December 31, 2012

(NT$)

Direct underwriting

business

Assumed reinsurance

business Net change for claim

reserve

Ceded reinsurance business

Ceded

premium

deficiency

reserve

Item

Reserve Recover Reserve Recover Reserve Recover Net change

(1) (2) (3) (4) (5)=(1)-(2)+(3)-(4) (6) (7) (8)=(6)-(7)

Claim reported but

not paid off $3,619,176 $3,892,767 $293,676 $196,680 $(176,595) $1,555,454 $1,841,574 $(286,120)

Unreported claim

1,072,918 904,613 39,442 44,432 163,315 218,506 202,725 15,781

Total

$4,692,094 $4,797,380 $333,118 $241,112 $(13,280) $1,773,960 $2,044,299 $(270,339)

221



December 31, 2012

(US$)

Direct underwriting

business

Assumed reinsurance


reserve


Ceded

premium

deficiency

reserve

Item


(1) (2) (3) (4) (5)=(1)-(2)+(3)-(4) (6) (7) (8)=(6)-(7)

Claim reported but

not paid off $124,584 $134,002 $10,109 $6,770 $(6,079) $53,544 $63,393 $(9,849)

Unreported claim

36,934 31,140 1,358 1,530 5,622 7,522 6,979 543

Total

$161,518 $165,142 $11,467 $8,300 $(457) $61,066 $70,372 $(9,306)

December 31, 2011

(NT$)

Direct underwriting

business

Assumed reinsurance


reserve


Ceded

premium

deficiency

reserve

Item


(1) (2) (3) (4) (5)=(1)-(2)+(3)-(4) (6) (7) (8)=(6)-(7)

Claim reported but

not paid off $3,892,767 $3,571,273 $196,680 $54,196 $463,978 $1,841,574 $1,533,321 $308,253

Unreported claim

904,613 827,046 44,432 - 121,999 202,725 147,389 55,336

Total

$4,797,380

$4,398,319

$241,112

$54,196 $585,977

$2,044,299

$1,680,710

$363,589

December 31, 2011

(US$)

Direct underwriting

business

Assumed reinsurance


reserve


Ceded

premium

deficiency

reserve

Item


(1) (2) (3) (4) (5)=(1)-(2)+(3)-(4) (6) (7) (8)=(6)-(7)

Claim reported but

not paid off $128,601 $117,981 $6,497 $1,790 $15,327 $60,838 $50,655 $10,183

Unreported claim

29,885 27,322 1,468 - 4,031 6,697 4,869 1,828

Total

$158,486 $145,303 $7,965 $1,790 $19,358 $67,535 $55,524 $12,011

222



c. Liability claim for policyholder who reported claim but not yet paid off or

unreported claim:

December 31, 2012

Claim reserve

Item

Claim reported but not yet paid off Unreported claim Total

(NT$)

(US$) (NT$) (US$) (NT$) (US$)

Fire insurance

$1,160,525

$39,949 $4,965 $171 $1,165,490 $40,120 Marine insurance

741,742

25,533 131,843 4,539 873,585 30,072


688,473 23,699 490,267 16,877 1,178,740 40,576 Liability insurance

169,140

5,822 117,731 4,053 286,871 9,875

Bonding insurance

19,834

683 10,367 357 30,201 1,040 Other property

insurance 307,451 10,583 11,853 408 319,304 10,991 Accident insurance

68,491

2,358 284,579 9,796 353,070 12,154

Health insurance

6,816

235 39,229 1,350 46,045 1,585 Compulsory

automobile liability insurance

750,380 25,831 21,526 741 771,906 26,572

Total

$3,912,852

$134,693 $1,112,360 $38,292 $5,025,212 $172,985

December 31, 2011

Claim reserve

Item


(NT$)

(US$) (NT$) (US$) (NT$) (US$)

Fire insurance

$2,005,810

$66,264 $81,919 $2,706 $2,087,729 $68,970 Marine insurance

582,242

19,235 174,483 5,764 756,725 24,999


506,625 16,737 456,098 15,068 962,723 31,805 Liability insurance

192,770

6,368 43,458 1,436 236,228 7,804

Bonding insurance

22,186

733 407 13 22,593 746 Other property


128,602

4,248 160,629 5,307 289,231 9,555

Health insurance

9,821

324 2,213 73 12,034 397 Compulsory


386,837 12,780 20,643 682 407,480 13,462

Total

$4,089,447

$135,099 $949,045 $31,353 $5,038,492 $166,452

223



d. Reinsurance asset- ceded claim reserve for policyholder who reported claim buy not

yet paid off or unreported claim:

December 31, 2012

Ceded claim reserve

Item


(NT$) (US$) (NT$) (US$) (NT$) (US$) Fire insurance

$439,940

$15,144 $- $- $439,940 $15,144

Marine insurance

599,505

20,637 124,716 4,293 724,221 24,930 Land and air

insurance 42,156

1,451 11,763 405 53,919 1,856

Liability insurance

38,711

1,333 32,719 1,126 71,430 2,459 Bonding insurance

18,225

627 5,084 175 23,309 802

Other property insurance

144,431

4,972 3,666 126 148,097 5,098

Accident insurance

6,829

235 31,650 1,090 38,479 1,325 Health insurance

75

3 1,398 48 1,473 51

Compulsory automobile liability insurance

265,582 9,142 7,510 259 273,092 9,401

Total

$1,555,454

$53,544 $218,506 $7,522 $1,773,960 $61,066

December 31, 2011

Ceded claim reserve

Item


(NT$) (US$) (NT$) (US$) (NT$) (US$) Fire insurance

$1,047,223

$34,596 $20,217 $668 $1,067,440 $35,264

Marine insurance

415,387

13,723 145,156 4,795 560,543 18,518 Land and air

insurance 22,205 733 1,412 47 23,617 780 Liability insurance

74,544

2,463 8,336 275 82,880 2,738

Bonding insurance

19,132

632 24 1 19,156 633 Other property


14,532

480 18,570 614 33,102 1,094

Health insurance

-

- 132 4 132 4 Compulsory


128,715 4,252 7,174 237 135,889 4,489

Total

$1,841,574

$60,838 $202,725 $6,697 $2,044,299 $67,535

224



e. Reconciliation statement for claim reserve and ceded claim reserve:


Item Claim reserve Ceded claim reserve

(NT$) (US$) (NT$) (US$) Beginning balance

$5,038,492 $173,442 $2,044,299 $70,372

Reserve

5,025,212 172,985 1,773,960 61,066 Recover

(5,038,492) (173,442) (2,044,299) (70,372)

Ending balance

$5,025,212 $172,985 $1,773,960 $61,066



(NT$) (US$) (NT$) (US$) Beginning balance

$4,452,515

$147,093 $1,680,710 $55,524

Reserve

5,038,492

166,452 2,044,299 67,535 Recover

(4,452,515)

(147,093) (1,680,710) (55,524)

Ending balance

$5,038,492

$166,452 $2,044,299 $67,535

D. Premium deficiency reserve

a. Premium deficiency reserve and ceded premium deficiency reserve:

December 31, 2012

Item

Premium deficiency reserve

Ceded premium

deficiency reserve

Retained business Direct business

Assumed

reinsurance business

Ceded reinsurance

business

(NT$) (US$) (NT$) (US$) (NT$) (US$) (NT$) (US$)

Fire insurance

$- $- $- $- $- $- $- $-

Marine insurance

9,074 312 726 25 (7,259) (250) 17,059 587


- - 9,319 321 - - 9,319 321

Liability insurance

- - - - - - - -

Bonding insurance

2,089 72 - - 2,089 72 - -


- - - - - - - -

Accident insurance

- - - - - - - -

Health insurance

- - - - - - - -

Total

$11,163 $384 $10,045 $346 $(5,170) $(178) $26,378 $908

225



December 31, 2011

Item


Ceded premium

deficiency reserve


Assumed


Ceded reinsurance

business


Fire insurance

$- $-

$432 $14

$(5,485) $(181)

$5,917 $195

Marine insurance

9,805 324

55 2

1,867 62

7,993 264


- -

2 -

(1,480) (49)

1,482 49

Liability insurance

- -

49 2

49 2

- -

Bonding insurance

11,179 369

6 -

11,185 369

- -


- -

3 -

- -

3 -

Total

$20,984 $693

$547 $18

$6,136 $203

$15,395 $508

b. Recognized net loss for premium deficiency reserve- Net change for premium

deficiency reserve and ceded premium deficiency reserve:


Direct underwriting

business

Assumed reinsurance

business

Premium deficiency

reserve Ceded reinsurance business

Ceded

premium

deficiency

reserve

Recognized

net loss (gain)

for premium

deficiency

reserve

Item

Reserve Recover Reserve Recover Net change Reserve Recover Net change

(1) (2) (3) (4) (5)=(1)-(2)+(3)-(4) (6) (7) (8)=(6)-(7) (9)=(5)-(8)

Fire insurance

$- $- $- $432 $(432) $- $(5,485) $5,485 $(5,917)

Marine insurance

9,074 9,805 726 55 (60) (7,259) 1,867 (9,126) 9,066

Land & air

insurance - - 9,319 2 9,317 - (1,480) 1,480 7,837

Liability insurance

- - - 49 (49) - 49 (49) -

Bonding insurance

2,089 11,179 - 6 (9,096) 2,089 11,185 (9,096) -

Other property

insurance

- - - 3 (3) - - - (3)

Accident insurance - - - - - - - - -

Health insurance - - - - - - - - -

Total

$11,163 $20,984 $10,045 $547 $(323) $(5,170) $6,136 $(11,306) $10,983

226




Direct underwriting

business

Assumed reinsurance

business

Premium deficiency


Ceded

premium

deficiency

reserve

Recognized

net loss (gain)

for premium

deficiency

reserve

Item


(1) (2) (3) (4) (5)=(1)-(2)+(3)-(4) (6) (7) (8)=(6)-(7) (9)=(5)-(8)

Fire insurance

$- $- $- $15 $(15) $- $(189) $189 $(204)

Marine insurance

312 337 25 2 (2) (250) 64 (314) 312

Land & air

insurance - - 321 - 321 - (51) 51 270

Liability insurance

- - - 2 (2) - 2 (2) -

Bonding insurance

72 385 - - (313) 72 385 (313) -

Other property

insurance

- - - - - - - - -

Accident insurance - - - - - - - - -

Health insurance - - - - - - - - -

Total

$384 $722 $346 $19 $(11) $(178) $211 $(389) $378


Direct underwriting

business

Assumed reinsurance

business

Premium deficiency


Ceded

premium

deficiency

reserve

Recognized

net loss for

premium

deficiency

reserve

Item


(1) (2) (3) (4) (5)=(1)-(2)+(3)-(4) (6) (7) (8)=(6)-(7) (9)=(5)-(8)

Fire insurance

$- $- $432 $- $432 $(5,485) $- $(5,485) $5,917

Marine insurance

9,805 61,778 55 139 (52,057) 1,867 56,155 (54,288) 2,231

Land & air

insurance - - 2 - 2 (1,480) (4,220) 2,740 (2,738)

Liability insurance

- - 49 - 49 49 - 49 -

Bonding insurance

11,179 9,053 6 - 2,132 11,185 9,053 2,132 -

Other property

insurance

- - 3 - 3 - - - 3

Total

$20,984 $70,831 $547 $139 $(49,439) $6,136 $60,988 $(54,852) $5,413

227




Direct underwriting

business

Assumed reinsurance

business

Premium deficiency


Ceded

premium

deficiency

reserve

Recognized

net loss for

premium

deficiency

reserve

Item


(1) (2) (3) (4) (5)=(1)-(2)+(3)-(4) (6) (7) (8)=(6)-(7) (9)=(5)-(8)

Fire insurance

$- - $14 - $14 $(181) - $ (181) $195

Marine insurance

324 2,041 2 5 (1,720) 62 1,855 (1,793) 73

Land & air

insurance - - - - - (49) (139) 90 (90)

Liability insurance

- - 2 - 2 2 - 2 -

Bonding insurance

369 299 - - 70 369 299 70 -

Other property

insurance

- - - - - - - - -

Total

$693 $2,340 $18 $5 $(1,634) $203

$2,015 $(1,812) $178

c. Reconciliation statement for premium deficiency reserve and ceded premium

deficiency reserve:


Item

Premium deficiency reserve Ceded premium deficiency reserve

(NT$)

(US$) (NT$) (US$)

Beginning balance

$21,513 $741 $6,136 $211 Reserve

21,208 730 (5,170) (178)

Recover

(21,531) (741) (6,136) (211) Ending balance

$21,208 $730 $(5,170) $(178)


Item Premium deficiency reserve Ceded premium deficiency reserve

(NT$)

(US$) (NT$) (US$)

Beginning balance

$70,970 $2,345 $60,988 $2,015 Reserve

21,531 711 6,136 203

Recover

(70,970) (2,345) (60,988) (2,015) Ending balance

$21,531 $711 $6,136 $203

228



d. Effects for the change of estimation and assumption:

Premium deficiency reserve for Cathay Century is a measurement of present value for future expenditure. The expected final loss ratio was referred to the data from Cathay Century in the past three years, spectacular compensation case and the trend of loss. The expected operation expense ratio was referred to the insurance expense statements from Cathay Century in the past three years exclude entertainment expense and membership fee. The actual ratio of return on investment may not be the same as the expected ratio due to the uncertainty of estimation and assumption.

� Cathay Century (China)



as follows: December 31, 2012

(NT$)

Item

Unearned premium reserve Ceded unearned premium reserve


Assumed reinsurance

business

Ceded reinsurance

business

Fire insurance $107,724 $409 $42,223 $65,910 Marine insurance 2,180 - 675 1,505 Liability insurance 94,195 70 31,363 62,902 Bonding insurance 857 - 180 677 Other property insurance 265,200 3,234 7,389 261,045 Accident insurance - 545 - 545 Total $470,156 $4,258 $81,830 $392,584

December 31, 2012

(US$)

Item



Assumed reinsurance

business

Ceded reinsurance

business

Fire insurance $3,708 $14 $1,453 $2,269 Marine insurance 75 - 23 52 Liability insurance 3,243 2 1,080 2,165 Bonding insurance 29 - 6 23 Other property insurance 9,129 112 255 8,986 Accident insurance - 19 - 19 Total $16,184 $147 $2,817 $13,514

229



December 31, 2011

(NT$)

Item


Retained business

Direct business

Assumed reinsurance

business

Ceded reinsurance

business

Fire insurance

$115,319

$296

$55,255

$60,360 Marine insurance

5,946

28

2,204

3,770

Liability insurance

62,315

-

25,200

37,115 Bonding insurance

2,190

-

315

1,875


95,764

1,484

9,944

87,304 Accident insurance

-

30

-

30

Total

$281,534

$1,838

$92,918

$190,454

December 31, 2011 (US$)

Item


Retained business

Direct business

Assumed reinsurance

business

Ceded reinsurance

business

Fire insurance

$3,810 $10 $1,825 $1,995 Marine insurance

196 1 73 124

Liability insurance

2,059 - 833 1,226 Bonding insurance

72 - 10 62


3,164 49 329 2,884 Accident insurance

- 1 - 1

Total

$9,301 $61 $3,070 $6,292 b. Reconciliation statement for unearned premium reserve and ceded unearned

premium reserve:


Item



(NT$) (US$)

(NT$) (US$)

Beginning balance

$283,372 $9,755 $92,918 $3,199 Reserve

476,555 16,405 82,199 2,830

Recover

(276,465) (9,517) (90,653) (3,121) Gains on foreign exchange (9,048) (312) (2,634) (91)

Ending balance

$474,414 $16,331 $81,830 $2,817

230




Item



(NT$) (US$)

(NT$) (US$)

Beginning balance

$114,703 $3,789 $47,363 $1,565 Reserve

268,481 8,870 88,035 2,908

Recover

(118,312) (3,908) (48,853) (1,614) Losses on foreign exchange 18,501 611 6,373 211

Ending balance

$283,373 $9,362 $92,918 $3,070

B. Claim reserve:

a. Liability claim for policyholder who reported claim but not yet paid off or

unreported claim: December 31, 2012

Claim reserve

Item

Claim reported and paid off Unreported claim Total

(NT$) (US$) (NT$) (US$) (NT$) (US$)

Fire insurance

$163,988 $5,645 $12,559 $433

$176,547 $6,078 Marine insurance

51,897 1,787 27,357 941

79,254 2,728

Liability insurance

79,882 2,750 108,342 3,729

188,224 6,479 Bonding insurance

- - 3,927 135

3,927 135


180,035 6,197 133,712 4,603

313,747 10,800 Accident insurance

- - 107 4

107 4

Total

$475,802 $16,379 $286,004 $9,845

$761,806 $26,224

December 31, 2011

Claim reserve

Item


(NT$) (US$) (NT$) (US$) (NT$) (US$)

Fire insurance

$49,595 $1,638

$80,708 $2,666 $130,303 $4,304 Marine insurance

32,697 1,080

14,974 495 47,671 1,575

Liability insurance

42,036 1,389

10,262 339 52,298 1,728 Bonding insurance

1,047 35

4,253 141 5,300 176

Accident insurance

- -

10 - 10 - Other property insurance

43,294 1,430

46,172 1,525 89,466 2,955

Total

$168,669 $5,572

$156,379 $5,166 $325,048 $10,738

231



b. Reinsurance asset- Ceded claim reserve for policyholder who reported claim buy

not yet paid off or unreported claim:

December 31, 2012 Ceded claim reserve

Item


(NT$) (US$) (NT$) (US$) (NT$) (US$)

Fire insurance

$104,849 $3,609 $1,901 $66 $106,750 $3,675 Marine insurance

14,071 485 9,130 314 23,201 799

Liability insurance

29,630 1,020 43,746 1,506 73,376 2,526 Bonding insurance

- - 635 22 635 22


7,847 270 14,709 506 22,556 776 Total

$156,397 $5,384 $70,121 $2,414 $226,518 $7,798

December 31, 2011 Ceded claim reserve

Item


(NT$) (US$) (NT$) (US$) (NT$) (US$)

Fire insurance

$28,041 $926 $53,603 $1,771 $81,644 $2,697 Marine insurance

7,918 262 7,474 247 15,392 509

Liability insurance

16,212 536 4,888 161 21,100 697 Bonding insurance

310 10 685 23 995 33


2,623 87 9,000 297 11,623 384 Total

$55,104 $1,821 $75,650 $2,499 $130,754 $4,320

c. Reconciliation statement for claim reserve and ceded claim reserve:


Item

Claim reserve

Ceded claim reserve

(NT$) (US$)

(NT$) (US$)

Beginning balance

$325,048 $11,189

$130,754 $4,501 Reserve

765,245 26,342

227,540 7,833

Recover

(317,125) (10,917)

(127,567) (4,391) Gains on foreign

exchange (11,362) (390) (4,209) (145) Ending balance

$761,806 $26,224

$226,518 $7,798

232




Item

Claim reserve

Ceded claim reserve

(NT$) (US$)

(NT$) (US$)

Beginning balance

$167,760 $5,542 $90,768 $2,999 Reserve

307,966 10,174 123,883 4,093

Recover

(173,038) (5,717) (93,624) (3,093) Losses on foreign exchange 22,360 739 9,727 321

Ending balance

$325,048 $10,738 $130,754 $4,320

C. Premium deficiency reserve:

a. Premium deficiency reserve and ceded premium deficiency reserve:

December 31, 2012 (NT$)

Item


Ceded premium deficiency

reserve

Retained business

Direct business

Assumed reinsurance

business

Ceded reinsurance

business

Fire insurance

$6,198

$23

$-


248

-

74

174

Liability insurance

13,059

10

-


115

-

7

108


35,659

435

34


-

194

-

194

Total

$55,279

$662

$115

$55,826


Item



reserve

Retained business

Direct business

Assumed reinsurance

business

Ceded reinsurance

business

Fire insurance

$213

$1

$-

$214 Marine insurance

9

-

3

6

Liability insurance

450

-

-

450 Bonding insurance

4

-

-

4


1,227

15

1


-

7

-

7

Total

$1,903

$23

$4

$1,922

233




Item



reserve


Assumed reinsurance

business

Ceded reinsurance

business

Marine insurance $1 $- $- $1 Liability insurance 116 - - 116 Other property insurance - 11 - 11 Bonding insurance 3,316 51 - 3,367 Total $3,433 $62 $- $3,495


Item



reserve


Assumed reinsurance

business

Ceded reinsurance

business

Marine insurance $- $- $- $- Liability insurance 4 - - 4 Other property insurance - - - - Bonding insurance 109 2 - 111 Total $113 $2 $- $115

b. Recognized net loss for premium deficiency reserve- Net changes for premium

deficiency reserve and ceded premium deficiency reserve:


Direct underwriting business

Assumed reinsurance business

premium deficiency reserve


Ceded premium

deficiency reserve

Recognized net loss

(gain) for premium deficiency

reserve Item


(1) (2) (3) (4) (5)=(1)-(2)+(3)-(4) (6) (7) (8)=(6)-(7) (9)=(5)-(8)

Fire insurance $6,198 $- $23 $- $6,221 $- $- $- $6,221 Marine insurance

248 1 - - 247 74 - 74 173

Liability insurance

13,059 - 10 - 13,069 - - - 13,069 Bonding insurance

115 113 - - 2 7 - 7 (5)

Other property insurance 35,659 3,220 435 50 32,824 34 - 34 32,790

Accident insurance - - 194 11 183 - - - 183

Total $55,279 $3,334 $662 $61 $52,546 $115 $- $115 $52,431

234




Direct underwriting

business

Assumed reinsurance

business

premium

deficiency reserve

Ceded reinsurance

business

Ceded

premium deficiency

reserve

Recognized

net loss (gain) for

premium deficiency

reserve

Item


(1) (2) (3) (4) (5)=(1)-(2)+(3)-(4) (6) (7) (8)=(6)-(7) (9)=(5)-(8)

Fire insurance $213 $- $1 $- $214 $- $- $- $214 Marine insurance

9 - - - 9 3 - 3 6

Liability insurance

450 - - - 450 - - - 450 Bonding insurance

4 4 - - - - - - -

Other property insurance 1,227 111 15 2 1,129 1 - 1 1,128

Accident insurance - - 7 - 7 - - - 7

Total

$1,903 $115 $23 $2 $1,809 $4 $- $4 $1,805






Ceded premium

deficiency reserve

Recognized

net loss for premium

deficiency reserve

Item


(1) (2) (3) (4) (5)=(1)-(2)+(3)-(4) (6) (7) (8)=(6)-(7) (9)=(5)-(8)

Marine insurance

$1 $37 $- $- $(36) $- $13 $(13) $(23)

Liability insurance

110 - - - 110 - - - 110 Bonding insurance

3,141 1,028 48 31 2,130 - - - 2,130

Other property insurance - - 11 - 11 - - - 11

Total

$3,252 $1,065 $59 $31 $2,215 $- $13 $(13) $2,228






Ceded premium

deficiency reserve

Recognized

net loss for premium

deficiency reserve

Item


(1) (2) (3) (4) (5)=(1)-(2)+(3)-(4) (6) (7) (8)=(6)-(7) (9)=(5)-(8)

Marine insurance

$- $1 $- $- $(1) $- $- $- $(1) Liability insurance

4 - - - 4 - - - 4

Bonding insurance

104 34 2 1 71 - - - 71

Total

$108 $35 $2 $1 $74 $- $- $- $74

235



c. Reconciliation statement for claim reserve and ceded claim reserve:



(NT$) (US$) (NT$) (US$) Beginning balance $3,495 $120 $- $- Reserve 56,194 1,935 116 4 Recover (3,410) (117) - - Gains on foreign exchange (338) (12) (1) -

Ending balance $55,941 $1,926 $115 $4



(NT$) (US$) (NT$) (US$) Beginning balance $1,063 $35 $12 $- Reserve 3,311 109 - - Recover (1,096) (36) (13) - Losses on foreign exchange 217 7 1 -

Ending balance $3,495 $115 $- $-

d. Effects for the change of estimation and assumption:

Cathay Century (China) use future cash flow method to measure its unearned reserves and recognize the excess amount of incurred reserve to net profit. In contrast, do not make any adjustment.

� Cathay Century (Vietnam)



as follows: December 31, 2012 (NT$)

Item



Assumed reinsurance

business

Ceded reinsurance

business

Fire insurance $1,519 $- $- $1,519 Marine insurance (1,092) - - (1,092) Land and air insurance 10,371 - - 10,371 Liability insurance 1,451 - - 1,451 Other property insurance 3,640 - - 3,640 Accident insurance 2,900 - - 2,900 Total $18,789 $- $- $18,789

236




Item


Retained business

Direct business

Assumed reinsurance

business

Ceded reinsurance

business

Fire insurance

$52

$-

$-


(37)

-

-

(37)


357

-

-

357 Liability insurance

50

-

-

50


125

-

-

125 Accident insurance

100

-

-

100

Total

$647

$-

$-

$647


Item


Retained business

Direct business

Assumed reinsurance

business

Ceded reinsurance

business

Fire insurance

$1,509

$-

$-


34

-

-

34


4,828

-

-

4,828 Liability insurance

94

-

-

94


(760)

-

-

(760) Accident insurance

1,556

-

-

1,556

Total

$7,261

$-

$-

$7,261


Item


Retained business

Direct business

Assumed reinsurance

business

Ceded reinsurance

business

Fire insurance

$50

$-

$-


1

-

-

1


160

-

-


3

-

-

3


(25)

-

-

(25) Accident insurance

51

-

-

51

Total

$240

$-

$-

$240

237



b. Reconciliation statement for unearned premium reserve and ceded unearned

premium reserve:


Item



(NT$) (US$)

(NT$) (US$)

Beginning balance

$7,261 $250 $- $- Reserve

19,138 659 - -

Recover

(7,156) (246) - - Gains on foreign exchange (454) (16) - -

Ending balance

$18,789 $647 $- $-


Item



(NT$) (US$)

(NT$) (US$)

Beginning balance

$70 $2

$- $- Reserve

7,182 237

- -

Recover

(67) (2)

- - Losses on foreign exchange 76 3 - -

Ending balance

$7,261 $240

$- $-

B. Claim reserve:

a. Liability claim for policyholder who reported claim but not yet paid off or

unreported claim:

December 31, 2012 Claim reserve

Item


(NT$) (US$) (NT$) (US$) (NT$) (US$)

Fire insurance

$14,048 $483

$227 $8 $14,275 $491 Marine insurance

916 32

24 1 940 33


1,923 66

1,112 38 3,035 104 Liability insurance

- -

(54) (2) (54) (2)


- -

99 3 99 3 Accident insurance

24 1

252 9 276 10

Total

$16,911 $582

$1,660 $57 $18,571 $639

238



December 31, 2011

Claim reserve

Item


(NT$) (US$) (NT$) (US$) (NT$) (US$)

Fire insurance

$139 $5

$25 $1 $164 $6 Marine insurance

- -

19 1 19 1


78 3

367 12 445 15 Liability insurance

- -

7 - 7 -


- -

62 2 62 2 Accident insurance

286 9

132 4 418 13

Total

$503 $17

$612 $20 $1,115 $37

b. Reconciliation statement for claim reserve and ceded claim reserve:


Item

Claim reserve

Ceded claim reserve

(NT$) (US$)

(NT$) (US$)

Beginning balance

$1,115 $38 $- $- Reserve

18,917 651 - -

Recover

(1,016) (35) - - Gains on foreign exchange

(445) (15) - -

Ending balance

$18,571 $639 $- $-


Item

Claim reserve

Ceded claim reserve

(NT$) (US$)

(NT$) (US$)

Beginning balance

$- $- $- $- Reserve

1,103 37 - -

Recover

- - - - Losses on foreign exchange

12 - - -

Ending balance

$1,115 $37 $- $-

20. Common stock

(1) As of December 31, 2012 and 2011, the authorized share capital amounted NT$120,000,000

(US$4,130,809) thousands, and the issued share capital amounted NT$108,653,851 (US$3,740,236) thousands and NT$103,575,096 (US$3,421,708) thousands, respectively.

239



(2) The recapitalization of undistributed earnings of NT$5,078,755 (US$174,828) thousands by

issuing 507,875 thousand shares with par value of NT$10 (US$0.34) was resolved by the Company’s shareholders’ meeting on June 15, 2012 and approved by the Financial Supervisory commission on July 12, 2012. The recapitalization record date was August 14, 2012.

(3) The recapitalization of undistributed earnings of NT$ 2,030,884 (US$67,092) thousands by

issuing 203,088 thousand shares with par value of NT$10 (US$0.33) was resolved by the Company’s shareholders’ meeting on June 10, 2011 and approved by the Financial Supervisory commission on July 5, 2011. The recapitalization record date was August 5, 2011.

(4) On December 31, 2001, the Company listed its shares on Taiwan Stock Exchange

Corporation (TSE) in accordance with relevant regulations. Since July 29, 2003, the Company listed a portion of its common shares on the Luxembourg Stock Exchange (LSE) in the form of Global Depositary Shares (GDSs).

21. Capital surplus

(1) The capital surplus of the Company consists of consolidation premium from share exchange, accumulated adjustments on paid-in capital from investment under equity method, and paid-in capital from treasury stocks. Capital surplus were NT$78,596,121 (US$2,705,546) thousands and NT$78,508,148 (US$2,593,596) thousands as of December 31, 2012 and 2011, respectively. Retained earnings from certain subsidiaries of the Company before the stock exchange of formation of the financial holding company amounted to NT$267,215 (US$9,198) thousands were included in the capital surplus as of both December 31, 2012 and 2011. The stock warrants consist of equity component recognized from convertible bonds issued in 2012 amounted NT$87,973 (US$3,028) thousands.

(2) The capital surplus of par value through the conversion of shares was generated from the

transfer of the shares of the subsidiaries to the Company. In compliance with Item 4 of Article 47 of the Financial Holding Company Act, the portion of capital surplus from the share exchange which comes from the original financial institution’s undistributed earnings is allowed to be distributed as cash dividends or to be capitalized.

(3) In addition, pursuant to the Company Act, capital surplus can only be used to offset a deficit

or to increase share capital. Capital surplus cannot be distributed as cash dividends. In compliance with Item 1 of Article 72 of Criteria Governing the Offering and Issuance of Securities by Securities Issuers, Capital Increase by Earnings Recapitalization shall not exceed 10% of total paid in capital and can be capitalized one year after the approval of the competent authority.

240



22. Retained earnings

(1) Legal reserve

Pursuant to the Company Act, 10% of the Company’s after-tax net income in the current year must be appropriated to legal reserve until the total amount of the legal reserve equals the issued share capital. This legal reserve can only be used to offset deficits. For companies with no accumulated deficits, legal reserve may be used for new share issuance or return cash to shareholders with the approval of stockholders’ meeting.

(2) Special reserve

A. In accordance with SFB regulations, in addition to the legal reserve retained, the Company should provide a special reserve of equal amount for any current year shareholders’ equity contra account (such as unrealized losses of financial instruments, cumulative conversion adjustments, and net loss not yet recognized as net pension cost, etc.) from the current year’s earnings after tax or prior years’ inappropriate earnings. However, the special reserve of equal amounts for prior years’ accumulated shareholders’ equity contra accounts should only be provided from prior years’ inappropriate earnings. If a reversal of shareholders’ equity contra account occurs, the reversed portion of the special reserve could be distributed.

B. For Cathay United Bank, Cathay Securities and Cathay Future, the remaining balance

should be reclassified as special reserve as of December 31, 2010 according to the related regulation. The special reserve may be used at any time to offset the accumulated deficit, if any. Once the legal reserve reaches one-half of the paid-in capital, up to 50% of the special reserve may be transferred to capital stock.

C. Cathay Life’s special reserves for major incidents and special reserve for fluctuation of

risks should be recorded as special reserve at the end of this year. As of December 31, 2012 and 2011, the reserves amounted to NT$1,119,727 (US$38,545) thousands and NT$741,951 (US$24,511) thousands, respectively.

D. Cathay Century’s special reserves for major incidents and special reserve for fluctuation

of risks should be recorded as special reserve at the end of this year. As of December 31, 2012 and 2011, the reserves amounted to NT$407,498 (US$14,027) thousands and NT$462,480 (US$15,278) thousands, respectively.

241



(3) Undistributed earnings

A. According to the Company Act and the Company’s articles of incorporation, 10% of the

Company’s annual earnings, after paying tax and offsetting deductions, if any, shall be appropriated as legal reserve and then 0.01%~0.05% of the remaining amount for employees’ bonus. Finally, the remainder after deducting for the aforementioned items must be appropriated in accordance with the resolutions passed at the shareholders’ meeting.

B. On June 15, 2012, the shareholders’ meeting resolved the distribution of earnings of

NT$1.0 (US$0.04) per share for the year of 2011. The cash and stock dividends with record dates are NT$0.5 (US$0.02) and NT$0.5 (US$0.02) on July 9 and August 14, 2012, respectively.

C. On June 10, 2011, the shareholders’ meeting resolved the distribution of earnings of

NT$0.8 (US$0.03) per share for the year of 2010. The cash and stock dividends with record dates are NT$0.6 (US$0.2) and NT$0.2 (US$0.01) on July 4 and August 5, 2011, respectively.

D. The Company is required to pay 10% surtax in the forthcoming tax year for undistributed

earnings. E. Pursuant to the explanatory letter of SFB on January 27, 2006, the Company is required

to appropriate a special reserve in the amount equal to unrealized loss of financial instruments, cumulative conversion adjustments, and net loss not yet recognized as net pension cost expect for the special reserve since 2007.

F. Dividends policy

The Company’s dividends policy is to distribute dividends in stock in order to retain sufficient cash for operations. Excess cash from retained earnings after taking into account operating needs may be distributed in cash; moreover cash dividends must be a minimum of 10% of the total dividends declared.

G. The estimation of employee bonus and remuneration of directors for the year ended

December 31, 2012 and 2011 were NT$6,945 (US$239) and NT$6,886 (US$227) based on the average actual payment over the past three year and recognized as operating expense. Resolution approved at the next year shareholders’ meeting might differ from the estimation mentioned above and the difference, if any, will be recognized as income or expense in the next year.

242



The Company distributed $6,416 (US$221) thousands of employee bonus and directors compensation for 2011. The difference of $470 (US$16) thousands exists between the actual and accrual amount recorded in year 2011 by the financial statements were recorded in the year ended December 31, 2012.

H. The Company’s distribution of 2012 retained earnings has not been approved by the

board of directors as of the independent auditor’s opinion date. For related information please refer to the “Market Observation Post System” website of the Taiwan Stock Exchange Corporation.

23. Treasury stock

The following is a summary of the movement of treasury stock For the year ended December 31, 2012 and 2011:

December 31, 2012

In thousands of shares Book value Book value per share Market value per share

Reason for

acquisition

January 1,

2012 Increase Decrease

December

31, 2012 (NT$) (US$) (NT$)

(US$)

( NT $)

( US$ )

Shares acquired

through share

exchange from

merger

transaction

200,000 - - 200,000 $7,179,872 $247,156 $35.90 $1.24 $31.50 $1.08

December 31, 2011

In thousands of shares Book value Book value per share Market value per share

Reason for

acquisition

January 1,

2011 Increase Decrease

December

31, 2011 (NT$) (US$) (NT$) (US$)

(NT$) (US$)

Shares acquired

through share

exchange from

merger

transaction

- 200,000 - 200,000 $7,179,872 $237,194 $35.90 $1.19 $32.70 $1.08

243



24. Operating Expense

For the years ended December 31, 2012 and 2011, personnel expense, depreciation and amortizations are summarized below:

For the year ended December 31,

2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Personnel expenses

Salary and wages $25,673,680 $883,776 $24,212,658 $799,890

Labor & health insurance expenses 3,128,323 107,687 2,922,226 96,539

Pension expenses 1,924,995 66,265 1,747,797 57,740

Other expenses 2,177,100 74,943 2,055,646 67,910

Depreciation 3,613,781 124,399 3,664,242 121,052

Amortization 430,849 14,831 450,739 14,891

25. Estimated income taxes

(1) Income tax expenses include the following:


2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Adjusted income tax calculates on

accounting income

$2,777,526 $95,612 $4,855,951 $160,421

Plus (Less): Alternative minimum tax

payable

92,560 3,186 84,802 2,802

Withholding tax for overseas

investments

97,377 3,352 27,809 919

Tax effects under consolidated

income tax

51,727 1,781 42,099 1,391

Deferred income tax benefits (3,400,898) (117,071) (6,920,961) (228,641)

Adjustment of income tax 249,856 8,601 152,558 5,039

Income tax credit 12,478 429 15,144 500

Other 81,711 2,813 76,008 2,511

Total income tax expense (benefits) $(37,663) $(1,297) $(1,666,590) $(55,058)

244



(2) Deferred income tax liabilities and assets are as follows:

December 31,

2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Total deferred tax assets $21,413,604 $737,129 $17,989,378 $594,297

Total deferred tax liabilities $1,202,368 $41,390 $928,545 $30,675

Allowance for deferred assets $890,866 $30,666 $189,769 $6,269

Temporary differences:

Pension expense $1,670,031 $57,488 $1,439,862 $47,567

Unrealized exchange losses 79,917,742 2,751,041 47,001,046 1,552,727

(Gains) losses from valuation on financial

assets and liabilities (2,662,399) (91,649) 12,743,142 420,983

Allowance for bad debts 4,289,032 147,643 1,888,036 62,373

Operating loss carry-forward 43,668,153 1,503,207 29,561,124 976,582

Other difference 173,972 5,989 (265,339) (8,766)

Total $127,056,531 $4,373,719 $92,367,871 $3,051,466

Tax effect under consolidated income tax

system $(2,340,983) $(80,585) $1,021,352 $33,741

Deferred income tax assets of foreign

branches $943,853 $32,491 $261,863 $8,651

Investment tax credit $8,755 $301 $75,080 $2,480

December 31,

2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Deferred tax assets $21,413,604 $737,129 $17,989,378 $594,297

Allowance for deferred tax assets (890,866) (30,666) (189,769) (6,269)

Net deferred tax assets 20,522,738 706,463 17,799,609 588,028

Deferred tax liabilities (1,202,368) (41,390) (928,545) (30,675)

Net offset balance of deferred tax assets $19,320,370 $665,073 $16,871,064 $557,353

In accordance with the Financial Holding Company Act, the Company elected to file consolidated income tax return along with 10% surtax on undistributed retained earning tax for all subsidiaries being held over 12 months within a taxable year by the Company. The applicable income tax rate of the Company and its subsidiaries were 17%.

245



(3) Income tax returns:

December 31, 2012 Income tax returns

examined by tax authorities

Notes The Company through 2006 The Company was in the process of administrative

litigation for 2003, 2004 and 2005 tax return, and re-examination of 2006 tax returns.

Cathay Life through 2006 Cathay Life was in the process of administrative litigation for 2003, 2004 and 2005 tax return, and re-examination of 2006 tax returns.

Cathay United Bank through 2006 Cathay United Bank was in the process of administrative litigation for 2004 and 2005, and re-examination of 2006 tax returns.

Cathay Century through 2006 Cathay Century as in the process of administrative litigation for 2003, 2004 and 2005, and re-examination of 2006 tax returns.

Cathay Securities through 2006 - Cathay Venture through 2009 - Cathay Securities Investment Trust

through 2010 Cathay Security Investment Trust has not examine for 2009 tax return.

Symphox Information through 2009 - Cathay Futures through 2010 -

(4) Information related to imputation credit account: December 31, 2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Balance of imputation credit account $1,665,811 $57,343 $1,063,636 $35,138 The Company’s distribution applicable to cash dividends-imputed tax credit ratio was 26.62%, stock dividends-imputed tax credit was 31.32% in 2011, and the actual distribution applicable to cash dividends-imputed tax credit was 25.56%, stock dividends-imputed tax credit was 25.56% in 2010.

(5) Information relating of undistributed retained earnings:

December 31,

Year 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Prior to 1997 $267,215 $9,198 $267,215 $8,828 After 1998 20,031,074 689,538 14,303,983 472,546

Total $20,298,289 $698,736 $14,571,198 $481,374

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The undistributed retained earnings prior to 1997 which derived from the undistributed retained earnings of the subsidiaries were included in the Company’s capital surplus and were allowed to be distributed as cash dividends by the regulations.

26. Earnings per share For the year ended December 31, 2012

Amount (Numerator) Shares

(in thousands

of shares)

denominator

EPS (in dollars)

Before income taxes After income taxes Before income taxes After income taxes


Earnings per share-basic:

Income attributable to

common stock stockholders

$17,020,374 $585,899 $17,058,037 $587,196 10,665,385 $1.60 $0.06 $1.60 $0.06

Effect of dilutive potential

ordinary shares:

Effect of convertible bonds $206,215 $7,099 $206,215 $7,099 199,901

Earnings per share-diluted:



and effect of potential

ordinary shares

$17,226,589 $592,998 $17,264,252 $594,295 10,865,286 $1.59 $0.05 $1.59 $0.05


Amount (Numerator) Shares

(in thousands

of shares)

denominator

EPS (in dollars)

Before income taxes After income taxes Before income taxes After income taxes


Earnings per share-basic:



$9,617,940 $317,738 $11,284,530 $372,796 10,809,707 $0.89 $0.03 $1.04 $0.03

Effect of dilutive potential

ordinary shares:

Effect of convertible bonds $- $- $- $- -

Earnings per share-diluted:



and effect of potential

ordinary shares

$9,617,940 $317,738 $11,284,530 $372,796 10,809,707 $0.89 $0.03 $1.04 $0.03

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27. Information of insurance contract

(1) Cathy Life, Cathay Life (China) and Cathay Life (Vietnam)

Risk management objectives, policies, procedures and methods

A. Framework for risk management, organization structure and responsibilities

a. Board of directors

(A) The board of directors should establish appropriate risk management function and culture, ratify appropriate risk management policy and allocate resources in the most effective manner.

(B) The board of directors and senior management should promote and execute risk

management policies and standards. Furthermore, they should ensure the policies and standards are in line with Cathy Life’s operational objective and operational strategy.

(C) The board of directors should acknowledge the risk of operation, ensure the

effectiveness of risk management and assume the ultimate responsibility for risk management.

(D) The board of directors should delegate authority to risk management department

to deal with violation of risk quotas by other departments.

b. Risk management committee

(A) The committee should draft the risk management policies, framework and organizational function to establish quantitative and qualitative risk management standards. The committee is also responsible to report the execution results to the board periodically and make necessary improvement suggestions.

(B) The committee should execute the risk management decisions set by the board of

directors and evaluate the development, implementation and results of execution of the risk management function

(C) The committee should assist and monitor the risk management activities.

248



(D) The committee should adjust the risk category, risk quota allocation and risk

taking according to the change of the big environment. (E) The committee should enhance cross-department interaction and communication.

c. Risk management department

(A) The department is responsible for monitoring, measuring and evaluating daily

risks. The department should execute its authority independently from the operating department.

(B) The department should perform following function based on activity categories:

� Assist drafting and execute the risk management policies set by the board of

directors. � Assist determines the risk quotas based on risk appetite. � Summarize the risk information provided by all departments. Facilitate and

communicate the execution of the policies as well as the risk quotas with departments.

� Periodically provide risk management related reports. � Periodically monitor all operating department’s risk quotas and manage the

exceptions attributable to exceed the risk quotas granted. � Assist the pressure test. Execute back testing if necessary. � Other risk management issues.

d. Operating departments

(A) Managers of the operating departments: � Responsible for the departments’ daily risk management report and respond to

issues if necessary. � Make sure to delivery risk management information periodically to the risk

management department.

249



(B) Operating departments:

� Address and measure risks and report the pervasiveness of exposure. � Periodically review the risk quotas. If exception happens, report the exceptions

as well as the actions taken. � Assist to develop the risk model. Ensure the measurement of risk, the usage of

the model and the assumptions made are reasonable and has been applied consistently.

� Ensure internal control operates effectively to comply with related regulation

and company’s risk management policies. � Assist gathering risk management related data.

e. Audit department

The department is required to audit all departments to determine the execution status of the risk management policies complies with the related regulations and Cathay Life’s risk management policies.

B. Reporting risk or measuring the range and characteristics of the system

Cathy Life set its risk management standards based on markets, credibility, sovereign, liquidity, operations, insurance, risks of matching between assets / liability positions and the capital adequacy. The company also periodically provides the risk management report for monitoring Cathy Life’s risks.

a. Market risk

The risk represents decrease in value of Cathay Life’s financial asset due to the price fluctuation of the financial instrument market. Cathy Life applies the 95% and 99% confidence level as the benchmark to measure odd week market risk. Cathy Life also applies back testing periodically to the market risk to ensure accuracy of the model. Furthermore, Cathy Life applies scenario analysis and stress test to evaluate the change in value of the asset groups due to significant domestic and international incidences.

250



b. Credit risk

This risk represents Cathy Life’s loss due to the default of debtors. The measurements that Cathy Life uses include credit rating, concentration analysis and value at risk (VAR). Cathy Life also periodically applies back-testing to the credit risk to ensure accuracy of the model. Furthermore, Cathy Life applies scenario analysis and stress test to evaluate the change in value of the asset groups due to significant domestic and international incidences.

c. Sovereign risk This represents risks of Cathy Life’s investment positions caused by changes of the local government’s politics or economy further causes price fluctuation or default that eventually results in a loss. Cathy Life takes international credit ranking companies’ ranking and other economy indexes into consideration to set the investment ceiling for specific countries. Cathy Life review and adjust the ceiling periodically.

d. Liquidity risk

Liquidity risks include “Funding liquidity risk” and “Market liquidity risk”. Funding liquidity risk is the risk of insufficient funding to meet Cathy Life’s commitment when due. Cathy Life uses current ratio to measure funding liquidity risk and manages to maintain the ratio below high risk. Operating departments have established funding communication system. The risk management department manages funding liquidity based on the information provided by the operating departments. Furthermore, operating departments have also built up their own cash flow analysis models and monitor the result of the analysis. They also set the annual assets allocation plan to better maintain the liquidity of funding. “Market liquidity risk” occurs when the market is under turmoil or lack of market depth further cause the drastic change of market price. All investment departments have evaluated the market liquidity risk based on the characteristics and intentions of current investment portfolio.

e. Operating risk

This risk occurs when there are errors caused by internal process, employee or system breakdown or external issues including legislative risks but strategic risk and reputation risks. Cathy Life had set the standard operating procedure based all characteristics of operations meanwhile established losses reporting system to manage operating risk losses information.

251



f. Insurance risk

This risk occurs after collecting premium from the policy holder. Cathy Life assumed the risk transferred from the policy holder and when the company pays the claim, due to unexpected change Cathy Life assumed a loss. This generally happens because of the policy design, pricing risks, underwriting risks, reinsurance risks, catastrophe risks, claim risks and reserve related risks.

g. Asset and liability matching risk

The type of risks happens when the changes in value of assets and liability are not equal. Cathy Life measures the risk by referencing capital costs, duration, cash flow management and scenario analysis.

h. Capital adequacy rate

Capital adequacy ratio is defined by Insurance Act and Regulations Governing Capital Adequacy of Insurance Companies. Cathy Life applies capital adequacy rate as the index of capital adequacy.

C. Manage the process of assuming, measuring, monitoring and controlling risks to ensure

proper risk classification, premium level and underwriting policies.

a. The process of assuming, measuring, monitoring and controlling risks:

� Promulgate Cathy Life’s risk management standards including the definition and rage of risk, management structure, risk management indexes and other risk management measures.

� Establish methods to evaluate insurance risks. � Periodically provide the insurance risk management report to the risk management

committee for supervising insurance risks and developing insurance risk management strategies.

� When a risk exceptional incidence occur, related departments should draft the

possible solution and submit it to the risk management committee and Cathay Financial Holding’s risk management committee.

252



b. Ensure proper risk classification and underwriting policies of premium level:

� Underwriters should ensure clients’ financial underwriting, checking insurance

notification for exceptions, considering the amount insured, types of insurance, age, family members, reason for insurance, employment, etc. to confirm client’s appropriateness of the amount insured and the ability to meet premium deadlines.

� Cathy Life has an underwriter team dealing with controversy events such as new

type of contracts and change of security systems and clarifying related underwriting standards.

� Cathy Life has a judging team for highly insured projects to enhance its risk

management and prevent adverse selection and moral hazard.

D. Evaluation based on the enterprise taken as a whole and range of managing insurance risks.

a. Evaluation of insurance risks include the following risks:

� Product design and pricing risks: This type of risk arises from improper design of

products, inappropriate policies, inappropriate pricing, referencing the wrong source of information, inconsistency and unexpected changes.

� Underwriting risks: Unexpected losses arise from promoting business, underwriting

activities and approval, other expenditure activities etc. � Reinsurance risks: This type of risk arises from failing to reinsure the excess risk or

reinsurer fails to fulfill its responsibility that results in loss in premium, claims or non-reimbursed expenses.

� Catastrophe risks: This type of risk arises from accidents that cause a type or more

than one type of insurance a loss which in aggregate might affect Cathy Life’s credit raking and solvency.

� Claim risks: This type of risk arises from inappropriate operation or mistakes while

handling claim. � Risks of insufficient reserve: This type of risk arises from insufficient reserve due

to underestimate of liability.

253



b. Range of managing insurance risks

� Establish Cathy Life’s insurance risk management standards as the guidance of

performing risk management. � Establish Cathy Life’s insurance risk management standards including the definition and

range of risks, management structure, risk management index and other risk management measures.

� Draft action plans for matching Cathy Life’s expanding strategy and response to the

changes of financial environment worldwide. � Establish measurement methods for insurance risks. � Periodically provide insurance risks management report for monitoring insurance

risk and drafting insurance managing strategy. � Other issues related to insurance risks management.

E. Methods to limit or transfer insurance risk exposure and to prevent inappropriate concentration of risks

The method that Cathy Life mainly uses to limit or transfer insurance risk exposure and to prevent inappropriate concentration of risks is the reinsurance managing plan. The company estimates the risk that Cathy Life is able to assume including characteristics of the risk, regulation issues and development technique factors all together to determine the range of reinsurance. In order to maintain safety of risk transfer and control the risk of reinsurance transactions, Cathy Life has established reinsurer selection standards.

F. Methods for managing assets and liabilities

a. Cathy Life has assets and liabilities managing committee to ensure full application of

the managing policy, establish management structure, integrate human capital and resources, review the strategy and practice periodically and further reduce all types of risks.

b. Responsible departments will review the measurement of the matching risks of assets

and liabilities periodically. The reports will be sent to the risk management committee. Furthermore, the reports should be delivered to the risk management committee of Cathay Financial Holding annually.

254



c. When exceptional situation occur, related departments should hold a meeting to find

possible actions plan and deliver the report to assets and liabilities managing committee, risk management committee and the risk management committee of the Company.

G. When special incidence happens, the managing, monitoring and controlling procedures

relating to extra liability or commitment of contributing extra owner equity are as following:

To comply with laws and regulation, Cathy Life is required to maintain its capital adequacy rate in a certain rage. In order to enhance Cathy Life’s capital management and maintain its capital adequacy ratio, Cathy Life has established a set of capital adequacy management standards as following:

a. Capital adequacy management

� Periodically provide capital adequacy management reports and analysis to the

financial department of Cathay Financial Holding. � Periodically provide the risk management committee the capital adequacy

management analysis report. � Practice scenario analysis for capital adequacy ratio focusing on Cathy Life’s usage

of funding, changes of the financial environment including updates of laws and regulations.

� Periodically review the capital adequacy rate and related control standards to fulfill

the management of capital adequacy.

b. Exception management process

When Cathy Life’s capital adequacy rate exceeds the risk management standard or other exceptions occur, Cathy Life is required to notify the risk management department and financial department of the Company enclosed with capital adequacy analysis report and related planned actions reports.

255



Information of Insurance Risk

A. Sensitivity of insurance risk- Insurance contracts and financial instruments with

discretionary participation features

a. Cathay Life


Change in supposition

Change in income before tax

Change in stockholders’ equity

Life table/Morbidity ×1.05 (×0.95) Decrease (increase) 2,037,788

Decrease (increase) 1,691,364

Expense ×1.05 (×0.95) Decrease (increase) 2,642,541

Decrease (increase) 2,193,309

Surrender rates ×1.05 (×0.95) Increase (decrease) 322,635

Increase (decrease) 276,087

Investment return rate +0.1% Increase 2,945,451 Increase 2,444,724 Investment return rate -0.1% Decrease 2,948,340 Decrease 2,447,122

December 31, 2012

(US$) Change in

supposition Change in income

before tax Change in

stockholders’ equity Life table/Morbidity ×1.05 (×0.95) Decrease (increase)

70,148 Decrease (increase)

58,223 Expense ×1.05 (×0.95) Decrease (increase)


75,501 Surrender rates ×1.05 (×0.95) Increase (decrease)

11,106 Increase (decrease)

9,504 Investment return rate +0.1% Increase 101,392 Increase 84,156 Investment return rate -0.1% Decrease 101,492 Decrease 84,238

December 31, 2011

(NT$) Change in




2,006,254 Decrease (increase)

1,665,191 Expense ×1.05 (×0.95) Decrease (increase)

2,440,125 Decrease (increase)

2,025,304 Surrender rates ×1.05 (×0.95) Increase (decrease)


264,926 Investment return rate +0.1% Increase 2,712,005 Increase 2,250,964 Investment return rate -0.1% Decrease 2,714,674 Decrease 2,253,180

256



December 31, 2011

(US$) Change in





55,011 Expense ×1.05 (×0.95) Decrease (increase)





b. Cathay Life (China)

December 31, 2012

(NT$) Change in



stockholders’ equity Life table/Morbidity ×1.10(×0.90) Decrease (increase)


25,348 Expense ×1.05(×0.95) Decrease (increase)


24,375 Surrender rates ×1.10(×0.90) Increase (decrease)







Life table/Morbidity ×1.10(×0.90) Decrease (increase) 1,163

Decrease (increase) 873

Expense ×1.05(×0.95) Decrease (increase) 1,119


Surrender rates ×1.10(×0.90) Increase (decrease) 598

Increase (decrease) 449

Investment return rate +0.25% Increase 3,869 Increase 2,902 Investment return rate -0.25% Decrease 4,216 Decrease 3,162

257



December 31, 2011

(NT$) Change in





6,490 Expense ×1.10(×0.95) Decrease (increase)


21,124 Surrender rates ×1.10(×0.90) Increase (decrease)



December 31, 2011

(US$) Change in




286 Decrease (increase)

214 Expense ×1.10(×0.95) Decrease (increase)


698 Surrender rates ×1.10(×0.90) Increase (decrease)

561 Increase (decrease)

421 Investment return rate +0.25% Increase 2,741 Increase 2,056 Investment return rate -0.25% Decrease 2,995 Decrease 2,246

c. Cathay Life (Vietnam)

December 31, 2012

(NT$) Change in





182 Expense ×1.05 (×0.95) Decrease (increase)





258



December 31, 2012

(US$) Change in





6 Expense ×1.05 (×0.95) Decrease (increase)


317 Surrender rates ×1.05 (×0.95) Increase (decrease)

76 Increase (decrease)

57 Investment return rate +0.1% Increase 50 Increase 37 Investment return rate -0.1% Decrease 50 Decrease 37





Life table/Morbidity ×1.05 (×0.95) Decrease (increase) 72


Expense ×1.05 (×0.95) Decrease (increase) 19,405

Decrease (increase) 14,554

Surrender rates ×1.05 (×0.95) Increase (decrease) 1,549

Increase (decrease) 1,162

Investment return rate +0.1% Increase 1,402 Increase 1,052 Investment return rate -0.1% Decrease 1,404 Decrease 1,053





Life table/Morbidity ×1.05 (×0.95) Decrease (increase) 2


Expense ×1.05 (×0.95) Decrease (increase) 641


Surrender rates ×1.05 (×0.95) Increase (decrease) 51

Increase (decrease) 38

Investment return rate +0.1% Increase 46 Increase 35 Investment return rate -0.1% Decrease 46 Decrease 35

259



� Changes in income before tax listed above refer to the effects of income before tax

in the profits and losses for the year ended December 31, 2012 by the assumption. Change of the stockholders’ equity is assumed 17%, 25% and 25% of income tax rate has been used by Cathay Life, Cathay Life (China) and Cathay Life (Vietnam).

� Increase (decrease) 0.1% on discount rate applied to liability adequacy test has no

impact on income before tax and stockholders’ equity. The result of the test shows adequacy. However, if the discount rate keeps decreasing to significant degree, income before tax and stockholders’ equity will probably be affected.

� Test of sensitivity: (i) Life Table/Morbidity test is measured by mortality, morbidity and the

occurrence rate of injury insurance multiply the change in supposition rate, in opposition to the change in income before tax.

(ii) Expenses sensitivity is measured by all expenses listed on income statement of

the first three quarter in 2012 (Note 1) multiply the change in supposition rate, in opposition to the change in income before tax.

(iii)Surrender rate sensitivity test is measured by surrender rate multiply the change

in supposition rate, in opposition to the change in income before tax. (iv) The rate of returns sensitivity test is measured by the rate of returns (Note 2)

increases (decreases) the change in supposition rate, in opposition to income before tax.

Note 1: Expenses includes brokerage expenses, commission expenses, other

operating expenses under operating costs as well as business expenses, administration expenses and staffs training expenses under operating expenses.

Note 2: The rate of returns is measured by 2 x net profits or losses on investment /

(the beginning balance of usable capital + the ending balance of usable capital – net profits or losses on investment) and it needs to be annualized.

260



B. Interpretation of concentration on insurance risk

Cathy Life’s insurance business is mainly from Taiwan, Republic of China. All the insurance contracts which have been signed have the similar risk of exposure, for example, the exposure of the unanticipated changes in trend (ex: mortality, morbidity, and lapse rate), the exposure of multiple insurance contracts caused by a specific event (ex: the simultaneous exposure of life insurance, health insurance, and accidental insurance caused by one earthquake). Cathy Life reduces the risk of exposure not only by monitoring the status of the risk continuously, but also buying reinsurance contracts. Cathy Life reviews the profits and losses on compensation as a whole and the capability of assuming the risk periodically. Depending upon the feature of each risk, the company assesses the amount of coverage a company retains on that risk, also called “net line,” as well as reviewed and approved by each competent authority. For the excess of net line, the company reinsures this portion of amount. At the same time, the company takes the possibility of suddenness of human and nature disasters into account periodically and estimates the reasonable maximum amount of compensation on retained risks. Depending upon the dollar amount of losses and the capability of assuming risks, the company makes the decision on whether it is necessary to adjust the insurance limits or reinsurance on disasters. Hence, the insurance risk to some extent has been spread out to reduce the potential impact on unanticipated losses. Furthermore, according to “Regulations Governing the Setting Aside of Various Reserves by Insurance Enterprises.”, the annual increase after-tax amount of special reserve for major accidents and special reserve for fluctuation of risks which is based upon the loss ratio of each type of insurance and used for the abnormal movement of compensation needs to be recognized and recorded in appropriated retained earnings of equity in accordance with the Statements of Financial Accounting Standards No. 22 since the beginning of 2011.

261



C. Trend of the Development on Compensation

a. Cathay Life

� Direct business trend of development

Development period (years)

(NT$) Expected

Accident year 1 2 3 4 5 6 7 future payment

2006Q1~2006Q4 11,425,053 13,557,196 13,665,394 13,693,817 13,728,736 13,744,249 13,759,078 -

2007Q1~2007Q4 12,452,527 14,654,222 14,777,445 14,836,106 14,885,981 14,940,094 14,955,691 15,597

2008Q1~2008Q4 13,213,167 15,502,203 15,690,933 15,752,002 15,809,213 15,844,103 15,859,726 50,513

2009Q1~2009Q4 14,440,987 17,222,987 17,462,074 17,540,479 17,596,452 17,635,049 17,652,707 112,228

2010Q1~2010Q4 14,132,667 17,063,839 17,346,230 17,408,477 17,462,709 17,498,996 17,515,903 169,673

2011Q1~2011Q4 14,898,732 18,205,420 18,418,577 18,484,902 18,542,274 18,580,339 18,598,390 392,970

2012Q1~2012Q4 14,630,400 17,372,614 17,566,220 17,623,362 17,672,882 17,705,213 17,721,475 3,091,075

Expected future payment $3,832,056

Less：expected reported but not paid claim (139,684)

Add: assumed reserve for incurred but not reported claim 41,732

Reserve for unreported claim 3,734,104

Add：reported but not paid claim 418,166

Reserve claim balance $4,152,270


(US$) Expected

Accident year 1 2 3 4 5 6 7 future payment

2005Q4~2006Q4 393,289 466,685 470,409 471,388 472,590 473,124 473,634 -

2006Q4~2007Q4 428,658 504,448 508,690 510,709 512,426 514,289 514,826 537

2007Q4~2008Q4 454,842 533,639 540,135 542,238 544,207 545,408 545,946 1,739

2008Q4~2009Q4 497,108 592,874 601,104 603,803 605,730 607,058 607,666 3,863

2009Q4~2010Q4 486,495 587,395 597,116 599,259 601,126 602,375 602,957 5,841

2010Q4~2011Q4 512,865 626,693 634,030 636,313 638,288 639,599 640,220 13,527

2011Q4~2012Q4 503,628 598,025 604,689 606,656 608,361 609,474 610,033 106,405

Expected future payment $131,912


Add: assumed reserve for incurred but not reported claim 1,436

Reserve for unreported claim 128,540


Reserve claim balance $142,935

262



Retained business trend of development


(NT$) Expected

Accident year 1 2 3 4 5 6 7 future

payment

2006Q1~2007Q4 11,552,058 13,673,489 13,800,715 13,838,046 13,875,194 13,889,224 13,912,560 -

2007Q1~2008Q4 12,530,438 14,750,682 14,881,256 14,941,735 14,991,028 15,052,095 15,067,952 15,857

2008Q1~2009Q4 13,304,966 15,621,032 15,813,590 15,874,029 15,938,326 15,973,747 15,989,639 51,313

2009Q1~2010Q4 13,556,435 15,902,174 16,096,383 16,169,162 16,215,892 16,248,749 16,263,501 94,339

2010Q1~2011Q4 12,304,040 14,592,249 14,803,959 14,850,410 14,887,449 14,913,061 14,924,564 120,605

2011Q1~2012Q4 12,998,408 15,670,011 15,829,449 15,879,608 15,919,385 15,946,525 15,959,044 289,033

2012Q1~2012Q4 12,821,935 15,088,340 15,233,647 15,276,252 15,309,950 15,332,458 15,343,745 2,521,810

Note：Retained business equals direct business plus assumed reinsurance business less ceded reinsurance business.

Expected future payment $3,092,957



Retained reserve claim balance $3,371,439


(US$) Expected

Accident year 1 2 3 4 5 6 7 future

payment

2006Q1~2007Q4 397,661 470,688 475,068 476,353 477,631 478,114 478,918 -

2007Q1~2008Q4 431,340 507,769 512,264 514,345 516,042 518,144 518,690 546

2008Q1~2009Q4 458,002 537,729 544,358 546,438 548,652 549,871 550,418 1,766

2009Q1~2010Q4 466,659 547,407 554,092 556,598 558,206 559,337 559,845 3,247

2010Q1~2011Q4 423,547 502,315 509,603 511,202 512,477 513,358 513,755 4,152

2011Q1~2012Q4 447,450 539,415 544,904 546,630 547,999 548,934 549,365 9,950

2012Q1~2012Q4 441,375 519,392 524,394 525,861 527,021 527,795 528,184 86,809

Note：Retained business equals direct business plus assumed reinsurance business less ceded reinsurance business.




Retained reserve claim balance $116,056

263



2 Cathay Life (China)

(A) Direct business trend of development


(NT$)

Expected

future

payment Accident year 1 2 3 4 5 6 7

2006Q1~2007Q4 26 51 53 53 53 53 53 -

2007Q1~2008Q4 783 3,148 3,160 3,160 3,160 3,160 3,160 -

2008Q1~2009Q4 8,993 17,321 18,087 18,087 18,087 18,087 18,087 -

2009Q1~2010Q4 49,583 112,041 117,922 117,922 117,922 117,922 117,922 -

2010Q1~2011Q4 93,208 186,536 198,475 198,475 198,475 198,475 198,475 -

2011Q1~2012Q4 172,199 357,911 363,655 363,655 363,655 363,655 363,655 5,744

2012Q1~2012Q4 309,385 660,270 660,270 660,270 660,270 660,270 660,270 350,885


Less: expected reported but not paid claim (36,142)

Add: assumed reserve for incurred but not reported claim -


Add: reported but not paid claim 75,962



(US$)

Expected

future


2006Q1~2007Q4 1 2 2 2 2 2 2 -

2007Q1~2008Q4 27 108 109 109 109 109 109 -

2008Q1~2009Q4 310 596 623 623 623 623 623 -

2009Q1~2010Q4 1,707 3,857 4,059 4,059 4,059 4,059 4,059 -

2010Q1~2011Q4 3,209 6,421 6,832 6,832 6,832 6,832 6,832 -

2011Q1~2012Q4 5,928 12,320 12,518 12,518 12,518 12,518 12,518 198

2012Q1~2012Q4 10,650 22,728 22,729 22,729 22,729 22,729 22,729 12,078



Add: assumed reserve for incurred but not reported claim -




264



(B) Retained business trend of development


(NT$)

Expected

future


2006Q1~2007Q4 26 51 53 53 53 53 53 -

2007Q1~2008Q4 783 3,148 3,160 3,160 3,160 3,160 3,160 -

2008Q1~2009Q4 8,993 17,321 18,087 18,087 18,087 18,087 18,087 -

2009Q1~2010Q4 49,583 112,041 117,922 117,922 117,922 117,922 117,922 -

2010Q1~2011Q4 93,208 186,405 198,342 198,342 198,342 198,342 198,342 -

2011Q1~2012Q4 171,811 356,056 361,777 361,777 361,777 361,777 361,777 5,721

2012Q1~2012Q4 311,744 662,129 662,129 662,129 662,129 662,129 662,129 350,385

Note: Retained business equals direct business plus assumed reinsurance less ceded reinsurance business.






(US$)

Expected

future


2006Q1~2007Q4 1 2 2 2 2 2 2 -

2007Q1~2008Q4 27 108 109 109 109 109 109 -

2008Q1~2009Q4 310 596 623 623 623 623 623 -

2009Q1~2010Q4 1,707 3,857 4,059 4,059 4,059 4,059 4,059 -

2010Q1~2011Q4 3,209 6,417 6,828 6,828 6,828 6,828 6,828 -

2011Q1~2012Q4 5,914 12,257 12,454 12,454 12,454 12,454 12,454 197

2012Q1~2012Q4 10,732 22,793 22,793 22,793 22,793 22,793 22,793 12,061

Note: Retained business equals direct business plus assumed reinsurance less ceded reinsurance business.





265



Cathay Life and Cathay Life (China) record and recognize reserve for claim for anticipated payment of reported and unreported compensations. Due to the factors of uncertainty, estimation, and judgment involved in recording and recognition, there is a high degree of complexity of reserve for claim. Any change of the estimation or judgment is treated as the change of the accounting principle and recorded and recognized as profit and loss in current year. Some claims of compensation are delayed notification. Also, the estimated unreported cases probably need to be settled by compensation. All these are involved in heavy judgment and estimation. Thus, it exists uncertainty that the estimated reserve for claim in balance sheet date will be not equal to the final settled amount of compensation. The reserve for claim recorded on the book is estimated based upon the current information obtained. However, the settled amount probably will be deviated from the original estimated amount because of the follow-up events. The chart above has shown the development trend of the compensation. The accident year is the actual year for the occurrence of the claimed accident; The cross axle is the year of the development for the settlement cases; the dollar amount showing above the diagonal line represents the settlement cases in that specific accident year with the corresponding accumulated dollar amounts has been paid in the end of the year; the dollar amount showed below the diagonal line represents the accumulated estimated dollar amounts need to be paid for each accident year. It is possible that the circumstances and trends affecting dollar amount of recording and recognition to the reserve for claim in current year will be different from that in the future. Thus, the anticipated dollar amounts need to be paid for the settlement cases cannot be made the decision to be made from this chart.

3 Cathay Life (Vietnam)

(A) Direct business trend of development

Accident year

Development period (years) (NT$)

1 2 3 4 2009Q1~2010Q4 10 15 15 15 2010Q1~2011Q4 255 227 227 227 2011Q1~2012Q4 338 554 554 554 2012Q1~2012Q4 1,072 1,504 1,504 1,504

266



Accident year

Development period (years) (US$)

1 2 3 4 2008Q4~2009Q4 - 1 1 1

2009Q4~2010Q4 9 8 8 8

2010Q4~2011Q4 12 19 19 19

2011Q4~2012Q4 37 52 52 52

(B) Retained business trend of development

Accident year

Development period (years) (NT$)

1 2 3 4 2009Q1~2010Q4 10 15 15 15

2010Q1~2011Q4 255 227 227 227

2011Q1~2012Q4 338 554 554 554

2012Q1~2012Q4 1,072 1,504 1,504 1,504

Accident year

Development period (years) (US$)

1 2 3 4 2008Q4~2009Q4 - 1 1 1

2009Q4~2010Q4 9 8 8 8

2010Q4~2011Q4 12 19 19 19

2011Q4~2012Q4 37 52 52 52

The chart above has shown the development trend of the compensation. The accident year is the actual year for the occurrence of the claimed accident; The cross axle is the year of the development for the settlement cases; the dollar amount showing above the diagonal line represents the settlement cases in that specific accident year with the corresponding accumulated dollar amounts has been paid in the end of the year; the dollar amount showing below the diagonal line represents the accumulated estimated dollar amounts need to be paid for each accident year.

267



Cathay Life (Vietnam) records and recognizes indemnify reserve for anticipated payment of reported claim and unreported claim compensations. The estimated method of unreported claim is earned premium reserve multiply by claim rate based upon the past indemnity experiences instead of loss triangle method, which approved by Vietnam local authorities. Thus, the anticipated dollar amounts need to be paid for the settlement cases cannot be made the decision to be made from this chart. Also, the estimated unreported cases probably need to be settled by compensation. All these are involved in heavy judgment and estimation. Thus, it exists uncertainty that the estimated indemnify reserve in balance sheet date will be not equal to the final settled amount of compensation.

Credit Risk, Liquidity Risk, and Market Risk for Insurance Contracts

A. Credit Risk

Due to the limitation of the features for reinsurance market and the qualification of reinsurer under the related regulation, the insurance company in Taiwan sustains certain degree of concentration of credit risk in reinsurer. To reduce this risk, Cathay Life chooses trading entity carefully and also reviews its credit rating periodically. Also, Cathay Life monitors and controls the risk of reinsurance transactions properly in accordance with Cathay Life’s “Reinsurance Risk Management Plan” and “Reinsurance Entity Assessment Procedures.” If Cathay Life has unqualified ceded reinsurance under “Regulations Governing Insurance Enterprises Engaging in Operating Reinsurance and Other Risk Spreading Mechanisms,” Cathay Life records and recognizes reserves for unqualified reinsurance in accordance with the requirements set forth by the competent authority to reduce the possible influence on the increase of reinsurer credit risk. The credit rating to the trading entities of reinsurance in the company is good and above certain level, complying with Cathay Life’s related rules and the regulations in Taiwan.

B. Liquidity Risk

The chart below is the analysis (undiscounted) of insurance contracts and net cash flows on liabilities of financial instruments with discretionary participation features. The figures showed in this chart are the total insurance payments and expenses of valid insurance contracts at every payment time in the future on the balance sheet date. The actual dollar amounts paid in the future will not be the same due to the difference between the practical and anticipated experiences.

268



Unit: Billion

December 31, 2012

(NT$) Within 1 year 1 to 5 year Over 5 year

Insurance contracts and financial

instruments with discretionary


$(674) $1,506 $95,141

December 31, 2012

(US$) Within 1 year 1 to 5 year Over 5 year

Insurance contracts and financial

instruments with discretionary


$(23) $52 $3,275

(Note) : Excluding Separate account

C. Market Risk

When Cathay Life measures insurance liabilities, the discounted rate approved by the

competent authority is applied. The competent authority reviews periodically the discount

rate assumption which has been used for reserves. However, the discount rate assumption

is not necessarily the same of the time, dollar amount, and direction with those variables

(ex: yield rate) in market risk. Thus, those possible variables in market risk to the

company’s valid insurance contacts have slight impact on profit and loss or equity. When

the competent authority changes the discount rate assumption possibly and reasonably,

this change will have the impact of different range on profit and loss or equity depending

upon the level of change it has been made and the overall company product portfolio.

Furthermore, the reasonable possibly change on the market risk probably will have

impact on the insurance contracts which are estimated on balance sheet date based upon

the current obtained information and the future cash flows of financial instruments with

discretionary participation features, used for assessing the adequacy of recognized

insurance liabilities via adequacy test. Based upon the reasonable possibly changes on

current market risk, it has no or little impact on the adequacy of current recognized

insurance liabilities.

269



(2) Cathay Century

Risk management objectives, policies, procedures and methods

A. Risk management framework, organization, and responsibility

a. Board of directors

(A) Recognize various risks associating with insurance business, assure effectiveness

of risk management and take ultimate responsibility for risk management as a whole.

(B) Establish proper mechanism and culture for risk management, ratify proper risk

management policies and optimize resources allocation. (C) Consider aggregate effect of various risks from the perspective of the company as

a whole, at the same time take into account regulatory capital requirements from the authority and other related capital allocation regulations regarding finance and business.

b. Risk Management Committee

(A) Formulate risk management policies, frameworks, and organizations. Build

quantitative and qualitative management standards. Regularly report to board of directors, reflect timely the execution of risk management and propose necessary steps for improvement.

(B) Execute risk management decisions from board of directors and review

development, establishment and effectiveness of risk management mechanism for company as a whole on a regular basis.

(C) Assist and supervise various departments in risk management activities. (D) Adjust risk category, allotment, and attribution in reaction to changes in scenario. (E) Coordinate interaction and communication of risk management function across

departments.

270



c. Risk management department

(A) Assist the draft of risk management policies and execute one ratified by the board

of directors. (B) Assist the set-up of risk limits according to the risk appetite. (C) Compile risk information from various departments, coordinate and communicate

with them to execute policies and limits. (D) Propose risk management related reports on a regular basis. (E) Supervise risk limit and its use of each business unit on a regular basis. (F) Assist in stress test and conduct back-testing when necessary. (G) Other risk management related tasks.

d. Business unit

� Responsibilities in risk management of business are as follows:

(A) Manage daily risk management and report of the corresponding unit and take

necessary reactions.

(B) Oversee the passage of risk management information to risk management on a regular basis.

� Responsibilities in operation of risk management of business unit are as follows:

(A) Identify risk and report risk exposure. (B) Evaluate (quantitive or qualitative) the degree of influence when risks occur

and pass risk information in a timely and correct manner. (C) Review each risk item and its limit on a regular basis to insure the effective

execution of risk limit within business unit.

271



(D) Oversee risk exposure and report when over-limit occur, including measures

taken against it.

(E) Assist in development of risk model to insure the evaluation of risk, use of model, and its assumption are conducting on a reasonable basis and is consistent with actual practice.

(F) Assure effective execution of internal control within business unit to comply

with related regulation and risk management policies of the company. (G) Assist in collecting information regarding operation risk.

e. Internal audit room

Audit the execution of risk management of each unit in the company according to current related regulation.

B. Scope and nature of risk reporting and evaluation system of property insurance

a. Risks reporting � Each business unit within Cathay Century should pass risk information to risk

management unit for overseeing purpose, and propose over-limit report and corresponding measures when risk exposure is over limit.

2 Risk management unit compile risk information from each department, examine

and track the use of major risk limit, submit monthly risk management report to general manager, and make quarter report to the board of director to oversee risk on a regular basis.

b. Scope and nature of risk evaluation system

The risk management unit of the Company and Cathay Century collaborate in building market risk management system. The structure will consider functionality, source of information, completeness of uploaded information, and the safety of the environment in which the system operates. Function-wise, risk management system focuses on the need of middle office to quantify risk, and it would only be authorized to risk management personnel.

272



C. Processes to undertake, evaluate, supervise and control insurance risk of property

insurance business. Policy in underwriting to assure proper risk categorization and fee standard.

In Cathay Century, risk management department takes responsibilities in monitoring risks, integrate insurance risk of the company as a whole, and set up each risk indicator, risk limit, and managing mechanism. Each related department is execution unit of insurance risk control. They report execution process to risk management department every month based on regulation, internal rules, and professional knowledge and experience of their respective field. Risk management department then propose insurance risk management report to the board of directors each quarter.

D. Evaluate risk from the perspective of enterprise as a whole and the scope in managing

insurance risk

Scope of insurance risk management of Cathay Century includes product design and pricing, underwriting, reinsurance, risks related to catastrophe, claim, and provision. Proper management mechanisms are set up and execute thoroughly.

E. Methods with which property insurance business limit insurance risk exposure and

improper risk concentration Before a business is introduced, underwriting personnel will evaluate the quality of the business based on the underwriting guideline of each insurance to decide whether to undertake the business. Risk is properly avoided and controlled to reduce exposure. In addition, as Cathay Century undertakes reinsurance business, risk management mechanism is set up in accordance with “Regulations Governing Insurance Enterprises Engaging in Operating Reinsurance and Other Risk Spreading Mechanisms” and the ability to undertake risk is taken into account for the establishment of re-insurance risk management plan which execution is based upon. Accumulated risk with the portfolio of direct written premiums and other inward-insurance business is conducted before an individual case of outward/inward reinsurance is executed. When the cumulative insurance amount exceeds contract limit or self-retain limit, risk is diversified through facultative reinsurance.

273



According to Cathay Century’s “Reinsurance Risk Managing Plan”, the limit of underlying retention for each risk unit of insurance is based on 10% of total amount of special reserve under stockholders’ equity and liability (exclude compulsory automobile liability insurance). The following summarize underlying retention for each risk unit by types of insurance:

2012

2011

Item (NT$)

(US$)

(NT$)

(US$) Fire insurance $613,000

$21,102

$630,000

$20,813

Marine insurance 613,000 21,102

US$12,000 12,000 Engineering insurance 613,000 21,102

630,000 20,813

Casualty insurance 613,000 21,102

630,000 20,813 Automobile insurance 613,000 21,102

100,000 3,304

Health and injury insurance

613,000 21,102

630,000 20,813

F. Methods of asset/liability management

Provisions are evaluated on a regular basis based on Cathay Century’s business characteristics to insure current fund allocation and the liquidity of asset investment is sufficient to meet possible future claims. Cash flow management with comprehensive consideration of the amount of fund required and its timeline of every department is conducted through fund procurement department, which is independent of trading unit. Operation standards under crisis are set up in accordance with the “Directions for Handling Financial Institutes in Crisis” issued by Financial Supervision Commission. When tremendous sum of fund is loss or liquidity is severely lacked, operation crisis team will be set up immediately to evaluate the impact on fund liquidity of Cathay Century cautiously and assess the amount, timeline, and benefit of making up the funding gap so as to assure rights of clients and the company.

G. Management, supervision, control process when additional liability or commitment to

equity contribution is required for the property insurance business Cathay Century has established management mechanism for capital adequacy, which includes capital adequacy indicators for regular review, and every six months a capital adequacy management report will be compiled to implement capital adequacy management.

274



If capital adequacy ratio exceeds control standard (risk limit) or in the case of unusual events, related departments will be summoned to study counter-measures and report to the Company, to review the impact on the group’s capital adequacy ratio.

Information of management achievement

A. Acquisition cost for insurance contracts:


Item

Commission expense Agency fee Surcharge

Reinsurance commission

expense Other cost Total

(NT$) (US$) (NT$) (US$) (NT$) (US$) (NT$) (US$) (NT$) (US$) (NT$) (US$)

Fire insurance

$23,855 $821 $6,508 $224 $1,595 $55 $1,716 $59 $91,186 $3,139 $124,860 $4,298

Marine insurance

9,820 338 2,721 94 145 5 2,577 89 69,367 2,388 84,630 2,914

Land & air

insurance 33,928 1,168 2,157 74 - - 3,211 111 680,747 23,434 720,043

24,787

Liability insurance

17,216 592 1,693 58 - - 151 5 55,730 1,918 74,790 2,573

Bonding insurance

764 26 20 1 - - 4 - 1,847 64 2,635 91

Other property

insurance

21,172 729 2,723 94 4 - 3,086 106 82,891 2,853 109,876

3,782

Accident insurance 10,541 363 945 33 7 - 24 1 336,110 11,570 347,627 11,967

Health insurance

4,150 143 334 11 - - - - 11,892 409 16,376 563

Compulsory

automobile

liability

insurance

- - - - 393,394 13,542 - - 11,055 381 404,449

13,923

Total

$121,446 $4,180 $17,101 $589 $395,145 $13,602 $10,769 $371 $1,340,825 $46,156 $1,885,286 $64,898


Item

Commission expense Agency fee Surcharge


expense Other cost Total

(NT$) (US$) (NT$) (US$) (NT$) (US$) (NT$) (US$) (NT$) (US$) (NT$) (US$)

Fire insurance

$47,242 $1,561 $4,366 $144 $1,838 $61 $812 $27 $82,628 $2,730 $136,886 $4,523

Marine insurance

14,538 480 2,426 80 289 10 1,485 49 41,203 1,361 59,941 1,980

Land & air

insurance 11,954 395 1,003 33 - - 2,850 94 598,360 19,767 614,167 20,289

Liability insurance

13,945 461 766 25 - - 60 2 43,195 1,427 57,966 1,915

Bonding insurance

279 9 33 1 - - (1) - 1,020 34 1,331 44

Other property

insurance

15,912 526 1,028 34 - - 3,139 104 71,944 2,377 92,023 3,041

Accident

insurance

6,563 217 696 23 16 - 1,349 44 319,526 10,556 328,150 10,840

Health insurance

979 32 102 4 - - - - 11,183 369 12,264 405

Compulsory

automobile

liability

insurance

- - - - 376,140 12,426 - - 38,436 1,270 414,576 13,696

Total

$111,412 $3,681 $10,420 $344 $378,283 $12,497 $9,694 $320 $1,207,495 $39,891 $1,717,304 $56,733

275



B. Disclosure for insurance cost benefit analysis:

� Cost benefits analysis for direct underwriting:


Item

Premium

income

Net change

for unearned

premium

reserve

Acquisition

cost for

insurance

contract Claims

Net change

for claim

reserve Net gain (loss)

Fire insurance

$2,623,079 $(292,978) $(123,144) $(1,172,779) $920,954 $1,955,132

Marine insurance

782,282 12,981 (82,053) (365,842) (49,486) 297,882

Land & air insurance

5,023,758 (472,256) (716,832) (2,879,643) (212,518) 742,509

Liability insurance

732,588 (83,717) (74,639) (229,635) (51,730) 292,867

Bonding insurance

58,808 (3,102) (2,631) (3,569) (7,598) 41,908

Other property

insurance

712,863

(83,568)

(106,790)

(217,744)

(55,749)

249,012

Accident insurance 2,367,455 (18,107) (347,603) (1,007,450) (61,509) 932,786

Health insurance

124,417 59,541 (16,376) (157,658) (34,125) (24,201)

Compulsory automobile

liability insurance

2,818,880

(50,870)

(404,449)

(1,769,121)

(342,953)

251,487

Total

$15,244,130 $(932,076) $(1,874,517) $(7,803,441) $105,286 $4,739,382


Item

Premium

income

Net change

for unearned

premium

reserve

Acquisition

cost for

insurance

contract Claims

Net change

for claim

reserve Net gain (loss)

Fire insurance

$90,295 $(10,085) $(4,239) $(40,371) $31,702 $67,302

Marine insurance

26,929 447 (2,825) (12,594) (1,703) 10,254


172,935 (16,257) (24,676) (99,127) (7,316) 25,559

Liability insurance

25,218 (2,882) (2,568) (7,905) (1,781) 10,082

Bonding insurance

2,024 (107) (91) (123) (261) 1,442

Other property

insurance 24,539 (2,877) (3,676) (7,495) (1,919) 8,572

Accident insurance 81,496 (623) (11,966) (34,680) (2,117) 32,110

Health insurance

4,283 2,050 (563) (5,427) (1,175) (832)


liability insurance

97,036

(1,751)

(13,923)

(60,899)

(11,806) 8,657

Total $524,755 $(32,085) $(64,527) $(268,621) $3,624 $163,146

276




Item

Premium

income

Net change

for unearned

premium

reserve

Acquisition

cost for

insurance

contract Claims

Net change

for claim

reserve Net gain

Fire insurance

$2,066,243 $13,756 $(136,074) $(960,480) $(165,708) $817,737

Marine insurance

785,170 (9,432) (58,456) (565,385) 42,540 194,437


4,193,135 (542,771) (611,317) (2,417,812) (184,923) 436,312

Liability insurance

572,164 (51,493) (57,906) (194,645) (36,824) 231,296

Bonding insurance

51,368 1,118 (1,332) (22,841) 5,716 34,029

Other property

insurance

874,582 (395,578) (88,884) (219,329) 70,112 240,903

Accident insurance 2,299,323 (222,954) (326,801) (889,319) (77,964) 782,285

Health insurance

167,785 (9,056) (12,264) (128,341) (6,695) 11,429


liability insurance 2,699,595 (45,012) (414,576) (1,632,213) (45,315) 562,479

Total

$13,709,365 $(1,261,422) $(1,707,610) $(7,030,365) $(399,061) $3,310,907


Item

Premium

income

Net change for

unearned

premium

reserve

Acquisition

cost for

insurance

contract Claims

Net change

for claim

reserve Net gain

Fire insurance

$68,260 $454 $(4,495) $(31,730) $(5,474) $27,015

Marine insurance

25,939 (312) (1,931) (18,678) 1,405 6,423


138,525 (17,931) (20,196) (79,875) (6,109) 14,414

Liability insurance

18,902 (1,701) (1,913) (6,430) (1,216) 7,642

Bonding insurance

1,697 37 (44) (755) 189 1,124

Other property

insurance

28,893 (13,068) (2,937) (7,246) 2,316 7,958

Accident insurance 75,960 (7,365) (10,796) (29,380) (2,576) 25,843

Health insurance

5,543 (299) (405) (4,240) (221) 378


liability insurance 89,184 (1,487) (13,696) (53,922) (1,497) 18,582

Total

$452,903

$(41,672) $(56,413)

$(232,256) $(13,183) $109,379

277



� Cost benefits analysis for assumed reinsurance business:


Item

Reinsurance

premium

Net change

for unearned

premium

reserve

Reinsurance

commission

expense

Reinsurance

claims

Net change

for claim

reserve

Net (loss) gain

for assumed

reinsurance

business

Fire insurance

$97,268 $(16,252) $(1,716) $(4,857) $1,285 $75,728

Marine insurance

35,889 (16,037) (2,577) 4,253 (67,373) (45,845)


19,976 (7,874) (3,211) (24,184) (3,501) (18,794)

Liability insurance

426 16 (151) (184) 1,087 1,194

Bonding insurance

1,186 (140) (4) (357) (10) 675

Other property

insurance

28,657

907

(3,086)

(9,350)

195

17,323

Accident insurance 6,443 22,414 (24) (13,474) (2,330) 13,029

Health insurance - - - - 114 114


liability insurance

280,083

(4,834)

-

(262,057)

(21,473)

(8,281)

Total

$469,928 $(21,800) $(10,769) $(310,210) $(92,006) $35,143


Item

Reinsurance

premium

Net change

for unearned

premium

reserve

Reinsurance

commission

expense

Reinsurance

claims

Net change

for claim

reserve

Net (loss) gain

for assumed

reinsurance

business

Fire insurance

$3,348 $(559) $(59) $(167) $44 $2,607

Marine insurance

1,235 (552) (89) 146 (2,319) (1,579)


688 (271) (111) (832) (121) (647)

Liability insurance

15 - (5) (6) 37 41

Bonding insurance

41 (5) - (12) - 24

Other property

insurance 986 31 (106) (322) 7 596

Accident insurance 222 772 (1) (464) (80) 449

Health insurance - - - - 4 4


liability insurance

9,641

(166)

-

(9,021)

(739)

(285)

Total

$16,176 $(750) $(371) $(10,678) $(3,167) $1,210

278




Item

Reinsurance

premium

Net change

for unearned

premium

reserve

Reinsurance

commission

expense

Reinsurance

claims

Net change

for claim

reserve

Net gain (loss)

for assumed

reinsurance

business

Fire insurance

$64,907 $12,521 $(812) $(269,594) $(1,283) $(194,261)

Marine insurance

20,928 896 (1,485) (15,011) (159,621) (154,293)


12,110 105,318 (2,850) (5,547) (3,298) 105,733

Liability insurance

1,293 566 (60) (510) (1,197) 92

Bonding insurance

687 15 1 (157) (13) 533

Other property

insurance

32,297 (8,617) (3,139) (12,879) (343) 7,319

Accident insurance 67,089 (22,249) (1,349) (38,245) (1,135) 4,111

Health insurance - - - - (114) (114)


liability insurance

273,796

(3,122)

-

(229,266)

(19,912)

21,496

Total

$473,107 $85,328 $(9,694) $(571,209) $(186,916) $(209,384)


Item

Reinsurance

premium

Net change

for unearned

premium

reserve

Reinsurance

commission

expense

Reinsurance

claims

Net change

for claim

reserve

Net gain (loss)

for assumed

reinsurance

business

Fire insurance

$2,144 $414 $(27) $(8,906) $(42) $(6,417)

Marine insurance

692 30 (49) (496) (5,273) (5,096)


400 3,479 (94) (183) (109) 3,493

Liability insurance

43 19 (2) (17) (40) 3

Bonding insurance

23 - - (5) - 18

Other property

insurance

1,067 (285) (104) (426) (11) 241

Accident insurance 2,216 (735) (44) (1,264) (38) 135

Health insurance - - - - (4) (4)


liability insurance 9,045 (103) - (7,574) (658) 710

Total

$15,630 $2,819 $(320) $(18,871) $(6,175) $(6,917)

279



� Recognized gain (loss) for reinsurance contract purchased:


Item Reinsurance

expense

Net change for unearned

premium reserve ceded


revenue

Claims recoverable

from reinsurers

Net change for claim

reserve ceded

Net loss (gain) for

reinsurance ceded

Fire insurance

$1,595,534 $(185,084) $(58,332) $(553,575) $627,500 $1,426,043 Marine insurance

646,603 9,275 (91,574) (201,615) (163,678) 199,011


223,696 (8,834) (40,105) (129,925) (30,301) 14,531 Liability insurance

238,675 (46,349) (62,297) (47,366) 11,450 94,113

Bonding insurance

26,079 (2,558) (4,817) (6,977) (4,154) 7,573 Other property

insurance

371,506

(20,992)

(61,833)

(62,932)

(26,558)

199,191

Accident insurance 166,776 (10,732) (40,382) (90,722) (5,378) 19,562 Health insurance

1,950 1,264 (679) (1,110) (1,341) 84


771,320

(20,370)

-

(696,501)

(137,201)

(82,752)

Total

$4,042,139

$(284,380)

$(360,019)

$(1,790,723)

$270,339

$1,877,356


Item Reinsurance

expense




revenue

Claims recoverable

from reinsurers


reserve ceded

Net loss (gain) for

reinsurance ceded

Fire insurance

$54,924 $(6,371) $(2,008) $(19,056) $21,601 $49,090 Marine insurance

22,258 319 (3,152) (6,940) (5,634) 6,851


7,700 (304) (1,381) (4,473) (1,043) 499 Liability insurance

8,216 (1,596) (2,144) (1,631) 394 3,239

Bonding insurance

898 (88) (166) (240) (143) 261 Other property

insurance

12,789

(723)

(2,129)

(2,166)

(914)

6,857

Accident insurance 5,741 (369) (1,390) (3,123) (185) 674 Health insurance

67 43 (23) (38) (46) 3


26,551

(701)

-

(23,976)

(4,723)

(2,849)

Total

$139,144 $(9,790) $(12,393) $(61,643) $9,307 $64,625

280




Item

Reinsurance

expense

Net change

for unearned

premium

reserve

ceded

Reinsurance

commission

revenue

Claims

recoverable

from

reinsurers

Net change

for claim

reserve ceded

Net loss (gain)

for

reinsurance

ceded

Fire insurance

$1,292,407 $18,754 $(49,906) $(561,895) $(185,863) $513,497

Marine insurance

615,745 (12,706) (85,804) (353,076) (219,164) (55,005)


200,068 1,331 (32,922) (78,640) 13,551 103,388

Liability insurance

177,365 (22,994) (55,198) (50,331) 560 49,402

Bonding insurance

21,761 155 (5,274) (13,650) 2,180 5,172

Other property

insurance

538,643 (372,731) (53,779) (108,341) 46,234 50,026

Accident insurance 147,576 28,008 (36,502) (88,832) (1,715) 48,535

Health insurance

3,187 (603) (1,114) - (128) 1,342


liability insurance 735,444 (18,007) - (629,960) (19,244) 68,233

Total

$3,732,196 $(378,793) $(320,499) $(1,884,725) $(363,589) $784,590


Item

Reinsurance

expense

Net change

for unearned

premium

reserve

ceded

Reinsurance

commission

revenue

Claims

recoverable

from

reinsurers

Net change

for claim

reserve ceded

Net loss

(gain)

for

reinsurance

ceded

Fire insurance

$42,696 $620 $(1,649) $(18,563) $(6,140) $16,964

Marine insurance

20,342 (420) (2,835) (11,664) (7,240) (1,817)


6,610 44 (1,087) (2,598) 448 3,417

Liability insurance

5,859 (760) (1,823) (1,663) 19 1,632

Bonding insurance

719 5 (174) (451) 72 171

Other property

insurance

17,795 (12,313) (1,777) (3,579) 1,527 1,653

Accident insurance 4,875 925 (1,206) (2,935) (57) 1,602

Health insurance

105 (20) (37) - (4) 44


liability insurance 24,296 (595) - (20,811) (636) 2,254

Total

$123,297 $(12,514) $(10,588) $(62,264) $(12,011) $25,920

281



Information of insurance risk

A. Sensitivity of insurance risk

The impact to profit and loss when the

expected loss ratio increases 5%

Insurance type

Premium income (NT$)

Expected loss ratio

Before reinsurance (NT$)

After reinsurance (NT$)

Fire insurance $2,628,929 63.75 $131,446 $660,031 Marine insurance 782,282 65.01 39,114 8,366 Land and air insurance 5,023,758 65.18 251,188 157,176 Liability insurance 732,588 68.03 36,629 19,886 Bonding insurance 58,808 69.48 2,940 652 Other property insurance 712,863 62.63 35,643 15,894 Accident insurance 2,367,455 72.02 118,373 78,433 Health insurance 124,417 66.03 6,221 4,096 Compulsory automobile

liability insurance

2,818,880

NA

NA

NA

The impact to profit and loss when the

expected loss ratio increases 5%

Insurance type

Premium income (US$)

Expected loss ratio

Before reinsurance (US$)

After reinsurance (US$)

Fire insurance $90,497 63.75 $4,525 $22,721 Marine insurance 26,929 65.01 1,346 288 Land and air insurance 172,935 65.18 8,647 5,411 Liability insurance 25,218 68.03 1,261 685 Bonding insurance 2,024 69.48 101 22 Other property insurance 24,539 62.63 1,227 547 Accident insurance 81,496 72.02 4,075 2,700 Health insurance 4,283 66.03 214 141 Compulsory automobile

liability insurance

97,036

NA

NA

NA

Note : Premium income doesn’t include preferential premium; Fire insurance does not include long-term fire insurance.

282



The chart above shows that with every 5% increase of the expected loss rate of every insurance contract of the company, certain influence will be imposed upon revenue; however, the influence has been mitigated through the arrangement of reinsurance to obtain the effect of risk diversification.

B. Concentration Risk

a. Situations that might cause concentration of insurance risk:

� Single insurance contract or few related contracts

For the year ended December 31, 2012, Cathay Century will undertake a business with infrequent but enormous losses only if all risks are evaluated by the underwriting department based on underwriting guidelines, or are discussed by an ad hoc meeting.

2 Exposure to unexpected changes in trend

For the year ended December 31, 2012, the loss rate of fire insurance is high due to several large claim cases. Other than these, the loss rates of the rest insurance categories are still within reasonable range.

� Material lawsuit or legal risks that could lead to huge losses in a single contract or have a broad effect on several contracts “Regulations for Assisting Lawsuit Cases of Cathay Century Insurance” is set up to safeguard the rights of the company and the insured and to implement process control of lawsuit cases of insurance claim. In addition, each compliance department of the company will appoint staff to be responsible of compliance matters, so that possible legal risk is minimized. For the year ended December 31, 2012, no material lawsuit or legal risks has taken place.

� Correlation and mutual influence between different risks

In case of a catastrophe, beside huge sum of claim of the insured case, other risks such as market risk, credit risk, liquidity risk, can also be derived. To avoid the operation of the company being severely endangered by these derived risks, Cathay Century has established “Operation standards under crisis” that set up crisis team in reaction to the event. The team will execute emergent tasks such as resource coordination and fund procurement to protect the rights of the insured and the company and to guard financial order. For the year ended December 31, 2012, no catastrophe has taken place.

283



� When a certain key variable has approached significant non-linear relationship with

future cash flow which could dramatically influence its performance

Since the 3rd stage of liberalization of property insurance fee took into effect, Cathay Century has conducted regular fee reviews on automobile insurance, fire insurance, and residential fire insurance in accordance with regulation. Fee will be raised when actual loss rate exceeds expected loss rate by a certain percentage to avoid worsening of further losses. In addition, from time to time related departments would observe the change in trend for loss rates of different product categories and adjust pricing and coverage in a timely manner to effectively lower insurance risk.

� Concentration risks in geographic regions and operating segments

Cathay Century’s catastrophe insurance for earthquakes and floods are centralizing in the areas of Taipei, Taoyuan, Hsinchu, Chiayi, Tainan, Kaohsiung and Pingtun.

b. Risk concentration before and after reinsurance by types of insurance:

Insurance type


Direct Written premiums income

Reinsurance premium income

Premiums ceded to reinsurers

Net premiums income

Automobile insurance $8,768,890 $290,597 $902,428 $8,157,059 Fire insurance 2,649,445 97,259 1,595,240 1,151,464 Marine insurance 859,994 45,360 738,549 166,805 Engineering insurance 573,679 14,318 309,356 278,641 Health and injury

insurance 1,384,403 6,065 154,867 1,235,601 Other insurance 1,007,719 16,329 341,699 682,349 Total $15,244,130 $469,928 $4,042,139 $11,671,919

Insurance type


Direct Written premiums income

Reinsurance premium income

Premiums ceded to reinsurers

Net premiums income

Automobile insurance $301,855 $10,003 $31,065 $280,793 Fire insurance 91,203 3,348 54,914 39,637 Marine insurance 29,604 1,561 25,423 5,742 Engineering insurance 19,748 493 10,649 9,592 Health and accident

insurance 47,656 209 5,331 42,534 Other insurance 34,689 562 11,762 23,489 Total $524,755 $16,176 $139,144 $401,787

284



Insurance type


(NT$)

Direct Written

premiums income

Reinsurance

premium income

Premiums ceded

to reinsurers

Net premiums

income

Automobile insurance $7,778,085 $283,357 $848,665 $7,212,777

Fire insurance 2,091,521 64,902 1,292,114 864,309

Marine insurance 867,763 23,482 702,308 188,937

Engineering insurance 725,394 16,441 457,024 284,811

Health and injury

insurance 1,393,750 65,584 137,720 1,321,614

Other insurance 852,852 19,341 294,365 577,828

Total $13,709,365 $473,107 $3,732,196 $10,450,276

Insurance type


(US$)

Direct Written

premiums income

Reinsurance

premium income

Premiums ceded

to reinsurers

Net premiums

income

Automobile insurance $256,957 $9,361 $28,037 $238,281

Fire insurance 69,096 2,144 42,686 28,554

Marine insurance 28,667 776 23,201 6,242

Engineering insurance 23,964 543 15,098 9,409

Health and accident

insurance 46,044 2,167 4,550 43,661

Other insurance 28,175 639 9,725 19,089

Total $452,903 $15,630 $123,297 $345,236

c. Catastrophes such as earthquake, typhoon, and flood, will bring tremendous insurance

risk to property insurance business. The greatest loss rate for such catastrophes for

Cathay Century in the past would be the 2000 Typhoon Fanapi and the fire broke out

in Formosa Plastic Group. Nevertheless, due to proper arrangement of reinsurance and

profit from investment, before-tax profit for the year still came out at NT$342 million

(US$12 million).

285



C. Claim development table

Underwriting Year

(NT$)

2008.1.1~

2008.12.31

2009.1.1~

2009.12.31

2010.1.1~

2010.12.31

2011.1.1~

2011.12.31

2012.1.1~

2012.12.31

Total

Estimate of cumulative claims

incurred:

At the end of underwriting

year

$3,156,024 $3,240,543 $5,114,327 $4,231,601 $5,087,543

One year later 4,601,140 3,956,155 6,298,033 4,856,841

Two years later 4,596,112 4,075,726 5,873,308

Three years later 4,638,890 4,135,108

Four years later 4,667,413


incurred

4,667,413 4,135,108 5,873,308 4,856,841 5,087,543

Cumulative payment to date 4,589,016 3,985,807 5,413,176 4,573,475 3,130,914

Subtotal 78,397 149,301 460,132 283,366 1,956,629 2,927,825

Reconciliation - - - - - -

Recorded in balance sheet $78,397 $149,301 $460,132 $283,366 $1,956,629 $2,927,825

Underwriting Year

(US$)

2008.1.1~

2008.12.31

2009.1.1~

2009.12.31

2010.1.1~

2010.12.31

2011.1.1~

2011.12.31

2012.1.1~

2012.12.31

Total


incurred:

At end of underwriting year $108,641 $111,551 $176,053 $145,666 $175,131

One year later 158,387 136,184 216,800 167,189

Two years later 158,214 140,300 202,179

Three years later 159,686 142,345

Four years later 160,668


incurred

160,668

142,345

202,179

167,189

175,131

Cumulative payment to date 157,970 137,205 186,340 157,434 107,777

Subtotal 2,698 5,140 15,839 9,755 67,354 100,786

Reconciliation - - - - - -

Recorded in balance sheet $2,698 $5,140 $15,839 $9,755 $67,354 $100,786

Note: The upper part of this chart is to explain the amount of claim for property

insurance of each underwriting year estimated through time; the lower part adjusts cumulative claim amount to the balance sheet.

286



(3) Cathay Century (China)

Risk management objectives, policies, procedures and methods A. The framework, organization structure and responsibilities for risk management.

a. The framework and organization structure for risk management.

Cathay Century (China) established the Audit Committee which is directly under the board of directors to be responsible for risk management, find out the significant risks and supervise the efficiency of operation for risk management. Cathay Century (China) also established risk management team which is responsible for coordinating the risk management affairs and specific risk management. The team is lead by general manager and the team members include high-level management and the department managers from marketing, financial accounting, sales, information technology etc.

b. Responsibilities: � The Audit Committee: discuss the following issues and give opinions and

suggestions to the board of directors.

(a) The overall objective, basic policies and working system for risk management. (b) The establishment and obligation of risk management institution. (c) Risk assessment for important decision and the solution for significant risk. (d) Annual risk assessment report.

2 Risk management department (risk management team)

(a) Coordinate the risk management affairs:

(i) Set up the policies and system for risk management that can match up to

the development strategies and overall risk tolerance for the insurance company.

287



(ii) Provide the risk assessment reports for significant events, decisions and

business process, and find out the solution for important risks. (iii) Submit the annual risk assessment report to the board of direct and the

management. (iv) Direct, coordinate and supervise each department and business unit to

launch risk management.

(b) Responsible for specific risk management:

(i) Evaluate the risk by qualitative and quantitative; meanwhile, improve the methods, technique and models for risk management.

(ii) Ensure the risk limit for each types of insurance and coordinate the daily

work for risk management. In addition, support business units to launch business under the risk limit and monitor the compliance.

(iii) Assets and liabilities management. (iv) Implement and establish the information system for risk management. (v) Implement culture construction for risk.

(c) Business unit (operating department and administrative department)

Cathay Century (China) has set up a basic process to identify, assess and control risks for operating activities. It is lead by risk management team and finished by the close cooperation between each department.

(d) Audit department

The department is required to audit all departments to determine the execution status of the risk management policies complies with the related regulations and company’s risk management policies.

288



B. The description and execution of overall strategies for risk management:

a. Overall strategies for risk management

According to the risk management policies and annual operating objectives from Cathay Century (China), every business unit should take measures to the risks they faced during the operating activity. The type of risks includes insurance risk, market risk, credit risk, liquidity risk and operating risk.

b. Execution for risk management

(a) Insurance risk:

� Implement pressure test periodically (include negative assumption of premium

income, claim expense and expenditure). 2 Continuously developing a balanced structure of product sales.

(b) Market risk:

� Periodically provide pressure test (include negative assumption for investment

under equity asset). 2 Implement pressure test periodically for investment (include debt deadline gap

analysis, exchange rate sensitive analysis, interest rate sensitive analysis and so on).

(c) Credit risk:

� Fulfill the related regulation for reinsurance. 2 Invest in the underlying asset with higher credit rating.

(d) Liquidity risk:

� According to “the Guidelines for the Risk Control in the Operation of

Insurance Funds” and the company’s annual strategies to plan the asset allocation.

289



2 Practice the policy of the insurance policy will not be approved until the

premium been paid and enhance the collection of insurance premium.

(e) Operating risk: � Periodically perform the audit. 2 Continuously improve the regulations and system for Cathay Century (China).




Item

Surcharge

Reinsurance commission expense Total

(NT$) (US$)

(NT$) (US$)

(NT$) (US$)

Fire insurance

$33,263 $1,145 $502 $17 $33,765 $1,162 Marine insurance

7,627 263 646 22 8,273 285

Liability insurance

37,870 1,304 63 2 37,933 1,306 Bonding insurance

640 22 - - 640 22


86,031 2,961 5,172 179 91,203 3,140 Accident insurance

- - 496 17 496 17

Total

$165,431 $5,695

$6,879 $237

$172,310 $5,932


Item

Surcharge

Reinsurance commission expense Total

(NT$) (US$)

(NT$) (US$)

(NT$) (US$)

Fire insurance

$27,092 $895 $174 $6 $27,266 $901 Marine insurance

11,228 371 222 7 11,450 378

Liability insurance

14,018 463 - - 14,018 463 Bonding insurance

1,473 49 - - 1,473 49


19,292 637 1,060 35 20,352 672 Accident insurance

- - 23 1 23 1

Total

$73,103 $2,415

$1,479 $49

$74,582 $2,464

290




� Cost benefit analysis for direct underwriting:


Item Premium income


premium reserve

Acquired cost for

insurance contract Claims

Net change for claim reserve

Net gain (loss)

Fire insurance

$326,887

$4,299

$(33,263)

$(143,411)

$(50,421)


53,265

3,611

(7,627)

(58,264)

(33,183)

(42,198)

Liability insurance

252,874

(33,824)

(37,870)

(95,557)

(138,106)

(52,483) Bonding insurance

4,338

1,275

(640)

(547)

1,226

5,652

Other property insurance 595,477 (172,967)

(86,031)

(172,530)

(230,558)

(66,609) Accident insurance -

-

-

(31)

-

(31)

Total

$1,232,841

$(197,606)

$(165,431)

$(470,340)

$(451,042)

$(51,578)


Item Premium income


premium reserve

Acquired cost for



Net gain (loss)

Fire insurance

$11,253

$148

$(1,145)

$(4,937)

$(1,736)


1,834

124

(263)

(2,006)

(1,142)

(1,453)

Liability insurance

8,705

(1,164)

(1,304)

(3,289)

(4,754)

(1,806) Bonding insurance

149

44

(22)

(19)

42

194

Other property insurance 20,498 (5,954) (2,961) (5,939) (7,937) (2,293) Accident insurance -

-

-

(1)

-

(1)

Total

$42,439

$(6,802)

$(5,695)

$(16,191)

$(15,527)

$(1,776)


Item Premium income


premium reserve

Acquired cost for



Net gain (loss)

Fire insurance

$290,455 $(46,410) $(27,266) $(6,141) $(24,721) $185,917 Marine insurance

87,066 (4,059) (11,449) (26,284) (18,873) 26,401

Liability insurance

140,544 (32,723) (14,018) (30,147) (33,461) 30,195 Bonding insurance

8,709 (1,430) (1,473) (419) (4,274) 1,113

Other property insurance 210,372 (64,949) (20,352) (137,755) (53,920) (66,604) Accident insurance - - (24) - - (24) Total

$737,146 $(149,571) $(74,582) $(200,746) $(135,249) $176,998

291




Item Premium income


premium reserve

Acquired cost for



Net gain (loss)

Fire insurance

$9,595

$(1,533)

$(901)

$(203)

$(817)


2,876

(134)

(378)

(868)

(624)

872

Liability insurance

4,643

(1,081)

(463)

(996)

(1,105)


288

(47)

(49)

(14)

(141)

37

Other property insurance 6,950 (2,146) (672) (4,551) (1,781) (2,200) Accident insurance -

-

(1)

-

-

(1)

Total

$24,352

$(4,941)

$(2,464) $(6,632)

$(4,468)

$5,847

� Cost benefit analysis for assumed reinsurance business:


Item Reinsurance

premium


premium reserve


expense Reinsurance

claim


Net gain for assumed reinsurance

business Fire insurance

$2,176 $(122) $(502) $(38) $204 $1,718

Marine insurance

4,086 27 (646) (788) 80 2,759 Liability insurance

237 (70) (62) - 56 161

Other property insurance 16,397 (1,801) (5,173) (630) 2,680 11,473 Accident insurance 1,629 (518) (496) - (98) 517 Total

$24,525 $(2,484) $(6,879) $(1,456) $2,922 $16,628


Item Reinsurance

premium


premium reserve


expense Reinsurance

claim


Net gain for assumed reinsurance

business Fire insurance

$75 $(4) $(18) $(1) $7 $59

Marine insurance

141 1 (22) (27) 2 95 Liability insurance

8 (3) (2) - 2 5

Other property insurance 564 (62) (178) (22) 93 395 Accident insurance 56

(18) (17) - (3) 18

Total

$844 $(86) $(237) $(50) $101 $572

292




Item Reinsurance

premium


premium reserve


expense Reinsurance

claim


Net gain (loss) for assumed


Fire insurance

$661

$(245)

$(174)

$(139)

$477


2,574

(26)

(221)

(3)

(46)

2,278

Liability insurance

1

323

-

-

285

609 Other property insurance 3,666 (621) (1,060) - (386) 1,599 Accident insurance 60 (29)

(23)

-

(9)

(1)

Total

$6,962

$(598)

$(1,478)

$(142)

$321

$5,065


Item Reinsurance

premium


premium reserve


expense Reinsurance

claim


Net gain (loss) for assumed


Fire insurance

$22

$(8)

$(6)

$(5)

$16


85

(1)

(7)

-

(2)

75

Liability insurance

-

11

-

-

9

20 Other property insurance 121 (21) (35) - (12) 53 Accident insurance 2

(1)

(1)

-

-

-

Total

$230

$(20)

$(49)

$(5)

$11

$167

� Recognized gain (loss) for reinsurance contract purchased:

For the year December 31, 2012 (NT$)

Item Reinsurance

expense




revenue

Claims recoverable

from reinsurers

Net change for claim reserve ceded

Net loss (gain) for

reinsurance ceded

Fire insurance

$192,233 $11,494 $(50,642) $(80,729) $(27,578) $44,778 Marine insurance

21,949 1,472 (7,533) (15,114) (8,289) (7,515)

Liability insurance

112,323 (6,918) (30,719) (35,248) (53,121) (13,683) Bonding insurance

817 127 (257) (33) 333 987

Other property insurance 23,659 2,279 (5,263) (3,472) (11,318) 5,885 Total

$350,981 $8,454 $(94,414) $(134,596) $(99,973) $30,452

293



For the year December 31, 2012 (US$)

Item Reinsurance

expense




revenue

Claims recoverable

from reinsurers


Net loss (gain) for

reinsurance ceded

Fire insurance

$6,617 $396 $(1,743) $(2,779) $(950) $1,541 Marine insurance

756 51 (259) (520) (286) (258)

Liability insurance

3,867 (238) (1,058) (1,213) (1,829) (471) Bonding insurance

28 4 (9) (1) 12 34

Other property insurance 814 78 (181) (120) (389) 202

Total

$12,082 $291 $(3,250) $(4,633) $(3,442) $1,048


Item Reinsurance

expense




revenue

Claims recoverable

from reinsurers


Net loss (gain) for

reinsurance ceded

Fire insurance

$179,604

$(21,476)

$(49,390)

$(62,542)

$(13,239)


34,906

(1,538)

(12,136)

(6,715)

(2,873)

11,644

Liability insurance

60,843

(11,199)

(15,106)

(12,325)

(10,154)


1,104

(68)

(354)

(157)

(702)

(177)

Other property insurance 19,298 (4,901) (5,371) (2,773) (3,291) 2,962

Total

$295,755

$(39,182)

$(82,357)

$(84,512)

$(30,259)

$59,445


Item Reinsurance

expense




revenue

Claims recoverable

from reinsurers


Net loss (gain) for

reinsurance ceded

Fire insurance

$5,933

$(709)

$(1,632)

$(2,066)

$(437)


1,153

(51)

(401)

(222)

(95)

384

Liability insurance

2,010

(370)

(499)

(407)

(336)


37

(2)

(12)

(5)

(23)

(5)

Other property insurance 638 (162) (177) (92) (109) 98

Total

$9,771

$(1,294)

$(2,721)

$(2,792)

$(1,000)

$1,964

294



Insurance risk information

A. Sensitivity of insurance risk

Insurance type Premium income

The impact to profit and loss when the ending loss rate increases 5% (NT$)

Before reinsurance After reinsurance Fire insurance $326,887 $16,344 $6,646 Marine insurance 53,265 2,663 1,770 Liability insurance 252,874 12,644 7,039 Bonding insurance 4,338 217 176 Other property insurance 595,477 29,774 29,606 Accident insurance - - 81

Insurance type Premium income

The impact to profit and loss when the ending loss rate increases 5% (US$)

Before reinsurance After reinsurance Fire insurance $11,253 $563 $229 Marine insurance 1,834 92 61 Liability insurance 8,705 435 242 Bonding insurance 149 7 6 Other property insurance 20,498 1,025 1,019 Accident insurance - - 3

According to the above chart, with every 5% increase in the ending loss rate of every insurance contract of Cathay Century (China), certain influence will be imposed upon revenue; however, the influence has been mitigated through the arrangement of reinsurance to obtain the effect of risk diversification.

B. Concentration of insurance risk

a. Conditions that might cause to the concentration of insurance risk:

� The exposure of unanticipated change in trend

Cathay Insurance (China) reduces the impact of unexpected risk changes on daily operating activities by formulating intensive underwriting and claim policy, entering into proper reinsurance agreements and inspecting and analyzing claims date periodically.

295



2 The correlation and cross effect between risks

When significant incidents happened, Cathay Century (China) may face the huge claim for the insured cases or the impairment loss for intangible or tangible assets. It may also create risks such as market risk, credit risk, liquidity risk and so on. To ensure management level and related departments can rapidly handle the significant incidents; Cathay Century (China) established “Notice for significant incidents handling process”. If necessary, the general manager or assigned personnel will held the emergency response team to make sure the operation of the company and protect the safety of policyholders’ property as well as the company’s equity. There is no significant incident occurred For the year ended December 31, 2012.

b. Risk concentration before and after reinsurance by types of insurance is summarized

as follows:

Types of insurance


Premium income Reinsurance premium

income Reinsurance premium

expense Net premium income


Automobile insurance $565,634 $19,471 $16,367 $563 $3,575 $123 $578,426 $19,911

Fire insurance 326,887 11,252 2,176 75 196,148 6,752 132,915 4,575

Marine insurance 53,265 1,834 4,086 141 21,949 756 35,402 1,219

Engineering insurance 21,775 750 29 1 16,170 557 5,634 194

Health and accident insurance - - 1,629 56 - - 1,629 56

Other insurance 265,280 9,132 237 8 113,139 3,894 152,378 5,246

Total $1,232,841 $42,439 $24,524 $844 $350,981 $12,082 $906,384 $31,201

Types of insurance


Premium income Reinsurance premium

income Reinsurance premium

expense Net premium income


Automobile insurance $172,769 $5,708 $3,583 $118 $1,498 $50 $174,854 $5,776

Fire insurance 291,401 9,627 661 22 179,966 5,945 112,096 3,704

Marine insurance 87,066 2,876 2,574 85 34,906 1,153 54,734 1,808

Engineering insurance 29,755 983 44 2 17,437 576 12,362 409

Health and accident insurance - - 99 3 - - 99 3

Other insurance 156,154 5,159 1 - 61,947 2,047 94,208 3,112

Total $737,145 $24,353 $6,962 $230 $295,754 $9,771 $448,353 $14,812

296



C. Claim development table

Incident period (NT$)

2008 2009 2010 2011 2012 Total

Estimated accumulation amount of

claim

As to 2008/12/31 $2,559

As to 2009/12/31 2,438 $148,443

As to 2010/12/31 2,434 142,653 $317,451

As to 2011/12/31 2,460 139,780 314,432 $341,631

As to 2012/12/31 1,278 121,339 282,378 305,963 $950,291

Estimated accumulation of claim 1,278 121,339 282,378 305,963 950,291 $1,661,249

Accumulated claim paid 1,278 121,211 278,661 253,337 281,521 936,008

Subtotal - 128 3,717 52,626 668,770 725,241

Indirect claim expense, discount and

risk margin

36,565

Recognized amount on balance sheet $761,806

Incident period (US$)

2008 2009 2010 2011 2012 Total

Estimated accumulation amount of

claim

As to 2008/12/31 $88

As to 2009/12/31 84 $5,110

As to 2010/12/31 84 4,911 $10,928

As to 2011/12/31 85 4,812 10,824 $11,760

As to 2012/12/31 44 4,177 9,720 10,533 $32,712

Estimated accumulation of claim 44 4,177 9,720 10,533 32,712 $57,186

Accumulated claim paid 44 4,173 9,592 8,721 9,691 32,221

Subtotal - 4 128 1,812 23,021 24,965

Indirect claim expense, discount and

risk margin

1,259

Recognized amount on balance sheet $26,224

297



(4) Cathay Century (Vietnam)




Item Commission

expense Agency fee


expense Total Fire insurance

$1,301 $1,422 $- $2,723

Marine insurance

114 49 - 163 Land and air insurance 2,390 8 - 2,398 Liability insurance

61 10 - 71

Other property insurance (100) 13 - (87) Accident insurance 922 28 - 950 Total

$4,688 $1,530 $- $6,218


Item Commission

expense Agency fee



$45 $49 $- $94

Marine insurance

4 2 - 6 Land and air insurance

82 - - 82

Liability insurance

2 - - 2 Other property insurance (4) 1 - (3) Accident insurance 32 1 - 33 Total

$161 $53 $- $214


Item Commission

expense Agency fee



$356 $230 $- $586

Marine insurance 59 64 - 123 Land and air insurance

976 - - 976

Liability insurance 12 - - 12 Other property insurance 502 20 - 522 Accident insurance 396 - - 396 Total

$2,301 $314 $- $2,615

298




Item Commission

expense Agency fee



$12 $7 $- $19

Marine insurance 2 2 - 4 Land and air insurance

32 - - 32

Liability insurance - - - - Other property insurance 17 1 - 18 Accident insurance 13 - - 13 Total

$76 $10 $- $86


� Cost benefit analysis for direct underwriting:


Item Premium income


premium reserve

Acquired cost for insurance

contract Claims


Net gain (loss)

Fire insurance

$35,281 $(30,043) $(2,723) $(3,005) $(28,917) $(29,407) Marine insurance

1,828 (408) (163) (56) (1,746) (545)


22,589 (8,616) (2,398) (5,935) (2,657) 2,983 Liability insurance

2,224 (2,537) (71) - (181) (565)


1,300

(8,064) 87 (12) (79) (6,768) Accident insurance 5,123 (1,421) (950) (1,271) 131 1,612

Total

$68,345 $(51,089) $(6,218) $(10,279) $(33,449) $(32,690)


Item Premium income


premium reserve

Acquired cost for insurance

contract Claims


Net gain (loss)

Fire insurance

$1,214 $(1,034) $(94) $(103) $(995) $(1,012) Marine insurance

63 (14) (6) (2) (60) (19)


778 (297) (82) (205) (91) 103 Liability insurance

77 (87) (2) - (7) (19)


45 (278) 3 - (3) (233) Accident insurance 176 (49) (33) (44) 5 55

Total

$2,353 $(1,759) $(214) $(354) $(1,151) $(1,125)

299




Item

Premium

income

Net change

for unearned

premium

reserve

Acquired cost

for insurance

contract Claims

Net change

for claim

reserve Net gain

Fire insurance

$10,698

$(1,433)

$(600)

$(85)

$(163)

$8,417

Marine insurance

714

(34)

(123)

-

(18)

539


7,261

(4,770)

(976)

(820)

(440)

255

Liability insurance

355

(92)

(13)

-

(7)

243


7,149

753

(521)

-

(62)

7,319

Accident insurance 2,604

(1,539)

(396)

(112)

(413)

144

Total

$28,781

$(7,115)

$(2,629)

$(1,017)

$(1,103)

$16,917


Item

Premium

income

Net change

for unearned

premium

reserve

Acquired cost

for insurance

contract Claims

Net change

for claim

reserve Net gain

Fire insurance

$353

$(47)

$(20)

$(3)

$(5)

$278

Marine insurance

24

(1)

(4)

-

(1)

18


240

(158)

(32)

(27)

(15)

8

Liability insurance

12

(3)

(1)

-

-

8


236

25

(17)

-

(2)

242

Accident insurance 86

(51)

(13)

(4)

(13)

5

Total

$951

$(235)

$(87)

$(34)

$(36)

$559

� Cost benefit analysis for assumed reinsurance business:


Item

Premium

income

Net change

for unearned

insurance

reserve

Acquisition cost

for insurance

contracts Claims

Net change

for claim

reserve

Net gain for

reinsurance

ceded

Fire insurance

$125

$-

$-

$-

$-

$125


80

-

-

-

-

80

Other property insurance 165 - - - - 165

Total

$370

$-

$-

$-

$-

$370

300




Item

Premium

income

Net change

for unearned

insurance

reserve

Acquisition cost

for insurance

contracts Claims

Net change

for claim

reserve

Net gain for

reinsurance

ceded

Fire insurance

$4

$- $-

$- $- $4


3

- -

- - 3

Other property insurance 6 - - - - 6

Total

$13

$- $-

$- $- $13


Item

Reinsurance

expense

Net change

for unearned

premium

reserve ceded

Reinsurance

commission

revenue

Claims

recoverable

from reinsurers

Net change

for claim

reserve ceded

Net gain for

reinsurance

ceded

Fire insurance

$78

$-

$-

$-

$-

$78


Item

Reinsurance

expense

Net change

for unearned

premium

reserve ceded

Reinsurance

commission

revenue

Claims

recoverable

from reinsurers

Net change

for claim

reserve ceded

Net gain for

reinsurance

ceded

Fire insurance

$3

$-

$-

$-

$-

$3

3 Recognized loss for reinsurance contract purchased:


Item

Reinsurance

expense

Net change

for unearned

premium

reserve ceded

Reinsurance

commission

revenue

Claims

recoverable

from

reinsurers

Net change

for claim

reserve ceded

Net loss for

reinsurance

ceded

Fire insurance

$29,165

$-

$(8,335)

$(1,065)

$-

$19,765

Marine insurance

1,346

-

(465)

(34)

-

847


42

-

14

-

-

56

Liability insurance

1,538

-

(356)

-

-

1,182

Other property insurance 1,267 - (394) (7) - 866

Total

$33,358

$-

$(9,536)

$(1,106)

$-

$22,716

301




Item Reinsurance

expense




revenue

Claims recoverable

from reinsurers


reserve ceded

Net loss for reinsurance

ceded

Fire insurance

$1,004

$-

$(287)

$(37)

$-


46

-

(16)

(1)

-

29


1

-

1

-

-


53

-

(12)

-

-

41

Other property insurance 44 - (14) - - 30

Total

$1,148

$-

$(328)

$(38)

$-

$782


Item Reinsurance

expense




revenue

Claims recoverable

from reinsurers


reserve ceded


ceded

Fire insurance

$10,274

$-

$(2,611)

$-

$-


343

-

(323)

-

-

20

Liability insurance

212

-

(75)

-

-

137 Other non-properties

insurance

5,929 - (484) - - 5,445

Total

$16,758

$-

$(3,493)

$-

$-

$13,265


Item Reinsurance

expense




revenue

Claims recoverable

from reinsurers


reserve ceded


ceded

Fire insurance

$339

$-

$(86)

$-

$-


11

-

(11)

-

-

-

Liability insurance

7

-

(2)

-

-

5 Other non-properties

insurance

196 - (16) - - 180

Total

$553

$-

$(115)

$-

$-

$438

Due to Cathay Insurance (Vietnam) has been operated for less than one year, there is no historical data for loss development trends. Cathay Insurance (Vietnam) has adopted the suggestion from Vietnamese Ministry of Finance 2842/BTC/QCBH for loss reserving method with IBNR, which is calculated as a rate of 5% of its annual retained premiums.

302



28. Related party transactions

(1) Related parties

Name Relationship Cathay Life Subsidiary of the Company Cathay United Bank 〃 Cathay Century 〃 Cathay Securities 〃 Cathay Venture 〃 Cathay Securities Investment Trust 〃 Cathay Life (China) Subsidiary of Cathay Life Cathay Life (Vietnam) 〃 Symphox Information 〃 Cathay Insurance (Bermuda) 〃 Cathay Securities Investment Consulting 〃 Lin Yuan 〃 Cathay Century (China) Subsidiary of Cathay Century Cathay Century (Vietnam) 〃 Indovina Bank Subsidiary of Cathay United Bank SBC Bank 〃 Seaward Card 〃 Cathay Futures Subsidiary of Cathay Securities Taiwan Real-estate Management Corp. Investee accounted for under the equity method Cathay Dragon Fund etc. The fund is managed by Cathay Securities

Investment Trust Vietinbank Joint venture partner of Indovina Bank China National Aviation Holding Company Joint venture partner of Cathay Life (China) Lin Yuan Property Management Co., Ltd. Related Party disclosed according to Accounting

Standard No. 6 Pai Hsing Investment Co., Ltd. 〃 Wan Da Investment Co., Ltd. 〃 Cathay General Hospital 〃 Cathay Real Estate Development Co., Ltd. 〃 San Ching Engineering Co., Ltd. 〃 Cathay Healthcare Inc. 〃 Seaward Leasing Ltd. 〃

(Merge with Cathay Real Estate Development Co., Ltd on July 28, 2011.)

Other related parties Includes chairmen, managers, their spouses and relatives of subsidiaries

303



(2) Significant transactions with related parties: A. Cash and cash equivalent

a. Call loans to banks


2012 2011

Ending balance Interest income Ending balance Interest income

Name (NT$) (US$) (NT$) (US$) (NT$) (US$) (NT$) (US$)

Vietinbank $6,376,067 $219,486 $217,002 $7,470 $5,731,948 $189,361 $83,193 $2,748

b. Due from commercial banks


2012 2011



Vietinbank $5,722 $197 $- $- $23,666 $782 $20 $1

c. Call loans from banks


2012 2011

Ending balance Interest expense Ending balance Interest expense


Vietinbank $2,797,772 $96,309 $132,414 $4,558 $4,072,018 $134,523 $54,979 $1,816

d. Due to commercial banks


2012 2011



Vietinbank $5,722 $197 $- $- $1,395 $46 $- $-

304



B. Financial assets at fair value through profit or loss

December 31,

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Cathay Dragon Fund etc. $2,319,890 $79,859 $1,676,355 $55,380

C. Receivables

December 31,

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Cathay Dragon Fund etc. $76,453 $2,632 $68,121 $2,250

D. Loans


Name

Ending balance (NT$)

Ending balance (US$)

Interest income (NT$)

Interest income (US$)

Cathay Real Estate Development Co., Ltd. $- $- $602 $21 Taiwan Real-estate Management Corp. 65,000 2,237 1,397 48 Cathay General Hospital 3,313,519 114,063 86,319 2,971 Other related parties 770,438 26,521 4,789 165

Total $4,148,957 $142,821 $93,107 $3,205


Name





Cathay Real Estate Development Co., Ltd. $- $- $3,877 $128 Seaward Leasing Ltd. - - 5,699 188 Taiwan Real-estate Management Corp. 80,000 2,643 1,715 57 Cathay General Hospital 3,588,571 118,552 88,843 2,935 Other related parties 536,737 17,732 10,530 348

Total $4,205,308 $138,927 $110,664 $3,656

305



E. Available-for-sale financial assets

December 31, Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Cathay Dragon Fund etc. $236,464 $8,140 $209,614 $6,925

F. Deposit


Name



Interest expense (NT$)

Interest expense (US$)

Cathay Real Estate Development Co., Ltd. $279,019 $9,605 $189 $6 Cathay Dragon Fund etc. 3,258,081 112,154 19,652 677 Other related parties 6,487,739 223,330 60,372 2,078 Total $10,024,839 $345,089 $80,213 $2,761


Name





Cathay Real Estate Development Co., Ltd. $215,767 $7,128 $130 $4 Cathay Dragon Fund etc. 3,533,073 116,719 23,593 779 Other related parties 6,001,239 198,257 47,908 1,583 Total $9,750,079 $322,104 $71,631 $2,366

G. Property transactions

a. Transactions between Cathay Life and related parties are in the nature of undertaking

contracted projects, construction, and lease transactions. The terms of such transactions are based on market surveys and the contracts of both parties.


Name Item (NT$) (US$)

Cathay Real Estate Development Co., Ltd. Cathay Land Mark, etc. $34,623 $1,192

San Ching Engineering Co., Ltd. Cathay Land Mark, etc. 1,409,314 48,513 Lin Yuan Property

Management Co., Ltd. Cathay Cosmos Building, etc. 21,297 733

Total $1,465,234 $50,438

306





Lin Yuan Property

Management Co., Ltd. Cathay Cosmos Building, etc. $28,888 $954

San Ching Engineering Co., Ltd. Cathay Land Mark, etc. 1,372,764 45,351

Total $1,401,652 $46,305

During the years ended December 31, 2012 and 2011, the prices of construction contract between Cathay Life and San Ching Engineering Co., Ltd. are in the amount of NT$5,483,615 (US$188,765) and NT$5,483,615 (US$181,157) thousands, respectively. During the years ended December 31, 2012 and 2011, the prices of construction contract between Cathay Life and Cathay Real Estate Development Co., Ltd. are in the amount of NT$49,306 (US$1,697) and NT$49,306 (US$1,629) thousands, respectively. During the years ended December 31, 2012 and 2011, the prices of construction contract between Cathay Life and Lin Yuan Property Management Co., Ltd. are in the amount of NT$3,408 (US$117) and NT$0 (US$0) thousands, respectively.

b. Cathay Life acquired real estate from related parties：

Cathay Life did not have any significant transaction with related parties for the year ended December 31, 2012.



Cathay Real Estate

Development Co., Ltd.

Taichung Chunghsing Building and

Taichung Yujen Commercial Building

$3,372,700

$111,421

Cathay Life already transferred the real estate ownership to Cathay Real Estate Development Co., Ltd., and the transaction price was referred to related report from professional appraisal institution.

307



c. Real estate rental income from Cathay Life:

Rental income For the year ended December 31,

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Real Estate Development Co., Ltd. $17,351 $597 $19,316 $638 Cathay General Hospital 174,620 6,011 179,855 5,942 San Ching Engineering Co., Ltd. 6,120 211 8,204 271 Cathay Securities Investment Consulting

Co., Ltd.

9,244 318

9,438

312 Cathay Healthcare Inc. 31,440 1,082 4,595 151

Total $238,775 $8,219 $221,408 $7,314

Guarantee deposits received December 31,

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Real Estate Development Co., Ltd. $4,028 $138 $4,028 $133 Cathay General Hospital 10,166 350 13,194 436 Cathay Healthcare Inc. 8,012 276 6,894 228

Total $22,206 $764 $24,116 $797

Lease terms are usually between 2 to 5 years and rental incomes are collected monthly. d. Real estate rental expense from Cathay Life and Cathay United Bank:

Rental expenses For the year ended December 31,

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Real Estate Development Co., Ltd. $37,949 $1,306 $40,312 $1,332 Seaward Leasing Ltd. - - 8,757 289

Total $37,949 $1,306 $49,069 $1,621

Guarantee deposits paid December 31,

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Real Estate Development Co., Ltd. $13,932 $480 $3,786 $125

According to the contracts, lease terms generally were 3 years and rents were paid monthly.

308



e. Leasehold improvement acquired by Cathay Securities Investment Trust：

Cathay Securities Investment Trust did not hare any significant transaction with related parties for the year ended December 31, 2012.


Name Cost

(NT$) Cost

(US$) Payable

(NT$) Payable

(US$) Lin Yuan Property Management Co., Ltd. $7,205 $238 $- $-

H. Securities sold under agreements to repurchase

December 31, Ending balance

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Other related parties $60,081 $2,068 $1,300,456 $42,962

For the years ended December 31, Interest expenses

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Other related parties $251 $9 $1,799 $59

I. Payables


Seaward Card $26,131 $900 $27,223 $899 Lin Yuan Property Management Co., Ltd. 3,580 123 5,294 175 San Ching Engineering Co., Ltd. 326 11 23,331 771 Vietinbank 407,904 14,041 - - Total $437,941 $15,075 $55,848 $1,845

J. Guarantee deposits


Lin Yuan Property Management Co., Ltd. $5,000 $172 $5,000 $165

309



The guarantee deposits received from Lin Yuan Property management Co., Ltd. are due to the construction contracts.

K. Net commission and handling fees

a. Handling fee income

For the year ended December 31, Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Cathay Securities Investment Consulting $7,943 $273 $4,490 $148

b. Reinsurance handling fee paid


Cathay Insurance (Bermuda) $9,412 $324 $9,087 $300

L. Net premiums from insurance business

a. Insurance income


Cathay General Hospital $47,979 $1,652 $41,046 $1,356 Seaward Leasing Ltd. - - 3,701 122 San Ching Engineering Co., Ltd. 6,054 208 3,374 111 Cathay Real Estate Development Co., Ltd. 8,324 287 4,503 149 Other related parties 103,346 3,557 257,926 8,521

Total $165,703 $5,704 $310,550 $10,259

b. Reinsurance income


Cathay Insurance (Bermuda) $130,785 $4,502 $123,882 $4,093

310



Since April 1, 2000, Cathay Insurance (Bermuda) has engaged in the reinsurance business providing reinsurance for RGA Global Reinsurance Company and Central Reinsurance Corporation’s accidental insurance. For the year ended December 31, 2012 and 2011, Cathay Life assumes 90% of the reinsurance business from Cathay Insurance (Bermuda).

c. Reinsurance claims payment


Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$)


d. Reinsurance commission expense


Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Cathay Insurance (Bermuda) $3,105 $107 $2,972 $98

M.Net other non-interest income

a. Sales


Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Cathay Real Estate Development Co., Ltd. $1,095 $38 $3,854 $127

Cathay General Hospital 26,953 928 9,418 311

Total $28,048 $966 $13,272 $438

b. Service income


Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Cathay General Hospital $10,341 $356 $5,894 $195

China Eastern Airlines Co., Ltd. 6,109 210 5,230 173

Total $16,450 $566 $11,124 $368

311



c. Management fee income


Cathay Bond Fund etc. $874,607 $30,107 $912,740 $30,153 Other related parties 5,724 197 1,135 38

Total $880,331 $30,304 $913,875 $30,191

d. Miscellaneous income


Cathay General Hospital $5,467 $188 $6,035 $199

N. Operating expense


Cathay Securities Investment Consulting $25,358 $873 $25,358 $838 Seaward Card 336,741 11,592 330,465 10,917 Lin Yuan Property Management Co., Ltd. 637,411 21,942 590,913 19,521 Cathay General Hospital 5,772 198 15,727 520 Cathay Real Estate Development Co., Ltd. 24,451 841 16,366 541 Seaward Leasing Ltd. - - 9,421 311 San Ching Engineering Co., Ltd. 3,769 130 3,304 109 Cathay Healthcare Inc. 9,551 329 39 1

Total $1,043,053 $35,905 $991,593 $32,758

O. Futures traders’ equity


Cathay Dragon Fund etc. $166,848 $5,743 $- $-

P. Others Disclosures

a. Cathay United Bank paid construction planning and design maintenance services fees to Lin Yuan Property Management Co., Ltd. in the amount of NT$4,006 (US$138) thousands and NT$11,961 (US$395) thousands during the years ended December 31, 2012 and 2011, respectively.

312



b. Cathay United Bank sold its land and buildings to Cathay Real Estate Development

Co., Ltd. for NT$1,925,949 (US$66,298) (taxes were deducted) during the year ended

December 31, 2012, the relevant carrying values was NT$388,064 (US$13,359) and

the disposal gains of premises and equipment was NT$1,537,885 (US$52,939).

(3) The Company’s significant transactions with related parties

A. Cash in bank


Name Item

Ending balance

(NT$) Rate

Interest income

(NT$)

Cathay United Bank Cash in bank $5,981 0.05%~0.17% $173

Time deposit 87,408 0.43%~0.88% 2,101

Total $93,389 $2,274


Name Item

Ending balance

(US$) Rate

Interest income

(US$)

Cathay United Bank Cash in bank $206 0.05%~0.17% $6

Time deposit 3,009 0.43%~0.88% 72

Total $3,215 $78


Name Item

Ending balance

(NT$) Rate

Interest income

(NT$)



Name Item

Ending balance

(US$) Rate

Interest income

(US$)


313



B. Receivables

December 31,

Name Item 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Life Interest $2,550,995 $87,814 $1,642,995 $54,278 Cathay Century Receivables due to

consolidated income tax and interest

172,887 5,951 103,717 3,426 Cathay Securities Receivables due to

consolidated income tax

111,308 3,832 - - Cathay Securities

Investment Trust Receivables due to


19,154 659 - -

Total $2,854,344 $98,256 $1,746,712 $57,704

C. Guarantee deposits paid

December 31, Name 2012(NT$) 2012 (US$) 2011(NT$) 2011(US$)

Cathay Life $6,604 $227 $5,816 $192 D. Held-to-maturity financial asset

December 31, Name 2012(NT$) 2012 (US$) 2011(NT$) 2011 (US$)

Cathay Life $30,000,000 $1,032,702 $30,000,000 $991,080 Cathay Century 1,000,000 34,424 1,000,000 33,036 Total $31,000,000 $1,067,126 $31,000,000 $1,024,116

E. Payables

December 31,

Name Item 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Life Payables due to


$5,235,287 $180,216 $3,055,618 $100,945 Cathay United Bank Payables due to


246,573 8,488 554,163 18,307 Cathay Securities Payables due to


- - 155,365 5,133 Cathay Venture Payables due to


2,473 85 6,515 215

Total $5,484,333 $188,789 $3,771,661 $124,600

314



F. Interest income


Cathay Life $908,000 $31,257 $827,995 $27,354 Cathay Century 18,600 640 2,599 86 Total $926,600 $31,897 $830,594 $27,440

G. Operating expenses


Cathay Life $27,960 $962 $25,701 $849

H. Sales of securities

There is no significant related parties transaction for the year ended December 31, 2012.


Shares Amount

Name Securities (thousand) (NT$) (US$)

Cathay Life Cathay Securities Investment Trust 17,256 $1,106,232 $36,545

Cathay Venture Cathay Securities Investment Trust 1,618 103,709 3,426

Pai Hsing Investment Co., Ltd. Cathay Securities Investment Trust 7,603 487,434 16,103

Wan Ta Investment Co., Ltd. Cathay Securities Investment Trust 4,368 280,015 9,251

Other related parties Cathay Securities Investment Trust 12,295 788,190 26,039

Total 43,140 $2,765,580 $91,364

I. Information about key management personnel compensation:

For the years ended December 31, 2012 2011 (NT$) (US$) (NT$) (US$)

Remunerations including wages, awards, bonus and etc. $199,448 $6,866 $167,549 $5,535

315



The management of the Company and Subsidiaries includes directors, supervisors, vice general managers and the above. Please refer to the report for annual stockholders’ meeting for details of total remunerations paid to above management.

(4) Subsidiaries’ significant transactions with related parties are follows:

A. Cathay Life

a. Cash in banks


Name Item Ending balance

(NT$) Rate Interest income

(NT$) Cathay United Cash in bank $16,738,298 0.01%~1.05% $17,350 Bank Time deposit 57,181,698 0.17%~1.40% 443,037

Total $73,919,996 $460,387



(US$) Rate Interest income

(US$) Cathay United Cash in bank $576,189 0.01%~1.05% $597 Bank Time deposit 1,968,389 0.17%~1.40% 15,251

Total $2,544,578 $15,848




(NT$) Cathay United Time deposit $9,604,915 0.02%~1.10% $13,175 Bank Cash in bank 53,090,553 0.12%~5.40% 283,343

Total $62,695,468 $296,518




(US$) Cathay United Time deposit $317,308 0.02%~1.10% $435

Bank Cash in bank 1,753,900 0.12%~5.40% 9,361 Total $2,071,208 $9,796

316



b. Other receivables

December 31,

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Financial Holding

(Note 1)

$5,235,287 $180,216 $3,055,618 $100,945 Cathay Century 141,412 4,868 217,861 7,197 Cathay Life (China)(Note 2) 204,097 7,026 204,097 6,743 Total $5,580,796 $192,110 $3,477,576 $114,885

Note 1:Receivables are refundable tax under the consolidated income tax system. Note 2:Receivables are consisted of other receivables for out-of-pocket IT system

expenses.

c. Secured loans


Name

Maximum amount (NT$)

Ending balance (NT$) Rate


Cathay General Hospital $3,485,571 $3,210,519 2.43%~2.55% $83,272 Other related parties 510,342 466,722 1.53%~3.78% 768 Total $3,677,241 $84,040


Name

Maximum amount (US$)

Ending balance (US$) Rate


Cathay General Hospital $119,985 $110,517 2.43%~2.55% $2,867 Other related parties 17,568 16,066 1.53%~3.78% 26 Total $126,583 $2,893


Name

Maximum amount (NT$)



Cathay General Hospital $3,756,320 $3,485,571 2.09%~2.55% $84,691 Other related parties 344,835 298,171 1.25%~3.78% 5,142 Total $3,783,742 $89,833

317




Name

Maximum amount (US$)



Cathay General Hospital $124,094 $115,149 2.09%~2.55% $2,798 Other related parties 11,392 9,851 1.25%~3.78% 170 Total $125,000 $2,968

d. Financial assets at fair value through profit or loss-beneficiary certificates

December 31,

Name Transactions 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Dragon Fund etc.

Market value

$2,294,788

$78,994

$1,641,409

$54,226

cost $2,127,934 $73,251 $1,523,992 $50,347

e. Guarantee deposits paid

December 31,

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Futures $364,739 $12,556 $511,844 $16,909 As of December 31, 2012 and 2011, the imputed interest income of guarantee deposits paid from Cathay Futures were NT$474 (US$16) thousands and NT$490 (US$16) thousands, respectively.

f. Other payables

December 31,

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Financial

Holding (Note) $2,550,995 $87,814 $1,642,995 $54,278

Note: Interest payable accrued from preferred stock liability.

g. Preferred stock liability


Cathay Financial Holding $30,000,000 $1,032,702 $30,000,000 $991,080

318



h. Property transactions

Property transactions between Cathay Life and related parties are in the nature of undertaking contracted prefects, construction, and lease transactions. The terms of such transaction are based on market surveys, the result of public bidding and the contracts of both parties.

(a) Real-estate contracted prefect from Cathay Life:



San Ching Engineering Co., Ltd Cathay Land Mark, etc. $1,409,314 $48,513



San Ching Engineering Co., Ltd Cathay Land Mark etc. $1,372,764 $45,351

During the years ended December 31, 2012 and 2011, the prices of construction contract between Cathay Life and San Ching Engineering Co., Ltd. are in the amount of NT$5,483,615 (US$188,765) and NT$5,483,615 (US$181,157) thousands, respectively.

(b) Real-estate acquire by Cathay Life:

Cathay Life did not have any significant sale with related parties for the year ended December 31, 2012.


Name Item (NT$) (US$) Cathay United Bank No. 166-1、166-2, Sec.1, Zhonghua

Rd., Wanhua Dist., Taipei 108, Taiwan (R.O.C.) $320,000 $10,571

Cathay Real Estate Development Co., Ltd.

Chung Hing Commercial Building and Yuren Trade Building 3,372,700 111,421

$3,692,700 $121,992

The real estate has already transfer the ownership, and the transaction price was referred to related report from professional appraisal institution.

i. Sale of securities:

Cathay Life did not have any significant sale of securities with related parties for the year ended December 31, 2012.

319




Shares Price of disposal Gain on disposal

Name Securities (thousand) 2011(NT$) 2011(US$) 2011(NT$) 2011(US$)

Cathay Financial Cathay Securities Holding Investment Trust 17,256 $1,106,232 $36,545 $632,746 $20,903

j. Real estate rental income


Cathay United Bank $352,726 $12,142 $339,807 $11,226 Cathay General Hospital 174,620 6,011 179,855 5,942

Total $527,346 $18,153 $519,662 $17,168

k. Premium income


Cathay United Bank $651,850 $22,439 $620,289 $20,492 Other related parties 103,346 3,557 257,926 8,521

Total $755,196 $25,996 $878,215 $29,013

l. Reinsurance income



Since April 1, 2000, Cathay Insurance (Bermuda) has engaged in the reinsurance business providing reinsurance for RGA Global Reinsurance Company and central Reinsurance Corporation’s accidental insurance. For the years ended 2012 and 2011, Cathay Life assumed 90% of the reinsurance business from Cathay Insurance (Bermuda).

m. Reinsurance claims payment



320



n. Insurance expense


Cathay Century $111,560 $3,840 $103,736 $3,427

o. Miscellaneous income


Cathay Century $1,176,280 $40,492 $1,163,894 $38,450 Cathay United Bank 94,630 3,257 101,583 3,356 Cathay Securities

Investment Trust

139,359 4,797 106,428 3,516 Total $1,410,269 $48,546 $1,371,905 $45,322

p. Operating expense


Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay United Bank $2,506,115 $86,269 $1,717,821 $56,750 Symphox Information 264,332 9,099 273,619 9,039 Lin Yuan Property

Management Co., Ltd.

629,076

21,655 590,913

19,522 Seaward Card 108,827 3,746 88,311 2,917 Total $3,508,350 $120,769 $2,670,664 $88,228

q. Non-operating expenses and losses


Cathay Financial Holding $908,000 $31,257 $827,995 $27,354

(Note)

Note: Non-operating expenses and losses are interest expenses accrued from preferred stock liability.

321



r. Other disclosures

(A) As of December 31, 2012 and 2011, the nominal amounts of the financial instruments transactions with Cathay United Bank are summarized as below:

December 31,

Item 2012 2011 CS contracts USD 985,000 USD 1,900,000

(B) Cathay Life had entered a credit assignment agreement with Cathay United Bank

in the amounts of NT$0 (US$0) thousands and NT$1,280,000 (US$42,286) thousands during the years ended December 31, 2012 and 2011, respectively.

B. Cathay United Bank

a. Loans and deposits


2012 2011


Account/Name (NT$) (US$) (NT$) (US$) (NT$) (US$) (NT$) (US$)

Loans Cathay General

Hospital

$103,000

$3,545 $3,047

$105

$103,000

$3,402 $4,152

$137 Other related

parties

265,425

9,137 3,253

112

207,829

6,866 4,862

161

Total $368,425 $12,682 $6,300 $217 $310,829 $10,268 $9,014 $298


2012 2011


Account/Name (NT$) (US$) (NT$) (US$) (NT$) (US$) (NT$) (US$)

Deposits Cathay Life $73,919,996 $2,544,578 $460,387 $15,848 $62,695,468 $2,071,208 $296,518 $9,796 Cathay Futures 1,978,796 68,117 21,587 743 2,289,023 75,620 17,319 572 Cathay Securities 1,797,618 61,880 7,040 242 746,384 24,658 1,304 43 Cathay Century 1,285,715 44,259 11,091 382 1,335,125 44,107 7,663 253 Cathay Securities

Investment Trust

1,745,795

60,096 12,388

426

1,695,233

56,004 6,449

213 Symphox

Information

167,730

5,774 2,306

79

277,215

9,158 2,381

79 Cathay Real Estate

Development Co., Ltd.

279,019

9,605 189

7

215,767

7,128 130

4 Cathay Dragon

Fund etc.

3,258,081

112,154 19,652

677

3,533,073

116,719 23,593

779 Other related

parties

6,487,739

223,330 60,372

2,078

6,001,239

198,257 47,908

1,583

Total $90,920,489 $3,129,793 $595,012 $20,482 $78,788,527 $2,602,859 $403,265 $13,322

322



For the year ended December 31, 2012 Maximum amount Ending balance Interest income (expense)

Account/Name (NT$) (US$) (NT$) (US$) Rate (NT$) (US$) Call loans to banks

Indovina Bank $3,059,280

$105,311 $3,059,280

$105,311

0.30%~2.08% $17,308

$596

Call loans from banks Indovina Bank

$1,019,760

$35,104 $-

$-

0.15%~0.30% $(444)

$(15)

For the year ended December 31, 2011 Maximum amount Ending balance Interest revenue (expense)

Account/Name (NT$) (US$) (NT$) (US$) Rate (NT$) (US$) Call loans to banks

Indovina Bank $2,120,300

$70,046 $2,120,300

$70,046

0.58%~2.08% $15,617

$516

Call loans from banks Indovina Bank

$1,311,758

$43,335 $-

$-

0.07%~0.32% $(694)

$(23)

Transaction terms with related parties are similar to those with third parties.

b. Securities sold under agreements to repurchase

December 31, Ending balance

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Other related parties $60,081 $2,068 $1,300,456 $42,962

For the year ended December 31, Interest expense

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Other related parties $251 $9 $1,799 $59

c. Handling fees income


Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Life $2,506,115 $86,269 $1,717,821 $56,750

d. Accrued insurance expense


Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Life $651,850 $22,439 $620,289 $20,492 Cathay Century 98,341 3,385 101,622 3,357 Total $750,191 $25,824 $721,911 $23,849

323



e. Rental expense


Cathay Life $352,726 $12,142 $339,807 $11,226

f. General expense


Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathy Life $94,630 $3,257 $101,583 $3,356 Symphox Information 430,341 14,814 475,643 15,713 Seaward Card 227,914 7,846 242,154 8,000

Total $752,885 $25,917 $819,380 $27,069

g. Receivables due to consolidated income tax

December 31,

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Financial Holding $246,573 $8,488 $554,163 $18,307

h. Other receivable-cash dividends


Indovina Bank $407,904 $14,041 $- $-

i. Other disclosures

(a) Cathay United Bank entered into a contract with Cathay Life to transferring credit

facilities. The transferring loan amount were NT$0 (US$0) and NT$1,280,000 (US$42,286) thousands for the years ended December 31, 2012 and 2011, respectively.

(b) Cathay United Bank sold its land and building in Taipei to Cathay Life for

NT$316,210 (US$10,446) thousands (taxes were deducted) during the six-month period ended June 30, 2011, the relevant carrying values were NT$146,959 (US$4,855) thousands and the disposal gains of were premises and equipment were NT$169,251 (US$5,591) thousands.

324



(c) Cathay United Bank sold its land and building to Cathay Real Estate Development

Co., Ltd. for NT$1,925,949 (US$66,298) (taxes were deducted) during the year ended December 31, 2012, the relevant carrying values was NT$388,064 (US$13,359) and the disposal gains of premises and equipment was NT$1,537,885 (US$52,939).

C. Cathay Century

a. Cash in banks

For the year ended December 31, 2012 Ending balance Interest income

Name Item (NT$) Rate (NT$) Cathay United Bank Cash in banks $589,915 0.01%~0.75% $447 Time deposits 695,800 0.17%~1.70% 10,644 Total $1,285,715 $11,091


Ending balance Interest income Name Item (US$) Rate (US$)

Cathay United Bank Cash in banks $20,307 0.01%~0.75% $15 Time deposits 23,952 0.17%~1.70% 367 Total $44,259 $382


Ending balance Interest income Name Item (NT$) Rate (NT$)

Cathay United Bank Cash in banks $420,125 0.17% $556 Time deposits 915,000 0.10%~1.345% 7,107 Total $1,335,125 $7,663


Ending balance Interest income Name Item (US$) Rate (US$)

Cathay United Bank Cash in banks $13,879 0.17% $18 Time deposits 30,228 0.10%~1.345% 235 Total $44,107 $253

325



b. Premium income


Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Life $111,560 $3,840 $103,736 $3,427 Cathay United Bank 98,341 3,385 101,622 3,357 Total $209,901 $7,225 $205,358 $6,784

c. Other payables

December 31,

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Life $141,412 $4,868 $217,861 $7,197 Cathay Financial Holding 172,887 5,951 103,717 3,426 Total $314,299 $10,819 $321,578 $10,623

d. Operating expense


Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Life $1,176,280 $40,492 $1,163,894 $38,450

e. Preferred stock liability

December 31,

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Financial Holding $1,000,000 $34,424 $1,000,000 $33,036

f. Other disclosures

As of December 31, 2012 and 2011 the nominal amount of the derivative financial instruments transactions with Cathay United Bank are listed below:

December 31,

Item 2012 2011 CS contracts USD 75,250 USD 41,050 IRS NTD 400,000

(USD 13,769) NTD 600,000

(USD 19,822)

326



D. Cathay Securities

a. Cash in bank


Name Item (NT$) Rate (NT$) Cathay United Bank Cash in banks $647,618 0.17% $477 Time deposits 1,150,000 0.50%~0.95% 6,563 Total $1,797,618 $7,040


Name Item (US$) Rate (US$) Cathay United Bank Cash in banks $22,293 0.17% $16 Time deposits 39,587 0.50%~0.95% 226 Total $61,880 $242


Name Item (NT$) Rate (NT$) Cathay United Bank Cash in banks $108,484 0.05%~1.10% $313 Time deposits 637,900 0.47%~1.345% 991 Total $746,384 $1,304


Name Item (US$) Rate (US$) Cathay United Bank Cash in banks $3,584 0.05%~1.10% $10 Time deposits 21,074 0.47%~1.345% 33 Total $24,658 $43

As of December 31, 2012 and 2011, the account of NT$1,000,000 (US$34,423)

thousands and NT$587,900 (US$19,422) thousands in bank account are pledged as collateral for the overdraft in settlement account and accounted as restricted assets-current. No other cash in bank has been pledged as collateral.

327



b. Other receivables


Cathay Financial Holding $- $- $155,365 $5,133

c. Other payables


Cathay Financial Holding $111,308 $3,832 $- $- (Note)

d. Clearing and settlement fees, dealing handling fee expense and margin for futures

trading-own funds

For the year ended December 31, 2012 Clearing and

settlement fees Dealing handling fee

expense Accounts payable

Margin for futures trading – own funds

Name (NT$) (US$) (NT$) (US$) (NT$) (US$) (NT$) (US$) Cathay Futures $- $- $- $- $- $- $535,174 $18,423

For the year ended December 31, 2011 Clearing and

settlement fees Dealing handling fee

expense Accounts payable

Margin for futures trading – own funds

Name (NT$) (US$) (NT$) (US$) (NT$) (US$) (NT$) (US$) Cathay Futures $- $- $- $- $- $- $454,706 $15,022

E. Cathay Securities Investment Trust

a. Cash in bank, Operating deposit and Refundable deposit




(NT$) Cathay United Bank Cash in bank $25,245 0.17% $3 Time deposits

(Note)

1,720,550 0.18%~1.395% 12,385 Total $1,745,795 $12,388

328






(US$) Cathay United Bank Cash in bank $869 0.17% $- Time deposits

(Note)

59,227 0.18%~1.395% 426 Total $60,096 $426




(NT$) Cathay United Bank Cash in bank $15,783 0.13%~0.17% $30

Time deposits (Note)

1,679,450 0.365%~1.345% 6,419

Total $1,695,233 $6,449




(US$) Cathay United Bank Cash in bank $522 0.13%~0.17% $1


55,482 0.365%~1.345% 212

Total $56,004 $213

Note: As of December 31, 2012 and 2011, according to Standards Governing the

Establishment of Futures Trust Enterprises and Regulations Governing the Conduct of Discretionary Investment Business by Securities Investment Trust Enterprises and Securities Investment Consulting Enterprises, Cathay Securities Investment Trust reserve NT$50,000 (US$1,721) thousands and NT$50,000 (US$1,652) thousands respectively of its time deposits in Cathay United Bank as operating deposit. In addition, Cathay Securities Investment Trust reserve NT$145,000 (US$4,991) thousands and NT$128,500 (US$4,245) thousands respectively as performance bond according to Discretionary Investment Services Contract.

b. Available-for-sale financial assets

December 31,

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Dragon Fund etc. $128,032 $4,407 $118,147 $3,903

329



c Management fee income


Cathay Dragon Fund etc.

$874,607 $30,107 $912,740 $30,153

d. Operating expenses

For the year ended December 31, Name 2012(NT$) 2012(US$) 2011(NT$) 2011 (US$)

Cathay Life $139,359 $4,797 $106,428 $3,516 G. Cathay Futures

a. Cash in bank, cash equivalent and operating deposits




(NT$) Cathay United Bank Cash in bank $15,231 0.17% $26


342,300

0.52%~1.345%

4,402

Total $357,531 $4,428




(US$) Cathay United Bank Cash in bank $524 0.17% $1


11,783

0.52%~1.345%

151

Total $12,307 $152




(NT$) Cathay United Bank Cash in bank $18,205 0.17% $28


347,200

0.27%~1.345%

3,632

Total $365,405 $3,660

330






(US$) Cathay United Bank Cash in bank $601 0.17% $1


11,470

0.27%~1.345%

120

Total $12,071 $121

Note: As of December 31, 2012 and 2011, Cathay Futures has time deposit amounting

to NT$65,000 (US$2,238) thousands and NT$60,000(US$1,982) thousands in Cathay United Bank as the guaranty bond, in accordance with Article 14 of Rules Governing Futures Commission Merchants、Article 10 of Regulation Governing Futures Advisory Enterprises and Article 7 of Rules Governing Securities Investment Trust Enterprises

b. Customer’s margin accounts


Ending balance Interest income

Name (NT$) (US$) Rate (NT$) (US$)

Cathay United Bank $1,621,265 $55,810 0.04%~1.345% $17,159 $591


Ending balance Interest income

Name (NT$) (US$) Rate (NT$) (US$)

Cathay United Bank $1,923,618 $63,549 0.02%~1.345% $13,659 $451

c. Futures customers’ equity

December 31,

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay Life $364,739 $12,556 $511,844 $16,909 Cathay Securities 535,174 18,423 454,706 15,022 Cathay Dragon Fund etc. 166,848 5,743 - - Total $1,066,761 $36,722 $966,550 $31,931

331



H. Symphox Information

a. Cash in bank


Name Item



Cathay United Cash in bank $7,730 0.17% $93 Bank Time deposit 160,000 1.08% 2,213

Total $167,730 $2,306


Name Item



Cathay United Cash in bank $266 0.17% $3 Bank Time deposit 5,508 1.08% 76

Total $5,774 $79


Name Item



Cathay United Cash in bank $7,008 0.10% $84 Bank Time deposit 270,207 0.40%~1.08% 2,297

$277,215 $2,381


Name Item



Cathay United Cash in bank $231 0.10% $3 Bank Time deposit 8,927 0.40%~1.08% 76

$9,158 $79

b. Sales revenue


Cathay United Bank $263,599 $9,074 $303,245 $10,018

c. Service income


Cathay Life $180,067 $6,198 $178,483 $5,897 Cathay United Bank 166,742 5,740 172,398 5,695

Total $346,809 $11,938 $350,881 $11,592

332



I. Indovina Bank

a. Call loans from banks


Name Ending

balance (NT$) Ending

balance (US$)



Cathay United Bank $3,059,280 $105,311 $17,308 $596 Vietinbank 2,797,772 96,309 132,414 4,558 Total $5,857,052 $201,620 $149,722 $5,154


Name Ending


balance (US$)



Cathay United Bank $2,120,300 $70,046 $15,617 $516 Vietinbank 4,072,018 134,523 54,979 1,816 Total $6,192,318 $204,569 $70,596 $2,332

b. Call loans to banks


Name Ending


balance (US$)



Vietinbank $6,376,067 $219,486 $217,002 $7,470


Name Ending


balance (US$)



Vietinbank $5,731,948 $189,361 $83,193 $2,748

c. Deposits


Name





Cathay Century (Vietnam) $326,295 $11,232 $24,397 $840

333




Name





Cathay Century (Vietnam) $433,341 $14,316 $41,785 $1,380

d. Dividends payables

December 31,

Name 2012(NT$) 2012(US$) 2011(NT$) 2011(US$) Cathay United Bank $407,904 $14,041 $- $- Vietinbank 407,904 14,041 - - Total $815,808 $28,082 $- $-

J. Cathay Life (China)

Other payables


Cathay Life $204,097 $7,026 $204,097 $6,743

K. Cathay Century (Vietnam)

Cash in bank




(NT$) Indovina Bank Cash in bank $4,066 0.10%~1.50% $18

Time deposits 322,229 0.50%~14.00% 24,379 Total $326,295 $24,397




(US$) Indovina Bank Cash in bank $140 0.10%~1.50% $1

Time deposits 11,092 0.50%~14.00% 839 Total $11,232 $840

334






(NT$) Indovina Bank Cash in bank $17,044 0.10%~2.40% $186





(US$) Indovina Bank Cash in bank $563 0.10%~2.40% $6


29. Pledged assets

As of December 31, 2012 and 2011, the Company and its subsidiaries’ pledged assets are summarized below:

Carrying amount

Item Guarantee purpose 2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Time deposits Correspondent deposit,

collateral for the

over-loaning of settlement

accounts, loan, other

financial or leasing $2,559,994 $88,124 $2,194,023 $72,482

Guarantee deposits paid Government bonds 10,277,450 353,785 11,153,999 368,484

Financial assets at fair value

through profit or loss

Business reserves and

guarantees, the operation of

electronic gift certificate

and customer’s rights 45,103 1,552 39,313

1,299

Available-for-sale financial

assets


guarantees 1,603,158 55,186 1,504,328

49,697

Held-to-maturity financial

assets


guarantees 610,570 21,018 635,080

20,980

Investments in debt securities

with no active market


guarantees 50,100,000 1,724,613 38,500,000

1,271,886

Other financial assets Business reserves and

guarantees 10 - - -

Total $65,196,285 $2,244,278 $54,026,743 $1,784,828

335



30. Commitment and contingent liabilities

(1) Cathay United Bank

A. Lee and Li Attorneys-at-Law and SanDisk Corporation filed lawsuits in the Taipei

District Court and alleged that Cathay United Bank breached its contractual and fiduciary duties in connection with the embezzlement conducted by Eddie Liu, a former employee of Lee and Li Attorneys-at-Law on October 2003. Both plaintiffs claimed indemnities amounted NT$0.99 billion (US$34 million) and NT$3.09 billion (US$106 million), respectively. Cathay United Bank has been advised by its legal advisor that it is possible, but not probable, that the action will succeed and accordingly no provision for such claims has been made in these financial statements.

B. As of December 31, 2012, Cathay United Bank had entered into certain contracts to

purchase premises and equipment totaling NT$446,566 (US$15,372) thousands with prepayments of NT$139,929 (US$4,817) thousands.

(2) Cathay Securities

As of December 31, 2012, Cathay Securities requested banks to issue letters of guarantees for warrants issuance of NT$430,000 (US$14,802) thousands.

(3) As of December 31, 2012 and 2011, Cathay United Bank had the following commitments

and contingent liabilities, which were not reflected in the financial statements:

December 31,

Item 2012(NT$) 2012(US$) 2011(NT$) 2011(US$)

Trust and security held for safekeeping $337,334,621 $11,612,207 $283,313,658 $9,359,553 Travelers checks for sale 462,167 15,909 419,563 13,861 Bills for collection 39,523,311 1,360,527 46,271,479 1,528,625 Book-entry for government bonds and

depository for short-term marketable securities under management

564,494,500 19,431,824 548,802,600 18,130,248 Entrusted financial management

business

2,385,838 82,129 2,670,038 88,207 Guarantees on duties and contracts 12,081,454 415,885 13,245,165 437,567 Unused commercial letters of credit 4,281,218 147,374 4,308,561 142,338 Irrevocable loan commitments 34,415,264 1,184,691 51,897,159 1,714,475 Credit card lines commitments 295,794,164 10,182,243 282,315,962 9,326,593 Stamp tax, securities and memorial

currency consignments

1,006 35 1,006 33

336



(4) According to the effective operating leases agreement (the longest lease term being 5 years),

rentals for the next five years are as follows:

Periods (NT$) (US$) January 1, 2013~ December 31, 2013 $879,398 $30,272 January 1, 2014~ December 31, 2017 1,228,925 42,304

Total $2,108,323 $72,576 31. Significant disaster losses: None. 32. Subsequent events: None. 33. Other significant matters

(1) Pension related information

According to the ROC SFAS No. 23 “Interim Financial Reporting and Disclosures”, the interim financial statements are not required to follow the principles outlined in the ROC SFAS No. 18 “Accounting for Pensions”.

A. Net periodic pension cost:


2012 2011

(NT$) (US$) (NT$) (US$)

(1) Service cost $484,332 $16,672 $508,517 $16,799

(2) Interest cost 281,119 9,677 273,295 9,029

(3) Projected return on plan assets (189,957) (6,539) (255,159) (8,430)

(4) Amortization of unrealized gain on

pension

(110) (4)

(132) (4)

(5) Amortization of unrealized transit on

obligation

2,502 86

2,410 80

(6) Net amortization 84,259 2,901 86,759 2,866

(7) Amortization of prior service cost 51,734 1,781 51,734 1,709

(8) Amortization of gain or loss 59,287 2,041 (69,395) (2,293)

(9) Others 5 - - -

(10) Net periodic pension cost $773,171 $26,615 $598,029 $19,756

337



B. Pension funded status:

December 31,

2012 2011

(NT$) (US$) (NT$) (US$)

(1) Vested benefit obligation $(9,889,076) $(340,416) $(9,004,195) $(297,462)

(2) Non-vested benefit obligation (4,184,288) (144,037) (4,056,268) (134,003)

(3) Accumulated benefit obligation (14,073,364) (484,453) (13,060,463) (431,465)

(4) Additional benefits based on future

salaries

(1,975,558)

(68,006)

(1,756,254)

(58,020)

(5) Projected benefit obligation (16,048,922) (552,459) (14,816,717) (489,485)

(6) Fair value of plan assets 12,057,636 415,065 10,163,151 335,750

(7) Funded status=(5)+(6) (3,991,286) (137,394) (4,653,566) (153,735)

(8) Unrecognized transitional net assets 42,890 1,476 84,703 2,798

(9) Unrecognized prior service cost - - - -

(10) Unrecognized pension gain and loss 2,280,554 78,505 3,130,715 103,427

(11) Additional accrued pension liability (1,123,074) (38,660) (1,494,542) (49,374)

(12) Others (6) - - -

(13) Accrued pension liability / prepaid

pension cost=(7)+(8)+(9)+(10)+(11)

$(2,790,922)

$(96,073)

$(2,932,690)

$(96,884)

(14) Vested benefit $12,376,479 $426,041 $11,380,902 $375,980

C. Actuarial assumptions


2012 2011

(1) Discount rate 1.75%~2.00% 2.00%

(2) Rate of increase in future salaries 1.50%~3.00% 1.50%~3.00%

(3) Rate of increase in future salaries (legwork) Adjust by seniority Adjust by seniority

(4) Expected return on pension plan assets 1.75%~2.00% 2.00%

(2) Financial instruments related information

A. The company and its subsidiaries

a. The fair values of financial assets or liabilities determined by quoted market price are classified as level 1 or pricing models are classified as level 2 and 3 are summarized as following:

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December 31, 2012

Total 1st Level 2nd Level 3rd Level

Financial instruments measured at fair value item NT($) US($) NT($) US($) NT($) US($) NT($) US($)

Non-derivative financial instruments

Assets

Financial assets at fair value through profit or loss:

Financial assets for trading

Stocks $14,880,432 $512,235 $14,400,582 $495,717 $479,850 $16,518 $- $-

Bonds 7,721,892 265,814 2,866,200 98,664 4,855,692 167,150 - -

Others 114,488,077 3,941,070 37,034,312 1,274,847 77,453,765 2,666,223 - -

Available-for-sale financial assets:

Stocks 283,881,298 9,772,162 283,849,826 9,771,079 31,472 1,083 - -

Bonds 890,861,870 30,666,501 55,641,477 1,915,369 835,220,393 28,751,132 - -

Others 110,177,697 3,792,692 88,229,854 3,037,172 19,951,630 686,803 1,996,213 68,717

Other financial assets:

Investments in debt securities with no active market 813,141,357 27,991,097 57,768,544 1,988,590 747,841,526 25,743,254 7,531,287 259,253

Liabilities

Financial liabilities at fair value through profit or loss 1,503,682 51,762 1,503,682 51,762 - - - -

Derivative financial instruments

Assets

Financial assets at fair value through profit or loss 10,054,649 346,115 648,848 22,335 9,405,801 323,780 - -


Derivatives financial assets for hedging 2,362,366 81,321 17,134 590 2,345,232 80,731 - -

Liabilities

Financial liabilities at fair value through profit or loss 7,215,020 248,365 203,241 6,996 7,011,779 241,369 - -

December 31, 2011


Financial instruments measured at fair value item NT($) US($) NT($) US($) NT($) US($) NT($) US($)


Assets



Stocks $9,308,657 $307,521 $9,308,657 $307,521 $- $- $- $-

Bonds 5,497,968 181,631 2,819,597 93,148 2,678,371 88,483 - -

Others 60,665,577 2,004,148 45,769,150 1,512,030 14,896,427 492,118 - -


Stocks 246,480,749 8,142,740 246,450,249 8,141,733 30,500 1,007 - -

Bonds 1,001,890,136 33,098,452 24,895,510 822,448 976,994,626 32,276,004 - -

Others 88,209,007 2,914,074 64,971,448 2,146,397 20,427,218 674,834 2,810,341 92,843


Investments in debt securities with no active market 528,978,714 17,475,346 - - 526,870,714 17,405,706 2,108,000 69,640

Liabilities

Financial liabilities at fair value through profit or loss 1,379,357 45,569 1,379,357 45,569 - - - -


Assets



Derivatives financial assets for hedging 3,425,140 113,153 28,521 942 3,396,619 112,211 - -

Liabilities

Financial liabilities at fair value through profit or loss 21,756,786 718,757 200,363 6,619 21,556,423 712,138 - -

339



b. Statements of change in financial assets measure at fair value classified as 3rd level are

summarized as following:


Gain or loss recognized

as net income or

stockholder's equity

Increase Decrease

Item Beginning Balance Buy in or issue

Transfer to 3rd

level

Sell, dispose or

transact

Transfer from

3rd level Ending Balance

Financial assets measure at fair value

Available for sale financial assets $2,810,341 $153,066 $2,348,485 $- $(3,315,679) $- $1,996,213

Other financial assets

Investments in debt securities with

no active market 2,108,000 - 5,423,287 - - - 7,531,287

Total $4,918,341 $153,066 $7,771,772 $- $(3,315,679) $- $9,527,500



as net income or


Increase Decrease


Transfer to 3rd

level

Sell, dispose or

transact

Transfer from



Available for sale financial assets $96,742 $5,269 $80,843 $- $(114,137) $- $68,717



no active market 72,565 - 186,688 - - - 259,253

Total $169,307 $5,269 $267,531 $- $(114,137) $- $327,970



as net income or


Increase Decrease


Transfer to 3rd

level

Sell, dispose or

transact

Transfer from



Available for sale financial assets $1,627,674 $(1,767,042) $2,949,709 $- $- $- $2,810,341



no active market 1,108,000 - 1,000,000 - - - 2,108,000

Total $2,735,674 $(1,767,042) $3,949,709 $- $- $- $4,918,341

340





as net income or


Increase Decrease


Transfer to 3rd

level

Sell, dispose or

transact

Transfer from



Available for sale financial assets $53,772 $(58,376) $97,447 $- $- $- $92,843



no active market 36,604 - 33,036 - - - 69,640

Total $90,376 $(58,376) $130,483 $- $- $- $162,483

B. The Company

a. Information of fair value

December 31, 2012

(NT$) (US$)

Item

Carrying

amount Fair value

Carrying

amount Fair value


Assets

Cash and cash equivalents $7,141,598 $7,141,598 $245,838 $245,838

Receivables 6,454,364 6,454,364 222,181 222,181

Held-to-maturity financial assets 31,000,000 31,000,000 1,067,126 1,067,126

Investments under equity method 252,085,633 252,085,633 8,677,646 8,677,646

Other financial assets 538,407 538,407 18,534 18,534

Liabilities

Payables 5,940,874 5,940,874 204,505 204,505

Bond payables 47,312,376 47,312,376 1,628,653 1,628,653

Derivative financial instrument

Liabilities

Financial liabilities at fair value

through profit or loss

182,100 182,100 6,269 6,269

341



December 31, 2011

(NT$) (US$)

Item

Carrying

amount Fair value

Carrying

amount Fair value


Assets


Receivables 5,207,033 5,207,033 172,020 172,020

Held-to-maturity financial assets 31,000,000 31,000,000 1,024,116 1,024,116

Investments under equity method 223,253,372 223,253,372 7,375,401 7,375,401

Other financial assets 538,407 538,407 17,787 17,787

Liabilities

Payables 6,103,726 6,103,726 201,643 201,643

Bonds payables 40,000,000 40,000,000 1,321,440 1,321,440

b. The methods and assumptions used to estimate the fair values of the financial instruments are as follows:

(a) The fair value of the Company’s short-term financial instruments is based on the carrying amount of those instruments at reporting date due to the short maturity of those instruments. The method is applied to cash and cash equivalents, receivables, payables and other financial assets.

(b) The fair value of bonds payables is in accordance with the term of issuance. (c) The fair value of the Company’s financial instruments is based on market prices if

available at the reporting date. When market prices are not available, the fair value is based on carrying amount or other relevant financial information.

(d) If no quoted market prices exist for the Company’s investments accounted for

equity method, then their fair value is taken as approximating their carrying amounts when no permanent market value decline exists.

342



(e) The fair value of embedded derivative financial assets from bonds payable is

calculated by the processes of evaluation method. (f) The Company’s fair value of CCS based on the data of quotation from

counterparties and from the Bloomberg information system, respectively. The calculation of fair value of CCS is derived contract by contract and the valuation of quotation mentioned previously is based on substance of transactions consistently.

c. The fair value of the Company’s financial assets or liabilities determined by quoted

market price or pricing models is summarized as following:

December 31, 2012

Based on the quoted market price Based on pricing models

Financial instruments (NT$) (US$) (NT$) (US$)

Non-derivative financial instruments Assets

Cash and cash equivalents $3,714,719 $127,873 $3,426,879 $117,965 Receivables - - 6,454,364 222,181 Held-to-maturity financial assets - - 31,000,000 1,067,126

Investments under equity method - - 252,085,633 8,677,646 Other financial assets - - 538,407 18,534

Liabilities Payables - - 5,940,874 204,505 Bonds payable - - 47,312,376 1,628,653

Derivative financial instrument Liabilities

Financial liabilities at fair value through profit or loss

- - 182,100 6,269

343



December 31, 2011

Based on the quoted market

price

Based on pricing

models

Financial instruments (NT$) (US$) (NT$) (US$)


Cash and cash equivalents $2,721,910 $89,921 $1,399,616 $46,238

Receivables - - 5,207,033 172,020 Held-to-maturity financial assets - - 31,000,000 1,024,116 Investments under equity method - - 223,253,372 7,375,401

Other financial assets - - 538,407 17,787 Liabilities

Payables - - 6,103,726 201,643 Bonds payable - - 40,000,000 1,321,440

d. Information on financial risks

(a) Risk of interest rate

The Company’s exposure to interest rate risk is minimal.

(b) Credit risk

The Company’s exposure to credit risk is minimal.

e. Financial risk management objectives and policies The Company’s financial assets primarily consist of cash and cash equivalents, short-term notes, domestic common stocks, and Cathay Life’s and Cathay Century’s preferred stocks.

The primary risks involved in these derivative transactions are market risk, credit risk, operational risk and liquidity risk. In addition to the risk management policies and guidance, the Company has also established risk management systems such as the VaR model, the credit evaluation model, the integrated appraisal and collection and the concentration management systems to monitor and manage the Company’s risks.

344



Market Risk

Market risk is the exposure to uncertain market value of a portfolio, including interest rate risk and exchange rate risk. The Company conducts analysis and assessments of the investment targets before any investment decisions are made. In addition, VaR model in connection with atmosphere simulation methods, stress test methods, Position Limit, VaR Limit and Loss Limit are used to effectively manage the market risk of the Company’s financial assets. Credit Risk

Credit risk is the risk of loss arising from the potential default of the counter-party. An internal credit risk evaluation model for investments in financial instruments is created based on external credit assessments and various characteristics of financial instruments. The Company also monitors the credit risk level of the investment targets, issuers or counterparties by evaluating the credit concentration of the investments or counterparties. Operational Risk

Operational risk is the risk of loss due to inadequate or failed internal controls, employee fraud or misconduct and management negligence. To mitigate the operational risk, the Company has adopted and implemented the internal control regulations and procedures. The Company has also commenced the development of information systems to accommodate and support the aforementioned policies. Liquidity Risk

Liquidity risk is the risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. The Company has primarily sought to achieve the flexible cash flow and stable liquidity by utilizing the deposits in financial institutions and short-term notes (includes repurchase agreement). In pursuit of these goals, the Company also conducts analysis of assets allocation, liquid asset ratio and cash flows to ensure the effectiveness and timeliness of managing liquidity risk.

345



B. Cathay Life


December 31, 2012

(NT$) (US$)

Item

Carrying

amount

Fair value

Carrying

amount

Fair value


Assets

Cash and cash equivalents $379,738,487 $379,738,487 $13,071,893 $13,071,893

Receivables 60,115,199 60,115,199 2,069,370 2,069,370

Financial assets at fair value through profit or loss 67,461,849 67,461,849 2,322,267 2,322,267

Available-for-sale financial assets 1,210,730,123 1,210,730,123 41,677,457 41,677,457

Financial assets carried at cost 10,707,797 (Note) 368,599 (Note)

Investments under equity method 7,144,025 7,144,025 245,922 245,922

Investments in debt securities with no active market 797,490,830 847,858,784 27,452,352 29,186,189

Other financial assets 23,500,000 23,500,000 808,950 808,950

Guarantee deposits paid 13,149,796 13,149,796 452,661 452,661

Liabilities

Payables 37,262,033 37,262,033 1,282,686 1,282,686

Preferred stock liability 30,000,000 30,464,799 1,032,702 1,048,702

Guarantee deposits received 2,072,652 2,072,652 71,348 71,348


Assets

Financial assets at fair value through profit or loss

Forward, CS and CCS 4,725,696 4,725,696 162,675 162,675

IRS and CDS 241,668 241,668 8,319 8,319

Derivative financial assets for hedging

IRS and CDS 1,142,094 1,142,094 39,315 39,315

Liabilities



IRS and CDS 106,666 106,666 3,672 3,672

Note: In reality, the fair value of the specified items can’t be accountably measured

346



December 31, 2011

(NT$) (US$)

Item

Carrying

amount

Fair value

Carrying

amount

Fair value

Non-derivative financial instrument

Assets

Cash and cash equivalents $374,353,961 $374,353,961 $12,367,161 $12,367,161

Receivables 45,684,727 45,684,727 1,509,241 1,509,241

Financial assets at fair value through profit or loss 55,536,230 55,536,230 1,834,695 1,834,695

Available-for-sale financial assets 1,274,860,140 1,274,860,140 42,116,291 42,116,291

Financial assets carried at cost 10,191,832 (Note) 336,697 (Note)

Investments under the equity method 4,016,883 4,016,883 132,702 132,702

Investments in debt securities with no active market 509,504,264 510,371,049 16,831,988 16,860,623

Other financial assets 13,300,000 13,300,000 439,379 439,379


Liabilities

Payables 22,003,803 22,003,803 726,918 726,918

Preferred stock liability 30,000,000 30,580,870 991,080 1,010,270

Guarantee deposits received 1,956,964 1,956,964 64,650 64,650

Derivative-financial instrument

Assets


Option 152,026 152,026 5,022 5,022


IRS and CDS 257,176 257,176 8,496 8,496

Derivative financial assets for hedging

IRS and CDS 1,957,846 1,957,846 64,679 64,679

Liabilities



IRS and CDS 366,942 366,942 12,122 12,122

Note: In reality, the fair value of the specified items can’t be accountably measured.

347



b. The methods and assumptions used to estimate the fair values of Cathay Life’s

financial instruments are as follows:

(a) The fair value of Cathay Life’s cash, cash equivalents, receivables and payables is

based on the carrying amount of those instruments at reporting date due to the

short maturity of those instruments.

(b) The fair value of the guarantee deposits paid and guarantee deposits received is

based on the carrying amount as Cathay Life predicts the future cash inflow or

outflow will be of similar amount to the carrying value.

(c) Quoted market price, if available, is utilized as estimates of the fair value of

financial instruments. If no quoted market prices exist for Cathay Life’s financial

assets, the fair value of those assets is derived based on pricing models. A pricing

model incorporates all information that market participants would consider in

setting a price available to Cathay Life. Cathay Life uses discount rates equal to

the prevailing rates of return for financial instruments with similar characteristics.

The characteristics involve debtor’s credit standing, residual period of contracted

fixed interest rates, residual period of principal repayment and currency of

payment.

(d) The fair value of Cathay Life’s financial instruments is based on market prices if

available at the reporting date. When market prices are not available, the fair value

is based on carrying amount or other relevant financial information.

(e) If no quoted market prices exist for Cathay Life’s investments accounted for under

the equity method, then their fair value is taken as approximating their carrying

amounts when no permanent market value decline exists.

348



c. As of December 31, 2012 and 2011, the fair values of financial assets or liabilities determined by quoted market price or pricing models are summarized as following:

December 31, 2012 Based on the quoted market price Based on valuation techniques

Financial instruments (NT$) (US$) (NT$) (US$) Non-derivative financial instrument ` Assets

Cash and cash equivalents $342,984,401 $11,806,692 $36,754,086 $1,265,201 Receivables - - 60,115,199 2,069,370 Financial assets at fair value through profit or loss 47,469,016 1,634,045 19,992,833 688,222 Available-for-sale financial assets 392,009,994 13,494,320 818,720,129 28,183,137 Investments under the equity method-Net - - 7,144,025 245,922 Investment in debt securities with no active market 63,879,749 2,198,959 783,979,035 26,987,230 Other financial assets - - 23,500,000 808,950

Liabilities

Payables - - 37,262,033 1,282,686 Preferred stock liability - - 30,464,799 1,048,702

Derivative financial instruments Assets

Financial assets at fair value through profit or loss - - 4,725,696 162,675 Forward, CS and CCS - - 241,668 8,319 IRS and CDS

Derivative financial assets for hedging - - 1,142,094 39,315 IRS and CDS

Liabilities

Financial liabilities at fair value through profit or loss - - 1,972,791 67,910 Forward, CS and CCS - - 106,666 3,672 IRS and CDS


Financial instruments (NT$) (US$) (NT$) (US$) Non-derivative financial instruments Assets

Cash and cash equivalents $361,673,820 $11,948,260 $12,680,141 $418,901 Receivables - - 45,684,727 1,509,241 Financial assets at fair value through profit or loss 55,273,380 1,826,012 262,850 8,683 Available-for-sale financial assets 416,804,318 13,769,551 858,055,822 28,346,740 Investments under the equity method - - 4,016,883 132,702 Investment in debt securities with no active market 29,669,351 980,157 480,701,698 15,880,466 Other financial assets - - 13,300,000 439,379

Liabilities

Payables - - 22,003,803 726,918 Preferred stock liability - - 30,580,870 1,010,270

349




Financial instruments (NT$) (US$) (NT$) (US$) Derivative financial instruments Assets

Financial assets at fair value through profit or loss Option $152,026 $5,022 $- $- Forward, CS and CCS - - 3,775,175 124,717 IRS and CDS - - 257,176 8,496

Derivative financial assets for hedging IRS and CDS - - 1,957,846 64,679

Liabilities Financial liabilities at fair value through profit or loss

Forward, CS and CCS - - 17,101,959 564,980 IRS and CDS - - 366,942 12,122

d. Information on financial risk


The following table summarizes the maturities of Cathay Life’s financial instruments at December 31, 2012 and 2011:

○a December 31, 2012

Non-derivative financial instruments of fixed interest rate

Less than one year Due in 1~2 years Due in 2~3 years Due in 3~4 years



through profit or loss $64,901 $2,234 $159,439 $5,489 $1,352,624 $46,562 $9,280,513 $319,467

Available-for-sale financial assets 30,142,886 1,037,621 39,285,509 1,352,341 48,487,400 1,669,102 29,676,466 1,021,565



6,968,204 239,869 26,124,165 899,283 30,604,557 1,053,513 4,777,077 164,443

Preferred stock liability - - - - 15,000,000 516,351 10,000,000 344,234

Due in 4~5 years Over 5 years Total

Item (NT$) (US$) (NT$) (US$) (NT$) (US$)


through profit or loss $9,914,804 $341,301 $2 $- $20,772,283 $715,053

Available-for-sale financial assets 70,413,562 2,423,875 470,240,580 16,187,283 688,246,403 23,691,787



18,305,306 630,131 665,841,740 22,920,542 752,621,049 25,907,781

Preferred stock liability - - 5,000,000 172,117 30,000,000 1,032,702

350



Non-derivative financial instruments of float interest rate




through profit or loss $11,887 $409 $9,829 $339 $3 $- $2 $-

Available-for-sale financial assets 123,688,593 4,257,783 341,836 11,767 504,939 17,382 1,708,520 58,813



- - 1,214,388 41,804 260,095 8,953 - -




through profit or loss $2 $- $- $- $21,723 $748

Available-for-sale financial assets 415,188 14,292 34,935,372 1,202,595 161,594,448 5,562,632


with no active market - - 43,395,298 1,493,814 44,869,781 1,544,571





through profit or loss $- $- $3,728 $128 $35,153 $1,210 $- $-

Derivative financial assets for

hedging 185,211 6,375 687,562 23,668 39,508 1,360 133,358 4,591


through profit or loss - - 66,836 2,301 29,261 1,007 10,569 364




through profit or loss $1,830 $63 $200,957 $6,918 $241,668 $8,319


hedging 73,718 2,538 22,737 783 1,142,094 39,315


through profit or loss - - - - 106,666 3,672

351



○b December 31, 2011

Non-derivative financial instruments of fixed interest rate




through profit or loss $1,569,417 $51,847 $514,833 $17,008 $206,990 $6,838 $1,315,212 $43,449

Available-for-sale financial assets 36,767,880 1,214,664 39,828,781 1,315,784 42,740,095 1,411,962 48,537,607 1,603,489



14,599,207 482,300 6,059,556 200,184 18,611,039 614,834 10,430,086 344,568

Preferred stock liability - - - - - - 15,000,000 495,540




through profit or loss $10,419,248 $344,211 $2 $- $14,025,702 $463,353

Available-for-sale financial assets 30,694,791 1,014,034 597,391,686 19,735,437 795,960,840 26,295,370



4,330,933 143,077 432,454,784 14,286,580 486,485,605 16,071,543

Preferred stock liability 10,000,000 330,360 5,000,000 165,180 30,000,000 991,080

Non-derivative financial instruments of float interest rate




through profit or loss $21,287 $703 $- $- $- $- $- $-

Available-for-sale financial assets 166,877,753 5,512,975 - - - - - -



23,018,659 760,445 - - - - - -

352






through profit or loss $- $- $- $- $21,287 $703

Available-for-sale financial assets - - - - 166,877,753 5,512,975


with no active market - - - - 23,018,659 760,445





through profit or loss $- $- $- $- $8,216 $272 $51,977 $1,717


hedging 20,940 692 479,288 15,833 1,124,375 37,145 59,656 1,971


through profit or loss - - - - 172,415 5,696 168,577 5,569




through profit or loss $- $- $129,956 $4,293 $190,149 $6,282


hedging 165,487 5,467 108,100 3,571 1,957,846 64,679


through profit or loss 23,594 779 - - 364,586 12,044

(b) Credit risk

Cathay Life doesn’t exposure to credit risk is minimal.

353



e. Hedge Accounting Disclosures

Cash flow hedges

(a) December 31, 2012

Par value

(NT$) (US$) Exchange rate Frequency Maturity date $2,000,000 $68,847 90DCP Yearly 2013.3.26 2,425,000 83,477 90DCP Each quarter 2013.4.24 3,600,000 123,924 90DCP Each quartey 2013.6.8 2,700,000 92,943 90DCP+25bps Each quarter 2013.8.24 3,000,000 103,270 90DCP+26.5bps Yearly 2013.11.3 2,000,000 68,847 90DCP Yearly 2013.11.3 1,000,000 34,423 90DCP+26.5bps Yearly 2013.12.14

500,000 17,212 90DCP+23bps Yearly 2013.12.14 1,500,000 51,635 90DCP+23bps Yearly 2013.12.16 1,000,000 34,423 90DCP+26.5bps Yearly 2013.12.16

900,000 30,981 90DCP Yearly 2014.3.12 1,000,000 34,423 90DCP Yearly 2014.6.12 3,000,000 103,270 90DCP Each quarter 2014.6.25 1,810,000 62,306 90DCP Each quarter 2014.6.26 2,000,000 68,847 90DCP Yearly 2014.6.29 5,000,000 172,117 90DCP Yearly 2014.8.23 1,000,000 34,423 90DCP Yearly 2014.9.20 3,200,000 110,155 90DCP Yearly 2014.9.27 2,000,000 68,847 90DCP Each quarter 2014.9.28 1,500,000 51,635 90DCP Yearly 2014.9.29 2,500,000 86,059 90DCP Yearly 2014.12.20 2,000,000 68,847 90DCP Yearly 2014.12.24 2,300,000 79,174 90DCP Each quarter 2015.3.25 1,500,000 51,635 90DCP Each quarter 2015.5.9 2,543,500 87,556 90DCP Each quarter 2016.10.23

900,000 30,981 90DCP Each quarter 2016.10.24 1,200,000 41,308 90DCP Each quarter 2017.10.25 1,400,000 48,193 90DCP Each quarter 2017.12.9

600,000 20,654 90DCP Each quarter 2020.9.23

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(b) December 31, 2011

Par value

NT$ US$ Exchange rate Frequency Maturity date

$1,000,000 $33,036 90DCP Each quarter 2012.6.26 2,000,000 66,072 90DCP Each quarter 2012.9.9 2,000,000 66,072 90DCP Each quarter 2012.10.11

700,000 23,125 90DCP Each quarter 2012.11.24 2,000,000 66,072 90DCP Yearly 2013.3.26 2,425,000 80,112 90DCP Each quarter 2013.4.24 3,600,000 118,930 90DCP Each quarter 2013.6.8 2,700,000 89,197 90DCP+25bps Each quarter 2013.8.24 2,000,000 66,072 90DCP Yearly 2013.11.3 3,000,000 99,108 90DCP+26.5bps Yearly 2013.11.3

500,000 16,518 90DCP+23bps Yearly 2013.12.14 1,000,000 33,036 90DCP+26.5bps Yearly 2013.12.14 1,500,000 49,554 90DCP+23bps Yearly 2013.12.16 1,000,000 33,036 90DCP+26.5bps Yearly 2013.12.16

900,000 29,732 90DCP Yearly 2014.3.12 1,000,000 33,036 90DCP Yearly 2014.6.12 3,000,000 99,108 90DCP Each quarter 2014.6.25 1,810,000 59,795 90DCP Each quarter 2014.6.26 2,000,000 66,072 90DCP Yearly 2014.6.29 5,000,000 165,180 90DCP Yearly 2014.8.23 1,000,000 33,036 90DCP Yearly 2014.9.20 3,200,000 105,715 90DCP Yearly 2014.9.27 2,000,000 66,072 90DCP Each quarter 2014.9.28 1,500,000 49,554 90DCP Yearly 2014.9.29 2,500,000 82,590 90DCP Yearly 2014.12.20 2,000,000 66,072 90DCP Yearly 2014.12.24 2,300,000 75,983 90DCP Each quarter 2015.3.25 1,500,000 49,554 90DCP Each quarter 2015.5.9 2,543,500 84,027 90DCP Each quarter 2016.10.23

900,000 29,732 90DCP Each quarter 2016.10.24 1,200,000 39,643 90DCP Each quarter 2017.10.25 1,400,000 46,250 90DCP Each quarter 2017.12.9

600,000 19,822 90DCP Each quarter 2020.9.23

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The terms of interest rate swap agreements are established based on the terms of the bonds being hedged.

Cathay Life’s interest rate swap agreements are considered to be highly effective cash flow hedges. As of December 31, 2012 and 2011, unrealized gains on these financial instruments recognized in equity were NT$1,140,187 (US$39,249) thousands and NT$1,961,877 (US$64,813)thousands, respectively.

f. Financial risk management objectives and policies

Cathay Life’s financial assets primarily consist of domestic or foreign common stocks, preferred stocks, government bonds, corporate bonds, repurchase bonds, structured notes, mortgage-backed securities, mutual funds, project investments, short-term notes, cash and cash equivalents. Cathay Life also enters into derivative transactions such as stock index options, index futures, interest rate futures, interest rate swaps, currency forwards, cross currency swap and credit default swaps to protect against the price risk of stock value, interest rate risk, foreign currency risk and credit risk from investment activities. Cathay Life does not enter into derivative transactions for increasing investment income; however, the derivatives not qualified for hedge accounting are measured at fair value through profit or loss. The primary risks involved in financial instruments are market risk, credit risk, operational risk, liquidity risk and sovereign risk. In addition to compliance with the risk management policies and guidance from the Company, Cathay Life has also established risk management systems such as the VaR model, the credit evaluation model, the integrated appraisal and collection, and the concentration management systems to monitor and manage Cathay Life’s risks. The risk management policies are summarized as follow: Market Risk Market risk is the exposure to uncertain market value of a portfolio, including interest rate risk, price risk and foreign currency risk, etc. Cathay Life conducts analysis and assessments of the investment targets before any investment decisions are made. In addition, VaR model in connection with scenario analysis, stress testing, back testing, Position Limit, VaR Limit and Loss Limit are used to effectively manage the market risk of Cathay Life’s financial instruments.

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Credit Risk Credit risk is the risk of loss arising from the potential default of the counter-party. In order to minimize Cathay Life’s exposure to the credit risk, following evaluations and controls are performed.

Cathay Life has taken the credit concentration index of each conglomerate into consideration when establishing Lending Policy to prevent from over-exposure. Strict credit evaluations are carried out by Cathay Life before committing to business lending, mortgage lending, policy loan, and security investments. All business loans are secured by land, property, plant and equipments or financial guarantees. Assessments on the mortgage repayment ability and personal credits are conducted before the mortgages are granted. The total mortgage amounts granted are based on a different percentage of the carrying value which varies according to regions where the secured buildings locate. For policy loans, the credit risk level is assessed at low as the policy loan amounts are limited to their net realizable value of the insurance policy and hence are deemed as fully secured investments. An internal credit risk evaluation model for investments in financial instruments has been created based on external credit assessments and various characteristics of financial instruments. Cathay Life also monitors the credit risk level of the investment targets, issuers or counter-parties by evaluating the credit concentration of the investments or counter-parties. Operational Risk

Operational risk is the risk of loss due to inadequate or failed internal controls, employee fraud or misconduct and management negligence. To mitigate the operational risk, Cathay Life has adopted and implemented the internal control regulations and procedures. Cathay Life has also commenced the development of information systems to accommodate and support the aforementioned policies.

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Liquidity Risk

Liquidity risk is the risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. Cathay Life has primarily sought to achieve the flexible cash flow and stable liquidity by utilizing the deposits in financial institutions, short-term notes (includes repurchase agreement) and domestic bond funds. In pursuit of these goals, Cathay Life also conducts analysis of assets allocation, liquid asset ratio and cash flows to ensure the effectiveness and timeliness of managing liquidity risk. Sovereign Risk Sovereign risk is the risk of market price fluctuation or default of the issuers due to the political or economical issues in the country where investments are located. Cathay Life categorizes and manages the investment risk based on each country or region, as well as regularly monitors the concentration of foreign countries to minimize its sovereign risk.

D. Cathay United Bank


December 31, 2012

(NT$) (US$)

Item Carry amount Fair value Carry amount Fair value


Assets

Financial assets at fair value through profit or loss $63,141,013 $63,141,013 $2,173,529 $2,173,529

Available-for-sale financial assets 57,681,737 57,681,737 1,985,602 1,985,602

Held-to-maturity financial assets and investments in

debt securities with no active market

444,586,533 444,672,669 15,304,184 15,307,149

Other financial assets-financial assets carried at

cost

3,308,665 (Note) 113,895 (Note)

Others 1,170,991,811 1,170,991,811 40,309,529 40,309,529

Liabilities

Financial debentures payable 42,518,631 42,518,631 1,463,636 1,463,636

Others 1,633,466,763 1,633,466,763 56,229,493 56,229,493

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December 31, 2012

(NT$) (US$)

Item Carry amount Fair value Carry amount Fair value


Assets

Forward $553,680 $553,680 $19,060 $19,060

Non-delivery forward 245,801 245,801 8,461 8,461

Currency swap 1,735,384 1,735,384 59,738 59,738

Interest rate swap 2,707,170 2,707,170 93,190 93,190

Cross currency swap 132,380 132,380 4,557 4,557

Options 484,616 484,616 16,682 16,682

Future 61 61 2 2


Liabilities

Forward 120,980 120,980 4,165 4,165


Currency swap 2,542,238 2,542,238 87,512 87,512



Options 515,012 515,012 17,728 17,728

December 31, 2011

(NT$) (US$)

Item

Carrying

amount

Fair value

Carrying

amount

Fair value


Assets

Financial assets at fair value through profit or loss $16,512,154 $16,512,154 $545,496 $545,496

Available-for-sale financial assets 47,322,633 47,322,633 1,563,351 1,563,351

Held-to-maturity financial assets and debt securities


443,316,412 443,396,178 14,645,405 14,648,040

Other financial assets-financial assets carried at cost 3,396,590 (Note) 112,210 (Note)

Others 1,150,989,688 1,150,989,688 38,024,106 38,024,106

Liabilities

Financial debentures payable 33,115,240 33,115,240 1,093,995 1,093,995

Others 1,570,455,090 1,570,455,090 51,881,569 51,881,569

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December 31, 2011

(NT$) (US$)

Item

Carrying

amount

Fair value

Carrying

amount

Fair value


Assets

Forward $2,290,792 $2,290,792 $75,679 $75,679


Currency swap 522,734 522,734 17,269 17,269



Options 321,818 321,818 10,632 10,632

Liabilities

Forward 539,462 539,462 17,822 17,822


Currency swap 2,053,111 2,053,111 67,826 67,826



Options 261,898 261,898 8,652 8,652

Note: Fair value cannot be reliably estimated.

b. The methodologies and assumptions used by Cathay United Bank to estimate the

above fair value of financial instruments are summarized as following:

(a) The carrying value of short-term financial instruments, such as cash and cash equivalents, receivables, securities purchased under agreements to resell, securities sold under agreements to repurchase, payables, refundable deposits, guarantee deposits, borrowed funds, due from the Central Bank and call loans to banks and due to the Central Bank and call loans from banks arising in the ordinary course of business, approximate fair value because of the relatively short period of time between their origination and expected realization.

(b) Quoted market prices, if available, are utilized as estimates of the fair values of

financial instruments at fair value through profit or loss, available-for-sale financial instruments, held-to-maturity financial assets and debt securities with no active market. If no quoted market prices exist for certain of Cathay United Bank’s financial instruments, the fair value of such instruments has been derived based on pricing models. A pricing model incorporates all factors that market participants would consider in setting a price. Cathay United Bank uses discount rates equal to the prevailing rates of return for financial instruments with similar characteristics.

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(c) Discounts and loans, deposits and principals received from the sale of structured products are classified as interest-bearing financial assets. Thus, their face values are equivalent to their fair values.

The face value of delinquent accounts deducted from allowance for doubtful accounts is adopted fair values.

(d) Fair value of financial debentures payable is based on quoted market price. If

quoted market price is not available, pricing models are utilized to assess the fair value of such instruments.

(e) If there is a quoted market price in an active market, the quoted market price of

derivative financial instruments is regarded as fair value. Otherwise, if the market for a derivative financial instrument is not active, Cathay United Bank assesses fair value by using pricing models.

(f) Cathay United Bank adopts the exchange rate and market interest rate provided by

Thomson Reuters’ system to evaluate the fair value of forward, currency swap, interest rate swap and cross currency swap. The average price or closing price is used to figure the fair value of each contract.

c. The fair values of Cathay United Bank’s financial assets or liabilities determined by

quoted market price are classified as level 1 or pricing models are classified as level 2 and 3 are summarized as following:

December 31, 2012


Financial instruments Measured at fair value item

(NT)

(US)

(NT)

(US)

(NT)

(US)

(NT)

(US)


Assets



Bonds $4,030,538 $138,745 $824,388 $28,378 $3,206,150 $110,367 $- $-

Others 59,110,475 2,034,784 - - 59,110,475 2,034,784 - -


Stocks

Bonds 7,348,855 252,973 7,348,855 252,973 - - - -

Others 48,562,558 1,671,689 14,259,792 490,871 34,302,766 1,180,818 - -

Other financial assets: 1,770,324 60,940 1,770,324 60,940 - - - -

Investments in debt securities with no active market 424,043,663 14,597,028 - - 424,043,663 14,597,028 - -


Assets


Other financial assets: 4,655,954 160,274 - - 4,655,954 160,274 - -

Derivatives financial assets for hedging 1,203,138 41,416 - - 1,203,138 41,416 - -

Liabilities

Financial liabilities at fair value through profit or loss 4,967,738 171,006 - - 4,967,738 171,006 - -

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December 31, 2011


Financial instruments measured at fair value NT US NT US NT US NT US


Assets



Bonds $1,646,923 $54,408 $1,500,970 $49,586 $145,953 $4,822 $- $-

Others 14,865,231 491,088 - - 14,865,231 491,088 - -

Available-for-sale financial assets

Stocks 6,765,923 223,519 6,765,923 223,519 - - - -

Bonds 39,032,580 1,289,481 8,243,897 272,345 30,788,683 1,017,136 - -

Others 1,524,130 50,351 1,524,310 50,351 - - - -


Investments in debt securities with no active market 425,140,266 14,044,938 - - 425,140,266 14,044,938 - -


Assets



Derivatives financial assets for hedging 1,438,773 47,531 - - 1,438,773 47,531 - -

Liabilities

Financial liabilities at fair value through profit or loss 4,835,152 159,734 - - 4,835,152 159,734 - -

d. Gains or recognized for the changes in fair value of financial asset or liabilities

determined by pricing models were NT$103,341 (US$3,557) thousands and NT$3,746 (US$124) thousands for the years ended December 31, 2012 and 2011, respectively.

e. The interest income arising from other than financial assets or liabilities at fair value

through profit or loss for the years ended December 31, 2012 and 2011 were NT$31,623,239 (US$1,088,580) and NT$27,279,498 (US$901,206), and expenses were NT$11,485,900 (US$395,384) and NT$9,650,440 (US$318,812), respectively.

f. Cathay United Bank recognized an unrealized gains or losses of NT$1,248,439

(US$42,976) thousands and NT$436,354 (US$14,416) thousands in shareholders’ equity for the changes in fair value of available-for-sale financial assets and a realized gains of NT$924,281 (US$31,817) thousands and NT$1,250,174 (US$41,301) thousands in the income statements, for the years ended December 31, 2012 and 2011, respectively.

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g. Information on financial risk

(a) Market risk

Market risk is the potential loss arising from adverse movements of market price, such as interest rates, foreign exchange rates and equity securities.

○a Interest rate risk

If interest rates are rising, the fair values of Cathay United Bank’s fixed-rate bond investments such as government bonds and corporate bonds may decline.

○b Foreign exchange risk

Cathay United Bank manages foreign exchange risk by matching foreign currency assets and liabilities. Cathay United Bank trades in currencies and derivative instruments, primarily spot and forward exchange contracts and currency swaps, to manage asset and liability positions and hedge against Cathay United Bank’s commercial positions. As most of foreign currency assets and liabilities are matched, the foreign exchange risk is insignificant.

○c Equity securities price risk

Cathay United Bank may expose to risk when the price of equity securities, such as stocks, mutual funds and TAIEX Futures and Options, moves in adverse direction.

Cathay United Bank adopts many methodologies to manage its market risk. Value-at-risk (VAR) is one of the methodologies. VAR is statistical measure that assesses potential losses that might be caused by changes in risk factors over a specified period of time and at a specific level of statistical confidence.

December 31, 2012

Average balance Maximum balance Minimum balance Factors of market risk (NT$) (US$) (NT$) (US$) (NT$) (US$)

Interest rate $611,347 $21,045 $876,417 $30,169 $457,036 $15,733 Foreign exchange 156,656 5,393 162,280 5,586 146,608 5,047 Equity Securities price 124,933 4,301 165,277 5,689 60,704 2,090

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December 31, 2011 Average balance Maximum balance Minimum balance

Factors of market risk (NT$) (US$) (NT$) (US$) (NT$) (US$) Interest rate $358,300 $11,837 $590,383 $19,504 $258,043 $8,525 Foreign exchange 133,656 4,415 177,844 5,875 92,593 3,059 Equity Securities price 138,602 4,579 207,076 6,841 100,824 3,331

Cathay United Bank enters into a variety of derivatives transactions for both trading and non-trading purposes. The objectives in using derivative instruments are to meet customers’ needs, to manage Cathay United Bank’s exposure to risks and to generate revenues through trading activities. Cathay United Bank provides trades derivative instruments on behalf of customers and for its own positions. Cathay United Bank provides derivative contracts to address customer demands for customized derivatives and also takes proprietary positions for its own accounts.

○d Market risk factor sensitivity

Market risk factor sensitivity is one of the tools to manage market risk. Market risk factor sensitivities of a position are defined as the change in the value of a position caused by a unit shift in a given market factor. Market risk factor sensitivities include interest rate, foreign exchange rate and equity factor sensitivities.

December 31, 2012

(NT$) (US$)

Foreign exchange rate factor sensitivity (FX Delta)

USD+1% $417,124 $14,359

HKD+1% 3,042 105

JPY+1% (1) -

NTD+1% (464,332) (15,984)

Interest rate factor sensitivity (PVBP)

Yield curves (USD) parallel shift+1bp (18,376) (633)

Yield curves (HKD) parallel shift+1bp (30) (1)

Yield curves (JPY) parallel shift+1bp (1) -

Yield curves (NTD) parallel shift+1bp (9,144) (315)

Equity securities price factor sensitivity (Equity Delta) 68,397 2,354

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Foreign exchange rate factor sensitivities (“FX delta”) represent the change of the foreign exchange portfolios caused by the underlying currency exchange rate fluctuation.

Interest rate factor sensitivities (the present value of one basis point, or “PVBP”) represent the change in the net present value of the interest rate derivatives portfolios caused by a parallel unit shift of 0.01% (1 basis point) in the interest rates in various yield curves affecting the portfolio. Cathay United Bank’s interest rate-sensitive portfolios include bonds, interest rate swaps and structured products composed of such products.

Equity securities price factor sensitivities (“Equity delta”) represent the change of the equity securities price portfolio of caused by the parallel unit shift of 1% (100 basis points) in the underlying stocks prices fluctuation. Cathay United Bank’s equity portfolios include stocks and equity index options.

Stress Test

December 31, 2012 Market/ Product Scenarios (NT$) (US$)

Stock Market Major Stock Exchanges +15% $1,025,960 $35,317

Major Stock Exchanges -15% (1,025,960) (35,317)

Interest Rate/Bond Market Major Interest Rate + 100bp (2,821,676) (97,132)

Major Interest Rate - 100bp 2,496,083 85,924

Foreign Exchange Market Major Currencies +3% 1,450,437 49,929

Major Currencies -3% (1,365,947) (47,021)

Composite

Major Stock Exchanges -15%

(2,397,199) (82,520) Major Interest Rate + 100bp

Major Currencies +3%

(b) Credit risk

Credit risk represents the risk of loss that Cathay United Bank would incur if counterparty fails to perform Cathay United Bank’s contractual obligations.

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To centralize risk management functions currently handled by different departments, Cathay United Bank’s board of directors resolved that a risk management department would be established to manage the credit risk. The objectives of credit risk management are to improve asset quality and to generate stable profits while reducing risk through a diversified and balanced loan portfolio. Cathay United Bank’s board of directors sets the counterparty credit limits, which are then implemented by credit committee. The credit committee also monitors current and potential credit exposure to individual counterparty and on an aggregate basis to counterparty and their affiliates. Cathay United Bank performs periodic and systematic detailed reviews of its lending portfolios to identify credit risks and to assess the overall collectability of those portfolios.

Cathay United Bank maintains a strict policy to evaluate customers’ credit ratings when providing loan commitments and commercial letters of credit transactions. Certain customers are required to provide appropriate collateral for the related loans, and Cathay United Bank retains the legal right to foreclose on or liquidate the collateral.

○a Information on concentrations of credit risk:

December 31, 2012

Carrying value

Maximum credit risk exposed amount

Financial assets (NT$) (US$) (NT$) (US$)

Non-derivative financial instruments Financial assets at fair value through profit or loss $63,141,013 $2,173,529 $63,141,013 $2,173,529 Available-for-sale financial assets 57,681,737 1,985,602 57,681,737 1,985,602 Held-to-maturity financial assets and investments in

debt securities with no active market

444,586,533 15,304,184 444,586,533 15,304,184 Other financial assets – financial assets carried at

cost

3,308,665 113,895 3,308,665 113,895 Other assets 1,170,991,811 40,309,529 1,170,991,811 40,309,529 Guarantees on duties and contracts - - 12,081,454 415,885 Unused commercial letters of credit - - 4,281,218 147,374 Irrevocable loan commitments - - 34,415,264 1,184,691 Credit card line commitments - - 295,794,164 10,182,243


Forward 553,680 19,060 553,680 19,060 Non-delivery forward 245,801 8,461 245,801 8,461 Currency swap 1,735,384 59,738 1,735,384 59,738 Interest rate swap 2,707,170 93,190 2,707,170 93,190 Cross currency swap 132,380 4,557 132,380 4,557 Options 484,616 16,682 484,616 16,682 Future 61 2 61 2

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December 31, 2011

Carrying value Maximum credit risk exposed

amount Financial assets (NT$) (US$) (NT$) (US$)

Non-derivative financial instruments Financial assets at fair value through profit or loss $16,512,154 $545,496 $16,512,154 $545,496 Available-for-sale financial assets 47,322,633 1,563,351 47,322,633 1,563,351 Held-to-maturity financial assets and debt

securities with no active market

443,316,412 14,645,405 443,316,412 14,645,405 Other financial assets-financial assets carried at

cost

3,396,590 112,210 3,396,590 112,210 Others 1,150,989,688 38,024,106 1,150,989,688 38,024,106 Guarantees on duties and contracts - - 13,245,165 437,567 Unused commercial letters of credit - - 4,308,561 142,338 Irrevocable loan commitments - - 51,897,159 1,714,475 Credit card line commitments - - 282,315,962 9,326,593

Derivative financial instruments Forward 2,290,792 75,679 2,290,792 75,679 Non-delivery forward 68,302 2,256 68,302 2,256 Currency swap 522,734 17,269 522,734 17,269 Interest rate swap 3,218,010 106,310 3,218,010 106,310 Cross currency swap 304,684 10,065 304,684 10,065 Options 321,818 10,632 321,818 10,632

○b Cathay United Bank does not believe it has high levels of risk concentration with

regard to any single customer or transaction. However, Cathay United Bank is likely to be exposed to regional or industry concentration risk. Cathay United Bank’s information of concentration of credit risk is as follows:

December 31, 2012 2011 (NT$) (US$) (NT$) (US$) Loans, customers’ liabilities under acceptances, bills

purchased and guarantees account

Industry type Manufacturing $119,508,896 $4,113,938 $131,145,762 $4,332,533 Financial institutions and insurance 29,845,385 1,027,380 31,093,366 1,027,201 Leasing and real estate 83,250,987 2,865,782 90,228,529 2,980,790 Individuals 491,308,474 16,912,512 484,128,104 15,993,660 Others 288,275,903 9,923,439 270,447,027 8,934,490

Total 1,012,190,645 34,843,051 1,007,042,788 33,268,674 Valuation allowance (13,043,222) (448,992) (9,316,456) (307,778) Maximum credit risk exposed $999,147,423 $34,394,059 $997,726,332 $32,960,896

Geographic Region

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December 31,

2012 2011 (NT$) (US$) (NT$) (US$)

Domestic $876,857,475 $30,184,422 $877,208,405 $28,979,465

South East Asia 55,179,868 1,899,479 43,909,725 1,450,602

North East Asia 694,753 23,916 851,735 28,138

America 22,560,687 776,616 15,206,114 502,349

Others 56,897,862 1,958,618 69,866,809 2,308,120

Total 1,012,190,645 34,843,051 1,007,042,788 33,268,674

Valuation allowance (13,043,222) (448,992) (9,316,456) (307,778)

Maximum credit risk exposed $999,147,423 $34,394,059 $997,726,332 $32,960,896

(c) Liquidity risk

The purpose of liquidity risk management is to ensure the availability of funds to meet present and future financial obligations.

Liquidity is also managed by ensuring that the excess of maturing liabilities over maturing assets in any period is kept to manageable levels relative to the amount of funds Cathay United Bank believes that it can generate within that period. As part of the liquidity risk management, Cathay United Bank focuses on a number of components, including tapping available sources of liquidity, preserving necessary funds at reasonable cost and continuous contingency planning. Cathay United Bank’s assets and liabilities management committee is responsible for overall liquidity risk management. Cathay United Bank’s liquidity policy focuses on cash flow management, interbank funding capacity and the maintenance of sufficient liquid assets. The treasury department is responsible for daily operation and monitoring. The primary tools for monitoring liquidity include measurement of liquidity risk, analysis of interest rate sensitivity and scenario simulation, and continuous contingency planning. Cathay United Bank manages liquidity risks across all classes of assets and liabilities with the goal that even under adverse conditions. The liquidity risk rate was 32.57%. Capital and working capital of Cathay United Bank have sufficed to deliver contracts. Cathay United Bank has raised sufficient capital to execute the obligations so that it is without liquidity risk.

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(d) Cash flow risk and fair value risk from interest rate fluctuation

Cathay United Bank’s financial debentures payable was matched with the interest rate swap and currency swap contracts which had been transferred from fixed rate to floating rate.

Except for default or redemption in advance, expected reset and maturity dates of interest-bearing financial instruments are confirmed under related contracts. As of December 31, 2012, there is no significant change in these dates.

As of December 31, 2012 and 2011, the effective interest rates of financial instruments held and issued by Cathay United Bank are classified as follows:

Effective interest rate (%)

Financial instruments December 31, 2012 December 31, 2011


Bonds 0~5.9295 0.53~5.9295

Overseas financial instruments 0~9.3714 0~8.1290

Held-to-maturity financial assets

Bonds 2.2292~6.8969 2.2292~6.9559 Overseas financial instruments 0~8.2501 0~20.7123

Investments in debt securities with no active market

Preferred stocks 5 5

Certificates of deposit 0.388~0.93 0.858~1.065

Overseas financial instruments 0~5.15 0~5.15

Financial debentures payable 1.48~5.593 1.65~2.95

h. Fair value hedge

The interest rate swap is used to hedge interest rate fluctuations of financial debentures payable with fixed rate:

Hedging instruments

Financial assets fair value

Derivative designated as December 31, 2012 December 31, 2011

Hedged item hedging instruments (NT$) (US$) (NT$) (US$)

Financial debentures payable Interest rate swap $1,203,138 $41,416 $1,438,773 $47,531

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The hedge is regarded as highly effective, at inception and throughout the life of the hedge, Cathay United Bank can expect changes in the fair value of the hedged item that are attributable to the hedged risk to be almost fully offset by the changes in the fair value of the hedging instrument and actual results are within a range of 80~125 percent.

i. Risk control and hedging strategy

To provide customer-oriented service and fulfill the requirement of government regulation, Cathay United Bank adopted multiple risk management mechanism to identify its risks. Meanwhile, under the regulation and the spirit of “Basel Accord”, Cathay United Bank set its business objectives as maintain steady capital and asset management, and higher capital adequacy ratio. Cathay United Bank established risk management Committee and its missions are as follow:

(a) Revise the risk management policies, risk appetite and risk tolerance for Cathay

United Bank, and report to Board of Directors. (b) Decision making for Cathay United Bank’s credit, market and operational risk

management. (c) Examine the significant risk management reports for Cathay United Bank (such as

credit rating, market evaluation, risk index…) and other items related to the project. (d) Any significant item mention by any risk management unit of Cathay United Bank

that needs to be investigated. (e) Other related items.

Cathay United Bank establish risk management department to supervise, lead, develop and settle the framework of integrated risk management. The objective for Cathay United Bank’s market risk management is to maintain moderate liquidity and centralize all the market risks in the consideration of economic environment, competition, market value and the effect to net interest income. To achieve the objectives, Cathay United Bank adopted fair value hedge which transfer the fixed income transaction to variable income. According to the principle of Funds Transfer Pricing, Cathay United Bank develop fair value hedge strategies for debentures with fixed rate. Cathay United Bank use interest rate swap as its main financial instrument.

370



E. Cathay Century


December 31, 2012

(NT$) (US$)

Items

Carrying

amount

Fair value

Carrying

amount

Fair value


Asset


Receivable 4,073,872 4,073,872 140,237 140,237

Financial assets at fair value through profit or loss 324,881 324,881 11,184 11,184

Available-for-sale financial assets 7,750,552 7,750,552 266,800 266,800

Investments under equity method 679,562 679,562 23,393 23,393

Investments in debt securities with no active market 1,172,459 1,172,459 40,360 40,360

Held-to-maturity financial assets 2,512,011 2,512,011 86,472 86,472

Secured loans 522,080 522,080 17,972 17,972

Guarantee deposits paid 739,997 739,997 25,473 25,473

Liabilities

Payables 2,095,542 2,095,542 72,136 72,136

Preferred stock liability 1,000,000 1,000,000 34,423 34,423


Asset


Forward and SWAP 60,579 60,579 2,085 2,085

Derivative financial for hedging

IRS 17,134 17,134 590 590

371



December 31, 2011

(NT$) (US$)

Items

Carrying

amount

Fair value

Carrying

amount

Fair value


Asset


Receivable 3,519,359 3,519,359 116,266 116,266

Financial assets at fair value through

profit or loss

454,960

454,960

15,030

15,030


Investments under equity method 1,055,058 1,055,058 34,855 34,855

Investments in debt securities with no active market 1,120,809 1,120,809 37,027 37,027

Held-to-maturity financial assets 2,408,714 2,408,714 79,574 79,574

Secured loans 551,965 551,965 18,235 18,235


Liabilities

Payable 1,946,257 1,946,257 64,297 64,297

Preferred stock liability 1,000,000 1,000,000 33,036 33,036


Asset

Derivative financial for hedging

IRS 28,521 28,521 942 942

Liabilities


Forward and SWAP 45,000 45,000 1,487 1,487

b. The methods and assumptions used to estimate the fair values of the financial instruments are as follows:

(a) The fair value of Cathay Century’s short-term financial instruments is based on the

carrying amount of those instruments at reporting date due to the short maturity of those instruments. The method is applied to cash and cash equivalents, receivables, claims recoverable from reinsurers, due from reinsurers and ceding companies, secured loans, claims outstanding, due to reinsurers and ceding companies, operating and liability reserve.

372



(b) The fair value of the guarantee deposits paid and guarantee deposits received is

based on the carrying amount.

(c) Quoted market prices, if available, are utilized as estimating of the fair value of

held-to-maturity financial assets. If no quoted market prices exist for Cathay

Century’s held-to-maturity financial assets, the fair value of financial assets has

been derived based on pricing models. A pricing model incorporates all information

that market participants would consider in setting a price. Cathay Century uses

discount rates equal to the prevailing rates of return for financial instruments with

similar characteristics. The characteristics involve debtor’s credit standing, residual

period of contracted fixed interest rates, residual period of principal repayment and

currency of payment.

(d) The fair value of Cathay Century’s current and noncurrent financial asset or

liabilities was based on market prices at the reporting date if market prices are not

available. When market prices are not available, their fair value was based on

relevant financial or any other information.

(e) If no quoted market prices exist for Cathay Century’s investments accounted for

equity method, then their fair value is taken as approximating their carrying

amounts when no permanent market value decline exists.

(f) The Company’s fair value of CCS based on the data of quotation from

counterparties and from the Bloomberg information system, respectively. The

calculation of fair value of CCS is derived contract by contract and the valuation of

quotation mentioned previously is based on substance of transactions consistently.

373



c. The fair values of financial assets or liabilities determined by quoted market price or

pricing models are summarized as following:

December 31, 2012 Based on the quoted market price Based on pricing models

Item (NT$) (US$) (NT$) (US$) Non-derivative financial instruments Assets

Cash and cash equivalents $4,945,403 $170,238 $80,103 $2,757 Financial assets at fair value through profit or loss 324,881 11,184 - - Available-for-sale financial assets 7,750,552 266,800 - - Investments under equity method - - 679,562 23,393 Investment in debt securities with no active market - - 1,172,459 40,360 Held-to-maturity financial assets - - 2,512,011 86,472


Financial assets at fair value through profit and loss Forward and SWAP - - 60,579 2,085 Derivative financial assets for hedging-current IRS - - 17,134 590

December 31, 2011

Based on the quoted market price Based on pricing models Item (NT$) (US$) (NT$) (US$)


Cash and cash equivalents $5,644,226 $186,463 $515,151 $17,018 Financial assets at fair value through profit or loss 454,960 15,030 - - Available-for-sale financial assets 5,281,500 174,480 - - Investments under equity method - - 1,055,058 34,855 Investment in debt securities with no active market - - 1,120,809 37,027 Held-to-maturity financial assets - - 2,408,714 79,574


Derivative financial assets for hedging-current IRS - - 28,521 942

Liabilities

Financial liabilities at fair value through profit and loss

Forward and SWAP - - 45,000 1,487

374





The following table summarizes the maturities of the Cathay Century’s financial instruments at December 31, 2012 and 2011:

� December 31, 2012

Fixed interest rate:



Available-for-sale financial assets $201,807 $6,947 $273,561 $9,417 $238,440 $8,208 $- $-

Held-to-maturity financial assets 857,366 29,513 647,903 22,303 - - 443,496 15,267

Investments in debt securities with no

active market

-

- 200,000 6,885 - - - -

Preferred stock liability - - - - - - - -



Available-for-sale financial assets $- $- $1,869,466 $64,353 $2,583,274 $88,925

Held-to-maturity financial assets 256,487 8,829 306,759 10,560 2,512,011 86,472


active market 300,000

10,327 672,459

23,148 1,172,459

40,360

Preferred stock liability - - 1,000,000 34,423 1,000,000 34,423

Floating interest rate:



Available-for-sale financial assets $200,000 $6,885 $200,000 $6,885 $200,000 $6,885 $- $-



Available-for-sale financial assets $- $- $- $- $600,000 $20,655

375



� December 31, 2011

Fixed interest rate:




$100,142

$3,308 $610,378

$20,164 $- $- $213,852

$7,065

Held-to-maturity financial assets 274,673 9,074 913,602 30,182 272,365 8,998 107,005 3,535


active market

300,000

9,911 200,000

6,607 - - - -

Preferred stock liabilities - - - - - - - -




$- $- $939,118

$31,025 $1,863,490

$61,562

Held-to-maturity financial assets - - 841,069 27,785 2,408,714 79,574


active market - - 620,809

20,509 1,120,809

37,027

Preferred stock liabilities - - 1,000,000 33,036 1,000,000 33,036

Floating interest rate:



Available-for-sale financial assets $200,000 $6,607 $- $- $200,000 $6,607 $200,000 $6,607



Available-for-sale financial assets $- $- $- $- $600,000 $19,821

(b) Credit risk

Cathay Century’s exposure to credit risk is minimal.

376



e. Hedged of derivative financial instruments related information

The following table summarizes the terms of Cathay Century’s interest rate swap for bonds hedging at December 31, 2012:

Cash flow hedges-IRS December 31, 2012

Par value Exchange rate

Frequency

Maturity date NT$ US$

$200,000 $6,885 2.65% Each quarter 2014.09.30 $200,000 $6,885 2.785% Each quarter 2015.04.30

The terms of interest rate swap agreements are established based on the terms of the bonds being hedged. Cathay Century’s interest rate swap agreements for cash flow hedges have passed the effectiveness testing. Unrealized gains on financial instruments were recognized in equity by NT$17,134 (US$590) thousands and NT$28,521 (US$942) thousands as of December 31, 2012 and 2011, respectively.

f. Risk management policies and hedge strategies

Cathay Century’s primary financial instruments other than derivatives consist of cash and cash equivalents and investments. The main purpose of holding these financial instruments is to manage cash flow. Cathay Century has other financial assets and liabilities such as notes receivable, premiums receivable, claims outstanding due to and from reinsurers and ceding companies, reinsurance account, receivable and payable and secured loans, etc.. Cathay Century also conducts derivative transactions, primarily including futures, option contracts and forward currency contracts. The purpose is to manage the stock price fluctuation and currency exchange risks arising from Cathay Century’s investment activities. Cathay Century does not conduct derivative transactions based on trading purpose.

The primary risks involved in these derivative transactions are market risk, credit risk, operational risk and liquidity risk. The risk management policies approved by the board of directors are as follows:

377



(a) Foreign Exchange Risk

As a result of significant overseas designated purpose pecuniary trust funds, Cathay Century’s balance sheet can be affected significantly by the fluctuation of the US$/NT$ exchange rates. Cathay Century utilizes forward currency contracts to hedge this exposure. Cathay Century also has transactional currency exposures. Such exposure arises from reinsurance transactions. These transactions with foreign reinsurance company usually receive on time and the fluctuation of exchange rate is not significant. Thus Cathay Century did not seek to hedge this exposure. To maximum the hedging effect, Cathay Century adopts an equivalent hedging strategy for foreign currency risks.

(b) Credit risk

Cathay Century only conducts business with recognized and creditworthy third parties. Customers are subject to credit verification procedures, and the collection of premium receivable and notes receivable are subsequently assessed. In addition, once the credit of the third party is impaired, Cathay Century will freeze the related contracts until the credit of the third party recovers. Thus Cathay Century has minimal bad debts. Assessments on the mortgage repayment ability and personal credits are conducted before the mortgages are granted. The total mortgage amounts granted are based on a different percentage of the carrying value which varies according to regions where the secured buildings locate. The counterparties to Cathay Century’s other financial assets (including cash and cash equivalents, all other current and noncurrent investments) are all creditworthy and well-known financial institutions in the world. As a result, counterparty credit risk is relatively low.

378



(c) Operational Risk

Operational risk is the risk of loss due to inadequate or failed internal controls, employee fraud or misconduct and management negligence. To mitigate the operational risk, Cathay Century has adopted and implemented the internal control regulations and sheets. Cathay Century is also commenced to develop the information systems to accommodate the aforementioned policies.

(d) Liquidity risk

Cathay Century’s exposure to liquidity risk is minimal.

F. Cathay Securities


December 31, 2012

(NT$) (US$)

Item

Carrying

amount Fair value

Carrying

amount Fair value


Assets Cash and cash equivalents $788,977 $788,977 $27,159 $27,159 Financial assets at fair value through profit or loss –

current

Securities borrowed 15,569 15,569 536 536 Open-end funds and currency market instruments 343,047 343,047 11,809 11,809 Operating securities – net 5,600,586 5,600,586 192,791 192,791

Receivable amount for margin loans 1,521,977 1,521,977 52,392 52,392 Refinancing margin 17,757 17,757 611 611 Receivables from refinance guaranty 18,997 18,997 654 654 Securities refinancing margin deposits 236,893 236,893 8,155 8,155 Security lending deposits 1,658,897 1,658,897 57,105 57,105 Receivables – net 326,048 326,048 11,224 11,224 Restricted assets – current 1,000,000 1,000,000 34,423 34,423 Available-for-sale financial assets – current 578,712 578,712 19,921 19,921 Investments under equity method 781,240 781,240 26,893 26,893 Available-for-sale financial assets – noncurrent 18 - 1 - Operating deposits 305,000 305,000 10,499 10,499 Settlement and clearance funds 121,863 121,863 4,195 4,195 Guarantee deposits paid 9,999 9,999 344 344

379



December 31, 2012

(NT$) (US$)

Item

Carrying

amount Fair value

Carrying

amount Fair value

Liabilities

Commercial paper payable $5,540,000 $5,540,000 $190,706 $190,706

Bonds sold under repurchase agreements 1,400,000 1,400,000 48,193 48,193

Financial liabilities at fair value through profit or loss –

current

Security lending payable-hedging 287,312 287,312 9,890 9,890

Security lending payable-non-hedging 1,216,370 1,216,370 41,872 41,872

Deposit received from securities borrower 171,897 171,897 5,917 5,917

Deposit payable for securities financing 196,956 196,956 6,780 6,780

Deposit received from Securities lender 245,018 245,018 8,434 8,434

Payables 217,289 217,289 7,480 7,480

Guarantee deposits received 106 106 4 4


Assets

Financial assets at fair value through profit or loss –

current

Call options – futures 4,561 4,561 157 157

Margin for futures trading – own funds 583,708 583,708 20,093 20,093

Liabilities


current

Liabilities for issuance of call (put) warrants 1,638,117 1,638,117 56,390 56,390

Repurchase of issued call (put) warrants (1,438,853) (1,438,853) (49,530) (49,530)

Put options-futures 3,977 3,977 137 137

380



December 31, 2011

Carrying amount

Fair value

Carrying amount

Fair value

Item (NT$) (NT$) (US$) (US$) Non-derivative financial instruments Assets

Cash and cash equivalents $266,078 $266,078 $8,790 $8,790 Financial assets at fair value through profit or loss –

current

Open-end funds and currency market instruments 58,440 58,440 1,931 1,931 Operating securities – net 2,630,361 2,630,361 86,897 86,897

Receivable amount for margin loans 1,362,756 1,362,756 45,020 45,020 Receivables from refinance guaranty 2,078 2,078 69 69 Securities refinancing margin deposits 366,228 366,228 12,099 12,099 Security lending deposits 1,990,015 1,990,015 65,742 65,742 Receivables - net 233,554 233,554 7,716 7,716 Restricted assets – current 587,900 587,900 19,422 19,422 Available-for-sale financial assets – current 581,774 581,774 19,219 19,219 Investments under equity method 773,814 773,814 25,564 25,564 Available-for-sale financial assets – noncurrent 18 - 1 - Operating deposits 245,000 245,000 8,094 8,094 Settlement and clearance funds 84,720 84,720 2,799 2,799 Guarantee deposits paid 8,673 8,673 287 287

Liabilities Commercial paper payable 2,290,000 2,290,000 75,652 75,652 Bonds sold under repurchase agreements 1,000,000 1,000,000 33,036 33,036 Financial liabilities at fair value through profit or loss –

current

Security lending payable-hedging 374,345 374,345 12,367 12,367 Security lending payable-non-hedging 960,011 960,011 31,715 31,715

Securities financing guarantee deposits-in 164,037 164,037 5,419 5,419 Deposit payable for securities financing 179,810 179,810 5,940 5,940 Payables 194,518 194,518 6,426 6,426 Guarantee deposits-in 106 106 4 4


Financial assets at fair value through profit or loss – current Call options – futures 603 603 20 20 Margin for futures trading – own funds 498,904 498,904 16,482 16,482 Derivative financial instrument assets

-GreTai (over-the-counter) 1,402 1,402 46 46 Liabilities

Financial liabilities at fair value through profit or loss – current

Liabilities for issuance of call (put) warrants 1,426,164 1,426,164 47,115 47,115 Repurchase of issued call (put) warrants (1,226,103) (1,226,103) (40,506) (40,506) Put options-futures 302 302 10 10

381



b. Methods and assumptions for estimating the fair value of the financial instruments are as follows:

(a) Short-term financial instruments are stated at their carrying amount on the balance

sheet date. Because the maturity date of these instruments is very close to the

balance sheet date, it is reasonable that their carrying amounts are equal to their

fair values. This assumption is adopted for the following accounts: cash and cash

equivalents, receivable amount for margin loans, refinancing margin, securities

refinancing margin deposits, receivable from refinance guaranty, security lending

deposits, receivables, operating deposits, settlement and clearance funds,

guarantee deposits paid, commercial paper payable, bonds sold under repurchase

agreement, deposit received from securities borrower deposit payable for

securities financing, deposit received from securities lender, payables and

guarantee deposits received.

(b) Available-for-sale financial assets – current/noncurrent is estimated based on

market prices, if available. If available-for-sale financial assets –

current/noncurrent of Cathay Securities is not traded on the open market, the

carrying amount on the balance sheet date is used to estimate the fair value.

(c) If no quoted market prices exist for Cathay Securities investments accounted for

under the equity method, then their fair value is taken as approximating their

carrying amounts when no permanent market value decline exists.

(d) If there is a quoted market price on the open market, the quoted market price of

financial assets and liabilities is regarded as fair value. Otherwise, if the market

for a financial instrument is not active, Cathay Securities assesses fair value by

using pricing models. A pricing model incorporates all factors that market

participants would consider in setting a price.

382



The following table summarizes the fair value information of financial assets and

liabilities as of December 31, 2012 and 2011:

December 31, 2012

Based on quoted market price Based on pricing models

Item (NT$) (US$) (NT$) (US$)


Assets

Financial assets at fair value through profit or loss - current

Securities borrowrd $15,569 $536 $- $-

Open-end funds and currency market instruments 343,047 11,809 - -

Operating securities - net 5,600,586 192,791 - -

Available-for-sale financial assets- current 578,712 19,921 - -

Liabilities

Financial liabilities at fair value through profit or loss -

current

Security lending payable-hedging 287,312 9,890 - -

Security lending payable-non-hedging 1,216,370 41,872 - -


Assets


current

Call options-futures 4,561 157 - -

Margin for futures trading – own funds 583,708 20,093 - -

Liabilities


current

Liabilities for issuance of call (put) warrants 1,638,117 56,390 - -

Repurchase of issued call (put) warrants (1,438,853) (49,530) - -

Put options-futures 3,977 137 - -

383



December 31, 2011




Assets

Financial assets at fair value through profit or loss - current

Open-end funds and currency market instruments $58,440 $1,931 $- $-

Operating securities - net 2,630,361 86,897 - -

Available-for-sale financial assets- current 581,774 19,219 - -

Liabilities

Financial liabilities at fair value through profit or loss -

current

Security lending payable-hedging 374,345 12,367 - -

Security lending payable-non-hedging 960,011 31,715 - -


Assets


current

Call options-futures 603 20 - -

Margin for futures trading – own funds 498,904 16,482 - -

Derivative financial instrument assets-GreTai

(over-the-counter)

-

-

1,402

46

Liabilities


current

Liabilities for issuance of call (put) warrants 1,426,164 47,115 - -

Repurchase of issued call (put) warrants (1,226,103) (40,506) - -

Put options-futures 302 10 - -

The above derivative financial instrument assets-GreTai (over-the-counter) is valued using “Binomial Tree”.

384



c. Financial risk management objectives and policies

(a) Market risk

Cathay Securities invests in equity securities that have active public market prices. When adverse market conditions exist, Cathay Securities is exposed to market risk as prices fluctuate. Although Cathay Securities controls and quantifies its market risk by establishing stop-loss limits and measuring Value-at-Risk, evaluating its risk utilizing historical prices and controls its overall investment portfolio, it is still exposed to market risk.

(b) Credit risk

In accordance with Cathay Securities’ policy, credit evaluations are required for all credit transactions. Credit limits are established based on customers’ credit ratings. Margin ratios are also evaluated continuously to control default risk.

The counterparties to Cathay Securities’ other financial assets (including cash and cash equivalents and all other current and noncurrent investments) are all creditworthy and well-known financial institutions in the ROC. As a result, counterparty credit risk is relatively low.

(c) Liquidity risk

Cathay Securities believes its working capital is sufficient for its operations and that the risk of contract defaults resulting from a lack of capital is low.

The financial assets held by Cathay Securities all have active markets and can be sold at prices approximating fair values. As the result, Cathay Securities believes there is no significant cash flow risk.

(d) Cash flow risk from interest rate fluctuations

Cathay Securities currently has no exposure to floating interest rates related to financial assets or liabilities and thus Cathay Securities believes there is no significant cash flow risk from interest rate fluctuations.

385



d. Financial derivatives

(a) Issuance of call (put) warrants

○a Nominal principal or contract amount and credit risk

Financial instruments

December 31, 2012 December 31, 2011 Nominal principal /contract amount

Credit risk

Nominal principal /contract amount

Credit risk

For trading purposes Issuance of call (put) warrants NT$1,960,708 NT$- NT$2,334,861 NT$- (US$67,494) (US$-) (US$77,134) (US$-)

○b Market risk

Market risk for call (put) warrants issued arises from changes in prices of the underlying securities. Although market risk can be avoided by adjusting Cathay Securities warrant and hedging positions, market risk still exist.

○c Risk from liquidity, cash flow risk and future cash requirements

When issuing call (put) warrants, the underlying securities and futures of the warrants held are all actively traded and it is expected that Cathay Securities can be sold in the open market at fair prices. As a result, there should not be significant liquidity risk. Risk from cash requirements results from the need to adjust hedge positions in response to changes in the prices of the underlying securities. Assuming favourable market liquidity, risk from cash requirements is relatively low. The call (put) warrants issued by Cathay Securities typically have contract periods of six to nine months starting from the date when the warrants are listed (OTC). Except for cash required for the related hedging transactions, there are no other cash requirements.

○d Types, purposes, and strategies for financial derivatives

Cathay Securities’ hedging positions are not held for trading purposes but instead, are held to minimize the risk of investors exercising warrants. Cathay Securities hedging strategy is focused on avoiding market price risks. The value of the underlying securities for hedging are highly correlated to the fair value of the issued call (put) warrants. Cathay Securities’ hedging positions are evaluated and adjusted periodically.

386



○e Financial statement presentation of derivative financial instruments

As of December 31, 2012 and 2011, disclosure of the issuance of call (put) warrants on the balance sheets and statements of income are summarized as follows:

Balance sheet

December 31, 2012 December 31, 2011

Financial liabilities at fair value through profit or

loss-current

Financial liabilities at fair value through profit or

loss-current (NT$) (US$) (NT$) (US$)

Liabilities for issuance of call (put) warrants $1,638,117 $56,389 $1,426,164 $47,115 Repurchase of issued call (put) warrants (1,438,853) (49,530) (1,226,103) (40,506) Total $199,264 $6,859 $200,061 $6,609

Statement of income



Profits or losses from issuing call (put) warrants (NT$) (US$) (NT$) (US$) Comments

Liabilities for issuance of call (put) warrants $(521,667) $(17,957) $226,028 $7,467 Fair value method

Repurchase of issued call (put) warrants - Loss on disposal (5,950,682) (204,843) (3,910,019) (129,171) - Gain (loss) from valuation 420,551 14,477 (595,179) (19,662) Fair value method

Gain from expiration of warrants issued 6,187,901 213,009 4,695,733 155,128

Trading securities-hedging - Gain (loss) on disposal 57,002 1,962 (378,462) (12,503) - Gain (loss) from valuation 21,441 738 (4,882) (161) Fair value method

Security lending payable-hedging

- (Loss) gain on disposal (9,286) (320) 87,651 2,896 - (Loss) gain from valuation (28,256) (973) 31,024 1,025 Fair value method

Futures transaction-hedging - Loss on disposal (623) (21) (229) (8) - Gain from valuation - - 196 6 Fair value method

Total $176,381 $6,072 $151,861 $5,017

387



e. Futures and options transactions As of December 31, 2012 and 2011, Cathay Securities’ unexercised futures and options were as follows:

December 31, 2012

Item Nature of

Transaction

Unexercised Futures/options

Contract amount/ payment (receipt) of premium Fair value

Buy/Sell Units (NT$) (US$) (NT$) (US$) Futures STW Sell 117 $(93,127) $(3,206) $93,745 $3,227 Futures FIxxF Sell 1,670 $(95,707) $(3,295) $93,105 $3,205 Futures FIxxF Buy 1,399 $170,620 $5,873 $170,611 $5,873 Futures FITF Sell 62 $(51,911) $(1,787) $52,068 $1,792 Futures FITX Sell 1,303 $(1,979,132) $(68,128) $1,999,994 $68,847 Futures FITE Buy 755 $863,685 $29,731 $870,351 $29,960 Futures FIMTX Sell 32 $(12,150) $(418) $12,270 $422 Futures FIMTX Buy 2 $755 $26 $765 $26 Futures FIXI Buy 18 $18,764 $646 $18,966 $653 Options TXO- Put Buy 73 $363 $13 $318 $11 Options TXO- Call Buy 334 $1,806 $62 $4,243 $146 Options TXO- Put Sell 1,178 $(4,387) $(151) $3,143 $108 Options TXO- Call Sell 198 $(788) $(27) $834 $29

December 31, 2011

Item

Nature of Transactio

n

Unexercised Futures /options

Contract amount/ payment (receipt) of

premium Fair value Buy/Sell Units (NT$) (US$) (NT$) (US$)

Futures STW Sell 41 $(31,660) $(1,046) $31,503 $1,041 Futures FIMTX Sell 111 $(39,254) $(1,297) $39,066 $1,291 Futures FITE Buy 520 $540,745 $17,864 $539,858 $17,835 Futures FITF Sell 1 $(749) $(25) $778 $26 Futures FITF Buy 145 $112,514 $3,717 $113,441 $3,748 Futures FITX Sell 579 $(818,178) $(27,029) $815,083 $26,927 Futures FIXI Buy 43 $42,157 $1,393 $42,402 $1,401 Futures FIXI Sell 15 $(14,907) $(492) $14,883 $492 Options TXO- Call Buy 132 $966 $32 $603 $20 Options TXO- Put Sell 153 $(647) $(21) $302 $10

388



(a) Nominal principal or contract amount and credit risk

December 31, 2012 Financial instruments Nominal principal/ contract amount Credit risk

STW NT$ 93,127 (US$ 3,206) NT$- (US$-) FIxxF NT$ 266,327 (US$ 9,168) NT$- (US$-) FITF NT$ 51,911 (US$ 1,787) NT$- (US$-) FITX NT$ 1,979,132 (US$ 68,128) NT$- (US$-) FITE NT$ 863,685 (US$ 29,731) NT$- (US$-) FIMTX NT$ 12,905 (US$ 444) NT$- (US$-) FIXI NT$ 18,764 (US$ 646) NT$- (US$-) TXO NT$ 7,344 (US$ 253) NT$- (US$-)

December 31, 2011

Financial instruments Nominal principal/ contract amount Credit risk STW NT$ 31,660 (US$ 1,046) NT$- (US$-) FIMTX NT$ 39,254 (US$ 1,297) NT$- (US$-) FITE NT$ 540,745 (US$ 17,864) NT$- (US$-) FITF NT$ 113,263 (US$ 3,742) NT$- (US$-) FITX NT$ 818,178 (US$ 27,029) NT$- (US$-) FIXI NT$ 57,064 (US$ 1,885) NT$- (US$-) TXO NT$ 1,613 (US$ 53) NT$- (US$-)

Cathay Securities believes it has no significant credit risk exposure since it has entered into futures trading transactions with futures agencies, and the risk of default is low.

(b) Market risk

Cathay Securities’ market risk from futures and options transactions arises from the purchase and sell of futures and options and the volatility of assets. Since the fair values of futures and options are available and stop-loss points are established, Cathay Securities believes it can limit its losses to within an expected range. However, market risk still exists.

(c) Risk from liquidity, cash flow, and future cash requirements

Cathay Securities’ unexercised futures and options could all be liquidated at reasonable prices in the market. As a result, Cathay Securities believes liquidity risk is low.

389



Cathay Securities’ trading in futures transactions requires an initial margin and additional margin depending on the daily valuation of open positions. In the event additional margin is required, Cathay Securities has sufficient working capital to meet its requirements, and hence Cathay Securities believes funding risk and cash flow risk are low. With respect to Cathay Securities’ trading in options, prior to any transaction Cathay Securities pays or receives option premium. If Cathay Securities sells call options and the counterparty exercises its option, Cathay Securities has sufficient working capital to cover the exercise and hence Cathay Securities believes funding risk and cash flow risk are low.

(d) Types, purposes, and strategies for financial derivatives

Cathay Securities purpose in trading futures and options is to increase the scope of its investment activities and improve its capital efficiency.

(e) Financial statement presentation of derivative financial instruments

The margin and premium resulting from trading are reflected in “financial assets at fair value through profit or loss – current (margin for futures trading – own funds) on the balance sheet. For the year ended December 31, 2012 and 2011, the related gain (loss) of futures and options on the statement of income were as follows:

For the year ended

December 31, 2012

For the year ended

December 31, 2011

(NT$) (US$) (NT$) (US$)

Gain from derivative financial instruments - futures

Non-hedging

Gain on futures contracts - realized $167,622 $5,770 $166,174 $5,490 Gain on futures contracts - unrealized 99,125 3,412 35,340 1,167 Gain from options transactions - realized 13,734 473 32,649 1,079 Gain from options transactions - unrealized 14,507 499 25,185 832

Subtotal 294,988 10,154 259,348 8,568 Hedging

Gain on futures contracts – realized 2,261 78 1,901 63 Gain on futures contracts – unrealized 1,676 58 2,663 88

Subtotal 3,937 136 4,564 151 Total $298,925 $10,290 $263,912 $8,719

390



For the year ended

December 31, 2012

For the year ended

December 31, 2011

(NT$) (US$) (NT$) (US$)

Loss from derivative financial instruments-futures

Non-hedging

Loss on futures contracts - realized $69,140 $2,380 $37,894 $1,252 Loss on futures contracts - unrealized 113,243 3,898 26,646 880 Loss from options transactions - realized 15,606 537 8,063 267 Loss from options transactions - unrealized 10,900 376 16,897 558

Subtotal 208,889 7,191 89,500 2,957 Hedging

Loss on futures contracts - realized 2,884 99 2,130 70 Loss on futures contracts - unrealized 1,676 58 2,467 82

Subtotal 4,560 157 4,597 152 Total $213,449 $7,348 $94,097 $3,109

G. Cathay Venture

a. Information of fair value December 31, 2012

(NT$) (US$)

Item

Carrying

amount

Fair value

Carrying

amount

Fair value


Assets

Cash and cash equivalents $65,757 $65,757 $2,264 $2,264

Financial assets at fair value through profit or loss 10,300 10,300 355 355

Available-for-sale financial assets-current 571,805 571,805 19,683 19,683

Notes receivable 119 119 4 4

Other receivables (include transactions with related

parties)

5,127 5,127 176 176

Investment under equity method 228,616 228,616 7,870 7,870

Available-for-sale financial assets-noncurrent 440,345 440,345 15,158 15,158

Financial assets carried at cost-noncurrent 840,495 - 28,933 -

Liabilities

Accrued expenses 4,580 4,580 158 158

Other payables 276 276 9 9

391



December 31, 2011

(NT$) (US$)

Item

Carrying

amount

Fair value

Carrying

amount

Fair value


Assets

Cash and cash equivalents $17,739 $17,739 $586 $586

Financial assets at fair value through profit or loss 25,738 25,738 850 850

Available-for-sale financial assets-current 405,473 405,473 13,395 13,395

Other receivables (include transactions with related

parties)

9,000 9,000 297 297

Investment under equity method 232,645 232,645 7,686 7,686


Financial assets carried at cost-noncurrent 1,151,947 - 38,056 -

Investment in debt securities with no active

market-noncurrent

34,000

-

1,123

-

Liabilities

Accrued expenses 4,215 4,215 139 139

Other payables 276 276 9 9

Note: In reality, the fair value of the specified items can’t be accountably measured.

b. The methods and assumptions used to estimate the fair value of the financial instruments are as follows:

(a) The fair value of Cathay Venture short-term financial instruments is assumed to approximate the carrying amount at reporting date due to the short maturity of those instruments. This assumption is applied to cash and cash equivalents, receivables and payables.

(b) Quoted market prices, if available, are used to determine the fair values of

available-for-sale financial assets. (c) If no quoted market prices exist for Cathay Venture’s investment under equity

method, then their fair value is taken as approximating their carry amounts when no permanent market value decline exists.

392



(d) Financial assets carried at cost are unlisted stock. Since these stocks have no

quoted market prices in an active market and their fair value cannot be reliably measured, their fair values are not disclosed.

c. The following table summarizes the basis of determining fair value of financial assets

and liabilities as of December 31, 2012 and 2011:

December 31, 2012 Based on quoted market price Based on pricing models


Cash and cash equivalents $65,757 $2,264 $- $- Financial assets at fair value through profit or loss 10,300 355 - - Available-for-sale financial assets-current 571,805 19,683 - - Notes Receivable - - 119 4 Other receivable (include transactions with related

parties)

- - 5,127 176 Investment under equity method - - 228,616 7,870 Available-for-sale financial assets-noncurrent 440,345 15,158 - - Financial assets carried at cost-noncurrent - - 840,495 28,933

Liabilities

Accrued expense - - 4,580 158 Other payables - - 276 9



Cash and cash equivalents $17,739 $586 $- $- Financial assets at fair value through profit or loss 25,738 850 - - Available-for-sale financial assets-current 405,473 13,395 - - Other receivable (include transactions with related

parties)

- - 9,000 297 Investment under equity method - - 232,645 7,686 Available-for-sale financial assets-noncurrent 292,901 9,676 - - Financial assets carried at cost-noncurrent - - 1,151,947 38,056 Investment in debt securities with no active market - - 34,000 1,123

Liabilities

Accrued expense - - 4,215 139 Other payables - - 276 9

393




(a) Market risk

Market risk is the exposure to potential loss arising from adverse movements of market price, such as interest rates or foreign exchange rates Cathay Venture assesses the impact of market risk on financial assets and liabilities to be limited.

(b) Credit risk

A credit risk is the risk of loss arising from counterparty or a debtor defaulting on their contractual obligations. The level of exposure depends on several factors including concentrations of credit risk, components of credit risk, the price of contract and other receivable of financial instruments. Cathay Venture believes the maximum credit exposure amount of financial instruments is equal to their carrying values.

(c) Liquidity risk and cash flow risk

Cathay Venture has sufficient working capital for its operation therefore there is no liquidity risk of defaulting on its contractual obligations due to insufficient working capital. In addition, except for the financial assets carried at cost (unquoted equity securities) which may be exposed to significant liquidity risks due to lack of active market, all other stocks Cathay Venture held are able to be disposed rapidly at prices close to fair values.

H. Cathay Securities Investment Trust


December 31, 2012 (NT$) (US$)

Item Carrying

amount

Fair value Carrying

amount

Fair value Non-derivative financial instruments Assets

Cash and cash equivalents $1,574,633 $1,574,633 $54,204 $54,204 Accounts receivable-related parties 87,689 87,689 3,019 3,019 Available-for-sale financial assets-noncurrent 128,032 128,032 4,407 4,407 Held-to-maturity financial asset - noncurrent 200,000 200,000 6,885 6,885 Operating deposits 50,000 50,000 1,721 1,721 Guarantee deposits paid 154,172 154,172 5,307 5,307

Liabilities

Accrued payable and other current liabilities 19,154 19,154 659 659 Income tax payable 152,996 152,996 5,267 5,267

394



December 31, 2011

(NT$) (US$)

Item

Carrying

amount

Fair value

Carrying

amount

Fair value


Assets


Accounts receivable-related parties 78,712 78,712 2,600 2,600

Available-for-sale financial assets - noncurrent 118,147 118,147 3,903 3,903

Held-to-maturity financial asset - noncurrent 200,000 200,000 6,607 6,607

Operating deposits 50,000 50,000 1,652 1,652


Liabilities

Income tax payable 29,344 29,344 969 969

Accrued payable and other current liabilities 125,899 125,899 4,159 4,159

b. The methods and assumptions used to estimate the fair value of the financial

instruments are as follows:

(a) The fair value of Cathay Securities Investment Trust financial assets and liabilities approximates the carrying amount of those instruments at reporting date due to the short maturity of those instruments. The method is applied to cash and cash equivalents, accounts receivable-related parties, operating deposit, guarantee deposit paid, income tax payable, accrued payable and other current liabilities.

(b) When financial assets are quoted on an active market, the fair value is the market

price. However, fair value is estimated using pricing model if an active market does not exist. A pricing model incorporates all information that market participants would consider in setting a price which are available to Cathay Securities Investment Trust.

(c) Quoted market prices, if available, are used to determine the collateral for

operating deposit and for guarantee deposit paid. If no quoted market prices exist, then their fair value is taken as approximating their carry amounts when no permanent market value decline exists.

395



c. The fair value of Cathay Securities Investment Trust financial assets determined by quoted market price or pricing models is summarized as following:



Available-for-sale financial assets-noncurrent $128,032 $4,407 $- $- Held-to-maturity financial asset - noncurrent - - 200,000 6,885



Available-for-sale financial assets-noncurrent $118,147 $3,903 $- $- Held-to-maturity financial asset - noncurrent - - 200,000 6,607

d. The interest income arising from other than financial assets at fair value through profit

or loss for the years ended December 31, 2012 and 2011 were NT$7,779 (US$268) thousands and NT$924 (US$31) thousands, respectively.

e. Information on financial risk

(a) Market risk

Cathay Securities Investment Trust invests in equity securities that have measured by fair market price; therefore, Cathay Securities Investment Trust is exposed to certain risk once the market price of equity securities is fluctuated.

Cathay Securities Investment Trust invests in inverse floating rate bond which was measured by allocated cost. Besides, in order to manage the market risk, Cathay Securities Investment Trust only chooses creditworthy banks when invests in held-to- maturity financial asset.

(b) Credit risk

Cathay Securities Investment Trust purchases funds and bonds issued by creditworthy companies as its financial instruments, and control credit risk that might expose to every financial institution. Thus Cathay Securities Investment Trust’s exposure in credit risk is minimal.

396



(c) Liquidity risk

Cathay Securities Investment Trust believes its working capital is sufficient for its operations and that the risk of contract defaults resulting from a lack of capital is low.

(d) Cash flow risk from interest rate fluctuations

Cathay Securities Investment Trust’s bond investment is measured by inverse floating rate. Therefore, when market rate fluctuate, it would be affected the real interest rate for bond investment as well as the future cash flow. When LIBOR is lower than 4.95% and at the resettlement date LIBOR is used 4.95% as base rate, every 10 basis points decrease in the LIBOR will increase NT$1,000 (US$34) thousands for Cathay Security Investment Trust every half year. If the requirement remain the same, the cash flow will be increased NT$2,000 (US$68) annually.

I. Cathay Futures



Item Carrying

amount

Fair value Carrying

amount


Cash and cash equivalents $292,581 $292,581 $10,072 $10,072 Customers’ margin accounts 2,216,353 2,216,353 76,294 76,294 Accounts receivable-related parties 247 247 9 9 Other receivable (include transactions with related

parties)

3,825 3,825 132 132 Available-for-sale financial assets-noncurrent 30,500 30,500 1,050 1,050 Operating deposits 65,000 65,000 2,238 2,238 Settlement and clearance funds 82,000 82,000 2,823 2,823 Guarantee deposits paid 1,669 1,669 57 57

Liabilities Futures customers’ equity 2,215,903 2,215,903 76,279 76,279 Payables (include transactions with related parties) 4,730 4,730 163 163 Other payable (include transactions with related

parties) 8,427 8,427 290 290

Guarantee deposits received 1,439 1,439 50 50

397



December 31, 2011

(NT$) (US$)

Item

Carrying

amount

Fair value

Carrying

amount

Fair value


Assets


Customers’ margin accounts 2,151,391 2,151,391 71,073 71,073

Futures trading deposits receivable 198 198 7 7

Accounts receivable-related parties 114 114 4 4

Other receivable (include transactions with related

parties)

2,242 2,242 74 74


Operating deposits 60,000 60,000 1,982 1,982

Settlement and clearance funds 75,000 75,000 2,478 2,478

Guarantee deposits paid 1,466 1,466 48 48

Liabilities

Futures customers’ equity 2,150,981 2,150,981 71,060 71,060

Payables (include transactions with related parties) 3,848 3,848 127 127

Other payable (include transactions with related

parties)

7,612 7,612 251 251

Guarantee deposits in 1,439 1,439 48 48

b. Methods and assumptions applied in estimating the fair value of financial instruments

are as follows:

(a) The carrying amounts of the financial instruments such as cash and cash equivalents, customers’ margin accounts, accounts receivable-related parties, other receivables, operating deposits, settlement and clearance funds, guarantee deposits paid, futures customers’ equity, payables, guarantee deposit received and other payables, approximate their fair values due to the short maturities of these instruments.

(b) The fair value of available-for-sale financial assets-noncurrent is valued at market

price or other financial information when available.

(c) The fair value of financial assets and financial liabilities is determined using pricing models.

398



c. Information on financial risk

(a) Market risk

The fair values of the shares on listed companies or derivative instruments held by Cathay Futures will fluctuate under the influence of the related stock market factors.

(b) Credit risk

Appropriate credit evaluation processes and continuous monitor of credit-lines are in place for all customers of the brokerage department. In addition, all transactions conducted by proprietary trading department go through Taiwan Futures Exchange and therefore no significant credit risk is expected.

(c) Liquidity risk and cash flow risk

Cathay Futures has sufficient working capital for its operation and there is no liquidity risk of defaulting on its contractual obligations due to insufficient working capital. In addition, except for the financial assets carried at cost which are exposed to significant liquidity risks due to lack of active market, all other stocks Cathay Futures held are able to be disposed rapidly at prices close to fair values.

J. Symphox Information

a. Information of fair value December 31, 2012

(NT$) (US$)

Item Carrying

amount

Fair value Carrying

amount


Cash and cash equivalents $528,181 $528,181 $18,182 $18,182 Financial assets at fair value through profit or

loss-current

165,124 165,124 5,684 5,684 Available for sale financial Assets-current 972 972 33 33 Receivables (include transactions with related parties) 145,205 145,205 4,998 4,998 Guarantee deposits paid 11,210 11,210 386 386 Other financial assets 10 10 - -

Liabilities Payables (include transactions with related parties) 218,434 218,434 7,519 7,519 Guarantee deposits received 62 62 2 2

399



December 31, 2011

(NT$) (US$)

Item Carrying

amount Fair value Carrying amount Fair value


Cash and cash equivalents $584,861 $584,861 $19,321 $19,321 Financial assets at fair value through profit or

loss-current

157,365

157,365

5,199

5,199 Receivables (include transactions with related parties) 171,616 171,616 5,670 5,670 Guarantee deposits paid 8,117 8,117 268 268

Liabilities Payables (include transactions with related parties) 221,487 221,487 7,317 7,317 Guarantee deposits in 62 62 2 2



(a) The fair value of Symphox Information short-term financial instruments approximates the carrying amount of those instruments at reporting date due to the short maturity of those instruments. The method is applied to cash and cash equivalents, receivables and payables.

(b) The fair value of the guarantee deposits paid and guarantee deposits received also

approximates the carrying amount.

c. The fair value of Symphox Information financial assets or liabilities determined by quoted market price or pricing models is summarized as following:

December 31, 2012




Financial assets at fair value through profit or loss-current

$165,124 $5,684 $- $-

Available-for-sale financial assets-current - - 972 33 Other financial assets - - 10 -

400





Financial assets at fair value through profit or loss-current

$157,365 $5,199 $- $-

K. Indovina Bank (Vietnam)


December 31, 2012

Item

Carrying amount (NT$)

Fair value

(NT$)

Carrying amount (US$)

Fair value

(US$) Non-derivative financial instruments Assets

Cash and cash equivalents $5,644,843 $5,644,843 $194,315 $194,315 Receivables 369,539 369,539 12,721 12,721 Financial assets at fair value through profit or

loss-current 140,920 140,920 4,851 4,851

Available-for-sale financial assets 768,191 768,191 26,444 26,444 Held-to-maturity financial assets 1,126,103 1,126,103 38,764 38,764

Liabilities Payables 1,397,400 1,397,400 48,103 48,103

December 31, 2011

Item


Fair value

(NT$)


Fair value


Cash and cash equivalents $13,655,584 $13,655,584 $451,126 $451,126 Receivables 353,155 353,155 11,667 11,667 Financial assets at fair value through profit or

loss-current 114,388 114,388 3,779 3,779

Available-for-sale financial assets 516,801 516,801 17,073 17,073 Held-to-maturity financial assets 1,170,705 1,170,705 38,675 38,675

Liabilities

Payables 726,723 726,723 24,008 24,008 Financial debenture payables 2,908,584 2,908,584 96,088 96,088

401





(a) The fair value of Indovina Bank (Vietnam) short-term financial instruments approximates the carrying amount of those instruments at reporting date due to the short maturity of those instruments. The method is applied to cash and cash equivalents, receivables and payables.

(b) When financial assets or liabilities are quoted on an active market, the fair value is

the market price. However, the fair value is estimated using pricing model if an active market does not exist. A pricing model incorporates all information that market participants would consider in setting a price which are available to Indovina Bank (Vietnam). Indovina Bank (Vietnam) uses discount rates equal to the prevailing rates of return for financial instruments with similar characteristics.

(c) Fair value of financial debentures payable is based on quoted market price. If

quoted market price is not available, pricing models are utilized to assets the fair value of such instruments.

c. The fair value of the Indovina Bank (Vietnam) financial assets and liabilities determined by market price or pricing models are summarized as following:



Cash and cash equivalents $5,644,843 $194,315 $- $- Financial assets at fair value through profit or loss 140,920 4,851 - - Available-for-sale financial assets - - 768,191 26,444 Held-to-maturity financial assets - - 1,126,103 38,764



Cash and cash equivalents $13,655,584 $451,126 $- $- Financial assets at fair value through profit or loss 114,388 3,779 - - Available-for-sale financial assets - - 516,801 17,073 Held-to-maturity financial assets - - 1,170,705 38,675

Non-derivative financial instruments Liabilities

Financial debenture payables - - 2,908,584 96,088

402



L. Cathay Life (China)


December 31, 2012

(NT$) (US$)

Item

Carrying

amount

Fair value

Carrying

amount

Fair value


Assets


Receivables 399,447 399,447 13,750 13,750



Investment in debt securities with no active market 534,405 534,405 18,396 18,396


Liabilities

Payables 714,954 714,954 24,611 24,611

Callable bonds and bonds inrestment 297,268 297,268 10,233 10,233

Guarantee deposits received 9,741 9,741 335 335

December 31, 2011

(NT$) (US$)

Item

Carrying

amount

Fair value

Carrying

amount

Fair value


Assets


Receivables 404,156 404,156 13,352 13,352



Investment in debt securities with no active market 529,375 529,375 17,488 17,488


Liabilities

Payables 491,420 491,420 16,235 16,235

Callable bonds and bonds investment 201,158 201,158 6,645 6,645

Guarantee deposits in 8,484 8,484 280 280

403





(a) The fair value of Cathay Life (China) short-term financial instruments approximates the carrying amount of those instruments at reporting date due to the short maturity of those instruments. The method is applied to cash and cash equivalents, premiums receivables, and payables.

(b) The fair value of the guarantee deposits paid and guarantee deposits in

approximates their carrying amount. (c) When financial assets or liabilities are quoted on an active market, the fair value is

the market price. However, fair value is estimated using pricing model if an active market does not exist. A pricing model incorporates all information that market participants would consider in setting a price which are available to Cathay Life (China). Cathay Life (China) uses discount rates equal to the prevailing rates of return for financial instruments with similar characteristics. The characteristics involve debtor’s credit standing, residual period of contracted fixed interest rates, residual period of principal repayment and currency of payment.

c. The fair value of the Cathay life (China) financial assets and liabilities determined by market price or pricing models are summarized as following:

December 31, 2012




Assets

Cash and cash equivalents $3,708,574 $127,662 $- $-

Receivables - - 399,447 13,750

Financial assets at fair value through profit or loss 370,475 12,753 - -

Available-for-sale financial assets 922,092 31,742 3,730,901 128,430

Investment in debt securities with no active market - - 534,405 18,396

Liabilities

Payables - - 714,954 24,611

Callable bonds and bonds investment 297,268 10,233 - -

404





Cash and cash equivalents $3,642,369 $120,329 $- $- Receivables - - 404,156 13,352 Financial assets at fair value through profit or loss 272,778 9,011 - - Available-for-sale financial assets 1,166,409 38,534 4,439,858 146,675 Investment in debt securities with no active market - - 529,375 17,488

Liabilities Payables - - 491,420 16,235 Callable bonds and bonds investment 201,158 6,645 - -

M. Cathay Life (Vietnam)


December 31, 2012

Item


Fair value

(NT$)


Fair value


Cash and cash equivalents $615,771 $615,771 $21,197 $21,197 Financial assets at fair value through profit or loss 79,948 79,948 2,752 2,752 Available-for-sale financial assets 932,943 932,943 32,115 32,115 Investment in debt securities with no active market 32,604 32,604 1,122 1,122

Liabilities

Payables 14,374 14,374 495 495

December 31, 2011

Item


Fair value

(NT$)


Fair value


Cash and cash equivalents $467,388 $467,388 $15,441 $15,441 Receivables 76,916 76,916 2,541 2,541 Available-for-sale financial assets 947,621 947,621 31,306 31,306 Guarantee deposits paid 41,274 41,274 1,364 1,364

Liabilities

Payables 27,231 27,231 900 900

405





(a) The fair value of Cathay Life (Vietnam) short-term financial instruments approximates the carrying amount of those instruments at reporting date due to the short maturity of those instruments. The method is applied to cash and cash equivalents, receivables and payables.

(b) When financial assets or liabilities are quoted on an active market, the fair value is

the market price. However, the fair value is estimated using pricing model if an active market does not exist. A pricing model incorporates all information that market participants would consider in setting a price which are available to Cathay Life (Vietnam). Cathay Life (Vietnam) uses discount rates equal to the prevailing rates of return for financial instruments with similar characteristics. The characteristics involve debtor’s credit standing, residual period of contracted fixed interest rates, residual period of principal repayment and currency of payment.

(c) The fair value of the guarantee deposits paid approximates their carrying amount.

c. The fair value of the Cathay Life (Vietnam) financial assets and liabilities determined by market price or pricing models are summarized as following:



Cash and cash equivalents $615,771 $21,197 $- $- Receivables - - 76,948 2,649 Available-for-sale financial assets 932,943 32,115 - -

Liabilities

Payables - - 14,374 495



Cash and cash equivalents $467,388 $15,441 $- $- Receivables - - 76,916 2,541 Available-for-sale financial assets 947,621 31,306 - -

Liabilities

Payables - - 27,231 900

406



N. Cathay Century (China)


December 31, 2012

(NT$) (US$)

Item

Carrying amount

Fair value

Carrying amount

Fair value


Cash and cash equivalents $476,055 $476,055 $16,387 $16,387 Financial assets at fair value through profit or loss 51,813 51,813 1,784 1,784 Available-for-sale financial assets 653,940 653,940 22,511 22,511 Premiums receivable 50,126 50,126 1,726 1,726 Due from reinsurers and ceding companies 45,040 45,040 1,550 1,550 Other accounts receivable 45,873 45,873 1,579 1,579 Guarantee deposits paid 391,335 391,335 13,471 13,471

Liabilities

Due to reinsurers and ceding companies 21,584 21,584 743 743 Operating and liabilities reserve 1,292,161 1,292,161 44,481 44,481

December 31, 2011

(NT$) (US$)

Item

Carrying amount

Fair value

Carrying amount

Fair value


Cash and cash equivalents $503,093 $503,093 $16,620 $16,620 Financial assets at fair value through profit or loss 164,496 164,496 5,434 5,434 Available-for-sale financial assets 616,117 616,117 20,354 20,354 Premiums receivable 59,813 59,813 1,976 1,976 Other accounts receivable 21,430 21,430 708 708 Due from reinsurers and ceding companies 41,493 41,493 1,371 1,371 Guarantee deposits paid 399,994 399,994 13,214 13,214

Liabilities

Due to reinsurers and ceding companies 61,686 61,686 2,038 2,038 Operating and liabilities reserve 611,915 611,915 20,215 20,215

407




(a) The fair value of Cathay Century (China) short-term financial instruments

approximates the carrying amount of those instruments at reporting date due to the short maturity of those instruments. The method is applied to cash and cash equivalents, receivables, due from reinsurers and ceding companies, due to reinsurers and ceding companies, operating and liabilities reserve.

(b) Quoted market price, if available, is utilized as estimates of the fair value of

held-to-maturity financial assets. If no quoted market prices exist for Cathay Century (China) held-to-maturity financial assets, the fair value of financial assets has been derived based on pricing models. A pricing model incorporates all factors that market participants would consider in setting a price. Cathay Century (China) uses discount rates equal to the prevailing rates of return for financial instruments with similar characteristics. The characteristics involve debtor’s credit standing, residual period of contracted fixed interest rates, residual period of principal repayment and currency of payment.

(c) The fair value of the guarantee deposits paid approximates their carrying amount.

c. The fair value of the Cathay Century (China) financial assets and liabilities determined by market price or pricing models are summarized as following:

December 31, 2012




Cash and cash equivalents $476,055 $16,387 $- $- Financial assets at fair value through profit or loss 51,813 1,784 - - Available-for-sale financial assets 653,940 22,511 - -




Cash and cash equivalents $477,587 $15,777 $25,506 $843 Financial assets at fair value through profit or loss 164,496 5,434 - - Available-for-sale financial assets 616,117 20,354 - -

408



O. Cathay Century (Vietnam)


December 31, 2012

(NT$) (US$)

Item

Carrying

amount

Fair value

Carrying

amount

Fair value


Assets


Other receivable 46,966 46,966 1,617 1,617


Liabilities

Operating and liabilities reserve 37,360 37,360 1,286 1,286

December 31, 2011

(NT$) (US$)

Item

Carrying

amount

Fair value

Carrying

amount

Fair value


Assets


Other receivable 33,510 33,510 1,107 1,107


Liabilities

Operating and liabilities reserve 8,375 8,375 277 277


(a) The fair value of Cathay Century (Vietnam) short-term financial instruments

approximates the carrying amount of those instruments at reporting date due to the short maturity of those instruments. The method is applied to cash and cash equivalents, premiums receivables, and operating and liabilities reserve.

(b) The fair value of the guarantee deposits paid approximates their carrying amount.

409



c. The fair value of the Cathay Century (Vietnam) financial assets and liabilities determined by market price or pricing models are summarized as following:

December 31, 2012




Assets

Cash and cash equivalents $326,301 $11,232 $- $-

December 31, 2011




Assets

Cash and cash equivalents $335,784 $11,093 $- $-

P. Lin Yuan (China)


December 31, 2012

(NT$) (US$)

Item

Carrying

amount

Fair value

Carrying

amount

Fair value


Assets


Liabilities

Payables 5,377 5,377 185 185


The fair value of Lin Yuan (China) short-term financial instruments approximates the carrying amount of those instruments at reporting date due to the short maturity of those instruments. The method is applied to cash and cash equivalents, premiums receivables, and operating and liabilities reserve.

410



c. The fair value of the Lin Yuan (China) financial assets and liabilities determined by market price or pricing models are summarized as following:


Item (NT$) (US$) (NT$) (US$) Non-derivative financial instruments Assets Cash and cash equivalents $410,172 $14,120 $- $-

Liabilities Payables - - 5,377 185

Lin Yuan was incorporated on August 15, 2012, thus there was no information about last period.

Q. SBC Bank



Item Carrying

amount

Fair value Carrying

amount


Cash and cash equivalents $678,535 $678,535 $23,357 $23,357 Receivables 52,289 52,289 1,800 1,800

Liabilities

Payables 38,488 38,488 1,325 1,325


Item Carrying

amount

Fair value Carrying

amount


Cash and cash equivalents $467,712 $467,712 $15,451 $15,451 Receivables 11,569 11,569 382 382

Liabilities

Payables 25,340 25,340 837 837

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The fair value of SBC Bank short-term financial instruments approximates the carrying amount of those instruments at reporting date due to the short maturity of those instruments. The method is applied to cash and cash equivalents, premiums receivables, and operating and liabilities reserve.

c. The fair value of the SBC Bank financial assets and liabilities determined by market price or pricing models are summarized as following:

December 31, 2012



Non-derivative financial instruments Assets Cash and cash equivalents $678,535 $23,357 S- S-

December 31, 2011



Non-derivative financial instruments Assets Cash and cash equivalents $467,712 $15,451 S- S-

(3) Exchange rates used to translate material financial assets and liabilities denominated in

foreign currencies are disclosed as follows: December 31, 2012 December 31, 2011

Foreign

Currency Exchange

Rate

NT$ Foreign

Currency Exchange

Rate

NT$

Financial Assets Monetary Items USD $45,105,812 29.136 $1,314,202,938 $38,440,021 30.29 $1,164,348,236 RMB 19,422,188 4.680 90,895,840 2,765,935 4.7746 13,206,233 Non-Monetary Items USD 3,188,552 29.136 92,901,651 2,407,923 30.29 72,935,988 Financial Liabilities Monetary Items USD 6,087,435 29.136 177,363,506 5,076,249 30.29 153,759,582

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(4) Assessment for loans and allowance for bad debt receivables are showed as followed:

Loans

Item December 31, 2012

Total loans (Note) Allowance for bad debts (NT$) (US$) (NT$) (US$)

Objective evidence of impairment exists

individually

Individual assessment of impairment $57,128,853 $1,966,570 $4,887,318 $168,238

Collective assessment of impairment 4,574,126 157,457 713,956 24,577

Objective evidence of impairment does not

exist individually

Collective assessment of impairment

1,473,387,850 50,719,031 10,581,993 364,268

Loans


Total loans (Note) Allowance for bad debts (NT$) (US$) (NT$) (US$)


individually

Individual assessment of impairment

$37,403,589 $1,235,665 $3,211,518 $106,096


5,526,448 182,572 898,460 29,681

Objective evidence of impairment does not

exist individually


1,459,296,622 48,209,337 6,907,969 228,212

Note: Total loans equal the original amount before subtract (add) the allowance for bad debts

and adjustment for discount (premium).

Receivables


Total receivables (Note) Allowance for bad debts (NT$) (US$) (NT$) (US$)


individually

Individual assessment of impairment $24,591,301 $846,516 $39,645 $1,365

Collective assessment of impairment 140,445 4,835 110,930 3,819

Objective evidence of impairment does

not exist individually


93,137,814 3,206,121 1,922,129 66,166

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Receivables


Total receivables (Note) Allowance for bad debts (NT$) (US$) (NT$) (US$)


individually

Individual assessment of impairment

$42,677,914 $1,409,908 $59,883 $1,978


154,121 5,092 125,533 4,147

Objective evidence of impairment does

not exist individually


57,257,666 1,891,565 2,740,114 90,523

Note: Total receivables equal the original amount before subtract (add) the allowance for

bad debts and adjustment for discount (premium).

(5) Information on bad and doubtful accounts is as follows:

A. Loans


(NT$) (US$) Balance, beginning of the period $11,017,947 $379,275 Reversal of doubtful accounts 4,596,122 158,214 Write-offs (1,173,362) (40,391) Recoveries 1,662,786 57,239 Effects on exchange rates and other changes 79,774 2,746 Balance, end of the period $16,183,267 $557,083


(NT$) (US$) Balance, beginning of the period $7,975,009 $263,462 Reversal of doubtful accounts 1,595,926 52,723 Write-offs (549,760) (18,162) Recoveries 2,269,115 74,963 Effects on exchange rates and other changes (272,343) (8,997) Balance, end of the period $11,017,947 $363,989

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B. Receivables


(NT$) (US$) Balance, beginning of the period $2,925,530 $100,707 Reversal of doubtful accounts (956,067) (32,911) Write-offs (430,052) (14,804) Recoveries 710,337 24,452 Effects on exchange rates and other changes (177,044) (6,094) Balance, end of the period $2,072,704 $71,350


(NT$) (US$) Balance, beginning of the period $2,423,492 $80,062 Reversal of doubtful accounts (220,837) (7,296) Write-offs (425,244) (14,048) Recoveries 806,083 26,630 Effects on exchange rates and other changes 342,036 11,300 Balance, end of the period $2,925,530 $96,648

(6) Discretionary account management for Cathay Life

December 31, 2012

Carrying value Fair value


Listed stocks $100,690,134 $3,466,098 $100,690,134 $3,466,098

Overseas stocks 28,173,078 969,813 28,173,078 969,813

Repurchase bonds and bond

investment notes 6,336,804 218,135 6,336,804 218,135

Cash in banks 38,106,426 1,311,753 38,106,426 1,311,753

Beneficiary certificate 29,184,078 1,004,615 29,184,078 1,004,615

Futures and options 1,482,600 51,036 1,482,600 51,036

Corporate bonds 690,768 23,779 690,768 23,779

Total $204,663,888 $7,045,229 $204,663,888 $7,045,229

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December 31, 2011

Carrying value Fair value


Listed stocks $90,957,252 $3,004,865 $90,957,252 $3,004,865 Repurchase bonds and bond investment 1,989,703 65,732 1,989,703 65,732

Cash in banks 25,585,086 845,229 25,585,086 845,229 Beneficiary certificate 748,618 24,731 748,618 24,731 Futures and options 1,859,134 61,418 1,859,134 61,418

Total $121,139,793 $4,001,975 $121,139,793 $4,001,975

As of December 31, 2012, Cathay Life entered into discretionary account management contracts in the amounts of NT$140,000,000 (US$4,819,277) thousands, US$2,090,000 thousands, and HK$2,000,000 thousands. As of December 31, 2011, the amount was NT$139,500,000 (US$4,608,523) thousands.

(7) Foreign exchange volatility reserve

A. The hedge strategy and risk exposure:

Based on the principle of risk control and to maintain the consistent level of foreign exchange volatility reserve, Cathay Life consistently adjusts the hedge ratios and risk exposure position under the risk control.

B. Adjustment in foreign exchange volatility reserve:


NT$ US$ Beginning balance (The first money) $4,511,406 $155,298 Reserve:

Compulsory reserve 1,672,322 57,567 Extra reserve 944,888 32,526 Subtotal 2,617,210 90,093

Recover 2,857,760 98,374 Total $4,270,856 $147,017

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C. Effects due to foreign exchange volatility reserve for the Company:

Inapplicable amount (1) Applicable amount (2) Effects (2) - (1)

Item (NT$) (US$) (NT$) (US$) (NT$) (US$) Net gains $16,858,380 $580,323 $17,058,037 $587,196 $199,657 $6,873 Earnings per share $1.58 $0.05 $1.60 $0.06 $0.02 $0.01 Foreign exchange volatility reserve $- $- $4,270,856 $147,017 $4,270,856 $147,017 Stockholders’ equity $248,384,791 $8,550,251 $248,584,448 $8,557,124 $199,657 $6,873

(8) Capital adequacy ratio on a consolidated basis:

A. Capital adequacy ratios

As of December 31, 2012

Item Ownership

interest Eligible capital Legal capital

(NT$) (US$) (NT$) (US$) The Company 100.00% $263,872,004 $9,083,374 $286,648,936 $9,867,433 Cathay United Bank 100.00% 124,681,317 4,291,956 80,594,040 2,774,321 Cathay Securities 100.00% 3,312,268 114,019 1,561,653 53,757

Cathay Life 100.00% 191,600,492 6,595,542 148,523,334 5,112,679

Cathay Century 100.00% 5,693,618 195,994 3,621,278 124,657

Cathay Venture 100.00% 2,187,120 75,288 1,093,671 37,648 Cathay Securities Investment

Trust 100.00% 2,031,836 69,943 1,157,716 39,853

Less: Item (288,045,911) (9,915,522) (283,085,633) (9,744,772) Subtotal (A) $305,332,744 $10,510,594 (B) $240,114,995 $8,265,576 Consolidated capital adequacy ratios (C)=(A)/(B) 127.16%


Item Ownership

interest Eligible capital Legal capital

(NT$) (US$) (NT$) (US$) The Company 100.00% $239,713,774 $7,919,187 $256,709,004 $8,480,641 Cathay United Bank 100.00% 110,304,187 3,644,010 74,908,271 2,474,670

Cathay Securities 100.00% 2,985,352 98,624 819,315 27,067 Cathay Life 100.00% 184,204,532 6,085,382 134,031,086 4,427,852

Cathay Century 100.00% 4,418,382 145,966 2,935,140 96,965

Cathay Venture 100.00% 2,197,781 72,606 1,098,851 36,302 Cathay Securities Investment

Trust 100.00% 2,047,819 67,652 1,107,852 36,599

Less: Item (261,217,171) (8,629,573) (254,253,372) (8,399,516) Subtotal (A) $284,654,656 $9,403,854 (B) $217,356,147 $7,180,580 Consolidated capital adequacy ratios (C)=(A)/(B) 130.96%

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B. Eligible capital

As of December 31, 2012 Item (NT$) (US$)

Common Stock $108,653,851 $3,740,236 Non-cumulative perpetual preferred stocks and non-cumulative subordinated debts without maturity dates-qualified as bank-level Tier I Capital - - Preferred Stocks and subordinated financial debenture 20,000,000 688,468 Capital collected in advance - - Capital surplus 78,596,121 2,705,546 Legal reserve 15,222,599 524,014 Special reserve 333,598 11,483 Accumulated profit 20,031,074 689,538 Equity adjustments 29,175,463 1,004,319 Less：Goodwill - - Less：Deferred assets (960,830) (33,075) Less：Treasury stock (7,179,872) (247,156) Consolidated eligible capital $263,872,004 $9,083,373


Item (NT$) (US$) Common Stock $103,575,097 $3,421,708 Non-cumulative perpetual preferred stocks and non-cumulative subordinated debts without maturity dates-qualified as bank-level Tier I Capital - - Preferred Stocks and subordinated financial debenture 28,000,000 925,008 Capital collected in advance - - Capital surplus 78,508,148 2,593,596 Legal reserve 14,105,459 465,988 Special reserve 333,598 11,021 Accumulated profit 14,303,983 472,547 Equity adjustments 10,014,522 330,839 Less：Goodwill - - Less：Deferred assets (1,947,161) (64,326) Less：Treasury stock (7,179,872) (237,194) Consolidated eligible capital $239,713,774 $7,919,187

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(9) Business or trading behaviors within Subsidiaries: A. Business or trading behaviors

Please refer Note 28 (business with stakeholders) for further details.

B. Integrate business activities:

By integrating the insurance, securities, banking and other diversified financial institutions, the Company has become a full-functioning financial platform. Through the branches and professional sales representatives across Taiwan, the Company is able to develop its cross-selling marketing strategy and provide a one-stop shopping service for its customers.

C. Cross utilization of information:

In compliance with “Financial Holding Companies Act”, “Personal Data Protection Act”, “Financial Holding Subsidiaries Cross-selling Activities Acts”, “Self-disciplinary Rules Governing the Activities of the FHC” and other related regulations from Financial Supervisory Commission, Executive Yuan, the Company has regulated “Cathay Financial Holding Subsidiaries Cross-selling Activities Acts” and ”Non-disclosure Confidential Agreement of Cathay Financial Holding Subsidiaries Cross-utilization of Customer’s Personal Data” to cross-utilized customer’s personal data under a safe and secure environment and provide comprehensive and integrated financial service to the customers.

D. Locations and business utilities:

In order to provide more comprehensive financial service and comply with the regulation of “Financial Holding Subsidiaries Cross-selling Activities Acts”, the Company has applied and been approval by Competent Authority. From September 13, 2010, all the business units of Cathay United Bank (163 branches) may engage in cross-selling activities for insurance business and securities business (except for 3 mini-branches). On September 2, 2011, Cathay Life has been approved by competent authorities to engage in cross-selling activities for banking, and property and casualty insurance businesses in all its business and service units (176 places). In the future, the Company and its subsidiaries will continuously applying for the admission to expand the cross-selling businesses.

E. Allocation on revenues, costs, expenses, profits and losses:

Revenue, costs, expenses, profits or losses arising from integrate business activities between the subsidiaries are allocated to each subsidiary based on the related business features.

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(10) Presentation of financial statements:

Certain accounts in the consolidated financial statements for the year ended December

31, 2011 has been reclassified in order to be comparable with those in the consolidated financial statements for the year ended December 31, 2012.

34. Pre-disclosures on the adoption of IFRSs

The Financial Supervisory Commission (“FSC”) requires companies with shares listed on the TSE or traded on the Taiwan GreTai Securities Market or Emerging Stock Market to prepare their financial statements in accordance with the International Financial Reporting Standards, International Accounting Standards, and Interpretations developed by the International Financial Reporting Interpretations Committee or the former Standing Interpretations Committee as recognized by the FSC (collectively referred to as “IFRSs”), and the Regulations Governing the Preparation of Financial Reports by Financial Holding Companies, starting 2013. According to Rule No. 0990004943 issued by the FSC on February 2, 2010, the Company and its subsidiaries make the following pre-disclosures on the adoption of IFRSs as follows:

(1) The main contents of the plan to adopt IFRSs and the current status:

The Company and its subsidiaries have set up a special project to adopt IFRSs. Chief Financial Officer is responsible for the coordination of this project. The key activities, estimated completion schedule and project progress as of December 31, 2012, were as follows:

Key Activity Responsible Department Project Progress

A. Assess stage: 2010/1/1~2011/12/31 1. Make a plan to adopt IFRSs and establish a

project team Accounting department Completed

2. Proceed initial internal training Accounting department and other authorized departments

Completed

3. Identify differences between the existing accounting policies and IFRSs

Accounting department Completed

4. Identify the adjustment required for existing accounting policies


5. Select voluntary exemptions under IFRS 1 “First-time Adoption of International Financial Reporting Standards” and assess the impact of these exemptions


6. Identify the adjustments required for IT system and internal controls

Risk management department、information department and audit department

Completed

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B. Prepare stage:2011/1/1~2012/12/31 7. Finalize the accounting policies under IFRSs Accounting department Completed 8. Finalize the selection of voluntary

exemptions under IFRS 1 “First-time Adoption of International Financial Reporting Standards


9. Finalize adjustments to the internal control (including financial statements process and the associated IT system)

Risk management department、information department and audit department

Completed

10. Proceed advanced internal training Accounting department and other authorized departments

Completed

C. Practice stage:2012/1/1~2013/12/31 11. Test the operation of information system Information department Completed 12. Prepare opening IFRS balance sheet and

comparative financial statements Accounting department Completed

13. Prepare IFRS financial statements Accounting department In progress (2) The material differences assessed by the Company between the existing accounting policies

under R.O.C SFAS and the accounting policies to be adopted under IFRSs and the Regulations Governing the Preparation of Financial Reports by Financial Holding Companies are described in the table below. The Company and its subsidiaries assess the material differences in accounting polices based on the IFRSs as recognized by the FSC and the Regulations Governing the Preparation of Financial Reports by Financial Holding Companies expected to become effective in 2013. However these assessments may be changed as the FSC may issue new rules governing different versions of IFRSs or amend the Regulations Governing the Preparation of Financial Reports by Financial Holding Companies in the future. Furthermore, the Company and its subsidiaries have decided the accounting policies to be adopted under IFRSs based on the current circumstances, should circumstances change in the future, the accounting policies to be adopted may change accordingly. The material differences in accounting policies described in the table below may not result in any adjustment on the date of transition to IFRSs, due to the voluntary exemptions selected under IFRS 1 “First-time Adoption of International Financial Reporting Standards”.

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Accounting Issues Description of differences

Business combinations

Under the requirements of ROC GAAP, if the equity stock issued in a business combination is traded in an open market, the market price fluctuations for a reasonable period of time before and after the announcement of the combination agreement should be considered (along with other factors) to determine the acquisition cost. If the quoted market price of the equity stock issued in a business combination mentioned above cannot represent its fair value, the fair value of the net assets acquired (including goodwill) should be calculated (after adjusting for other factors) to determine the acquisition cost. However under the requirements of IFRS 3 “Business Combinations”, the acquisition-date fair value of the equity interests issued in a business combination shall be used to determine the acquisition cost. If the acquisition-date fair value of the acquiree’s equity interests is more reliably measurable than the acquisition-date fair value of the acquirer’s equity interest, then the acquirer shall determine the acquisition cost by using the acquisition-date fair value of the acquiree’s equity interests. Under the requirements of ROC GAAP, the purchase cost of the acquiring corporation in a business combination includes all direct costs of an acquisition, except for the costs of issuing securities, indirect costs and general administrative expenses. However under the requirements of IFRS 3, the acquirer shall account for acquisition-related costs as expenses in the periods in which the cots are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with IAS 32 “Financial Instruments: Presentation” and IAS 39 “Financial Instruments: Recognition and Measurement”.

Under the requirements of ROC GAAP, the minority interests should be measured based on the book value of the acquired corporation. However under the requirements of IFRS 3, the acquirer shall measure any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. Under the requirements of ROC GAAP, where the distribution of additional consideration may be contingent on maintaining or achieving specified future earnings level for the acquired corporation and it is reasonably certain that the event is likely to occur and the amount can be reasonably estimated, then such contingent consideration should be included in the acquisition cost. Additional consideration contingent on the market price of a particular stock issued as a result of a business combination will not affect the acquisition costs. However under the requirements of IFRS 3, contingent consideration is recognized at the acquisition-date fair value.

422




Business combinations

Under the requirements of ROC GAAP, goodwill is separately calculated on each portion of investment acquired, the previously held equity interest in the acquiree is not required to be remeasured. However under the requirements of IFRS 3, in a business combination achieved in stages, the acquirer shall remeasure its previously held equity interests in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss, if any, in profit or loss

Fixed assets

For fixed assets acquired prior to the issuance of Accounting Research and Development Foundation Interpretation No 97-340, even if the cost of a component of the asset is significant relative to the total cost of such asset, that component is not depreciated separately. Furthermore, for fixed assets acquired prior to the issuance of Accounting Research and Development Foundation Interpretation No 97-340, the cost of such assets does not include the costs of dismantling and removing the asset and restoring the site on which it is located, and related provision is not recognized. However under the requirements of IAS 16 “Property, Plant and Equipment”, each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. The cost of an item of property, plant and equipment comprises the costs of dismantling and removing the asset and restoring the site on which it is located. The cost of regular major inspections is expensed as incurred under ROC GAAP. However under the requirements of IAS 16, when each major inspection is performed, its cost is recognized in the carrying amount of the item of property, plant and equipment as a replacement if the recognition criteria are satisfied. Any remaining carrying amount of the cost of the previous inspection is derecognized.

Properties held to be leased out or for long-term capital appreciation are currently classified under fixed assets, as there is no clear guidance under ROC GAAP. However under the requirements of IAS 40 “Investment Property”, properties which meet the definition of investment property should be classified as such.

Lease accounting

The Company and its subsidiaries recognize rental income and expense based on the regulation of leasing contracts. However, under the requirement of IAS No.17 “Leases”, operating leases should be calculated under straight line basis and recognized as revenue or expense during the lease.

Employee benefits

There is no guidance under ROC GAAP for short-term compensated absences. The Company and its subsidiaries recognize the cost as expense as employees take these absences. However under the requirements of IAS 19 “Employee Benefits”, the Company and its subsidiaries shall recognize

423




Employee benefits

and accrue for the accumulating compensated absences. The Company and its subsidiaries have selected a rate of return on relatively high-safety fixed-income investment as the discount rate under ROC GAAP. However under the requirements of IAS 19, the rate used to discount post-employment benefits obligations shall be determined by reference to market yields on high quality corporate bonds. In countries where there is no deep market in such bonds, the market yields on government bonds shall be used. Under the requirements of ROC GAAP, minimum pension liability is to be recognized for the excess of the accumulated benefit obligation over the pension plan assets. There is no such requirement under IAS 19. Under the requirements of ROC GAAP, the unrecognized transitional net assets (or net benefit obligation) should be amortized on a straight-line basis over the average remaining service period of employees still in service and expected to receive benefits. There is no such requirement under IAS 19.

Other employee benefits (employee preferential interest deposits)

According to internal regulation of Cathay United Bank or hiring agreement, the excess interest of employee preferential retiring deposits is adapted to IAS No.19 “Employee Benefit” once the employee is retired.

Customer loyalty Programmes

The Company and its subsidiaries recognize the fair value of all considerations received or receivable as revenue at the time of sale, and estimate the cost and related liabilities resulting from the awards given. However under the requirements of IFRIC 13 “Customer Loyalty Programmes”, the fair value of the consideration received or receivable in respect of the initial sale shall be allocated between the award credits and the other components of the sale; the consideration allocated to the award credits should be deferred and only recognized as revenue when award credit are redeemed and the Company and its subsidiaries fulfill its obligations to supply awards.

Financial assets measured at cost

Under the requirements of the existing Regulations Governing the Preparation of Financial Reports by Financial Holding Companies, equity investments in unlisted entities or entities traded on Emerging Stock market should be measured at cost. However under the requirements of IAS 39, only investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured could be measured at cost. The fair value of investments in equity instruments that do not have a quoted market price in an active market is reliably measurable if (a) the variability in the range of reasonable fair value estimates is not significant for that instrument or (b) the probabilities of the various estimates within the range can be reasonably assessed and used in estimating fair value.

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Insurance contracts

Under the requirements of ROC GAAP, catastrophic reserve and stability reserve (special reserve) that Cathay Century reserved prior to Statement of Financial Accounting Standard No.40 are recognized as liabilities. However, according to the regulation of IFRS 4 “Insurance Contracts”, potential claims should not be recognized as liabilities if it results from insurance contracts that do not exist at the balance sheet date (ex. Catastrophic reserve and stability reserve).

Income taxes

Under the requirements of ROC GAAP, deferred tax assets are recognized in full, however, if there is over 50% possibility that the economic benefits of a deferred tax asset become unrealizable, a valuation allowance account should be established to reduce the carrying amount of the deferred tax asset. However under the requirements of IAS 12 “Income Taxes”, a deferred tax asset shall be recognized to the extent that it is probable that it would be utilized. Under the requirements of ROC GAAP, the current and noncurrent deferred tax liabilities and assets of the same taxable entity should be offset against each other and presented as a net amount. However under the requirements of IAS 12, an entity shall offset current tax assets and current tax liabilities if, and only if, the entity has a legally enforceable right to set off the recognized amounts; and an entity shall offset deferred tax assets and current tax liabilities if the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on the same taxable entity.

Liquidating dividends

Under the requirements of ROC GAAP, if equity security does not belong to “financial assets measure at fair value and financial assets at fair value through profit or loss”, the dividends on an equity investment are declared from the pre-acquisition net income, such dividends should be deducted from the cost of the equity investment. However, there is no similar regulation under IAS 18.

Regular way purchases or sales

The bond trading of Cathay United Bank is recognized on the settlement date under regular way purchase and sales. However, under IFRSs, the method is applied consistently for all purchases and sales of financial assets that belong to the same category of financial assets. For this purpose, Cathay United Bank changes the regular way purchases and sales of bond trading are recognized on the trade date.

(3) The preliminary assessment on the monetary impacts of the material differences between the

existing accounting policies and the accounting policies to be adopted under IFRSs and the Regulations Governing the Preparation of Financial Reports by Financial Holding Companies is as follows：

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○1 Reconciliation of the balance sheet as at January 1, 2012:

ROC GAAP Notes Adjustments IFRSs (NT$) (US$) (NT$) (US$) (NT$) (US$)

Investment Property-Net $146,173,482 $5,031,790 A $64,517,737 $2,220,920 $210,691,219 $7,252,710 Property and Equipment-Net 38,605,554 1,328,934 B 8,824,975 303,786 47,430,529 1,632,720

Financial assets 2,004,797,982 69,011,979 C 2,666,099 91,776 2,007,464,081 69,103,755

Other assets 2,815,825,762 96,930,319 D (3,127,444) (107,657) 2,812,698,318 96,822,662

Total assets 5,005,402,780 172,303,022 72,881,367 2,508,825 5,078,284,147 174,811,847

Reserve for liabilities 2,822,627,363 97,164,453 E 57,460,802 1,977,997 2,880,088,165 99,142,450

Other liabilities 1,965,063,844 67,644,195 F 14,368,475 494,611 1,979,432,319 68,138,806

Total liabilities 4,787,691,207 164,808,648 71,829,277 2,472,608 4,859,520,484 167,281,256

Common Stock 103,575,096 3,565,408 - - 103,575,096 3,565,408

Capital surplus 78,508,148 2,702,518 - - 78,508,148 2,702,518

Retained Earnings 28,743,040 989,433 G 3,305,709 113,794 32,048,749 1,103,227

Other Stockholders’ Equity 2,834,651 97,578 H (2,253,619) (77,577) 581,032 20,001

Minority Equity 4,050,638 139,437 - - 4,050,638 139,437

Stockholders’ Equity 217,711,573 7,494,374 1,052,090 36,217 218,763,663 7,530,591

A. The Company and its subsidiaries adopt the requirements of IAS 40 “Investment

Property”, properties which meet the definition of investment property should be classified as such. The properties which do not meet such definition would be transferred to property and equipment, so decrease the investment property by NT$12,422,760 (US$427,634) thousands. In compliance with IAS 40 “Investment Property”, if the components of investment property are significant, the Company and its subsidiaries should recognize depreciation over useful lives of the property. Total decrease of the investment property amounted to NT$2,058,259 (US$70,852) thousands. And according to IFRS 1, the Company and its subsidiaries identified deemed cost of some properties in accordance with the definition of investment property as optional exemptions, which increase the investment property by NT$78,998,756 (US$2,719,406) thousands. Total increase of the investment property amounted to NT$64,517,737 (US$2,220,920) thousands.

426



B. The Company and its subsidiaries adopt IAS 16 “Property, Plant and Equipment”, significant items of property, plant and equipment shall be recorded and depreciated separately. The reclassification cause the decrease of the property and equipment by NT$2,131,230 (US$73,364) thousands. And according to IAS 16 “Property, Plant and Equipment”, properties which meet the definition of property and equipment should be classified as such. The increase of the property and equipment amounted by NT$10,956,205 (US$377,150) thousands. Total increase of the property and equipment amounted to NT$8,824,975 (US$303,786) thousands.

C. Financial assets include financial assets at fair value through profit or loss, available-for-sale financial assets, held-to-maturity financial assets, other financial assets and investments in debt securities with no active market. The Company and its subsidiaries reclassified financial assets carried at cost to available-for-sale financial assets and measured at fair value on each balance sheet date. As of January 1, 2012, the reclassification adjustment resulted in the increases of financial assets by NT$2,666,099 (US$91,776) thousands.

D. Apply to assets other than assets described in above section A, B and C. The Company and its subsidiaries reclassified idled assets to investment property which increase the other assets by NT$2,133,448 (US$73,441) thousands. In addition, according to IAS 12 “Income taxes”, IAS17 “Leases” and other classification decreases the other assets by NT$5,260,892 (US$181,098) thousands. Total decrease of the property and equipment amounted to NT$3,127,444 (US$107,657) thousands.

E. The Company and its subsidiaries adopt the Regulations Governing the Preparation of Financial Reports by Insurance Enterprises, IFRS4 “Insurance Contracts” and IAS19 “Employee benefits”, and recognized reserve for liabilities which increase the special reserve for life insurance by NT$50,905,213 (US$1,752,331) thousands The Company and its subsidiaries also adopt IAS19 to measure pension liability, employee preferential interest benefit, unrecognized transitional net benefit obligation and recognize all cumulative actuarial gains and losses according to the IFRS 1. As of January 1, 2012, the IFRSs adjustments resulted in an increase of reserve for liabilities by NT$2,050,909 (US$70,599) thousands. Therefore, the Company and its subsidiaries reclassified accrued pension liabilities which reserve for liabilities which increase the reserve for liabilities by NT$4,504,680 (US$155,067) thousands. Total increase of the reserve for liabilities amounted to NT$57,460,802 (US$1,977,997) thousands.

427



F. This amendment applies to all liabilities except for liability E. According to IFRIC13 “Customer Loyalty Programmes”, increase of the deferred revenue debt amounted by NT$1,105,371 (US$38,050) thousands. In addition, according to IAS 12 “Income taxes” and other classification increases the other liabilities by NT$13,263,104 (US$456,561) thousands. Total increase of the other liabilities amounted to NT$14,368,475 (US$494,611) thousands.

G. Retained Earnings include legal reserve, special reserve and unappropriated retained earnings. The Company and its subsidiaries have assessed and calculated income tax effects resulted in the relevant amounts and explanations below with adjustment items above. Special reserve, according to the Regulations Governing the Preparation of Financial Reports by Insurance Enterprises, recognized as special reserve which increase the special reserve by NT$3,744,467 (US$128,897) thousands. And according to investment property classification, the unappropriated retained earnings increased by NT$73,761,791 (US$2,539,132) thousands. According to the significant component of property and equipment adjusted, the unappropriated retained earnings decreased by NT$2,131,229 (US$73,364) thousands. According to Reserve for Liabilities classification, the unappropriated retained earnings decreased by NT$3,144,562 (US$108,246) thousands. In addition, the Company and its subsidiaries assessed that unused tax loss carryforward would not probably realize and decreased the deferred tax assets which decreased unappropriated retained earnings by NT$4,238,597 (US$145,907) thousands. And other classification decreased the unappropriated retained earnings by NT$64,686,161 (US$2,226,718) thousands. The decrease of the unappropriated retained earnings amounted to NT$438,758 (US$15,103) thousands. The total increase of the retained earnings amounted to NT$3,305,709 (US$113,794) thousands.

H. Other stockholders’ equity include land revaluation increment, unrealized gains or losses on financial instruments, net loss not yet recognized as net pension cost, treasury stock and other items. According to IAS39, the Company and its subsidiaries reclassified financial assets carried at cost to available-for-sale financial assets and measured at fair value which increased the unrealized gains or losses on financial instruments by NT$287,916 (US$9,911) thousands. In compliance with IAS 12, the Company and its subsidiaries evaluate income tax adjustment which recognize under other comprehensive income (loss) or other equity items. Total decrease of unrealized gains or losses on financial instrument amounted to NT$3,964,056 (US$134,456) thousands. According to IAS19 “Employee benefits”, the net loss not yet recognized as net pension cost were reversed by NT$1,423,982 (US$49,018) thousands. And other classification increased the other items by NT$1,461(US$50) thousands. Total decrease of the other stockholders’ equity amounted to NT$2,253,619 (US$77,577) thousands.

428



� Reconciliation of the balance sheet as at December 31, 2012:

ROC GAAP Notes Adjustments IFRSs

(NT$) (US$) (NT$) (US$) (NT$) (US$)

Investment Property-Net $163,887,441 $5,641,564 A $49,463,009 $1,702,685 $213,350,450 $7,344,249

Property and

Equipment-Net 48,821,416 1,680,600 B 22,657,927 779,963 71,479,343 2,460,563

Financial assets 2,311,675,550 79,575,750 C 19,599,966 674,698 2,331,275,516 80,250,448

Other assets 2,910,918,397 100,203,732 D (16,422,994) (565,336) 2,894,495,403 99,638,396

Total assets 5,435,302,804 187,101,646 75,297,908 2,592,010 5,510,600,712 189,693,656

Reserve for liabilities 3,117,676,956 107,321,066 E 55,243,479 1,901,669 3,172,920,435 109,222,735

Other liabilities 2,069,041,400 71,223,456 F 20,345,040 700,345 2,089,386,440 71,923,801

Total liabilities 5,186,718,356 178,544,522 75,588,519 2,602,014 5,262,306,875 181,146,536

Common Stock 108,653,851 3,740,236 - - 108,653,851 3,740,236

Capital surplus 78,596,121 2,705,546 (87,973) (3,028) 78,508,148 2,702,518

Retained Earnings 35,587,271 1,225,035 G 3,148,907 108,396 38,736,178 1,333,431

Other Stockholders’ Equity 21,995,591 757,163 H (3,351,545) (115,372) 18,644,046 641,791

Minority Equity 3,751,614 129,144 - - 3,751,614 129,144

Stockholders’ Equity 248,584,448 8,557,124 (290,611) (10,004) 248,293,837 8,547,120

A. The Company and its subsidiaries adopt the requirements of IAS 40 “Investment

Property”, properties which meet the definition of investment property should be classified as such. The properties which do not meet such definition would be transferred to property and equipment, therefore, decrease the investment property by NT$28,659,220 (US$986,548) thousands. In compliance with IAS 40 “Investment Property”, if the components of investment property are significant, the Company and its subsidiaries should recognize depreciation over useful lives of the property. Total decrease of the investment property amounted to NT$177,139 (US$6,098) thousands. And according to IFRS 1, the Company and its subsidiaries identified deemed cost of some properties in accordance with the definition of investment property as optional exemptions, which increase the investment property by NT$78,299,368 (US$2,695,331) thousands. Total increase of the investment property amounted to NT$49,463,009 (US$1,702,685) thousands.

429



B. The Company and its subsidiaries adopt IAS 16 “Property, Plant and Equipment”, significant items of property, plant and equipment shall be recorded depreciated separately. Decrease the property and equipment by NT$4,367,470 (US$150,343) thousands. And according to IAS 16 “Property, Plant and Equipment”, properties which meet the definition of property and equipment should be classified as such. Increase the property and equipment by NT$27,025,397 (US$930,306) thousands. Total increase of the property and equipment amounted to NT$22,657,927 (US$779,963) thousands.

C. Financial assets include financial assets at fair value through profit or loss,

available-for-sale financial assets, held-to-maturity financial assets, other financial assets and investments in debt securities with no active market. The Company and its subsidiaries reclassified financial assets carried at cost to available-for-sale financial assets and measured at fair value on each balance sheet date. As of January 1, 2012, the reclassification adjustment resulted in increases of financial assets by NT$334,280 (US$11,507) thousands.The bond trading of the Company and its subsidiaries are recognized on the settlement date under the regular way purchase and sales. However, under IFRSs, the method is applied consistently for all purchases and sales of financial assets that belong to the same category of financial assets. For this purpose, the Company and its subsidiaries change the regular way purchases and sales of bond trading are recognized on the trade date. As such, increase the financial assets by NT$19,265,686 (US$663,191) thousands. Total increase of the financial assets amounted to NT$19,599,966 (US$674,698) thousands.

D. Apply to assets other than assets describe in above section A, B and C. The Company

and its subsidiaries reclassified idled assets to investment property, therefore, decrease the other assets by NT$1,621,804 (US$55,828) thousands. And according to IAS 12 “Income taxes”, IAS17 “Leases” and other classification which decrease the other assets by NT$14,801,190 (US$509,508) thousands. Total decrease of the property and equipment amounted to NT$16,422,994 (US$565,336) thousands.

E. The Company and its subsidiaries adopt the Regulations Governing the Preparation of Financial Reports by Insurance Enterprises, IFRS4 “Insurance Contracts” and IAS19 “Employee benefits”, recognized reserve for liabilities. Increase the special reserve for life insurance by NT$51,038,736 (US$1,756,927) thousands. And the Company and its subsidiaries adopt IAS19 to measure pension liability, employee preferential interest benefit, unrecognized transitional net benefit obligation and recognize all cumulative actuarial gains and losses according to the IFRS 1. As of January 1, 2012, the IFRSs adjustments resulted in an increase of reserve for liabilities by NT$2,009,384 (US$69,170) thousands. Therefore, the Company and its subsidiaries reclassified accrued pension liabilities to reserve for liabilities which increase the reserve for liabilities by NT$2,195,359 (US$75,572) thousands. Total increase of the reserve for liabilities amounted to NT$55,243,479 (US$1,901,669) thousands.

430



F. Apply to all liabilities except for liability E. According to IFRIC13 “Customer Loyalty Programmes”, increase the deferred revenue debt by NT$1,123,325 (US$38,668) thousands. According to IAS 12 “Income taxes” and other classification which increase the other liabilities by NT$19,221,715 (US$661,677) thousands. Total increase of the other liabilities amounted to NT$20,345,040 (US$700,345) thousands.

G. The Company recognized Capital surplus –stock warrants resulted from the issuance

of convertible bonds. It was necessary to transfer such capital surplus from equity items amounted to NT$87,973 (US$3,028) thousands into financial liabilities at fair value through profit and loss at the date of the adoption of IFRS.

H. Retained Earnings include Legal reserve, Special reserve and Unappropriated retained earnings. The Company and its subsidiaries have assessed and calculated income tax effects resulted in the relevant amounts and explanations below with adjustment items above. Special reserve, according to the Regulations Governing the Preparation of Financial Reports by Insurance Enterprises, recognized special reserve. Increase the special reserve by NT$3,744,467 (US$128,897) thousands. And according to investment property classification, increase the unappropriated retained earnings by NT$73,761,791 (US$2,539,132) thousands. According to the significant component of property and equipment classification which decrease the unappropriated retained earnings by NT$2,131,229 (US$73,364) thousands. According to reserve for liabilities classification which decrease the unappropriated retained earnings by NT$3,649,125 (US$125,615) thousands. In addition, the Company and its subsidiaries assessed that unused tax loss carryforward would not probably realize and decreased in recognition of deferred tax assets and the amount of unappropriated retained earnings by NT$4,238,597 (US$145,907) thousands. And other classification decrease the unappropriated retained earnings by NT$64,023,075 (US$2,203,892) thousands. In addition, consolidated net income increase by NT$315,325 (US$10,855) thousands. The unappropriated retained was decreased earnings total NT$595,560 (US$20,501) thousands. Total increase of the retained earnings amounted to NT$3,148,907 (US$108,396) thousands.

I. Other stockholders’ equity include land revaluation increment, unrealized gains or losses on financial instruments, net loss not yet recognized as net pension cost, treasury stock and other items. According to IAS39, the Company and its subsidiaries reclassified financial assets carried at cost to available-for-sale financial assets and measured at fair value. Increase the unrealized gains or losses on financial instruments by NT$855,473 (US$29,448) thousands. In compliance with IAS 12, the Company and its subsidiaries evaluate income tax adjustment which recognize under other comprehensive income (loss) or other equity items. Total decrease of unrealized gains or losses on financial instrument amounted to NT$5,297,904 (US$182,372) thousands. According to IAS19 “Employee benefits”, reverse the net loss not yet recognized as net pension cost by NT$1,093,582 (US$37,645) thousands. And other classification decrease the other items by NT$2,696 (US$93) thousands. Total decrease of the other stockholders’ equity amounted to NT$3,351,545 (US$115,372) thousands.

431



� Reconciliation of the income statement for the year period ended December 31, 2012:

ROC GAAP Notes Adjustments IFRSs (NT$) (US$) (NT$) (US$) (NT$) (US$)

Net Income $378,762,408 13,038,293 A $(102,430) $(3,526) $378,659,978 $13,034,767

Bad Debt Expenses (3,172,002) (109,191) - - (3,172,002) (109,191) Provision for

Premiums Reserve (307,361,510) (10,580,431) - - (307,361,510) (10,580,431)

Operating Expenses (51,208,522) (1,762,772) B (515,735) (17,753) (51,724,257) (1,780,525) Net Income before

Income Tax 17,020,374 585,899 (618,165) (21,279) 16,402,209 564,620

Income Tax Benefit 37,663 1,297 C 302,840 10,424 340,503 11,721 Consolidated Net

Income 17,058,037 587,196 (315,325) (10,855) 16,742,712 576,341

Include: ROC GAAP Notes Adjustments IFRSs

(NT$) (US$) (NT$) (US$) (NT$) (US$)

Parent company 17,001,741 585,258 (315,325) (10,855) 16,686,416 574,403

Minority interest 56,296 1,938 - - 56,296 1,938 Consolidated Net

Income 17,058,037 587,196 (315,325) (10,855) 16,742,712 576,341

A. The Company and its subsidiaries adopt IFRIC 13 “Customer Loyalty Programmes”,

which decrease the handling fee income by NT$17,954 (US$618) thousands and interest expense by NT$274,779 (US$9,459) thousands, respectively. According to IFRS No.4, The Company and its subsidiaries did not recognize contingent liabilities for potential claims resulting from insurance contracts which did not exist at Dec 31, 2012,as result, under such amendment, the recovered special reserve decreased by NT$133,523 (US$4,596) thousands affecting the net change of provision of special reserve. The Company and its subsidiaries reclassified it financial asset carried at cost to available for sale financial assets and measure at fair value at the date of transition to IFRS. The bond trading is recognized on the settlement date under the Company and its subsidiaries’ regular way purchase and sales. However, under IFRSs, the method is applied consistently for all purchases and sales of financial assets that belong to the same category of financial assets. For this purpose, the Company and its subsidiaries change the regular way purchases and sales of bond trading are recognized on the trade date and result gain on valuation of financial assets of NT$279,676 (US$9,628) thousands. In addition, the Company adopt IAS 17 “Leases”, resulting in decreases of rental income by NT$88,688 (US$3,053) thousands and increase of other adjustment by NT$142,632 (US$4,910) thousands under straight line basis. Therefore, the adjustment decreased the net income by NT$102,430 (US$3,526) thousands.

432



B. The Company and its subsidiaries adopt IAS 19 “Employee Benefits”, result in an

increase of the administrative expense by NT$208,361 (US$7,172). In addition, the Company and its subsidiaries adopt IAS 16 “Property, Plant and Equipment”, which increase the depreciation expense of NT$2,236,240 (US$76,979). The Company and its subsidiaries adopts IAS 40 “Investment Property” and according to IFRS 1, the Company and its subsidiaries identified fair value at the transition date as optional exemptions in accordance with the definition of investment property as optional exemptions. The IFRSs adjustment results in decrease of depreciation expense by NT$1,881,120 (US$64,754) thousands and decrease of other items by NT$47,746 (US$1,644) thousands. In addition, result in an increase of operating expense by NT$515,735 (US$17,753) thousands.

C. According to the IAS 12, the Company and its subsidiaries assessed income tax effects

resulted from adjustment items above, the adjustment increase income tax expense by NT$31,324 (US$1,078) thousands. In addition, the Company and its subsidiaries assessed that unused tax loss carryforward would not probably realize and resulted in decreases of income tax expense by NT$261,192 (US$8,991) thousands and other adjustment by NT$72,972 (US$2,511) thousands. Total decrease of the income tax expense amounted to NT$302,840 (US$10,424) thousands.

(3) According to the requirements under IFRS 1, “First-time Adoption of International Financial

Reporting Standards”, the Company prepares its first IFRS financial statements based on the effective IFRS standards and makes adjustments retrospectively, except for the optional exemptions and mandatory exemptions under IFRS 1. The optional exemptions selected by the Bank are as follows: � The Company and its subsidiaries have recognized all cumulative actuarial gains and

losses directly to retained earnings as at January 1, 2012. � The Company and its subsidiaries have elected to disclose amounts required by paragraph

120A (p) of IAS19 prospectively from January 1, 2012. � The Company and its subsidiaries have elected to use the fair value at the date of

transition to be the deemed costs for certain investment properties as at that date. � The Company and its subsidiaries have elected to regard the revalued amount under

previous GAAP as the deemed costs for certain items of land or buildings as at the date of revaluation.

� The Company and its subsidiaries designate financial instruments which were recognized

as financial assets carried at cost previously as available-for-sale financial assets at the date of transition.

433



� The Company IFRS 3 “Business Combinations” has not been applied to acquisitions of

subsidiaries or of interests in associates and joint ventures that occurred before January 1, 2012. Applying this exemption would result in the carrying amount of assets acquired and liabilities assumed in the business combination in accordance with previous GAAP to be their deemed costs in accordance with IFRSs as at the date of acquisition. Subsequent to the date of acquisition, the assets and liabilities would be measured in accordance with IFRSs. The carrying amount of goodwill in the opening IFRS Balance Sheet is its carrying amount in accordance with previous GAAP at January 1, 2012, after testing for impairments and adjusting for recognition or de-recognition of intangibles under IFRS 1.

(4) Special reserve at the date of transition to IFRSs

In accordance with the order VI-1010012865 issued by FSC on April 6, 2012, at the first-time adoption of IFRSs, an entity shall appropriate a corresponding amount to special reserve same as the IFRS adjustment, in which case an entity elects to use exemption application specified in IFRS 1 and resets unrealized revaluation increment and cumulative translation differences under stockholders’ equity to zero, and its retained earnings is being increased accordingly. However, if the retained earnings arising from IFRS adjustments at the first-time adoption are insufficient, special reserve shall be appropriated by the amount that retained earnings increase from the IFRS adjustment. While subsequent usage, disposal or reclassification of the related assets, special reserve shall be reversed in proportion. The Company and its subsidiaries’ total IFRS adjustments, at the first-time adoption of IFRSs, resulted in a decrease of retain earnings by NT$595,560 (US$20,501) thousands. Therefore, no special reserve was appropriated.

35. Information regarding investment in Mainland China

(1) On December 25, 2002 and July 24, 2003, the Investment Commission of the Ministry of Economic Affairs (MOEAIC) authorized Cathay Life to remit US$22,850 thousands and US$27,150 thousands, respectively, as the registered capital to establish a China-based company named Cathay Life Insurance Co., Ltd. (Guangzhou). The total amount of the registered capital was revised from US$50,000 thousands to US$48,330 thousands approved by MOEAIC on December 20, 2010. Also, MOEAIC authorized Cathay Life to remit US $59,000 thousands as the registered capital again on May 16, 2008. The total registered capital is US $107,330 thousands. On September 25, 2003, MOEAIC authorized Cathay Life Insurance Co., Ltd. (Guangzhou) to change its location from Guangzhou to Shanghai. Cathay Life’s subsidiary, Cathay Life Insurance Ltd. (China) has acquired a business license of an enterprise as legal person on December 29, 2004. Cathay Life has remitted US$48,330 thousands to Cathay Life Insurance Ltd. (China) till December 31, 2009, and injected other US$29,880 thousands on September 29, 2010. As of December 31, 2012, Cathay Life’s remittances to Cathay Life Insurance Ltd. (China) totaled approximately US$78,210 thousands.

434



(2) On October 17, 2007, the Investment Commission of the Ministry of Economic Affairs

(MOEAIC) authorized Cathay Life to remit US$26,390 thousands as the registered capital to establish a China-based general insurance subsidiary (in form of joint venture with Cathay Century Insurance). On March 6, 2008, MOEAIC authorized Cathay Life to increase the remittances from US$26,390 thousands to US$28,960 thousands. The joint venture company named Cathay Insurance Company Ltd. (China) established by Cathay Life and Cathay Century Insurance in Shanghai has acquired a business license of an enterprise as legal person on August 26, 2008. As of December 31, 2012, Cathay Life’s remittances to this general insurance company totaled approximately US$28,140 thousands.

(3) On November 1, 2011 and April 11, 2012, the Investment Commission of the Ministry of

Economic Affairs (MOEAIC) authorized the Cathay Life to remit US$47,000 thousands and US$80,000 thousands, respectively, as the registered capital to establish a China-based company named Lin Yuan (Shanghai) Real Estate Co., Ltd.. Cathay Life’s subsidiary, Lin Yuan (Shanghai) Real Estate Co., Ltd. has acquired a business license of an enterprise as legal person on August 15, 2012. As of December 31, 2012, Cathay Life’s remittances to Lin Yuan (Shanghai) Real Estate Co., Ltd. totaled approximately US$126,060 thousands.

(4) On December 31, 2006, the Investment Commission of the Ministry of Economic Affairs

(MOEAIC) authorized Cathay Century to remit US$28,960 thousands as the registered capital to establish a China-based general insurance subsidiary (in form of joint venture with Cathay Life.) Cathay Century has received approved from the China Insurance Regulatory Commission on October 8, 2007 to form a joint venture general insurance company. Cathay Century and Cathay Life Insurance subsidiary, Cathay Insurance Company Ltd. (China) has acquired a business license of an enterprise as legal person on August 26, 2008. As of December 31, 2012, Cathay Century’s remittances to this company totaled approximately US$27,820 thousands.

435



36. Segment information


Items Bank division

(NT$)

Life insurance

division (NT$)

Property and

casualty

insurance

division (NT$)

Securities

division (NT$)

Other division

(NT$)

Reconciliation

(NT$)

Total

(NT$)

Interest income $34,270,753 $92,370,914 $386,894 $112,033 $1,031,485 $(1,576,582) $126,595,497

Less: Interest expenses (13,041,447) (80,721) - (12,262) (1,218,560) 573,734 (13,779,256)

Net interest income 21,229,306 92,290,193 386,894 99,771 (187,075) (1,002,848) 112,816,241

External customer 21,689,946 91,829,806 351,406 92,731 (1,147,648) - 112,816,241

Inter-segment (460,640) 460,387 35,488 7,040 960,573 (1,002,848) -

Net income other than interest 13,349,720 249,037,108 5,512,521 947,170 19,571,864 (22,472,216) 265,946,167

Gains on investments under equity method 247,166 (524,342) (356,043) 30,629 17,605,654 (17,052,653) (49,589)

External customer (1,753,853) 243,337,557 5,256,776 760,665 18,345,022 - 265,946,167

Inter-segment 15,103,573 5,699,551 255,745 186,505 1,226,842 (22,472,216) -

Total income 34,579,026 341,327,301 5,899,415 1,046,941 19,384,789 (23,475,064) 378,762,408

Bad debt expenses (2,133,253) (1,047,074) - - - 8,325 (3,172,002)

Provision for premiums reserve - (306,102,409) (1,259,101) - - - (307,361,510)

Operating expenses (17,368,081) (32,951,323) (4,432,882) (895,902) (1,968,194) 6,407,860 (51,208,522)

Depreciation and amortizations expenses (1,175,572) (2,668,437) (107,391) (24,954) (85,951) 17,675 (4,044,630)

Income (loss) from continuing operations

before income taxes 15,077,692 1,226,495 207,432 151,039 17,416,595 (17,058,879) 17,020,374

Income taxes (expense) benefit (1,603,533) 1,760,378 (195,458) 11,905 64,371 - 37,663

Consolidated net income 13,474,159 2,986,873 11,974 162,944 17,480,966 (17,058,879) 17,058,037

Operating assets 1,821,211,396 3,648,320,901 29,793,148 14,142,827 310,623,182 (388,788,650) 5,435,302,804

Investments under equity method 5,038,973 7,144,025 679,562 781,240 252,314,249 (264,811,723) 1,146,326

Operating liabilities 1,712,114,459 3,510,093,230 24,230,617 9,513,944 56,535,200 (125,769,094) 5,186,718,356

436




Items Bank division

(US$)

Life insurance

division (US$)

Property and

casualty

insurance

division (US$)

Securities

division (US$)

Other division

(US$)

Reconciliation

(US$)

Total

(US$)

Net interest income $1,179,716 $3,179,722 $13,318 $3,856 $35,507 $(54,271) $4,357,848

Less: Interest expenses (448,931) (2,779) - (422) (41,947) 19,750 (474,329)

Net interest income 730,785 3,176,943 13,318 3,434 (6,440) (34,521) 3,883,519

External customer 746,642 3,161,095 12,096 3,192 (39,506) - 3,883,519

Inter-segment (15,857) 15,848 1,222 242 33,066 (34,521) -

Net income other than interest 459,543 8,572,706 189,760 32,605 673,730 (773,570) 9,154,774

Gains on investments under equity method 8,508 (18,050) (12,256) 1,054 606,047 (587,010) (1,707)

External customer (60,373) 8,376,508 180,956 26,185 631,498 - 9,154,774

Inter-segment 519,916 196,198 8,804 6,420 42,232 (773,570) -

Total income 1,190,328 11,749,649 203,078 36,039 667,290 (808,091) 13,038,293

Bad debt expenses (73,434) (36,044) - - - 287 (109,191)

Provision for premiums reserve - (10,537,088) (43,343) - - - (10,580,431)

Operating expenses (597,868) (1,134,297) (152,595) (30,840) (67,752) 220,580 (1,762,772)

Depreciation and amortizations expenses (40,467) (91,856) (3,697) (859) (2,959) 608 (139,230)

Income from continuing operations before

income taxes 519,026 42,220 7,140 5,199 599,538 (587,224) 585,899

Income (loss) taxes (expense) benefit (55,199) 60,598 (6,728) 410 2,216 - 1,297

Consolidated net income 463,827 102,818 412 5,609 601,754 (587,224) 587,196

Operating assets 62,692,303 125,587,639 1,025,582 486,844 10,692,708 (13,383,430) 187,101,646

Investments under equity method 173,458 245,922 23,393 26,893 8,685,516 (9,115,722) 39,460

Operating liabilities 58,936,815 120,829,371 834,101 327,502 1,946,134 (4,329,401) 178,544,522


Items Bank division

(NT$)

Life insurance

division (NT$)

Property and

casualty

insurance

division (NT$)

Securities

division (NT$)

Other division

(NT$)

Reconciliation

(NT$)

Total

(NT$)

Interest income $30,490,388 $86,920,714 $358,251 $141,184 $957,704 $(1,213,371) $117,654,870

Less: Interest expenses (11,771,465) (39,597) - (6,089) (1,167,635) 385,376 (12,599,410)

Net interest income 18,718,923 86,881,117 358,251 135,095 (209,931) (827,995) 105,055,460

External customer 19,088,657 86,584,599 308,802 135,095 (1,061,693) - 105,055,460

Inter-segment (369,734) 296,518 49,449 - 851,762 (827,995) -

Net income other than interest 11,761,683 135,832,276 4,887,257 479,681 13,647,007 (16,876,645) 149,731,259

Gains on investments under equity method 339,253 (269,041) (113,996) 33,146 11,625,365 (11,508,089) 106,638

External customer 3,204,691 129,395,740 4,253,205 524,735 12,352,888 - 149,731,259

Inter-segment 8,556,992 6,436,536 634,052 (45,054) 1,294,119 (16,876,645) -

Total income 30,480,606 222,713,393 5,245,508 614,776 13,437,076 (17,704,640) 254,786,719

Bad debt expenses (622,837) (428,252) (11,524) - - - (1,062,613)


Operating expenses (16,396,994) (30,587,949) (3,875,443) (676,597) (1,687,196) 5,335,234 (47,888,945)

Depreciation and amortizations expenses (1,248,953) (2,686,895) (95,327) (19,502) (64,304) - (4,114,981)

Income from continuing operations before

income taxes 13,460,775 (3,671,055) 509,567 (61,821) 11,749,880 (12,369,406) 9,617,940

Income taxes (expense) benefit (1,743,672) 3,565,417 (132,624) (11,439) (11,092) - 1,666,590

Consolidated net income 11,717,103 (105,638) 376,943 (73,260) 11,738,788 (12,369,406) 11,284,530

Operating assets 1,743,422,059 3,291,447,851 28,097,029 9,797,332 274,750,617 (342,112,108) 5,005,402,780

Investments under equity method 4,696,998 4,016,883 1,055,058 773,813 223,486,018 (232,740,927) 1,287,843

Operating liabilities 1,638,945,615 3,175,878,323 22,611,742 5,542,160 55,487,514 (110,774,147) 4,787,691,207

437




Items Bank division

(US$)

Life insurance

division (US$)

Property and

casualty

insurance

division (US$)

Securities

division (US$)

Other division

(US$)

Reconciliation

(US$)

Total

(US$)

Net interest income $1,007,281 $2,871,513 $11,835 $4,664 $31,639 $(40,085) $3,886,847

Less: Interest expenses (388,882) (1,308) - (201) (38,574) 12,731 (416,234)

Net interest income 618,399 2,870,205 11,835 4,463 (6,935) (27,354) 3,470,613

External customer 630,613 2,860,410 10,201 4,463 (35,074) - 3,470,613

Inter-segment (12,214) 9,795 1,634 - 28,139 (27,354) -

Net income other than interest 388,559 4,487,356 161,455 15,847 450,843 (557,537) 4,946,523

Gains on investments under equity method 11,207 (8,888) (3,766) 1,095 384,056 (380,181) 3,523

External customer 105,870 4,274,719 140,509 17,335 408,090 - 4,946,523

Inter-segment 282,689 212,637 20,946 (1,488) 42,753 (557,537) -

Total income 1,006,958 7,357,561 173,290 20,310 443,908 (584,891) 8,417,136

Bad debt expenses (20,576) (14,148) (380) - - - (35,104)


Operating expenses (541,692) (1,010,504) (128,029) (22,352) (55,738) 176,255 (1,582,060)

Depreciation and amortizations expenses (41,261) (88,764) (3,149) (644) (2,125) - (135,943)

Income (loss) from continuing operations

before income taxes 444,690 (121,278) 16,834 (2,042) 388,170 (408,636) 317,738

Income taxes (expense) benefit (57,604) 117,787 (4,381) (378) (366) - 55,058

Consolidated net income 387,086 (3,491) 12,453 (2,420) 387,804 (408,636) 372,796

Operating assets 57,595,707 108,736,302 928,214 323,665 9,076,664 (11,302,019) 165,358,533

Investments under equity method 155,170 132,702 34,855 25,564 7,383,086 (7,688,832) 42,545

Operating liabilities 54,144,222 104,918,346 747,002 183,091 1,833,086 (3,659,536) 158,166,211

438


NT $ US $ NT $ US $Assets Cash and cash equivalents $7,141,598 $245,838 $4,121,526 $136,159 Receivables -net 6,454,364 222,181 5,207,033 172,020 Held-to-maturity financial assets 31,000,000 1,067,126 31,000,000 1,024,116 Investments under equity method 252,085,633 8,677,646 223,253,372 7,375,401 Other financial assets -net 538,407 18,534 538,407 17,787 Property and equipment -net 4,739 163 3,645 120 Goodwill and intangible assets -net - - 62 2 Other assets -net 1,122,807 38,651 2,110,428 69,720Total assets $298,347,548 $10,270,139 $266,234,473 $8,795,325

Liabilities & stockholders' equity Payables $5,940,874 $204,505 $6,103,726 $201,643 Financial liabilities at fair value through profit and loss 182,100 6,269 - - Short-term notes and bills payable - - 6,430,000 212,422 Bonds payable 47,312,376 1,628,653 40,000,000 1,321,440 Other payable 79,364 2,732 39,812 1,315Total liabilities 53,514,714 1,842,159 52,573,538 1,736,820

Stockholders' equity Capital stock Common stock 108,653,851 3,740,236 103,575,096 3,421,708 Capital surplus 78,596,121 2,705,546 78,508,148 2,593,596 Retained earnings Legal reserve 15,222,599 524,014 14,105,459 465,988 Special reserve 333,598 11,483 333,598 11,021 Unappropriated retained earnings 20,031,074 689,538 14,303,983 472,547 Equity adjustments

Reserve for land revaluation increment 1,461 50 1,461 48Cumulative conversion adjustments (1,082,092) (37,249) (378,126) (12,492)Unrealized gains or losses on financial instruments 31,349,676 1,079,163 11,816,355 390,365Treasury stock (7,179,872) (247,156) (7,179,872) (237,194)Net loss not yet recognized as net pension cost (1,093,582) (37,645) (1,425,167) (47,082)

Total stockholders' equity 244,832,834 8,427,980 213,660,935 7,058,505Total liabilities and stockholders' equity $298,347,548 $10,270,139 $266,234,473 $8,795,325

Cathay Financial Holding Co., Ltd.Audited Balance sheets



439

Income

Gain on investment-equity method

Other operating income

Expenses and loss

Operating expenses

Other expenses and losses

Income from continuing operations before income taxes

Income taxes benefit

Net income

Earnings per share (expressed in dollars)

Primary earnings per share: Before taxes After taxes Before taxes After taxes Before taxes After taxes Before taxes After taxes

Net income $1.58 $1.59 $0.05 $0.05 $1.02 $1.03 $0.03 $0.03

Diluted earnings per share:

Net income $1.57 $1.58 $0.05 $0.05 $1.02 $1.03 $0.03 $0.03

(50,014)

129,165 4,446 85,389 2,821

$17,001,741 $585,258 $11,128,898 $367,654

(466,002) (16,041) (344,844) (11,392)

(1,441,998) (49,639) (1,169,077) (38,622)

16,872,576 580,812 11,043,509 364,833

(1,908,000) (65,680) (1,513,921)

18,780,576 646,492 12,557,430 414,847

1,195,048 41,138 965,557 31,898

$17,585,528 $605,354 $11,591,873 $382,949

2012 2011

NT $ US $ NT $ US $



Audited Statements of Income

For the years ended December 31, 2012 and 2011

(Expressed in thousands of dollars, except earning per share)

440


Common stock Capital surplus Legal reserve Special reserve Total

NT $ US $ NT $ US $ NT $ US $ NT $ US $ NT $ US $ NT $ US $ NT $ US $ NT $ US $ NT $ US $ NT $ US $ NT $ US $

Balance on January 1, 2011 $101,544,212 $3,354,616 $78,508,148 $2,593,596 $13,645,400 $450,790 $- $- $11,748,433 $388,121 $1,461 $48 $(893,051) $(29,503) $14,672,597 $484,724 $- $- $(650,993) $(21,506) $218,576,207 $7,220,886


Legal reserve 460,059 15,198 (460,059) (15,198) - -

Cash dividends (6,092,652) (201,277) (6,092,652) (201,277)

Stock dividend 2,030,884 67,092 (2,030,884) (67,092) - -

Cumulative translation adjustments 514,925 17,011 514,925 17,011

Unrealized gains or losses of financial instruments (2,856,242) (94,359) (2,856,242) (94,359)

Purchase of treasury stock (7,179,872) (237,194) (7,179,872) (237,194)

Adjustment made by subsidiarise 333,598 11,021 10,247 339 343,845 11,360

Net loss not recognized as pension cost (774,174) (25,576) (774,174) (25,576)

Net income for the year ended December 31, 2011 11,128,898 367,654 11,128,898 367,654

Balance on December 31, 2011 $103,575,096 $3,421,708 $78,508,148 $2,593,596 $14,105,459 $465,988 $333,598 $11,021 $14,303,983 $472,547 $1,461 $48 $(378,126) $(12,492) $11,816,355 $390,365 $(7,179,872) $(237,194) $(1,425,167) $(47,082) $213,660,935 $7,058,505

Balance on January 1, 2012 $103,575,096 $3,565,408 $78,508,148 $2,702,518 $14,105,459 $485,558 $333,598 $11,483 $14,303,983 $492,392 $1,461 $50 $(378,126) $(13,016) $11,816,355 $406,759 $(7,179,872) $(247,156) $(1,425,167) $(49,059) $213,660,935 $7,354,937


Legal reserve 1,117,140 38,456 (1,117,140) (38,456) - -

Cash dividends (5,078,755) (174,828) (5,078,755) (174,828)

Stock dividend 5,078,755 174,828 (5,078,755) (174,828) - -

Cumulative translation adjustments (703,966) (24,233) (703,966) (24,233)

Unrealized gains or losses of financial instruments 19,533,321 672,404 19,533,321 672,404

Embeded conversion options derived from convertible bonds 87,973 3,028 87,973 3,028

Net loss not recognized as pension cost 331,585 11,414 331,585 11,414

Net income for the year ended December 31, 2012 17,001,741 585,258 17,001,741 585,258

Balance on December 31, 2012 $108,653,851 $3,740,236 $78,596,121 $2,705,546 $15,222,599 $524,014 $333,598 $11,483 $20,031,074 $689,538 $1,461 $50 $(1,082,092) $(37,249) $31,349,676 $1,079,163 $(7,179,872) $(247,156) $(1,093,582) $(37,645) $244,832,834 $8,427,980

Note1：The remuneration of directors and supervisors NT $5,400 (US$178) thousands, employee bonus NT $813 (US$27) thousands were recorded as operating cost and expense in 2011.

Note2：The remuneration of directors and supervisors NT $5,400 (US$186) thousands, employee bonus NT $1,016 (US$35) thousands were recorded as operating cost and expense in 2012.

Summary

Retained earnings Other stockholders' equity

Unappropriated retainedearnings

Land revaluation

increment adjustments Treasury stock as pension cost


Audited Statements of Changes in Stockholders' Equity


(Expressed in thousands of dollars)

Cumulative conversion Unrealized gains or losseson financial instruments

Net loss not recognized

441


NT $ US $ NT $ US $Cash flows from operating activities Net income $17,001,741 $585,258 $11,128,898 $367,654 Adjustments: Income and other adjustments with no cash flow effects Amortizations 62 2 62 2 Depreciation 1,136 39 1,090 36 Losses on disposal of property and equipment - - 48 2 Investment income recognized by equity method more than cash dividends received (9,412,207) (324,000) (3,711,085) (122,599) Unrealized revaluaion gain on bonds payable (207,604) (7,146) - - Amortization of dicounts on bonds payable 23,352 804 - - Effects of exchange rate changes 31,928 1,099 (116) (4) Changes in operating assets and liabilities (Increase) decrease in accounts receivable (1,247,331) (42,937) 327,075 10,805 Decrease in deferred income tax assets 986,270 33,951 19,130 632 Decrease (Increase) in other assets 2,140 73 (145,907) (4,820) Increase (decrease) in accounts payable 1,866,397 64,248 (2,483,149) (82,033) Increase in financial liabilities at fair value through profit and loss 182,100 6,268 - - (Decrease) increase in income tax payable (2,029,249) (69,854) 1,288,584 42,570 Increase in deferred income tax liabilities 34,890 1,201 1 - Increase in other liabilities 4,662 160 3,290 108Net cash provided by operating activities 7,238,287 249,166 6,427,921 212,353Cash flows from investing activities Acquisition of investments under equity method (59,120) (2,035) (2,803,784) (92,626) Capital increase by cash for subsidiary under equity method (199,992) (6,884) (714,852) (23,616) Acquisition of financial assets carried at cost - - (506,687) (16,739) Acquisition of held-to-maturity financial assets - - (6,000,000) (198,216) Acquisition of property and equipment (2,231) (77) (437) (14) Increase in refundable deposit (788) (27) - - Net cash used in investing activities (262,131) (9,023) (10,025,760) (331,211)Cash flows from financing activities (Decrease) increase in short-term notes and bills payable (6,430,000) (221,343) 6,430,000 212,422 Issue convertible bonds 7,623,096 262,413 - - Issue costs of convertible bonds (38,497) (1,325) - - Cash dividends (5,078,755) (174,828) (6,092,652) (201,277) Purchase of treasury stock - - (7,179,872) (237,195)Net cash used in financing activities (3,924,156) (135,083) (6,842,524) (226,050)Effects of exchange rate changes (31,928) (1,099) 116 4Increase (decrease) in cash and cash equivalents 3,020,072 103,961 (10,440,247) (344,904)Cash and cash equivalents at the beginning of year 4,121,526 141,877 14,561,773 481,063Cash and cash equivalents at the end of year $7,141,598 $245,838 $4,121,526 $136,159

Supplemental disclosure of cash flows information Interest paid during the period $1,193,821 $41,095 $1,166,423 $38,534 Income tax paid $1,467,769 $50,526 $892,862 $29,497

Cathay Financial Holding Co., Ltd. Audited Statements of cash flows


2012 2011

442

36.The major subsidiaries' condensed balance sheets and statements of income

Items NT$ US$ NT$ US$Assets

Cash and cash equivalents $379,738,487 $13,071,893 $374,353,961 $12,367,161Receivables 60,115,199 2,069,370 45,684,727 1,509,241Investments 2,803,406,633 96,502,810 2,509,415,150 82,901,062Reinsurance reserve assets 9,157,952 315,248 9,159,908 302,607Property and equipment 20,508,928 705,987 13,029,771 430,452Intangible assets 147,816 5,088 267,387 8,833Other assets 362,059,507 12,463,322 325,458,364 10,751,845

Total assets $3,635,134,522 $125,133,718 $3,277,369,268 $108,271,201

LiabilitiesPayables $37,262,033 $1,282,686 $22,003,803 $726,918Financial liabilities 32,079,457 1,104,284 47,468,901 1,568,183Liabilities reserve 3,088,412,857 106,313,696 2,793,900,127 92,299,310Other liabilities 342,106,891 11,776,485 301,571,863 9,962,731

Total liabilities 3,499,861,238 120,477,151 3,164,944,694 104,557,142Stockholders' equity

Capital stock 53,065,274 1,826,687 53,065,274 1,753,065Capital surplus 13,009,649 447,836 13,009,649 429,787Retained earnings 39,768,944 1,368,983 36,488,955 1,205,449Others 29,429,417 1,013,061 9,860,696 325,758

Total stockholders' equity 135,273,284 4,656,567 112,424,574 3,714,059Total liabilities and stockholders' equity $3,635,134,522 $125,133,718 $3,277,369,268 $108,271,201

Items NT$ US$ NT$ US$Operating revenues $683,636,392 $23,533,094 $580,879,514 $19,189,941Operating costs (666,987,338) (22,959,977) (571,268,764) (18,872,440)Operating gross profit 16,649,054 573,117 9,610,750 317,501Operating expenses (16,134,194) (555,394) (13,699,538) (452,578)Non-operating revenues 1,878,483 64,664 1,767,487 58,391Non-operating expenses (911,668) (31,383) (833,718) (27,543)Income (loss) from continuing operations before income taxes $1,481,675 $51,004 $(3,155,019) $(104,229)Net income $3,279,989 $112,908 $455,880 $15,060Earnings per share (in dollars)Income (loss) from continuing operations before income taxes $0.28 $0.01 $(0.59) $(0.02)Net income $0.62 $0.02 $0.09 $-

2012 2011




Cathay Life Insurance Co., Ltd. Condensed Statements of Income

(Expressed in thousands of dollars, except earnings per share)

Cathay Life Insurance Co., Ltd. Condensed Balance Sheets

(Expressed in thousands of dollars)As of December 31, 2012 and 2011

443


Cash and cash equivalents $5,025,506 $172,995 $6,159,377 $203,481Receivables 4,073,872 140,236 3,519,359 116,265Investments 13,039,258 448,856 10,901,527 360,143Reinsurance reserve assets 4,205,066 144,753 4,202,331 138,828Property and equipment 101,738 3,502 136,795 4,519Intangible assets 24,804 854 29,353 970Other assets 801,108 27,577 616,315 20,361

Total assets $27,271,352 $938,773 $25,565,057 $844,567

LiabilitiesPayables $2,095,542 $72,136 $1,946,257 $64,296Financial liabilities 1,000,000 34,423 1,045,000 34,523Liabilities reserve 19,080,300 656,809 18,445,491 609,365Other liabilities 511,341 17,602 321,685 10,627

Total liabilities 22,687,183 780,970 21,758,433 718,811Stockholders' equity

Capital stock 2,522,950 86,849 2,317,006 76,544Capital surplus 1,929 66 1,929 64Retained earnings 2,161,834 74,418 1,677,143 55,406Others (102,544) (3,530) (189,454) (6,258)

Total stockholders' equity 4,584,169 157,803 3,806,624 125,756Total liabilities and stockholders' equity $27,271,352 $938,773 $25,565,057 $844,567

Items NT$ US$ NT$ US$Operating revenues $11,538,906 $397,208 $10,254,987 $338,784Operating costs (6,871,426) (236,538) (6,107,615) (201,771)Operating gross profit 4,667,480 160,670 4,147,372 137,013Operating expenses (3,778,448) (130,067) (3,426,368) (113,194)Non-operating revenues 18,002 620 14,503 479Non-operating expenses (19,142) (659) (3,271) (108)Income from continuing operations before income taxes $887,892 $30,564 $732,236 $24,190Net income $690,635 $23,774 $601,782 $19,880Earnings per share (in dollars)Income from continuing operations before income taxes $3.52 $0.12 $2.90 $0.10Net income $2.74 $0.09 $2.39 $0.08

December 31, 2011December 31, 2012


Cathay Century Insurance Co., Ltd. Condensed Balance Sheets

(Expressed in thousands of dollars)As of December 31, 2012 and 2011

20112012

Cathay Century Insurance Co., Ltd. Condensed Statements of Income

(Expressed in thousands of dollars, except earnings per share)For the years ended December 31, 2012 and 2011

444


Cash and cash equivalents $3,708,574 $127,662 $3,642,369 $120,329Receivables 399,447 13,750 404,156 13,352Investments 5,590,220 192,434 6,427,823 212,350Reinsurance reserve assets 7,683 264 8,525 282Property and equipment 128,242 4,415 154,889 5,117Intangible assets 94,237 3,244 113,833 3,760Other assets 1,552,230 53,433 1,719,147 56,794

Total assets $11,480,633 $395,202 $12,470,742 $411,984

LiabilitiesPayables $714,954 $24,611 $491,420 $16,235Financial liabilities 297,268 10,233 201,158 6,645Liabilities reserve 8,523,557 293,410 9,400,743 310,563Other liabilities 375,802 12,936 574,633 18,984


Capital stock 5,134,155 176,735 5,134,155 169,612Retained earnings (3,916,879) (134,832) (3,629,795) (119,914)Others 351,776 12,109 298,428 9,859


Items NT$ US$ NT$ US$Operating revenues $2,740,637 $94,342 $2,890,923 $95,504Operating costs (1,773,656) (61,055) (2,006,126) (66,274)Operating gross profit 966,981 33,287 884,797 29,230Operating expenses (1,214,137) (41,795) (1,318,269) (43,550)Non-operating revenues 1,566 54 1,027 34 Non-operating expenses (1,336) (46) (1,602) (53)Loss from continuing operations before income taxes $(246,926) $(8,500) $(434,047) $(14,339)Net loss $(287,084) $(9,882) $(469,394) $(15,507)Earnings per share (in dollars)Loss from continuing operations before income taxes Note Note Note NoteNet loss Note Note Note Note

Note：Cathay Life (China) is a limited company, there is no information about earnings per share.




2012 2011

Cathay Life Insurance Co., Ltd. (China) Condensed Statements of Income


Cathay Life Insurance Co., Ltd. (China) Condensed Balance Sheets


445


Current assets $706,829 $24,332 $568,133 $18,769Loans 9,305 320 4,590 152Funds and investments 932,943 32,115 947,621 31,306Property and equipment 18,322 631 32,810 1,084Intangible assets 5,742 198 13,413 443Other assets 32,604 1,122 41,274 1,363

Total assets $1,705,745 $58,718 $1,607,841 $53,117

LiabilitiesCurrent liabilities $14,374 $495 $27,231 $900Long-term liabilities 208 7 370 12Liabilities reserve $305,830 10,528 235,821 7,791Other liabilities - - 2,254 74

Total liabilities 320,412 11,030 265,676 8,777Stockholders' equity

Capital stock 1,940,080 66,784 1,940,080 64,093Retained earnings 2,296 79 (75,371) (2,490)Others (557,043) (19,175) (522,544) (17,263)


Items NT$ US$ NT$ US$Operating revenues $340,863 $11,734 $437,549 $14,455Operating costs (126,536) (4,356) (206,040) (6,807)Operating gross profit 214,327 7,378 231,509 7,648Operating expenses (222,198) (7,649) (313,998) (10,373)Non-operating revenues 2,127 73 499 16 Non-operating expenses (2,510) (86) - - Loss from continuing operations before income taxes $(8,254) $(284) $(81,990) $(2,709)Net loss $(6,033) $(208) $(92,125) $(3,043)Earnings per share (in dollars)Loss from continuing operations before income taxes Note Note Note NoteNet loss Note Note Note Note

Note：Cathay Life (Vietnam) is a limited company, there is no information about earnings per share.



Cathay Life Insurance (Vietnam) Co., Ltd. Condensed Balance Sheets



2012 2011

Cathay Life Insurance (Vietnam) Co., Ltd. Condensed Statements of Income


446

Items NT$ US$Assets

Current assets $411,418 $14,163Property and equipment 3,276,008 112,771

Total assets $3,687,426 $126,934

LiabilitiesCurrent liabilities $5,377 $185

Total liabilities 5,377 185Stockholders' equity

Capital stock 3,773,774 129,906Retained earnings (57,489) (1,979)Others (34,236) (1,178)

Total stockholders' equity 3,682,049 126,749Total liabilities and stockholders' equity $3,687,426 $126,934

Items NT$ US$Operating expenses $(32,848) $(1,131)Non-operating revenues 128 4Non-operating expenses (24,769) (852)Loss from continuing operations before income taxes $(57,489) $(1,979)Net loss $(57,489) $(1,979)Earnings per share (in dollars)Loss from continuing operations before income taxes Note 1 Note 1Net loss Note 1 Note 1

Note 1：Lin Yuan is a limited company, there is no information about earnings per share.Note 2：Lin Yuan was incorporated on August 15, 2012, thus there was no information about last period.

2012


Lin Yuan (Shanghai) Real Estate Co., Ltd. Condensed Balance SheetsAs of December 31, 2012


December 31, 2012

Lin Yuan (Shanghai) Real Estate Co., Ltd. Condensed Statements of Income

For the year ended December 31, 2012 (Expressed in thousands of dollars, except earnings per share)

447


Cash and cash equivalents $476,055 $16,388 $503,093 $16,620Receivables 141,039 4,855 122,736 4,055Investments 705,753 24,294 780,613 25,789Reinsurance reserve assets 308,462 10,618 223,672 7,389Property and equipment 44,380 1,528 38,511 1,272Intangible assets 6,998 241 393 13Other assets 403,365 13,885 415,795 13,736

Total assets $2,086,052 $71,809 $2,084,813 $68,874

LiabilitiesPayables $119,446 $4,112 $153,395 $5,068Liabilities reserve 1,292,161 44,480 611,915 20,215Other liabilities 73,865 2,543 61,363 2,027

Total liabilities 1,485,472 51,135 826,673 27,310Stockholders' equityCapital stock 1,745,942 60,101 1,745,942 57,679Retained earnings (1,265,328) (43,557) (616,335) (20,361)Others 119,966 4,130 128,533 4,246

Total stockholders' equity 600,580 20,674 1,258,140 41,564Total liabilities and stockholders' equity $2,086,052 $71,809 $2,084,813 $68,874

Items NT$ US$ NT$ US$Operating revenues $855,733 $29,457 $462,727 $15,287Operating costs (920,189) (31,676) (303,756) (10,035)Operating gross profit (64,456) (2,219) 158,971 $5,252Operating expenses (576,451) (19,843) (392,293) (12,960)Non-operating revenues 759 26 11,152 368 Non-operating expenses (8,845) (305) (31) (1)Loss from continuing operations before income taxes $(648,993) $(22,341) $(222,201) $(7,341)Net loss $(648,993) $(22,341) $(222,201) $(7,341)Earnings per share (in dollars)Loss from continuing operations before income taxes Note Note Note NoteNet loss Note Note Note Note

Note：Cathay Century (China) is a limited company, there is no information about earnings per share.




Cathay Insurance Co., Ltd (China) Condensed Balance Sheets



2012 2011

Cathay Insurance Co., Ltd (China) Condensed Statements of Income


448


Current assets $374,368 $12,887 $370,136 $12,228Property and equipment 38,271 1,318 50,494 1,668Intangible assets 7,434 256 11,638 384Other assets 15,670 539 14,891 492

Total assets $435,743 $15,000 $447,159 $14,772

LiabilitiesCurrent liabilities $20,245 $697 $16,068 $531Liabilities reserve 37,360 1,286 8,375 277Other liabilities 356 12 2,193 72

Total liabilities 57,961 1,995 26,636 880Stockholders' equityCapital stock 517,502 17,814 517,502 $17,096Retained earnings (34,576) (1,190) (4,907) (162)Others (105,144) (3,619) (92,072) (3,042)

Total stockholders' equity 377,782 13,005 420,523 13,892Total liabilities and stockholders' equity $435,743 $15,000 $447,159 $14,772

Items NT$ US$ NT$ US$Operating revenues $114,117 $3,928 $96,363 $3,183Operating costs (67,608) (2,327) (28,526) (942)Operating gross profit 46,509 1,601 67,837 2,241 Operating expenses (77,983) (2,684) (68,306) (2,256)Non-operating revenues 68 2 2 - Non-operating expenses (61) (2) - - Loss from continuing operations before income taxes $(31,467) $(1,083) $(467) $(15)Net loss $(29,669) $(1,021) $(2,637) $(87)Earnings per share (in dollars)Loss from continuing operations before income taxes Note Note Note NoteNet loss Note Note Note Note

Note：Cathay Century (Vietnam) is a limited company, there is no information about earnings per share.


Cathay Insurance (Vietnam) Co., Ltd. Condensed Balance Sheets


2012 2011

Cathay Insurance (Vietnam) Co., Ltd. Condensed Statements of Income



449

Cathay United Bank Co., Ltd. Condensed Balance Sheets



Cash and cash equivalents $33,496,114 $1,153,050 $29,191,573 $964,373Due from the Central Bank and call loans to banks 98,844,688 3,402,571 88,690,435 2,929,978Financial assets at fair value through profit or loss 67,796,967 2,333,803 21,799,721 720,176Securities purchased under agreements to resell - - 2,308,788 76,273Receivables-net 50,824,045 1,749,537 45,699,636 1,509,734Discounts and loans-net 986,516,412 33,959,257 984,101,470 32,510,785

Available-for-sale financial assets -net 57,681,737 1,985,602 47,322,633 1,563,351Held-to-maturity financial assets-net 20,542,870 707,156 18,176,146 600,467Investments under equity method-net 5,038,973 173,459 4,696,999 155,170Other financial assets-net 4,525,421 155,780 4,840,800 159,921Investments in debt securities with no active market-net 424,043,663 14,597,028 425,140,266 14,044,938Property and equipment-net 23,867,620 821,605 24,698,951 815,955Intangible assets-net 7,164,320 246,620 7,277,073 240,405Other assets-net 6,216,017 213,976 4,395,256 145,202

Total assets $1,786,558,847 $61,499,444 $1,708,339,747 $56,436,728

LiabilitiesDue to the Central Bank and call loans from banks $51,891,103 $1,786,269 $53,815,904 $1,777,863Funds borrowed from the Central Bank and other banks 1,456,800 50,148 1,514,500 50,033Financial liabilities at fair value through profit or loss 4,967,738 171,006 4,835,152 159,734Securities sold under agreements to repurchase 20,369,249 701,179 13,546,462 447,521Payables 20,388,329 701,836 20,520,083 677,902Deposits and remittances 1,520,735,366 52,348,894 1,469,487,309 48,545,996Financial debentures payable 42,518,631 1,463,636 33,115,240 1,093,995Other financial liabilities 17,426,191 599,869 10,611,073 350,548Other liabilities 3,760,062 129,434 2,715,921 89,723

Total liabilities 1,683,513,469 57,952,271 1,610,161,644 53,193,315Shareholders' equity

Capital stock 52,277,026 1,799,554 52,277,026 1,727,025 Capital surplus 15,213,292 523,693 15,213,292 502,586 Retained earnings 35,699,786 1,228,908 30,452,058 1,006,014 Others (144,726) (4,982) 235,727 7,788

Total shareholders' equity 103,045,378 3,547,173 98,178,103 3,243,413Total liabilities and shareholders' equity $1,786,558,847 $61,499,444 $1,708,339,747 $56,436,728

Cathay United Bank Co., Ltd. Condensed Statements of Income


Items NT$ US$ NT$ US$Net interest income $20,280,818 $698,135 $17,657,886 $583,346Non-interest income 13,466,341 463,557 11,883,959 392,599 Net operating income 33,747,159 1,161,692 29,541,845 975,945 Bad debt expense (2,050,285) (70,578) (525,659) (17,366)Operating expenses (17,159,749) (590,697) (16,322,447) (539,229) Income from continuing operations before income taxes $14,537,125 $500,417 $12,693,739 $419,350Net income $13,068,125 $449,849 $11,139,739 $368,013Earnings per share (in dollars)Income from continuing operations before income taxes $2.78 $0.10 $2.43 $0.08Net income $2.50 $0.09 $2.13 $0.07


2012 2011

December 31, 2011December 31, 2012



450

Indovina Bank Limited Condensed Balance Sheets



Cash and cash equivalents $5,644,843 $194,314 $13,655,584 $451,126Due from the Central Bank and call loans to banks 7,870,743 270,938 836,687 27,641Financial assets at fair value through profit or loss 140,920 4,851 114,388 3,779Available-for-sale financial assets-net 768,191 26,444 516,801 17,073Held-to-maturity financial assets-net 1,126,103 38,764 1,170,705 38,675Receivables-net 369,539 12,721 353,155 11,667Discounts and loans-net 15,808,657 544,188 17,824,324 588,845Property and equipment-net 281,343 9,685 226,958 7,498Intangible assets-net 351,370 12,095 370,965 12,255Other assets-net 11,731 404 12,745 421

Total assets $32,373,440 $1,114,404 $35,082,312 $1,158,980

LiabilitiesDue to the Central Bank and call loans from banks $8,116,896 $279,411 $10,606,785 $350,406Payables 1,397,400 48,103 726,723 24,008Deposits and remittances 17,219,063 592,739 14,541,878 480,406Bonds payable - - 2,908,584 96,088Other liabilities 4,180 144 - -

Total liabilities 26,737,539 920,397 28,783,970 950,908Shareholders' equity

Capital stock 5,269,493 181,394 5,269,493 174,083Retained earnings 932,848 32,112 1,354,678 44,753Others (566,440) (19,499) (325,829) (10,764)

Total shareholders' equity 5,635,901 194,007 6,298,342 208,072Total liabilities and shareholders' equity $32,373,440 $1,114,404 $35,082,312 $1,158,980

Indovina Bank Limited Condensed Statements of Income


Items NT$ US$ NT$ US$Net interest income $868,053 $29,881 $1,060,975 $35,050Non-interest income 153,918 5,299 195,841 6,470 Net operating income 1,021,971 35,180 1,256,816 41,520 Bad debt expense (74,186) (2,554) (97,178) (3,210)Operating expenses (415,428) (14,300) (392,603) (12,970) Income from continuing operations before income taxes $532,357 $18,326 $767,035 $25,340Net income $399,465 $13,751 $577,364 $19,074Earnings per share (in dollars)Income from continuing operations before income taxes Note Note Note NoteNet income Note Note Note Note

Note：Indovina Bank is a subsidiary of foreign bank, there is no information about earnings per share.

2012 2011





451

Singapore Banking Corporation Limited Condensed Balance Sheets



Cash and cash equivalents $678,535 $23,357 $467,712 $15,451Due from the Central Bank and call loans to banks 519,496 17,883 220,331 7,279Receivables-net 52,289 1,800 11,569 382Discounts and loans-net 858,125 29,540 1,024,613 33,849Other financial assets-net 728 25 757 25Property and equipment-net 136,718 4,706 138,087 4,562Intangible assets-net 5,971 206 3,869 128Other assets-net 27,248 938 35,853 1,185

Total assets $2,279,110 $78,455 $1,902,791 $62,861

LiabilitiesDue to the Central Bank and call loans from banks $143 $5 $- $- Payables 38,488 1,325 25,340 837Deposits and remittances 1,819,637 62,638 1,445,364 47,749Bonds payable 5,183 178 6,688 221

Total liabilities 1,863,451 64,146 1,477,392 48,807Shareholders' equity

Capital stock 495,312 17,050 514,930 17,011Retained earnings (79,552) (2,738) (87,063) (2,876)Others (101) (3) (2,468) (81)

Total shareholders' equity 415,659 14,309 425,399 14,054Total liabilities and shareholders' equity $2,279,110 $78,455 $1,902,791 $62,861

Singapore Banking Corporation Limited Condensed Statements of Income


Items NT$ US$ NT$ US$Net interest income $80,435 $2,769 $75,384 $2,490Non-interest income 55,508 $1,911 34,311 1,134 Net operating income 135,943 4,680 109,695 3,624 Bad debt expense (8,782) (302) (10,453) (345)Operating expenses (118,951) (4,095) (83,930) (2,773) Income from continuing operations before income taxes $8,210 $283 $15,312 $506Net income $6,568 $226 $12,192 $403Earnings per share (in dollars)Income from continuing operations before income taxes Note1 Note1 Note1 Note1Net income Note1 Note1 Note1 Note1

Note1：SBC Bank is a subsidiary of foreign bank, there is no information about earnings per share.Note2：SBC Bank was incorporated into the consolidated financial statement of a subsidiary on December 13,2012.

2012 2011





452

Cathay Securities Corporation Condensed Balance Sheets



Current assets $12,768,982 $439,552 $8,594,497 $283,928Funds and investments 781,258 26,893 773,832 25,564Property and equipment 121,973 4,199 46,341 1,531Intangible assets 14,748 508 11,097 367Other assets 455,866 15,692 371,565 12,275

Total assets $14,142,827 $486,844 $9,797,332 $323,665

Current liabilities $9,501,555 $327,076 $5,528,993 $182,656Long-term liabilities 316 11 1,797 59Other liabilities 12,072 415 11,370 376

9,513,943 327,502 5,542,160 183,091Stockholders' equity

Capital stock 3,866,660 133,104 3,700,000 122,233Capital surplus 291,766 10,043 258,434 8,538Retained earnings 460,989 15,869 298,045 9,846

9,469 326 (1,307) (43)Total stockholders' equity 4,628,884 159,342 4,255,172 140,574Total liabilities and stockholders' equity $14,142,827 $486,844 $9,797,332 $323,665

Cathay Securities Corporation Condensed Statements of Income

(Expressed in thousands of dollars, except for earnings per share)

Items NT$ US$ NT$ US$Revenue $1,471,045 $50,638 $1,478,490 $48,844Expenses (1,320,006) (45,439) (1,540,311) (50,886)Income (loss) from continuing operations before income taxes $151,039 $5,199 $(61,821) $(2,042)Net income (loss) $162,944 $5,609 $(73,259) $(2,420)Earnings per share (in dollars)Income (loss) from continuing operations before income taxes $0.40 $0.01 $(0.17) $(0.01)Net income (loss) $0.43 $0.01 $(0.20) $(0.01)




Liabilities

Total liabilities

Others


2012 2011

453


Current assets $663,149 $22,828 $474,206 $15,666Funds and investments 1,509,456 51,961 1,711,493 56,541Property and equipment 306 10 513 17Other assets 19,561 673 16,076 531

Total assets $2,192,472 $75,472 $2,202,288 $72,755

LiabilitiesCurrent liabilities $4,874 $168 $4,507 $149Long-term liabilities 478 16 - -

Total liabilities 5,352 184 4,507 149Stockholders' equity

Capital stock 2,000,000 68,847 1,895,224 62,611Retained earnings 205,204 7,064 186,150 6,150Others (18,084) (623) 116,407 3,845


Items NT$ US$ NT$ US$Operating revenues $230,796 $7,945 $309,104 $10,211Operating costs (49,777) (1,714) (126,320) (4,173)Operating gross profit 181,019 6,231 182,784 6,038Operating expenses (6,986) (240) (6,513) (215)Non-operating revenues 404 14 284 9Non-operating expenses (4) - (10) - Income from continuing operations before income taxes $174,433 $6,005 $176,545 $5,832Net income $178,460 $6,143 $172,249 $5,690Earnings per share (in dollars)Income from continuing operations before income taxes $0.87 $0.03 $0.88 $0.03Net income $0.89 $0.03 $0.86 $0.03



Cathay Venture Inc. Condensed Balance Sheets


2012 2011

Cathay Venture Inc. Condensed Statements of Income


454

Cathay Securities Investment Trust Co., Ltd. Condensed Balance Sheets



Current assets $1,689,011 $58,142 $1,673,311 $55,280Funds and investments 328,032 11,292 318,147 10,510Property and equipment 19,952 687 24,048 794Intangible assets 32,311 1,112 10,376 343Other assets 246,125 8,472 189,821 6,271

Total assets $2,315,431 $79,705 $2,215,703 $73,198

LiabilitiesCurrent liabilities $183,517 $6,317 $155,243 $5,129Other liabilities 100,078 3,445 12,641 417


Capital stock 1,500,000 51,635 1,500,000 49,554Capital surplus 13,908 479 13,908 459Retained earnings 515,939 17,760 541,458 17,888Others 1,989 69 (7,547) (249)


Cathay Securities Investment Trust Co., Ltd. Condensed Statements of Income

(Expressed in thousands of dollars, except for earnings per share)

Items NT$ US$ NT$ US$Revenue $1,134,696 $39,060 $1,110,568 $36,689Expenses (801,081) (27,576) (703,951) (23,256)Income from continuing operations before income taxes $333,615 $11,484 $406,617 $13,433Net income $277,157 $9,541 $337,500 $11,150Earnings per share (in dollars)Income from continuing operations before income taxes $2.22 $0.08 $4.03 $0.13Net income $1.85 $0.06 $3.35 $0.11

2012 2011





455


Current assets $882,194 $30,368 $1,029,491 $34,010Property and equipment 133,632 4,600 109,342 3,612Intangible assets 7,083 244 2,200 73Other assets 44,631 1,536 17,944 593

Total assets $1,067,540 $36,748 $1,158,977 $38,288

LiabilitiesCurrent liabilities $494,648 $17,027 $576,232 $19,036Other liabilities 62 2 62 2


Capital stock 499,000 17,177 499,000 16,485Retained earnings 73,858 2,543 83,683 2,765Others (28) (1) - -

Total stockholders' equity 572,830 19,719 582,683 19,250Total liabilities and stockholders' equity $1,067,540 $36,748 $1,158,977 $38,288

Items NT$ US$ NT$ US$Operating revenues $1,850,038 $63,685 $1,873,449 $61,891Operating costs (1,644,159) (56,598) (1,642,872) (54,274)Operating gross profit 205,879 7,087 230,577 7,617Operating expenses (155,003) (5,336) (152,923) (5,052)Non-operating revenues 7,688 265 6,979 231Non-operating expenses (6) - (110) (4)Income from continuing operations before income taxes $58,558 $2,016 $84,523 $2,792Net income $50,467 $1,737 $66,991 $2,213Earnings per share (in dollars)Income from continuing operations before income taxes $1.17 $0.04 $1.69 $0.06Net income $1.01 $0.03 $1.34 $0.04



Symphox Information Co., Ltd. Condensed Balance Sheets


2012 2011

Symphox Information Co., Ltd. Condensed Statements of Income


456


Current assets $2,516,674 $86,633 $2,460,133 $81,273Funds and investments 30,500 1,050 30,500 1,008Property and equipment 59,025 2,032 53,485 1,767Intangible assets 1,311 45 1,602 53Other assets 405,255 13,950 393,455 12,998

Total assets $3,012,765 $103,710 $2,939,175 $97,099

LiabilitiesCurrent liabilities $2,230,012 $76,765 $2,163,850 $71,485Other liabilities 1,439 49 1,439 48


Capital stock 650,000 22,376 650,000 21,473Retained earnings 131,314 4,520 123,886 4,093

Total stockholders' equity 781,314 26,896 773,886 25,566Total liabilities and stockholders' equity $3,012,765 $103,710 $2,939,175 $97,099

Items NT$ US$ NT$ US$Operating revenues $147,259 $5,069 $146,937 $4,854Operating expenses (112,356) (3,868) (108,251) (3,576)Income from continuing operations before income taxes $34,903 $1,201 $38,686 $1,278Net income $30,632 $1,054 $33,149 $1,095Earnings per share (in dollars)Income from continuing operations before income taxes $0.54 $0.02 $0.60 $0.02Net income $0.47 $0.02 $0.51 $0.02



Cathay Futures Co., Ltd. Condensed Balance Sheets


2012 2011

Cathay Futures Co., Ltd. Condensed Statements of Income


457

Appendix 2


Consolidated Affiliation Business Reports

2012

458

Organizational Chart of Affiliated Companies

(Note) A subsidiary other than those referred to in Article 4 of the Financial Holding Company Act.

39.88% 60.12% 50% 50%



Consulting Co., Ltd. (Shareholding ratio: 100%)

Cathay Life Insurance Co., Ltd. (China)

(Note) (Shareholding ratio: 50%)

Symphox Information Co.,

Ltd.

Cathay Insurance (Bermuda)


Cathay Venture Inc.



Ltd. (Shareholding ratio: 100%)

Cathay Futures Co., Ltd.

(Shareholding ratio: 99.99%)

Indovina Bank Limited (Note)


Seaward Card Co., Ltd.


Cathay Life Insurance

(Vietnam) Co., Ltd (Shareholding ratio: 100%)

Cathay Insurance Co., Ltd.

(China)







Cathay Insurance (Vietnam)



Trust Co., Ltd. (Shareholding ratio: 100%)

Lin Yuan (Shanghai) Real

Estate Co., Ltd. (Shareholding ratio: 100%)

Singapore Banking

Corporation Limited (Shareholding ratio: 70%)

459

Basic Information of Affiliated Companies

Unit: NTD thousand Name Date of

Incorporation Address Paid-in

Capital Scope of business/ production

Cathay Financial Holding Co., Ltd. 2001.12.31 No.296, Sec. 4, Ren’ai Rd., Da’an Dist., Taipei City $108,653,851 Financial holding services

Cathay Life Insurance Co., Ltd. 1962.10.23 No.296, Sec. 4, Ren’ai Rd., Da’an Dist., Taipei City 53,065,274 Life insurance services

Cathay United Bank Co., Ltd. 1975.1.4 No. 7. Songren Road, Xinyi District, Taipei City 52,277,026 Commercial banking services

Cathay Century Insurance Co., Ltd. 1993.7.19 No.296, Sec. 4, Ren’ai Rd., Da’an Dist., Taipei City 2,522,950 Property insurance services

Cathay Securities Corporation 2004.5.12 No.296, Sec. 4, Ren’ai Rd., Da’an Dist., Taipei City 3,866,660 Securities services

Cathay Venture Inc. 2003.4.10 No.296, Sec. 4, Ren’ai Rd., Da’an Dist., Taipei City 2,000,000 Venture capital services


2000.2.11 No.296, Sec. 4, Ren’ai Rd., Da’an Dist., Taipei City 1,500,000 Securities investment trust services

Cathay Life Insurance Co., Ltd. (China) 2004.12.29 11F, Jin Mao Tower, 88 Century Boulevard, Pudong, Shanghai

5,134,155 Life insurance services

Cathay Securities Investment Consulting Co., Ltd.

2002.11.25 9F, No.296, Sec. 4, Ren’ai Rd., Da’an Dist., Taipei City

70,000 Securities investment consulting services

Cathay Insurance (Bermuda) Co., Ltd.

2000.1.24 Canon’s Court, 22 Victoria Street, Hamilton HM 12, Bermuda

11,744 Re-insurance services

460

Name Date of Incorporation

Address Paid-in Capital

Scope of business/ production

Symphox Information Co., Ltd. 1999.12.12 12F, No.296, Sec. 4, Ren’ai Rd., Da’an Dist., Taipei City

499,000 Type II telecommunications Business, data processing services, and digital information supply services

Lin Yuan (Shanghai) Real Estate Co., Ltd.

2012.8.15 Suite 306, Cafeteria-2, 3F, Huatu Tower, No. 828-838, Zhangyang Road, Shanghai City

3,773,774 Owned office property leasing

Indovina Bank Limited 1990.11.21 46-48-50 Pham Hong Thai Street, District 1, Hochiminh City, Vietnam

5,269,493 Banking services

Singapore Banking Corporation Limited 1993.7.5 No.68, Samdech Pan St.(214), Sangkat Boeung Raing, Khan Daun Penh, Phnom Penh

495,312 Commercial banking services

Seaward Card Co., Ltd.

1999.4.9 2F, No. 7. Songren Road, Xinyi District, Taipei City 30,000 Credit card application services and human resource dispatch

Cathay Futures Co., Ltd. 1993.12.29 19F, No. 333, Dunhua S. Road, Sec. 2, Daan District, Taipei City

650,000 Futures services

Cathay Life Insurance (Vietnam) Co., Ltd

2007.11.21 46-48-50 Pham Hong Thai Street, District 1, Ho Chi Minh City, Vietnam

1,940,080 Life insurance services

Cathay Life Insurance Co., Ltd. (China) 2008.8.26 30F, No. 989, Chang Le Road, Xuhui District, Shanghai City

1,745,942 Property insurance services

Cathay Insurance (Vietnam) Co., Ltd. 2010.11.2 46-48-50 Pham Hong Thai Street, District 1, Hochiminh City, Vietnam

517,502 Property insurance services

461

Information on shareholders presumed to have controlling and dependent relationship Unit: NTD thousand; Share; %

Cause Name

(Note 1)

Shares held (Note 2) Date of

establishment Address Paid-in capital Main business services

Quantity Shareholding

ratio

N/A

Note 1: If a corporate shareholder, please fill in the corporation’s name. If a natural person shareholder, please fill in the natural person’s name. If a natural person shareholder, please specify the cause, name and shares held only.

Note 2: Shares held are the shares held by the shareholder in the holding company.

462

Information about directors, supervisors and presidents of affiliated companies

Unit: Share; %

Name Job Title Name or Representative Shares Held

Quantity Shareholding ratio Cathay Financial Holding Co., Ltd.

Chairman Hong-Tu Tsai (representative of Pai Hsing Investment Co., Ltd.) 88,462,784 0.81%

Vice Chairman Gregory K. H. Wang (representative of Pai Hsing Investment Co., Ltd.)

88,462,784 0.81%

Director Cheng-Ta Tsai (representative of Wan Ta Investment Co., Ltd.) 119,642,082 1.10%

Director Cheng-Chiu Tsai (representative of Chen-Sheng Industrial Co., Ltd.) 24,256,606 0.22%

Director Tiao-Kuei Huang (representative of Wan Ta Investment Co., Ltd.) 119,642,082 1.10%

Director Tsu-Pei Chen (representative of Wan Ta Investment Co., Ltd.) 119,642,082 1.10%

Director Fa-Te Chang (representative of Pai Hsing Investment Co., Ltd.) 88,462,784 0.81%

Director Chang-Ken Lee (representative of Cathay Life Employees' Welfare Committee)

30,852,893 0.28%

Director Ming-Ho Hsiung (representative of Wan Ta Investment Co., Ltd.) 119,642,082 1.10%

Director David P. Sun (representative of Pai Hsing Investment Co., Ltd.) 88,462,784 0.81%

Independent Director Min-Houng Hong - -

Independent Director Tsing-Yuan Hwang - -

Independent Director Andrew Ming-Jian Kuo - -

President Chang-Ken Lee - -

463

Information about directors, supervisors and presidents of affiliated companies

Unit: Share; %

Name

Job Title Name or Representative Shares Held

Quantity Shareholding ratio


Chairman Hong-Tu Tsai (representative of Cathay Financial Holding Co., Ltd.) 5,306,527,395 100%

Vice Chairman Tiao-Kuei Huang (representative of Cathay Financial Holding Co., Ltd.)

5,306,527,395 100%

Director Cheng-Ta Tsai (representative of Cathay Financial Holding Co., Ltd.) 5,306,527,395 100%

Director Cheng-Chiu Tsai (representative of Cathay Financial Holding Co., Ltd.)

5,306,527,395 100%

Director Ming-Ho Hsiung (representative of Cathay Financial Holding Co., Ltd.)

5,306,527,395 100%

Director Tzung-Han Tsai (representative of Cathay Financial Holding Co., Ltd.)

5,306,527,395 100%

Director Chung-Yan Tsai (representative of Cathay Financial Holding Co., Ltd.)

5,306,527,395 100%

Director Chung-Yuen Chu (representative of Cathay Financial Holding Co., Ltd.)

5,306,527,395 100%

Director Wei-Ming Lu (representative of Cathay Financial Holding Co., Ltd.) 5,306,527,395 100%

Director Han-Chang Tsai (representative of Cathay Financial Holding Co., Ltd.)

5,306,527,395 100%

Independent Director Min-Houng Hong (representative of Cathay Financial Holding Co., Ltd.)

5,306,527,395 100%

Independent Director Tsing-Yuan Hwang (representative of Cathay Financial Holding Co., Ltd.)

5,306,527,395 100%

464

Name


Quantity Shareholding ratio

Independent Director Andrew Ming-Jian Kuo (representative of Cathay Financial Holding Co., Ltd.)

5,306,527,395 100%

Managing Supervisor Wan-Teh Tsai (representative of Cathay Financial Holding Co., Ltd.) 5,306,527,395 100%

Supervisor Kai-Mo Chen (representative of Cathay Financial Holding Co., Ltd.) 5,306,527,395 100%

Supervisor Chih-Ming Lin (representative of Cathay Financial Holding Co., Ltd.) 5,306,527,395 100%

President Ming-Ho Hsiung - -

465

Information about directors, supervisors and presidents of affiliated companies Unit: Share; %

Name


Quantity Shareholding ratio Cathay United Bank Co., Ltd. Chairman Gregory K. H. Wang (representative of Cathay

Financial Holding Co., Ltd.) 5,227,702,586 100%

Vice Chairman Tsu-Pei Chen (representative of Cathay Financial Holding Co., Ltd.)

5,227,702,586 100%

Managing Director Chang-Ken Lee (representative of Cathay Financial Holding Co., Ltd.)

5,227,702,586 100%

Managing Director Alan Lee (representative of Cathay Financial Holding Co., Ltd.)

5,227,702,586 100%

Director William C.W. Huang (representative of Cathay Financial Holding Co., Ltd.)

5,227,702,586 100%

Director Irene Lee (representative of Cathay Financial Holding Co., Ltd.)

5,227,702,586 100%

Director Chan Boon Teong (representative of Cathay Financial Holding Co., Ltd.)

5,227,702,586 100%

Director Grace Chen (representative of Cathay Financial Holding Co., Ltd.)

5,227,702,586 100%

Director Chuan-Chuan Hsieh (representative of Cathay Financial Holding Co., Ltd.)

5,227,702,586 100%

Director Benjamin Ching (representative of Cathay Financial Holding Co., Ltd.)

5,227,702,586 100%


5,227,702,586 100%

Independent Managing Director

Tsing-Yuan Hwang (representative of Cathay Financial Holding Co., Ltd.)

5,227,702,586 100%

466

Name


Quantity Shareholding ratio Independent Director Min-Houng Hong (representative of Cathay

Financial Holding Co., Ltd.) 5,227,702,586 100%


5,227,702,586 100%

Managing Supervisor Peggy Wang (representative of Cathay Financial Holding Co., Ltd.)

5,227,702,586 100%

Supervisor Hsien-Chao Chen (representative of Cathay Financial Holding Co., Ltd.)

5,227,702,586 100%

Supervisor Kuo-Hsim Yeh (representative of Cathay Financial Holding Co., Ltd.)

5,227,702,586 100%

President Chang-Ken Lee - -

467



Quantity Shareholding ratio Cathay Century Insurance Co., Ltd.

Chairman Cheng-Chiu Tsai (representative of Cathay Financial Holding Co., Ltd.)

252,295,000 100%

Director K.C. Tsai (representative of Cathay Financial Holding Co., Ltd.)

252,295,000 100%

Director Chu-Yao Lu (representative of Cathay Financial Holding Co., Ltd.)

252,295,000 100%

Director Fa-Te Chang (representative of Cathay Financial Holding Co., Ltd.)

252,295,000 100%

Director J. H. Hsu (representative of Cathay Financial Holding Co., Ltd.)

252,295,000 100%

Director Min-Yang Wu (representative of Cathay Financial Holding Co., Ltd.)

252,295,000 100%

Director T. James Yang (representative of Cathay Financial Holding Co., Ltd.)

252,295,000 100%

Independent Director Min-Houng Hong (representative of Cathay Financial Holding Co., Ltd.)

252,295,000 100%


252,295,000 100%

Managing Supervisor R.C. Sun (representative of Cathay Financial Holding Co., Ltd.)

252,295,000 100%

Supervisor

Ching-Tien Su (representative of Cathay Financial Holding Co., Ltd.)

252,295,000 100%

President J. H. Hsu

- -

468


Quantity Shareholding ratio Cathay Securities Corporation

Chairman Shih-Ting Chu (representative of Cathay Financial Holding Co., Ltd.)

386,666,000 100%

Director Li-Ling Tso (representative of Cathay Financial Holding Co., Ltd.)

386,666,000 100%

Director Tsu-Jien Cheng (representative of Cathay Financial Holding Co., Ltd.)

386,666,000 100%

Director Jinn-Shing Leou (representative of Cathay Financial Holding Co., Ltd.)

386,666,000 100%

Director Hung-Huei Liao (representative of Cathay Financial Holding Co., Ltd.)

386,666,000 100%

Independent Director Tsing-Yuan Hwang (representative of Cathay Financial Holding Co., Ltd.)

386,666,000 100%


386,666,000 100%

Supervisor Wan-Chie Ma (representative of Cathay Financial Holding Co., Ltd.)

386,666,000 100%

Supervisor Su-Jhu Li (representative of Cathay Financial Holding Co., Ltd.)

386,666,000 100%

President Li-Ling Tso - -

469



Quantity Shareholding ratio Cathay Venture Inc. Chairman Jen-Ho Chang (representative of Cathay

Financial Holding Co., Ltd.) 200,000,000 100%

Director Alan Lee (representative of Cathay Financial Holding Co., Ltd.)

200,000,000 100%


200,000,000 100%

Director Chuan-Yen Hu (representative of Cathay Financial Holding Co., Ltd.)

200,000,000 100%

Director Shan-Chi Liu (representative of Cathay Financial Holding Co., Ltd.)

200,000,000 100%

Supervisor Shun-Yu Chuang (representative of Cathay Financial Holding Co., Ltd.)

200,000,000 100%

President Chuan-Yen Hu - -


Chairman Yin-Feng Wu (representative of Cathay Financial Holding Co., Ltd.)

150,000,000 100%

Director Jeff Chang (representative of Cathay Financial Holding Co., Ltd.)

150,000,000 100%

Director Andy Chang (representative of Cathay Financial Holding Co., Ltd.)

150,000,000 100%

Director Peter Chiang (representative of Cathay Financial Holding Co., Ltd.)

150,000,000 100%

Supervisor Rui-Hong Hong (representative of Cathay Financial Holding Co., Ltd.)

150,000,000 100%

President Jeff Chang - -

470


Quantity Shareholding ratio Cathay Life Insurance Co., Ltd. (China)

Chairman Chao Hsu (representative of China National Aviation Holding Company)

- 50%

Director Yen Zou (representative of China National Aviation Holding Company)

- 50%

Director Shun-Hsi Shao (representative of China National Aviation Holding Company)

- 50%

Director Fu-Chien Lin (representative of China National Aviation Holding Company)

- 50%

Director Hui-Bin Wu (representative of Cathay Life Insurance)

- 50%

Director Tiao-Kuei Huang (representative of Cathay Life Insurance)

- 50%

Director Fa-Te Chang (representative of Cathay Life Insurance)

- 50%

Director Han-Chang Tsai (representative of Cathay Life Insurance)

- 50%

471



Quantity Shareholding ratio Cathay Securities Investment Consulting Co., Ltd.

Chairman Shan-Chi Liu (representative of Cathay Life Insurance)

7,000,000 100%

Director Shun-Yu Chuang (representative of Cathay Life Insurance)

7,000,000 100%

Director Shu-Ying Wu (representative of Cathay Life Insurance)

7,000,000 100%

Director Chuan-Yen Hu (representative of Cathay Life Insurance)

7,000,000 100%

Director Chung-Yi Teng (representative of Cathay Life Insurance)

7,000,000 100%

Supervisor Wei-Chi Lee (representative of Cathay Life Insurance)

7,000,000 100%

President Shao-Chou Huang

- -

Cathay Insurance (Bermuda) Co., Ltd.

Chairman Fong-Kun Lee (representative of Cathay Life Insurance)

370,000 100%

Vice Chairman Hsien-Chung Lin (representative of Cathay Life Insurance)

370,000 100%

Director Kong-Shih Lee (representative of Cathay Life Insurance)

370,000 100%

President Fong-Kun Lee

- -

472


Quantity Shareholding ratio Symphox Information Co., Ltd.

Chairman Peggy Wang (representative of Cathay Venture Inc.)

19,900,000 39.88%

Director Shu-Ying Wu (representative of Cathay Venture Inc.)

19,900,000 39.88%

Director Chuan-Yen Hu (representative of Cathay Venture Inc.)

19,900,000 39.88%

Director Yu-Chen Lin (representative of Cathay Venture Inc.)

19,900,000 39.88%

Director Hsi-Lin Ho (representative of Cathay Venture Inc.)

19,900,000 39.88%

Supervisor Li-Hua Lo (representative of Cathay Venture Inc.)

19,900,000 39.88%

President Yu-Chen Lin - -

473



Quantity Shareholding ratio Indovina Bank Limited Chairman Tzu-Li Dong (representative of Cathay United

Bank Co., Ltd.) - 50%

Vice Chairman Pham Huy Hung (representative of Vietinbank) - 50%

Director Tsu-Pei Chen (representative of Cathay United Bank Co., Ltd.)

- 50%

Director Yi-Fan Chan (representative of Cathay United Bank Co., Ltd.)

- 50%

Director Le Van Phu (representative of Vietinbank) - 50%

Director Nguyen Van Du (representative of Vietinbank) - 50%

President Yi-Fan Chan - -

Seaward Card Co., Ltd. Chairman Chun-Wei Yang (representative of Cathay United Bank Co., Ltd.)

3,000,000 100%

Director Tsu-Pei Chen (representative of Cathay United Bank Co., Ltd.)

3,000,000 100%

Director Alan Lee (representative of Cathay United Bank Co., Ltd.)

3,000,000 100%

Director Su-Jhu Li (representative of Cathay United Bank Co., Ltd.)

3,000,000 100%

Director Yeh-Chiang Wang (representative of Cathay United Bank Co., Ltd.)

3,000,000 100%

Supervisor Yao-Chun Lai (representative of Cathay United Bank Co., Ltd.)

3,000,000 100%

Supervisor Hsiun-Hao Wu (representative of Cathay United Bank Co., Ltd.)

3,000,000 100%

474


Quantity Shareholding ratio Cathay Futures Co., Ltd. Chairman Peggy Wang (representative of Cathay

Securities) 64,993,907 99.99%

Director Shih-Ting Chu (representative of Cathay Securities)

64,993,907 99.99%

Director Hsiun-Ling Chang (representative of Cathay Securities)

64,993,907 99.99%

Director Tsu-Jien Cheng (representative of Cathay Securities)

64,993,907 99.99%

Supervisor Yu-Mei Lee (representative of Cathay Securities) 64,993,907 99.99%

President Chia-Ching Lin - -

Cathay Life Insurance (Vietnam) Co., Ltd

Chairman Chi-Chiang Liao (representative of Cathay Life Insurance)

- 100%

Vice Chairman Han-Chang Tsai (representative of Cathay Life Insurance)

- 100%

Director Xun-Yu Lee (representative of Cathay Life Insurance)

- 100%

Supervisor Chun-Hong Wu (representative of Cathay Life Insurance)

- 100%

President Xun-Yu Lee - -

475



Quantity Shareholding ratio Cathay Insurance Co., Ltd. (China)

Chairman Fa-Te Chang (representative of Cathay Insurance Co., Ltd.)

- 50%

Director Min-Yang Wu (representative of Cathay Insurance Co., Ltd.)

- 50%

Director Jin-Chou Chen (representative of Cathay Insurance Co., Ltd.)

- 50%

Director Tiao-Kuei Huang (representative of Cathay Life Insurance)

- 50%

Director Chien-Yuan Wang (representative of Cathay Life Insurance)

- 50%

Supervisor Wen-Te Du (co-representative of Cathay Life Insurance and Cathay Insurance Co., Ltd.)

- 50%

President Jin-Chou Chen - -

Cathay Insurance (Vietnam) Co., Ltd.

Chairman Pin-Yao Lin (representative of Cathay Insurance Co., Ltd.)

- 100%

Director Wen-Te Du (representative of Cathay Insurance Co., Ltd.)

- 100%

Director Yu-Tang Lin (representative of Cathay Insurance Co., Ltd.)

- 100%

President Pin-Yao Lin

- -

476


Quantity Shareholding ratio Lin Yuan (Shanghai) Real Estate Co., Ltd.

Chairman Hong-Ming Lee (representative of Cathay Life Insurance)

- 100%

Director Wen-Kai Kuo (representative of Cathay Life Insurance)

- 100%

Director Yi-Huei Chien (representative of Cathay Life Insurance)

- 100%

Supervisor Sheng-Hsiung Tsai (representative of Cathay Life Insurance)

- 100%

Singapore Banking Corporation Limited

Chairman Kun Swee Tiong Andy - 20%

Director Kun Swee Yi Diaz - 10%

Director Alan Lee (representative of Cathay United Bank Co., Ltd.)

- 70%

Director Shu-Ying Wu (representative of Cathay United Bank Co., Ltd.)

- 70%

Director Ssu-Chuan Hong (representative of Cathay United Bank Co., Ltd.)

- 70%

Independent Director Joseph Eby Ruin (representative of Cathay United Bank Co., Ltd.)

- 70%

President Ssu-Chuan Hong - -

477

Business overview of affiliated companies Unit: NTD thousand

Name Capital Total assets Total liabilities Net worth Operating revenue

Operating income

/Net earnings

Income in current period

(after tax)

EPS (NT$)(after

tax) Cathay Financial Holding Co., Ltd. $108,653,851 $298,347,548 $53,514,714 $244,832,834 Note $17,338,578 $17,001,741 $1.59 Cathay Life Insurance Co., Ltd. 53,065,274 3,635,134,522 3,499,861,238 135,273,284 $683,636,392 514,860 3,279,989 0.62 Cathay United Bank Co., Ltd. 52,277,026 1,786,558,847 1,683,513,469 103,045,378 Note 33,747,159 13,068,125 2.50 Cathay Century Insurance Co., Ltd. 2,522,950 27,271,352 22,687,183 4,584,169 11,538,906 889,032 690,635 2.74 Cathay Securities Corporation 3,866,660 14,142,827 9,513,943 4,628,884 1,416,588 128,953 162,944 0.43 Cathay Venture Inc. 2,000,000 2,192,472 5,352 2,187,120 230,796 174,033 178,460 0.89 Cathay Securities Investment Trust Co., Ltd.

1,500,000 2,315,431 283,595 2,031,836 1,111,684 310,782 277,157 1.85

Cathay Life Insurance Co., Ltd. (China) 5,134,155 11,480,633 9,911,581 1,569,052 2,740,637 (247,156) (287,084) - Cathay Securities Investment Consulting Co., Ltd. 70,000 208,565 37,906 170,659 196,961 76,795 62,811 8.97

Cathay Insurance (Bermuda) Co., Ltd. 11,744 130,352 28,590 101,762 305,216 (20,473) (20,473) (55.38) Symphox Information Co., Ltd. 499,000 1,067,540 494,710 572,830 1,850,038 50,876 50,467 1.01 Lin Yuan (Shanghai) Real Estate Co., Ltd. 3,773,774 3,687,426 5,377 3,682,049 - (32,848) (57,489) -

Indovina Bank Limited 5,269,493 32,373,440 26,737,539 5,635,901 Note 1,021,971 399,465 - Singapore Banking Corporation Limited 495,312 2,279,110 1,863,451 415,659 Note 135,943 6,568 - Seaward Card Co., Ltd. 30,000 62,585 22,833 39,752 342,584 2,756 2,327 0.78 Cathay Futures Co., Ltd. 650,000 3,012,765 2,231,451 781,314 103,197 (6,415) 30,632 0.47 Cathay Life Insurance (Vietnam) Co., Ltd 1,940,080 1,705,745 320,412 1,385,333 340,863 (7,871) (6,033) -

Cathay Insurance Co., Ltd. (China) 1,745,942 2,086,052 1,485,472 600,580 855,733 (640,907) (648,993) - Cathay Insurance (Vietnam) Co., Ltd. 517,502 435,743 57,961 377,782 114,117 (31,474) (29,669) - Note: Due to amendments to the Regulations Governing the Preparation of Financial Reports by Financial Holding Companies and Regulations Governing the Preparation of Financial Reports by Public Banks, these companies' financial statements did not disclose such account titles as operating revenue and operating income, except net earnings.

478

Business activities of affiliated companies 1. Business lines covered by the business activities of affiliated companies:

(1) Cathay Financial Holding Co., Ltd.: financial holding services (2) Cathay Life Insurance Co., Ltd.: life insurance services (3) Cathay United Bank Co., Ltd.: commercial banking services (4) Cathay Century Insurance Co., Ltd.: property insurance services (5) Cathay Securities Corporation: securities services (6) Cathay Venture Inc.: venture capital services (7) Cathay Securities Investment Trust Co., Ltd.: securities investment trust services (8) Cathay Life Insurance Co., Ltd. (China): life insurance services (9) Cathay Securities Investment Consulting Co., Ltd.: securities investment consulting services (10) Cathay Insurance (Bermuda) Co., Ltd.: reinsurance services (11) Symphox Information Co., Ltd.: type II telecommunications, data processing services, and

digital information supply services (12) Lin Yuan (Shanghai) Real Estate Co., Ltd.: owned office property leasing services (13) Indovina Bank Limited: banking services (14) Singapore Banking Corporation Limited: commercial banking services (15) Seaward Card Co., Ltd.: Credit card application services and human resource dispatch (16) Cathay Futures Co., Ltd.: futures services (17) Cathay Life Insurance (Vietnam) Co., Ltd.: life insurance services (18) Cathay Insurance Co., Ltd. (China): property insurance services (19) Cathay Insurance (Vietnam) Co., Ltd.: property insurance services 2. Cooperation between affiliated companies to carry out financial exchange: (1) Joint business promotion

In order to enhance competitiveness and upgrade operating synergy, the Company has set up a comprehensive functional operating platform by integrating such diversified financial organizations banks, insurance companies and securities firms, dedicated to developing cross-selling strategies and providing customers with one-stop service through its business locations and trained sale representatives throughout the country.

(2) Interoperability of information

In order to provide customers with comprehensive and diversified financial wealth management products and services, the Company has defined the relevant regulations and guidelines, including “Regulations Governing Cross-Selling Among Subsidiaries of Cathay Financial Holding Co., Ltd.”, “Non-Disclosure Statement of Cathay Financial Holding Co., Ltd. and Its Subsidiaries”, “Non-Disclosure Agreement for Interoperability of Customers’ Information Among Subsidiaries of

479

Cathay Financial Holding Co., Ltd.” and “Guidelines Governing Data Storage Management Operation of Cathay Financial Holding Co., Ltd.”, in accordance with the “Financial Holding Company Act”, “Personal Information Protection Act ”, “Regulations Governing Cross-Selling by Financial Holding Company Subsidiaries”, “Self-Regulatory Rules of Financial Holding Companies and Subsidiaries Thereof” and the relevant decrees and orders defined by the Financial Supervisory Commission (FSC), in order to interoperate customer information in a safe and confidential manner, and provide customers with comprehensive wealth management services.

(3) Joint operating equipment or premises

In order to boost the omnibus financial wealth management services of Cathay Financial Holding and satisfy the objective of providing customers with “one-stop” financial services, the Company has, in accordance with the “Regulations Governing Cross-Selling Among Subsidiaries of Financial Holding Companies”, sought approval from the competent authority on September 13, 2010, as of which date all business locations of Cathay United Bank Co., Ltd. (163 branches) were eligible to carry out the cross-selling of insurance, and any business locations of the Bank other than the mini branches (3 mini branches) were eligible to carry out the cross-selling of securities. Meanwhile, the Company also sought approval from the competent authority on September 2, 2011, to engage in the cross-selling of banking and property insurance at all administrative centers and service centers of Cathay Life Insurance (a total of 176 offices).The Company will be continuously dedicated to applying for developing cross-selling businesses with the competent authority, insofar as it is permitted by laws.

(4) Amortization and amount of revenue, cost, expense and income

For the time being, the Company amortizes the revenue, cost, expense and income from the cross-selling among its subsidiaries into the subsidiaries directly, subject to the business nature.

480

Appendix 3


Affiliation report

2012

481

Declaration

It is hereby declared that the Affiliation Report for 2012 (from January 1, 2012 to December

31, 2012) was prepared pursuant to the Criteria Governing Preparation of Affiliation Reports,

Consolidated Business Reports and Consolidated Financial Statements of Affiliated Enterprises,

and there are no significant inconsistencies between the information given above and the

supplementary information disclosed in the financial statements for the above period.

Company Name: Cathay Financial Holding Co., Ltd.

Chairman: Hong-Tu Tsai

Dated: March 15, 2013

482

Letter

To: Cathay Financial Holding Co., Ltd. Subject: We hereby provide our review opinion on whether the declaration issued by your

management with respect to the affiliation report 2012 is reasonable in all respects. Descriptions: Your Affiliation Report for 2012 has been prepared by your management, and the

Declaration was issued to state that said report was prepared pursuant to the Criteria

Governing Preparation of Affiliation Reports, Consolidated Business Reports and

Consolidated Financial Statements of Affiliated Enterprises, and there were no significant inconsistencies between the information given above and the supplementary information disclosed in the financial statements 2012.

Based on our review, the Declaration issued by your management toward the Affiliation Report

2012 is considered reasonable in material respects.

Ernst & Young James Huang, CPA Andrew Fuh, CPA

Dated: March 15, 2013

483

Relationship between the controlling company and its subordinates Units: shares; %

Controlling company Reasons for control Shareholding and pledges by the controlling company Directors and supervisors or managers

representing the controlling company

Shares held Shareholding % Shares pledged Job Title Name


Substantial control Hold 88,462,784 shares of Cathay Financial

Holding Co., Ltd.

0.81% 13,450,000 shares Chairman

Vice Chairman

Director

Director

Hong-Tu Tsai

Gregory K. H. Wang

Fa-Te Chang

David P. Sun

Note: Where the controlling company was once a subordinate to any company, the company’s information shall be included, and the same shall apply where the company was once

another company’s subordinate, and so on.

484

Purchase (sale) transaction Unit: NTD thousand; %

Transaction with controlling company

Transaction terms and conditions with

controlling company General transaction

terms and conditions Special terms and conditions of trade

and reasons

Notes/accounts receivable (payable) NPL

Remark Purchase/sale Amount Percentage to total

purchase (sales)

Gross profit

Unit Price (NT$)

Credit term Unit Price (NT$)

Credit term Balance Percentage to notes/accounts

receivable (payable)

Amount Mode of Treatment

Allowance for bad

debt

None

Note 1: If receipt in advance (prepayment) is available, please specify the cause, contract terms and conditions, amount and the difference from the general transaction mode in the “Remark” section.

Note 2: If none of the stated titles are applicable, please adjust. Business of a special nature which none of the titles is applicable may not be specified.

485

Property Transaction Unit: NTD Thousand

Type of transaction (acquisition or disposal)

Descriptions of property

Transaction date

Transaction price

Delivery or

payment terms

Payment

Income from

disposal (Note

1)

Cause for controlling company acting as trading

counterparty

Prior acquisition information (Note 2) Way to decide

transaction (Note 3)

Reference basis for

price determination

Purpose of acquisition or disposal

Other agreements Owner

Relationship with the company

Date Amount

None

Note 1: Not required, in the acquisition of property. Note 2: 1) In the acquisition of property, please state the original information about acquisition by the controlling company. In the disposal of property, please state the original

information about acquisition of the subordinate. 2) The “Relationship with the Company” section shall specify the relationship between the owner and the subordinate and the controlling company. 3) If the counterparty in the prior acquisition is a related party, please also state the related party’s prior acquisition information in the same section.

Note 3: Please specify the transaction decision maker’s rank.

486

Capital financing

Unit: NTD Thousand; % Type of

transaction (lending or borrowing)

Maximum balance

Balance - ending

Interest rate range

Total interest in

current period

Due date Cause

Acquisition (supply) of collateral Way to decide transaction

(Note 1)

Allowance for bad debt (Note 2) Descriptions Amount

None

Note 1: Please specify the transaction decision maker’s rank. Note 2: Not required, in the borrowing of funds.

487

Asset leasing Unit: NTD Thousand

Type of transaction (Lease or

rent)

Subject Premises Term of

lease

Nature of lease

(Note 1)

Basis to decide rent

Collection (Payment)

Comparison with the

general rent

Total rent in current

period

Collection/payment in current period

Other agreements

(Note 2) Descriptions Location

None

Note 1: Please specify whether a capital lease or business lease in nature. Note 2: Please also specify the creation of any other rights, e.g. superficies, pledge and easement, if any.

488

Endorsement/Guarantee Unit: NTD Thousand; %

Maximum balance

Balance – ending

Cause

Secured by collateral Terms or date of relieve from

guarantee liability or

collection of collateral

Amount recognized in the financial statement or loss amount

Violations of the relevant

SOPs Amount

Percentage of net worth

shown in the financial

statements

Descriptions Quantity Value

None

489

Appendix 4


Statement on the Internal Control System of 2012

490


Statement on Internal Control System

We hereby declare on behalf of Cathay Financial Holding Co., Ltd. that, in

accordance with the Implementation Rules of Internal Audit and Internal Control

System of Financial Holding Companies and Banking Industries from January 1,

2012 to December 31, 2012, the Company had an internal control system, performed

risk management, and was audited by an impartial and independent internal auditing

department, which regularly reported to the board of directors and the audit

committee. After careful assessment, it was found that all units were able to

effectively implement internal control and legal compliance tasks during the year.

This statement shall be included among the chief contents of the Company's annual

report and prospectus, and shall be made public. Any illegalities such as

misrepresentations or concealments in the published contents mentioned above will be

considered a breach of Articles 20, 32, 171, and 174 of the Securities and Exchange

Act and incur legal responsibilities.

To: Financial Supervisory Commission, R.O.C.

Stated by:

Chairman: Hong-Tu, Tsai

President: Chang-Ken Lee

General Auditor: Ching-Ming Pan

Head Office CCO: Deh-Yen Weng

Date: April 30, 2013

491

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