china taiping insurance (hk) company limited china taiping

China Taiping Insurance (H

K) C

ompany Lim

ited二零一二年年報

Annual Report 2012 Annual Report 2012二零一二年年報

China Taiping Insurance (HK) Company LimitedChina Taiping Insurance (HK) Company Limited

Corporate Information 2

Chairman’s Statement 3

Report of the Directors 4

Independent Auditor’s Report 7

Consolidated Income Statement 8

Consolidated Statement of Comprehensive Income 9

Consolidated Statement of Financial Position 10

Statement of Financial Position 11

Consolidated Statement of Changes in Equity 12

Consolidated Statement of Cash Flows 13

Notes to the Consolidated Financial Statements 15

Five Year Financial Summary 81

Properties Held for Investment 83

Contents

Corporate Information

China Taiping Insurance (HK) Company Limited Annual Report 20122

Board of DirectorsChairmanMENG Zhao Yi

Honorary Vice ChairmanSIU Yick Wong

Vice ChairmanCHENG Kwok Ping

DirectorsSONG Shu Guang

WU Chi Hung

LIU Shi Hong

Independent Non-executive DirectorsSUNG Wen Ming

HONG Kam Cheung

General ManagementChief Executive OfficerLIU Shi Hong

General ManagerCHAN Pui Leung

Deputy General ManagersLI Xiao Ming

SZE Nan Fan

YIU Kwok

Chief Financial OfficerHO Kwok Ching, FCCA, FCPA

Assistant General ManagerDONG Sheng Xu

Company SecretaryLIM Bik Har, ACS, ACIS

Registered Offi ce19/F., China Taiping Tower

8 Sunning Road

Causeway Bay

Hong Kong

Telephone : (852) 2815 1551

Fax : (852) 2541 6567

Email : [email protected]

Website : www.hk.cntaiping.com

AuditorDeloitte Touche Tohmatsu

Certifi ed Public Accountants

SolicitorsDeacons

Lau, Chan & Ko

Tsang, Chan & Wong

Principal BankersCitibank, N.A.

Nanyang Commercial Bank, Limited

China Merchants Bank (Hong Kong Branch)

Industrial and Commercial Bank of China (Asia) Limited

Chairman’s Statement

China Taiping Insurance (HK) Company Limited Annual Report 2012 3

OVERVIEW

Under sluggish global economic conditions and modest

economic growth in Hong Kong, the business of the China

Taiping Insurance (HK) Company Limited expanded rapidly

in the year 2012 while maintaining quality and efficiency.

The overall business conditions remained satisfactory.

The Company’s total gross premium income increased by

54.1% to HK$1.47 billion; investment income and other

income increased by 28% to HK$541 million. In the year

2012, the profit attributable to shareholders increased by

53.7% to HK$532 million as compared with the previous year.

In the year 2012, the Company focused on restructuring

distribution channels, raising the ability to expand our

markets, maintaining the focus on developing business by

class, improving the current insurance product portfolio, and

establishing a performance appraisal culture which is based

on value. In the year 2012, the Company was ranked sixth1 in the Hong Kong general insurance market in terms

of premium income and achieved the objectives to “strive for prominence and outperform the market”.

On 21 November 2012, A.M. Best Company assigned a fi nancial strength rating of “A” and an issuer credit rating

of “a” to the Company. On 22 January 2013, Standard and Poor’s Ratings Services maintained the Company’s

long term insurer fi nancial rating and counterparty credit rating of “A-”. The ratings refl ected the Company’s

excellent capitalization, well-established position in the Hong Kong insurance market, stable returns, and further

improvement of the standard of management.

OUTLOOK FOR 2013

In the year 2013, it is expected that the European fi nancial market environment will improve, the American

economy will recover modestly, the Chinese economy will remain stable, and the Hong Kong economy will

generally improve. The Company will continue to adhere to the development strategy of the Group by following

the main direction of “accelerating development, creating new ways of development”, and the core objectives of

“controlling risks, safeguarding profi tability”, in order to further strengthen the Company’s position and infl uence

in the Hong Kong general insurance market and further improve the Company’s professional and management

standards.

In respect of investment, the Company will continue to be prudent in the pursuit of business growth. The

Company will further improve its assets structure and investment portfolio, further strengthen the communication

and cooperation with asset management companies, and continue to increase investment returns in order to

create greater value for shareholders.

On behalf of the Board of Directors of the China Taiping Insurance (HK) Company Limited, I would like to take

this opportunity to thank our customers for their long-term trust and support. I would also like to thank the

management team and all of our employees for their diligence and selfl ess contributions in the past year.

Meng Zhao Yi

Chairman

Hong Kong, 25 March 2013

1 Please refer to the provisional statistics on Hong Kong general insurance business (January to December 2012) published by Offi ce of the Commissioner of Insurance

for details.

Report of the Directors


The directors of China Taiping Insurance (HK) Company Limited (the “Company”) have pleasure in submitting their

annual report together with the audited consolidated fi nancial statements of the Company and its subsidiaries

(collectively referred to as the “Group”) for the year ended 31 December 2012.

PRINCIPAL ACTIVITIES

The principal activities of the Company are the underwriting of all classes of general insurance and reinsurance

business. The principal activities and other particulars of the subsidiaries are set out in note 15 to the

consolidated fi nancial statements.

RESULTS AND APPROPRIATIONS

The results of the Group for the year are set out in the consolidated income statements on page 8.

The directors recommend the payment of a fi nal dividend of $65,588,675 representing $2.75 per ordinary share,

to the shareholders.

The directors propose the retention of the remaining profi t for the year of $466,133,257.

RESERVES

Movements in reserves of the Group and the Company during the year are set out in consolidated statement of

changes in equity on pages 12 and note 27 to the consolidated fi nancial statements respectively.

PROPERTY AND EQUIPMENT

Movements in property and equipment of the Group and the Company during the year are set out in note 13 to

the consolidated fi nancial statements.

INVESTMENT PROPERTIES

Movements in investment properties of the Group and the Company during the year are set out in note 14 to the


SHARE CAPITAL

Details of share capital of the Company are set out in note 27 to the consolidated fi nancial statements. There was

no movement in the Company’s share capital during the year.



DIRECTORS

The directors of the Company during the year and up to the date of this report are as follows:

Directors:

Meng Zhao Yi

Song Shu Guang

Siu Yick Wong

Feng Xiao Zeng (resigned on 26 February 2013)

Cheng Kwok Ping

Liu Shi Hong

Wu Chi Hung

Lin Fan (resigned on 21 May 2012)

Independent non-executive directors:

Sung Wen Ming

Hong Kam Cheung

In accordance with article 82 of the Company’s Articles of Association, all existing directors retire and, being

eligible, offer themselves for re-election at the forthcoming Annual General Meeting.

DIRECTORS’ INTERESTS IN CONTRACTS OF SIGNIFICANCE

No contracts of signifi cance in relation to the Group’s business to which the Company or any of its holding

companies, subsidiaries or fellow subsidiaries was a party and in which a director of the Company had a material

interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year.

ARRANGEMENTS TO PURCHASE SHARES OR DEBENTURES

Share Option Scheme

Under the share option scheme of the intermediate holding company, China Taiping Insurance Holdings

Company Limited (“CTIH”), share options were granted to certain directors of the Company. Details of the

movement of the options granted are set out below:

No. of options

outstanding at Lapsed No. of options

the beginning during outstanding at the

of the year the year end of the year

Feng Xiao Zeng 2,350,000 – 2,350,000

Lin Fan 3,200,000 (3,200,000) –

Peng Wei 400,000 – 400,000

Song Shu Guang 800,000 – 800,000

6,750,000 (3,200,000) 3,550,000



Each option gives the holder the right to subscribe for one share in CTIH. These equity compensation benefi ts

were granted to the above-mentioned directors for their employment either in CTIH or fellow subsidiaries. As

these options were not granted for services rendered to the Group, the related share-based payments are not

refl ected in these fi nancial statements.

Other than as disclosed above, at no time during the year was the Company or, any of its holding companies,

subsidiaries or fellow subsidiaries a party to any arrangement to enable the directors of the Company to acquire

benefi ts by means of the acquisition of shares in, or debentures of, the Company or any other body corporate.

AUDITOR

A resolution will be submitted to the annual general meeting to re-appoint Messrs. Deloitte Touche Tohmatsu as

auditor of the Company.

By Order of the Board

Liu Shi Hong

Director

Hong Kong, 25 March 2013

Independent Auditor’s Report


To the members of

China Taiping Insurance (HK) Company Limited

中國太平保險（香港）有限公司(Incorporated in Hong Kong with limited liability)

We have audited the consolidated fi nancial statements of China Taiping Insurance (HK) Company Limited (the

“Company”) and its subsidiaries (collectively referred to as the “Group”) set out on pages 8 to 80, which comprise

the consolidated and Company’s statements of fi nancial position as at 31 December 2012, and the consolidated

income statement, consolidated statement of comprehensive income, consolidated statement of changes

in equity and consolidated statement of cash fl ows for the year then ended, and a summary of signifi cant

accounting policies and other explanatory information.

Directors’ Responsibility for the Consolidated Financial Statements

The directors of the Company are responsible for the preparation of consolidated fi nancial statements that give

a true and fair view in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong

Institute of Certifi ed Public Accountants and the Hong Kong Companies Ordinance applicable to insurance

companies, and for such internal control as the directors determine is necessary to enable the preparation of

consolidated fi nancial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated fi nancial statements based on our audit and

to report our opinion solely to you, as a body, in accordance with section 141 of the Hong Kong Companies

Ordinance, and for no other purpose. We do not assume responsibility towards or accept liability to any other

person for the contents of this report. We conducted our audit in accordance with Hong Kong Standards on

Auditing and with reference to Practice Note 810.2 “The Duties of Auditors under The Insurance Companies

Ordinance” issued by the Hong Kong Institute of Certifi ed Public Accountants. Those standards require that we

comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether

the consolidated fi nancial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the

consolidated fi nancial statements. The procedures selected depend on the auditor’s judgment, including the

assessment of the risks of material misstatement of the consolidated fi nancial statements, whether due to

fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s

preparation of the consolidated fi nancial statements that give a true and fair view in order to design audit

procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the

effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting

policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the

overall presentation of the consolidated fi nancial statements.

We believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our audit

opinion.

Opinion

In our opinion, the consolidated fi nancial statements give a true and fair view of the state of affairs of the

Company and of the Group as at 31 December 2012 and of the Group’s profi t and cash fl ows for the year

then ended in accordance with Hong Kong Financial Reporting Standards and have been properly prepared in

accordance with the Hong Kong Companies Ordinance applicable to insurance companies.

Deloitte Touche Tohmatsu

Certifi ed Public Accountants

Hong Kong

25 March 2013

Consolidated Income StatementFor the year ended 31 December 2012

(Expressed in Hong Kong dollars)


Notes 2012 2011

$ $

Turnover 5 1,467,569,326 952,238,827

Gross written premiums 1,467,569,326 952,238,827

Change in gross provision for unearned premiums 21 (225,405,285) (43,292,769)

Gross earned premiums 1,242,164,041 908,946,058

Reinsurers’ share of earned premiums 6 (366,198,232) (310,640,748)

Net earned premiums 875,965,809 598,305,310

Net commission expenses 6 (330,428,590) (129,928,313)

Gross claims paid (518,703,851) (421,828,488)

Change in gross provision for outstanding claims 21 (201,742,588) 84,933,045

Gross claims incurred (720,446,439) (336,895,443)

Reinsurers’ share of claims incurred 6 301,676,106 24,118,030

Net claims incurred (418,770,333) (312,777,413)

Change in net provision for unexpired risks 6 18,549,000 696,900

Other operating expenses (124,637,705) (149,673,206)

Underwriting profi t 20,678,181 6,623,278

Investment income 7 189,969,706 172,266,598

Net realised and unrealised gains on investments 8 359,320,024 183,979,198

Other net gains 22,906,084 89,841,284

Administrative and other expenses (31,485,150) (23,987,450)

Profi t before tax 9 561,388,845 428,722,908

Income tax expense 10 (29,666,913) (82,828,696)

Profi t for the year 531,721,932 345,894,212

The notes on pages 15 to 80 form part of these consolidated fi nancial statements.

Consolidated Statement of Comprehensive IncomeFor the year ended 31 December 2012



2012 2011

$ $

Profi t for the year 531,721,932 345,894,212

Other comprehensive income/(expense):

Exchange difference arising on translation of PRC operations

Exchange differences arising during the year 162,148 210,138

Available-for-sale securities

Net fair value changes arising during the year 175,568,436 (143,368,844)

Reclassifi cation adjustments to profi t or loss upon disposal 8,256,755 2,424,556

Reclassifi cation adjustment to profi t or loss on impairment 4,832,117 19,261,858

188,657,308 (121,682,430)

Revaluation gain arising from reclassifi cation of own-use

properties to investment properties 6,536,570 –

Other comprehensive income/(expense) for the year 195,356,026 (121,472,292)

Total comprehensive income for the year 727,077,958 224,421,920


Consolidated Statement of Financial PositionAs at 31 December 2012



Notes 2012 2011

$ $

Assets

Property and equipment 13 357,343,313 359,014,255

Investment properties 14 1,739,920,000 1,389,853,791

Intangible assets 16 3,101,205 3,383,133

Deferred tax assets 17 22,142 –

Investments in securities 18 1,973,369,213 1,738,728,395

Insurance receivables 19 304,548,418 214,539,738

Other receivables 20 72,895,973 55,883,828

Reinsurers’ share of insurance funds 21 792,187,790 639,700,274

Amounts due from related parties 22 747,933,408 550,951,410

Pledged deposit 23 20,000,000 –

Deposits with banks with original maturity

more than three months 18,579,050 50,904,226

Cash and cash equivalents 24 898,010,644 726,146,341

6,927,911,156 5,729,105,391

Liabilities

Insurance funds 21 2,409,249,191 1,979,338,318

Insurance payables 25 352,020,540 287,251,355

Other payables 26 100,937,736 88,320,745

Amounts due to related parties 22 3,251,464 7,237,749

Current tax liabilities 147,354,537 121,468,537

Deferred tax liabilities 17 35,103,000 31,381,000

3,047,916,468 2,514,997,704

Net assets 3,879,994,688 3,214,107,687

Capital and reserves

Share capital 27 2,586,000,000 2,586,000,000

Reserves 1,293,994,688 628,107,687

Total equity 3,879,994,688 3,214,107,687


Approved and authorised for issue by the Board of Directors on 25 March 2013 and are signed on its behalf by:

Cheng Kwok Ping Liu Sui Hong

Director Director

Statement of Financial PositionAs at 31 December 2012



Notes 2012 2011

$ $

Assets

Property and equipment 13 286,038,021 287,018,531

Investment properties 14 904,830,000 712,650,000

Interests in subsidiaries 15 333,062,053 335,393,618

Intangible assets 16 3,101,205 3,383,133

Investments in securities 18 1,973,369,213 1,738,728,395

Insurance receivables 19 304,548,418 214,539,738

Other receivables 20 63,194,793 46,848,258

Reinsurers’ share of insurance funds 21 792,187,790 639,700,274

Amounts due from related parties 22 747,913,940 550,951,409

Pledged deposit 23 20,000,000 –


more than three months 80,000 49,670,726

Cash and cash equivalents 24 860,206,188 697,445,981

6,288,531,621 5,276,330,063

Liabilities

Insurance funds 21 2,409,249,191 1,979,338,318

Insurance payables 25 352,020,540 287,251,355

Other payables 26 71,642,033 60,774,421

Amounts due to related parties 22 3,251,466 7,237,749

Current tax liabilities 25,886,000 –

Deferred tax liabilities 17 22,596,000 23,147,000

2,884,645,230 2,357,748,843

Net assets 3,403,886,391 2,918,581,220


Share capital 27 2,586,000,000 2,586,000,000

Reserves 27 817,886,391 332,581,220

Total equity 3,403,886,391 2,918,581,220


Approved and authorised for issue by the Board of Directors on 25 March 2013 and are signed on its behalf by:

Cheng Kwok Ping Liu Sui Hong

Director Director

Consolidated Statement of Changes in EquityFor the year ended 31 December 2012



Properties

Share Capital Exchange Fair value revaluation Retained Total

Notes capital reserve reserve reserve reserve profi ts equity

$ $ $ $ $ $ $

At 1 January 2011 2,586,000,000 15,086,005 (8,969) 59,550,918 29,797,363 1,371,345,020 4,061,770,337

Profi t for the year – – – – – 345,894,212 345,894,212

Other comprehensive income/(expense) for the year

– Exchange difference arising during

the year on translation of PRC operations – – 210,138 – – – 210,138

– Available-for-sale securities

Net fair value changes arising during the year – – – (143,368,844) – – (143,368,844)

Reclassifi cation adjustments to profi t or loss

upon disposal – – – 2,424,556 – – 2,424,556

Reclassifi cation adjustment to profi t or loss

on impairment – – – 19,261,858 – – 19,261,858

Total comprehensive income/(expense) for the year – – 210,138 (121,682,430) – 345,894,212 224,421,920

Dividends recognised as distributions 12 – – – – – (1,072,084,570) (1,072,084,570)

At 31 December 2011 2,586,000,000 15,086,005 201,169 (62,131,512) 29,797,363 645,154,662 3,214,107,687

Properties

Share Capital Exchange Fair value revaluation Retained Total

capital reserve reserve reserve reserve profi ts equity

$ $ $ $ $ $ $

At 1 January 2012 2,586,000,000 15,086,005 201,169 (62,131,512) 29,797,363 645,154,662 3,214,107,687

Profi t for the year – – – – – 531,721,932 531,721,932

Other comprehensive income for the year

– Exchange difference arising during

the year on translation of PRC operations – – 162,148 – – – 162,148


Net fair value changes arising during the year – – – 175,568,436 – – 175,568,436

Reclassifi cation adjustments to profi t or loss

upon disposal – – – 8,256,755 – – 8,256,755

Reclassifi cation adjustment to profi t or loss

on impairment – – – 4,832,117 – – 4,832,117

– Revaluation gain arising from reclassifi cation

of own-use properties to investment properties 13 – – – – 6,536,570 – 6,536,570

Total comprehensive income for the year – – 162,148 188,657,308 6,536,570 531,721,932 727,077,958

Dividends recognised as distributions 12 – – – – – (61,190,957) (61,190,957)

At 31 December 2012 2,586,000,000 15,086,005 363,317 126,525,796 36,333,933 1,115,685,637 3,879,994,688


Consolidated Statement of Cash FlowsFor the year ended 31 December 2012



2012 2011

$ $

Operating activities

Profi t before tax 561,388,845 428,722,908

Adjustments for:

Interest income (113,149,549) (103,696,702)

Dividend income from investments in securities (9,835,820) (9,423,519)

Depreciation and amortisation 11,069,683 9,677,797

Net foreign exchange loss/(gain) 3,109,621 (47,687,763)

Fair value gain on investment properties (331,876,314) (161,218,483)

Net (gain)/loss on disposal of property and equipment (239) 120,287

Impairment loss on available-for-sale securities 4,836,543 19,288,537

Reversal of impairment loss on leasehold land (14,337,879) (33,581,141)

Net gain on disposal of available-for-sale securities (29,209,036) (34,530,374)

Net gain on other investments (3,071,217) (7,518,878)

Reversal of net impairment loss on insurance receivables (1,544,867) (762,841)

Bad debts on insurance receivables and other receivables 184,552 269

Operating cash fl ows before movements in working capital 77,564,323 59,390,097

Increase in insurance receivables (86,612,341) (29,834,891)

Increase in other receivables (8,864,791) (645,798)

(Increase)/decrease in reinsurers’ share of insurance funds (152,487,516) 117,134,918

Increase in amounts due from related parties (197,009,783) (546,226,785)

Increase/(decrease) in insurance funds 429,913,401 (50,007,776)

Increase in insurance payables 63,930,699 32,583,679

Increase in other payables 7,465,152 23,462,223

Decrease in amounts due to related parties (3,986,390) (315,693)

Increase in pledged deposit (20,000,000) –

Cash generated from/(used in) operations 109,912,754 (394,460,026)

Tax paid-PRC income tax (80,980) (65,748,627)

Tax paid-HK income tax – (685)

Net cash generated from/(used in) operating activities 109,831,774 (460,209,338)

Consolidated Statement of Cash FlowsFor the year ended 31 December 2012



2012 2011

Note $ $

Investing activities

Dividend received from investments in securities 10,479,351 9,564,171

Interest received 111,132,311 106,062,307

Decrease/(increase) in deposits with banks with

original maturity more than three months 32,383,326 (49,340,060)

Proceeds on disposal of available-for-sale securities 1,475,513,574 2,765,874,764

Proceeds on disposal of property and equipment 25,000 9,793

Purchase of investment properties (349,895) (1,403,790)

Purchases of available-for-sale securities (1,502,590,442) (2,807,628,399)

Purchases of property and equipment (6,107,193) (9,980,810)

Proceeds on other investments 3,071,217 6,725,000

Purchase of intangible assets – (3,524,097)

Net cash infl ow on disposal of a subsidiary – 1,267,913,454

Net cash generated from investing activities 123,557,249 1,284,272,333

Cash used in fi nancing activity

Dividend paid (61,190,957) (1,072,084,570)

Net increase/(decrease) in cash and cash equivalents 172,198,066 (248,021,575)

Effect of foreign exchange rate changes (333,763) 33,297,312

Cash and cash equivalents at 1 January 726,146,341 940,870,604

Cash and cash equivalents at 31 December 24 898,010,644 726,146,341


Notes to the Consolidated Financial StatementsFor the year ended 31 December 2012


1. General

The Company is a private limited company incorporated in Hong Kong. Its immediate holding company is

The Ming An (Holdings) Company Limited (“MAH”) (incorporated in the Cayman Islands). Its ultimate holding

company is China Taiping Insurance Group Co. (“TPG”) (established in the People’s Republic of China (the

“PRC”)). The addresses of the registered offi ce and principal place of business of the Company are 19th

Floor, China Taiping Tower, 8 Sunning Road, Causeway Bay, Hong Kong.

The principal activities of the Company are the underwriting of all classes of general insurance and

reinsurance business. The principal activities and other particulars of the subsidiaries are set out in note 15

to the consolidated fi nancial statements.

The consolidated fi nancial statements are presented in Hong Kong dollars (“$”), which is also the functional

currency of the Company. For the purpose of the consolidated fi nancial statements, the PRC does not

include Taiwan, Hong Kong and Macau.

2. Application of new and revised Hong Kong Financial Reporting Standards (“HKFRSs”)

In the current year, the Group has applied a number of new and revised HKFRSs issued by the Hong Kong

Institute of Certifi ed Public Accountants (“HKICPA”).

Except as described below, the application of the new and revised HKFRSs in the current year has had no

material impact on the Group’s fi nancial performance and position for the current and prior years and/or on

the disclosures set out in these consolidated fi nancial statements.

Amendments to HKAS 12 Deferred tax: Recovery of underlying assets

The Group has applied for the fi rst time the amendments to HKAS 12 Deferred Tax: Recovery of Underlying

Assets in the current year. Under the amendments, investment properties that are measured using the

fair value model in accordance with HKAS 40 Investment Property are presumed to be recovered entirely

through sale for the purposes of measuring deferred taxes, unless the presumption is rebutted in certain

circumstances.

The Group measures its investment properties using the fair value model. As a result of the application

of the amendments to HKAS 12, the directors reviewed the Group’s investment property portfolios and

concluded that all the Group’s investment properties are not held under a business model whose objective

is to consume substantially all of the economic benefi ts embodied in the investment properties over time

through use, rather than through sale. Therefore, the directors have determined that the ‘sale’ presumption

set out in the amendments to HKAS 12 is not rebutted.

The application of the amendments to HKAS 12 has resulted in the Group not recognising any deferred

taxes on changes in fair value of the investment properties as the Group is not subject to any income taxes

on disposal of its investment properties. Previously, the Group recognised deferred taxes on changes in

fair value of investment properties on the basis that the entire carrying amounts of the properties were

recovered through use.

The directors consider that the impact of the adoption of the amendments to HKAS 12 is insignifi cant

for prior years and current period, and accordingly, the amendments to HKAS 12 have not been applied

retrospectively and cumulative effects have been recognised in current year’s profi t or loss.



2. Application of new and revised Hong Kong Financial Reporting Standards (“HKFRSs”) (continued)

New and revised HKFRSs issued but not yet effective

The Group has not early applied the following new and revised HKFRSs that have been issued but are not

yet effective:

Amendments to HKFRSs Annual improvements to HKFRSs 2009-2011 cycle,

except for the amendments HKAS 11

Amendments to HKFRS 7 Disclosures – Offsetting fi nancial assets and fi nancial liabilities1

Amendments to HKFRS 9 Mandatory effective date of HKFRS 9 and transition disclosures3

and HKFRS 7

Amendments to HKFRS 10, Consolidated fi nancial statements, joint arrangements and

HKFRS 11 and HKFRS 12 disclosure of interests in other entities: Transition guidance1

Amendments to HKFRS 10, Investment entities2

HKFRS 12 and HKAS 27

HKFRS 9 Financial instruments3

HKFRS 10 Consolidated fi nancial statements1

HKFRS 11 Joint arrangements1

HKFRS 12 Disclosure of interests in other entities1

HKFRS 13 Fair value measurement1

HKAS 19 (as revised in 2011) Employee benefi ts1

HKAS 27 (as revised in 2011) Separate fi nancial statements1

HKAS 28 (as revised in 2011) Investments in associates and joint ventures1

Amendments to HKAS 1 Presentation of items of other comprehensive income4

Amendments to HKAS 32 Offsetting fi nancial assets and fi nancial liabilities2

HK(IFRIC)-Int 20 Stripping costs in the production phase of a surface mine1

1 Effective for annual periods beginning on or after 1 January 2013.2 Effective for annual periods beginning on or after 1 January 2014.3 Effective for annual periods beginning on or after 1 January 2015.4 Effective for annual periods beginning on or after 1 July 2012.

Amendments to HKAS 32 Offsetting fi nancial assets and fi nancial liabilities and amendments to

HKFRS 7 Disclosures – Offsetting fi nancial assets and fi nancial liabilities

The amendments to HKAS 32 clarify existing application issues relating to the offsetting requirements.

Specifi cally, the amendments clarify the meaning of “currently has a legally enforceable right of set-off” and

“simultaneous realisation and settlement”.

The amendments to HKFRS 7 require entities to disclose information about rights of offset and related

arrangements (such as collateral posting requirements) for fi nancial instruments under an enforceable

master netting agreement or similar arrangement.

The amended offsetting disclosures are required for annual periods beginning on or after 1 January 2013

and interim periods within those annual periods. The disclosures should also be provided retrospectively

for all comparative periods. However, the amendments to HKAS 32 are not effective until annual periods

beginning on or after 1 January 2014, with retrospective application required.

The directors anticipate that the application of these amendments to HKAS 32 and HKFRS 7 would result

in more disclosures being made with regard to offsetting fi nancial assets and fi nancial liabilities in the future.




HKFRS 9 Financial instruments

HKFRS 9 issued in 2009 introduces new requirements for the classifi cation and measurement of fi nancial

assets. HKFRS 9 amended in 2010 includes the requirements for the classifi cation and measurement of

fi nancial liabilities and for derecognition.

HKFRS 9 requires all recognised financial assets that are within the scope of HKAS 39 “Financial

Instruments: Recognition and Measurement” to be subsequently measured at amortised cost or fair

value. Specifi cally, debt investments that are held within a business model whose objective is to collect

the contractual cash fl ows, and that have contractual cash fl ows that are solely payments of principal and

interest on the principal outstanding are generally measured at amortised cost at the end of subsequent

accounting periods. All other debt investments and equity investments are measured at their fair values at

the end of subsequent reporting periods. In addition, under HKFRS 9, entities may make an irrevocable

election to present subsequent changes in the fair value of an equity investment (that is not held for trading)

in other comprehensive income, with only dividend income generally recognised in profi t or loss.

HKFRS 9, as amended, is effective for annual periods beginning on or after 1 January 2015, with earlier

application permitted. The directors are considering the implications of HKFRS 9, the impact on the Group

and the timing of its adoption by the Group. The directors anticipate that the adoption of HKFRS 9 in

the future may have signifi cant impact on amounts reported in respect of the Group’s fi nancial assets.

However, it is not practicable to provide a reasonable estimate of that effect until a detailed review has been

completed.

New and revised standards on consolidation, joint arrangements, associates and disclosures

In June 2011, a package of fi ve standards on consolidation, joint arrangements, associates and disclosures

was issued, including HKFRS 10, HKFRS 11, HKFRS 12, HKAS 27 (as revised in 2011) and HKAS 28 (as

revised in 2011).

Key requirements of these fi ve standards are described below.

HKFRS 10 replaces the parts of HKAS 27 “Consolidated and separate fi nancial statements” that deal with

consolidated fi nancial statements and HK(SIC)-Int 12 “Consolidation – Special purpose entities”. HKFRS 10

includes a new defi nition of control that contains three elements: (a) power over an investee, (b) exposure,

or rights, to variable returns from its involvement with the investee, and (c) the ability to use its power over

the investee to affect the amount of the investor’s returns. Extensive guidance has been added in HKFRS

10 to deal with complex scenarios.

HKFRS 11 replaces HKAS 31 Interests in Joint Ventures and HK(SIC)-Int 13 “Jointly controlled entities

– Non-monetary contributions by venturers”. HKFRS 11 deals with how a joint arrangement of which

two or more parties have joint control should be classifi ed. Under HKFRS 11, joint arrangements are

classifi ed as joint operations or joint ventures, depending on the rights and obligations of the parties to the

arrangements. In contrast, under HKAS 31, there are three types of joint arrangements: jointly controlled

entities, jointly controlled assets and jointly controlled operations. In addition, joint ventures under HKFRS

11 are required to be accounted for using the equity method of accounting, whereas jointly controlled

entities under HKAS 31 can be accounted for using the equity method of accounting or proportionate

accounting.

HKFRS 12 is a disclosure standard and is applicable to entities that have interests in subsidiaries, joint

arrangements, associates and/or unconsolidated structured entities. In general, the disclosure requirements

in HKFRS 12 are more extensive than those in the current standards.

In July 2012, the amendments to HKFRS 10, HKFRS 11 and HKFRS 12 were issued to clarify certain

transitional guidance on the application of these fi ve HKFRSs for the fi rst time.




New and revised standards on consolidation, joint arrangements, associates and disclosures

(continued)

These fi ve standards, together with the amendments relating to the transitional guidance, are effective for

annual periods beginning on or after 1 January 2013 with earlier application permitted provided that all of

these standards are applied at the same time. The directors anticipate that the application of these fi ve

standards may not have a signifi cant impact on amounts reported in the consolidated fi nancial statements.

Amendments to HKFRS 10, HKFRS 12 and HKAS 27 Investment entities

The amendments to HKFRS 10 introduce an exception to consolidating subsidiaries for an investment

entity, except where the subsidiaries provide services that relate to the investment entity’s investment

activities. Under the amendments to HKFRS 10, an investment entity is required to measure its interests in

subsidiaries at fair value through profi t or loss.

To qualify as an investment entity, certain criteria have to be met. Specifi cally, an entity is required to:

• obtain funds from one or more investors for the purpose of providing them with professional

investment management services;

• commit to its investor(s) that its business purpose is to invest funds solely for returns from capital

appreciation, investment income, or both; and

• measure and evaluate performance of substantially all of its investments on a fair value basis.

Consequential amendments to HKFRS 12 and HKAS 27 have been made to introduce new disclosure

requirements for investment entities.

The amendments to HKFRS 10, HKFRS 12 and HKAS 27 are effective for annual periods beginning on or

after 1 January 2014, with early application permitted. The directors anticipate that the application of the

amendments will have no effect on the Group as the Company is not an investment entity.

HKFRS 13 Fair value measurement

HKFRS 13 establishes a single source of guidance for fair value measurements and disclosures about fair

value measurements. The standard defi nes fair value, establishes a framework for measuring fair value, and

requires disclosures about fair value measurements. The scope of HKFRS 13 is broad; it applies to both

fi nancial instrument items and non-fi nancial instrument items for which other HKFRSs require or permit fair

value measurements and disclosures about fair value measurements, except in specifi ed circumstances. In

general, the disclosure requirements in HKFRS 13 are more extensive than those in the current standards.

For example, quantitative and qualitative disclosures based on the three-level fair value hierarchy currently

required for fi nancial instruments only under HKFRS 7 Financial Instruments: Disclosures will be extended

by HKFRS 13 to cover all assets and liabilities within its scope.

HKFRS 13 is effective for annual periods beginning on or after 1 January 2013, with earlier application

permitted. The directors anticipate that the application of the new standard may affect certain amounts

reported in the consolidated financial statements and result in more extensive disclosures in the





Amendments to HKAS 1 Presentation of items of other comprehensive income

The amendments to HKAS 1 retain the option to present profi t or loss and other comprehensive income

in either a single statement or in two separate but consecutive statements. However, the amendments to

HKAS 1 require additional disclosures to be made in the other comprehensive income section such that

items of other comprehensive income are grouped into two categories: (a) items that will not be reclassifi ed

subsequently to profi t or loss; and (b) items that may be reclassifi ed subsequently to profi t or loss when

specifi c conditions are met. Income tax on items of other comprehensive income is required to be allocated

on the same basis.

The amendments to HKAS 1 are effective for annual periods beginning on or after 1 July 2012. The

presentation of items of other comprehensive income will be modifi ed accordingly when the amendments

are applied in the future accounting periods.

3. Signifi cant accounting policies

The consolidated fi nancial statements have been prepared on the historical cost basis except for certain

investment properties and fi nancial instruments, which are measured at fair values, as explained in the

accounting policies set out below. Historical cost is generally based on the fair value of the consideration

given in exchange for goods and services.

The consolidated fi nancial statements have been prepared in accordance with HKFRSs issued by the

HKICPA and the Hong Kong Companies Ordinance.

Basis of consolidation

The consolidated fi nancial statements incorporate the fi nancial statements of the Company and entities

controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to

govern the fi nancial and operating policies of an entity so as to obtain benefi ts from its activities.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated income

statement from the effective date of acquisition and up to the effective date of disposal, as appropriate.

Where necessary, adjustments are made to the fi nancial statements of subsidiaries to bring their accounting

policies into line with those used by other members of the Group.

All intra-group transactions, balances, income and expenses are eliminated in full on consolidation.

Changes in the Group’s ownership interests in existing subsidiaries

Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control

over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group’s

interests and the non-controlling interests are adjusted to refl ect the changes in their relative interests in the

subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and

the fair value of the consideration paid or received is recognised directly in equity and attributed to owners

of the Company.



3. Signifi cant accounting policies (continued)

Basis of consolidation (continued)

Changes in the Group’s ownership interests in existing subsidiaries (continued)

When the Group loses control of a subsidiary, the profi t or loss on disposal is calculated as the difference

between (i) the aggregate of the fair value of the consideration received and the fair value of any retained

interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the

subsidiary and any non-controlling interests.

Where assets of the subsidiary are carried at revalued amounts or fair values and the related cumulative

gain or loss has been recognised in other comprehensive income and accumulated in equity, the amounts

previously recognised in other comprehensive income and accumulated in equity are accounted for as if

the Group had directly disposed of the related assets (i.e. reclassifi ed to profi t or loss or transferred directly

to retained earnings as specifi ed by applicable HKFRSs). The fair value of any investment retained in the

former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for

subsequent accounting under HKAS 39 “Financial Instruments: Recognition and Measurement” or, when

applicable, the cost on initial recognition of an investment in an associate or a jointly controlled entity.

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts

receivable for services provided in the normal course of business, net of discounts and sales related taxes.

The accounting policy in relation to the recognition of premium income from insurance contracts is set out

under the recognition and measurement of insurance contracts below.

Commission income from reinsurance transactions is recognised on the effective commencement or

renewal dates of the related insurance contracts accepted by the reinsurers.

Rental income receivable under operating leases is recognised on a straight line basis over the lease term,

except where an alternative basis is more representative of the pattern of benefi ts to be derived from the

leased asset. Lease incentives granted are recognised in profi t or loss as an integral part of the aggregate

net lease payments receivable.

Interest income from a fi nancial asset is accrued on a time basis, by reference to the principal outstanding

and at the effective interest rate applicable, which is the rate that exactly discounts the estimated future

cash receipts through the expected life of the fi nancial asset to that asset’s net carrying amount on initial

recognition.

Dividend income from investments is recognised when the Group’s rights to receive payment have been

established.

Investments in subsidiaries

Investments in subsidiaries are included in the Company’s statement of fi nancial position at cost less any

identifi ed impairment loss. The results of subsidiaries are accounted for by the Company on the basis of

dividends received or receivable.




Property and equipment

Property and equipment, including leasehold land and buildings held for use in the production or supply of

services, or for administrative purposes are stated in the consolidated statement of fi nancial position at cost

less subsequent accumulated depreciation and accumulated impairment losses, if any.

Depreciation is recognised so as to write off the cost of items of property and equipment less their residual

values over their estimated useful lives, using the straight-line method. The estimated useful lives, residual

values and depreciation method are reviewed at the end of each reporting period, with the effect of any

changes in estimate accounted for on a prospective basis.

The property and equipment are depreciated on a straight-line basis at the following rates per annum:

Land and buildings Over the shorter of the term of the lease or 50 years

Furniture and equipment 20%

If an item of property and equipment becomes an investment property because its use has been changed

as evidenced by end of owner-occupation, any difference between the carrying amount and the fair value

of that item at the date of transfer is recognised in other comprehensive income and accumulated in

properties revaluation reserve. On the subsequent sale or retirement of the asset, the relevant revaluation

reserve will be transferred directly to retained profi ts.

An item of property and equipment is derecognised upon disposal or when no future economic benefi ts are

expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement

of an item of property and equipment determined as the difference between the sales proceeds and the

carrying amount of the asset is recognised in profi t or loss.

Impairment of non-fi nancial assets

At the end of the reporting period, the Group reviews the carrying amounts of its non-fi nancial assets to

determine whether there is any indication that those assets have suffered an impairment loss. If any such

indication exists, the recoverable amount of the asset is estimated in order to determine the extent of

the impairment loss, if any. If the recoverable amount of an asset is estimated to be less than its carrying

amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is

recognised as an expense immediately, unless the relevant asset is carried at a revalued amount under

another standard, in which case the impairment loss is treated as a revaluation decrease under that

standard.

The carrying amount of the non-fi nancial assets is reduced by the impairment loss directly for all non-

fi nancial assets. Subsequent recoveries of amounts previously written off are credited to profi t or loss.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the

revised estimate of its recoverable amount, such that the increased carrying amount does not exceed the

carrying amount that would have been determined had no impairment loss been recognised for the asset in

prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset

is carried at a revalued amount under another standard, in which case the reversal of the impairment loss is

treated as a revaluation increase under that standard.




Investment properties

Investment properties are properties held to earn rentals and/or for capital appreciation.

Investment properties are initially measured at cost, including any directly attributable expenditure.

Subsequent to initial recognition, investment properties are measured at their fair values. Gains or losses

arising from changes in the fair value of investment property are included in profi t or loss for the period in

which they arise.

If an item of investment property becomes property and equipment because its use has changed as

evidenced by commencement of owner-occupation, the property is measured at fair value at the date of

transfer. The subsequent measurement of property follows the accounting policy applicable to property and

equipment.

An investment property is derecognised upon disposal or when the investment property is permanently

withdrawn from use and no future economic benefi ts are expected from its disposal. Any gain or loss

arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and

the carrying amount of the asset) is included in profi t or loss in the period in which the item is derecognised.

Intangible asset

Intangible assets acquired separately

Intangible assets acquired separately and with fi nite useful lives are carried at cost less accumulated

amortisation and any accumulated impairment losses. Amortisation for intangible assets with fi nite useful

lives is provided on a straight-line basis over their estimated useful lives. The estimated useful life and

amortisation method are reviewed at the end of each reporting period, with the effect of any changes in

estimate being accounted for on a prospective basis.

Gains or losses arising from derecognition of an intangible asset are measured as the difference between

the net disposal proceeds and the carrying amount of the asset and are recognised in profi t or loss in the

period when the asset is derecognised.

Leasing

Leases are classifi ed as fi nance leases whenever the terms of the lease transfer substantially all the risks

and rewards of ownership to the lessee. All other leases are classifi ed as operating leases.

The Group as lessor

The accounting policies on rental income for operating leases are stated under revenue recognition. Initial

direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of

the leased asset and recognised as an expense on a straight-line basis over the lease term.

The Group as lessee

Operating lease payments are recognised as an expense on a straight-line basis over the lease term,

except where another systematic basis is more representative of the time pattern in which economic

benefi ts from the leased asset are consumed.




Leasing (continued)

Leasehold land and building

When a lease includes both land and building elements, the Group assesses the classifi cation of each

element as a fi nance or an operating lease separately based on the assessment as to whether substantially

all the risks and rewards incidental to ownership of each element have been transferred to the Group,

unless it is clear that both elements are operating leases in which case the entire lease is classifi ed as an

operating lease. Specifi cally, the minimum lease payments (including any lump-sum upfront payments) are

allocated between the land and the building elements in proportion to the relative fair values of the leasehold

interests in the land element and building element of the lease at the inception of the lease.

To the extent the allocation of the lease payments can be made reliably, interest in leasehold land that

is accounted for as an operating lease is presented as “prepaid lease payments” in the consolidated

statement of fi nancial position and is amortised over the lease term on a straight-line basis. When the lease

payments cannot be allocated reliably between the land and building elements, the entire lease is generally

classifi ed as a fi nance lease and accounted for as property and equipment.

Financial instruments

Financial assets and fi nancial liabilities are recognised in the consolidated statement of fi nancial position

when a group entity becomes a party to the contractual provisions of the instrument. Financial assets and

fi nancial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the

acquisition or issue of fi nancial assets and fi nancial liabilities are added to or deducted from the fair value of

the fi nancial assets or fi nancial liabilities, as appropriate, on initial recognition.

Financial assets

The Group’s fi nancial assets are classifi ed either into loans and receivables or available-for-sale fi nancial

assets. The classifi cation depends on the nature and purpose of the fi nancial assets and is determined

at the time of initial recognition. All regular way purchases or sales of fi nancial assets are recognised and

derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of fi nancial

assets that require delivery of assets within the time frame established by regulation or convention in the

marketplace.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a debt instrument and

of allocating interest income over the relevant period. The effective interest rate is the rate that exactly

discounts estimated future cash receipts (including all fees paid or received that form an integral part of the

effective interest rate, transaction costs and other premiums or discounts) through the expected life of the

debt instrument, or, where appropriate, a shorter period to the net carrying amount on initial recognition.

Interest income is recognised on an effective interest basis for debt instruments.

Loans and receivables

Loans and receivables are non-derivative fi nancial assets with fi xed or determinable payments that are

not quoted in an active market. Subsequent to initial recognition, loans and receivables including amounts

due from subsidiaries, other receivables, amounts due from related parties, deposits with banks, and cash

at bank and in hand are carried at amortised cost using the effective interest method, less any identifi ed

impairment losses (see accounting policy on impairment of fi nancial assets below).




Financial instruments (continued)

Financial assets (continued)

Available-for-sale fi nancial assets

Available-for-sale fi nancial assets are non-derivatives that are either designated or not classifi ed as loans

and receivables, fi nancial assets at fair value through profi t or loss or held-to-maturity investments.

Equity and debt securities held by the Group that are classifi ed as available-for-sale and are traded in

an active market are measured at fair value at the end of each reporting period. Changes in the carrying

amount of available-for-sale monetary fi nancial assets relating to interest income calculated using the

effective interest method and dividends on available-for-sale equity investments are recognised in profi t

or loss. Other changes in the carrying amount of available-for-sale fi nancial assets are recognised in other

comprehensive income and accumulated under the heading of fair value reserve. When the investment

is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the

investments revaluation reserve is reclassifi ed to profi t or loss (see the accounting policy in respect of

impairment of fi nancial assets below).

Impairment of fi nancial assets

Financial assets are assessed for indicators of impairment at the end of the reporting period. Financial

assets are considered to be impaired where there is objective evidence that, as a result of one or more

events that occurred after the initial recognition of the fi nancial asset, the estimated future cash fl ows of the

fi nancial assets have been affected.

For an available-for-sale equity investment, a signifi cant or prolonged decline in the fair value of that

investment below its cost is considered to be objective evidence of impairment.

For all other fi nancial assets, objective evidence of impairment could include:

• signifi cant fi nancial diffi culty of the issuer or counterparty; or

• breach of contract, such as default or delinquency in interest and principal payments; or

• it becoming probable that the borrower will enter bankruptcy or fi nancial re-organisation; or

• the disappearance of an active market for that fi nancial asset because of fi nancial diffi culties.

For fi nancial assets carried at amortised cost, the amount of an impairment loss recognised is the difference

between the asset’s carrying amount and the present value of the estimated future cash fl ows discounted

at the fi nancial asset’s original effective interest rate. If, in a subsequent period, the amount of impairment

loss decreases and the decrease can be related objectively to an event occurring after the impairment loss

was recognised, the previously recognised impairment loss is reversed through profi t or loss to the extent

that the carrying amount of the asset at the date the impairment is reversed does not exceed what the

amortised cost would have been had the impairment not been recognised.

The carrying amount of the fi nancial assets is reduced by the impairment loss directly for all fi nancial assets

with the exception of amounts due from subsidiaries, where the carrying amount is reduced through the

use of an allowance account. Changes in the carrying amount of the allowance account are recognised in

profi t or loss. When an amount due from a subsidiary is considered uncollectible, it is written off against the

allowance account. Subsequent recoveries of amounts previously written off are credited to profi t or loss.





Impairment of fi nancial assets (continued)

Similarly, the carrying amount of the insurance receivables is reduced through the use of an allowance

account. Changes in the carrying amount of the allowance account are recognised in profi t or loss.

When an insurance receivable is considered uncollectible, it is written off against the allowance account.

Subsequent recoveries of amounts previously written off are credited to profi t or loss.

When an available-for-sale financial asset is considered to be impaired, cumulative gains or losses

previously recognised in other comprehensive income are reclassifi ed to profi t or loss in the period in which

the impairment takes place.

Impairment losses on available-for-sale equity investments will not be reversed through profi t or loss.

Any increase in fair value subsequent to impairment loss is recognised directly in other comprehensive

income and accumulated in fair value reserve. For available-for-sale debt investments, impairment losses

are subsequently reversed through profi t or loss if an increase in the fair value of the investment can be

objectively related to an event occurring after the recognition of the impairment loss.

Financial liabilities and equity

Debt and equity instruments issued by a group entity are classifi ed as either fi nancial liabilities or as equity in

accordance with the substance of the contractual arrangements and the defi nitions of a fi nancial liability and

an equity instrument.

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of a group entity after

deducting all of its liabilities. Equity instruments issued by the Company are recognised at the proceeds

received, net of direct issue costs.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a fi nancial liability and of

allocating interest expense over the relevant period. The effective interest rate is the rate that exactly

discounts estimated future cash payments (including all fees and points paid or received that form an

integral part of the effective interest rate, transaction costs and other premiums or discounts) through the

expected life of the fi nancial liability, or where appropriate, a shorter period, to the net carrying amount on

initial recognition.

Interest expense is recognised on an effective interest basis.

Financial liabilities

Financial liabilities including other payables and amounts due to related parties are subsequently measured

at amortised cost, using the effective interest method.





Derecognition

The Group derecognises a fi nancial asset only when the contractual rights to the cash fl ows from the asset

expire, or when it transfers the fi nancial asset and substantially all the risks and rewards of ownership of the

asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of

ownership and continues to control the transferred asset, the Group continues to recognise the asset to the

extent of its continuing involvement and recognises an associated liability. If the Group retains substantially

all the risks and rewards of ownership of a transferred fi nancial asset, the Group continues to recognise the

fi nancial asset and also recognises a collateralised borrowing for the proceeds received.

On derecognition of a fi nancial asset in its entirety, the difference between the asset’s carrying amount

and the sum of the consideration received and receivable and the cumulative gain or loss that had been

recognised in other comprehensive income and accumulated in equity is recognised in profi t or loss.

The Group derecognises a fi nancial liability when, and only when, the Group’s obligations are discharged,

cancelled or expires. The difference between the carrying amount of the fi nancial liability derecognised and

the consideration paid and payable is recognised in profi t or loss.

Insurance contracts

Classifi cation of contracts

Contracts under which the Group accepts signifi cant insurance risk from another party (the policyholder)

by agreeing to compensate the policyholder or other benefi ciary if a specifi ed uncertain future event (the

insured event) adversely affects the policyholder or other benefi ciary are classifi ed as insurance contracts.

Recognition and measurement

Premiums

Written premiums from direct and reinsurance businesses are recognised on the risk inception date and are

recognised as earned on a time-apportionment basis.

Claims

Insurance claims are recognised when they are incurred. Incurred claims arising in a year include the losses

and related handling costs paid during the year and the change in the provision for outstanding claims

during the year. Provision for outstanding claims falls into two categories: case reserves for reported claims

and reserves for incurred but not reported claims (“IBNR”).

The Group estimates reported claims on an individual basis, based on past experience of similar losses

and the judgment of experienced claims handlers. Estimates of reported claims are reviewed and revised

when more accurate information is available. This process is regularly reviewed by comparing the estimated

amount and the fi nal settlement amount of a claim to ensure that the established reserving policies are

reasonable.

IBNR is established to recognise the estimated cost of losses that have been incurred but of which the

Group has not yet been notifi ed as well as the estimated costs necessary to bring the claims to fi nal

settlement. IBNR is estimated by using a range of standard actuarial projection techniques such as the

Bornhuetter-Ferguson method (“BF method”) and the paid and incurred loss development method.




Insurance contracts (continued)

Recognition and measurement (continued)

Claims (continued)

At the end of the reporting period, the Group reviews its unexpired risks and carries out a liability adequacy

test for each class of insurance on the basis of estimates of future claims and related claims handling costs

and premiums earned. A provision for premium defi ciency is recognised if the sum of expected claim costs

and claim handling costs exceeds related unearned premiums while considering the anticipated investment

income.

Reinsurance

Assets, liabilities, income and expenses arising from reinsurance contracts are presented separately in the

consolidated income statement and the consolidated statement of fi nancial position.

The benefi ts to which the Group is entitled under its reinsurance contracts held are recognised as

reinsurance assets. Reinsurance assets primarily include balances due from both insurance and reinsurance

companies for businesses ceded and accepted. Amounts recoverable from reinsurers are measured

consistently with the amounts associated with the reinsurance contracts and in accordance with the

terms of each reinsurance contract. Reinsurance liabilities are primarily premiums payable for reinsurance

contracts.

If a reinsurance asset is impaired, the Group reduces the carrying amount accordingly and recognises the

impairment loss in profi t or loss.

Reinsurers’ share of insurance funds represents the balances due from reinsurance companies for ceded

insurance liabilities. It includes the reinsurers’ share of provision for unearned premiums, provision for

outstanding claims and provision for unexpired risks.

Insurance funds

Provision for unearned premiums

The provision for unearned premiums comprise the proportion of gross premiums written which is

estimated to be earned in the following or subsequent fi nancial years, computed on a time-apportionment

basis, adjusted if necessary to refl ect any variation in the incidence of risk during the period covered by the

contract.

Provision for outstanding claims

Provision for outstanding claims represents estimated liabilities in respect of case reserves for reported

claims and IBNR. The basis of provision is set out in note 21.

Provision for unexpired risks

Provision for unexpired risks is made where the expected value of claims and expenses attributable to the

unexpired periods of policies in force at the end of reporting period exceeds the provision for unearned

premiums relating to such policies. The amount of provision is made for each class of business individually,

after taking into account the future investment return on investments held to back the provision for

unearned premiums and the provision for unexpired risks.




Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profi t for the year. Taxable profi t differs from profi t before tax

as reported in the consolidated income statement because it excludes items of income or expense that are

taxable or deductible in other years and it further excludes items that are never taxable or deductible. The

Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted

by the end of the reporting period.

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities

in the consolidated fi nancial statements and the corresponding tax base used in the computation of taxable

profi t. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax

assets are generally recognised for all deductible temporary differences to the extent that it is probable that

taxable profi ts will be available against which those deductible temporary differences can be utilised.

Deferred tax liabilities are recognised for taxable temporary differences associated with investments in

subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is

probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising

from deductible temporary differences associated with such investments and interests are only recognised

to the extent that is probable that there will be suffi cient taxable profi ts against which to utilise the benefi ts

of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the end of the reporting period and reduced to

the extent that it is no longer probable that suffi cient taxable profi ts will be available to allow all or part of the

asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in

which the liability is settled or the asset is realised, based on tax rate (and tax laws) that have been enacted

or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and

assets refl ects the tax consequences that would follow from the manner in which the Group expects, at the

end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

For the purposes of measuring deferred tax liabilities or deferred tax assets for investment properties

that are measured using the fair value model, the carrying amounts of such properties are presumed

to be recovered entirely through sale, unless the presumption is rebutted. The presumption is rebutted

when the investment property is depreciable and is held within a business model whose objective is to

consume substantially all of the economic benefi ts embodied in the investment property over time, rather

than through sale. If the presumption is rebutted, deferred tax liabilities and deferred tax assets for such

investment properties are measured in accordance with the above general principles set out in HKAS 12

(i.e. based on the expected manner as to how the properties will be recovered).

Current and deferred tax are recognised in profi t or loss, except when it relates to items that are recognised

in other comprehensive income or directly in equity, in which case the current and deferred tax are also

recognised in other comprehensive income or directly in equity respectively.




Foreign currencies

In preparing the fi nancial statements of each individual group entity, transactions in currencies other

than the functional currency of that entity (foreign currencies) are recorded in the respective functional

currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of

exchanges prevailing on the dates of the transactions. At the end of the reporting period, monetary items

denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items

carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the

date when the fair value was determined. Non-monetary items that are measured in terms of historical cost

in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the translation of monetary items,

are recognised in profi t or loss in the period in which they arise, except for exchange differences arising

on a monetary item that forms part of the Company’s net investment in a foreign operation, in which case,

such exchange differences are recognised in other comprehensive income and accumulated in equity and

will be reclassifi ed from equity to profi t or loss on disposal of the foreign operation. Exchange differences

arising on the retranslation of non-monetary items carried at fair value are included in profi t or loss for

the period except for exchange differences arising on the retranslation of non-monetary items in respect

of which gains and losses are recognised directly in other comprehensive income, in which cases, the

exchange differences are also recognised directly in other comprehensive income.

For the purposes of presenting the consolidated fi nancial statements, the assets and liabilities of the

Group’s foreign operations are translated into the presentation currency of the Group (i.e. Hong Kong

dollars) at the rate of exchange prevailing at the end of the reporting period, and their income and expenses

are translated at the average exchange rates for the year, unless exchange rates fl uctuate signifi cantly

during the period, in which case, the exchange rates prevailing at the dates of transactions are used.

Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in

equity (the exchange reserve).

Provisions and contingent liabilities

Provisions are recognised for liabilities of uncertain timing or amount when the Group has a legal or

constructive obligation arising as a result of a past event, it is probable that an outfl ow of economic benefi ts

will be required to settle the obligation and a reliable estimate can be made. Where the time value of money

is material, provisions are stated at the present value of the expenditure expected to settle the obligation.

Where it is not probable that an outfl ow of economic benefi ts will be required, or the amount cannot be

estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outfl ow

of economic benefi ts is remote. Possible obligations, whose existence will only be confi rmed by the

occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities

unless the probability of outfl ow of economic benefi ts is remote.

Retirement benefi t costs

Payments to defi ned contribution retirement benefi t plans are charged as an expense when employees

have rendered service entitling them to the contributions.

Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and in hand, demand deposits with banks and other

fi nancial institutions, and short-term, highly liquid investments that are readily convertible into known

amounts of cash and which are subject to an insignifi cant risk of changes in value, having been within three

months of maturity at acquisition.



4. Critical accounting judgments and key sources of estimation uncertainty

In the application of the Group’s accounting policies, which are described in note 3, the directors of the

Company are required to make judgments, estimates and assumptions about the carrying amounts of

assets and liabilities that are not readily apparent from other sources. The estimates and associated

assumptions are based on historical experience and other factors that are considered to be relevant. Actual

results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting

estimates are recognised in the period in which the estimate is revised if the revision affects only that period,

or in the period of the revision and future periods if the revision affects both current and future periods.

The following are the critical judgments, estimates and underlying assumptions, that the directors have

made in the process of applying the entity’s accounting policies and that have the most signifi cant effect on

the amounts recognised in the consolidated fi nancial statements.


The Group uses assumptions based on a mixture of internal and market data to measure its provision for

outstanding claims. Internal data is derived mostly from the Group’s claims reports and screening of the

actual insurance contracts carried out in prior years. The Group reviews the individual contracts and in

particular the industries in which the insured companies operate and the actual exposure years of claims.

In addition, the estimation process considers factors that infl uence the amount and timing of cash fl ows

from the contracts. A claim of insurance contract usually arises from an event of loss from contract holders.

The uncertainty of future cash fl ows therefore arises mainly from the uncertainty of the timing of occurrence

of such event and the amount to be paid. The directors of the Company believe that the provision for

outstanding claims as set out in note 21 is adequate as at the end of the reporting period.


Provision for unexpired risks represents the excess of the estimated value of claims and claims handling

costs likely to arise after the end of the reporting period from contracts concluded before that date over and

above the provision for unearned premiums relating to those contracts. The provision for unexpired risks is

assessed separately for each class of insurance. The provision for unexpired risks is made when the sum of

the ultimate loss and claim expense ratios exceeds 100% of the unearned premiums. The directors of the

Company believe that the provision for unexpired risks as set out in note 21 is adequate as at the end of the

reporting period.

Deferred tax asset

As at 31 December 2012, a deferred tax asset of $20,233,000 and $nil (2011: $31,263,000 and

$7,653,000) in relation to unused tax losses has been recognised in the Group’s consolidated statement of

fi nancial position and the Company’s statement of fi nancial position respectively. No deferred tax asset has

been recognised in the Group’s consolidated statement of fi nancial position and the Company’s statement

of fi nancial position on the remaining tax losses of approximately $82,102,000 and $nil (2011: $73,617,000

and $nil) respectively due to the unpredictability of future profi t streams. The realisability of the deferred tax

asset mainly depends on whether suffi cient future profi ts or taxable temporary differences will be available

in the future. In cases where the actual future profi ts generated are less than expected, a material reversal

of deferred tax asset may arise, which would be recognised in the consolidated income statement for the

period in which such a reversal takes place.



5. Turnover

Turnover represents gross written premiums, net of discounts and returns, from direct and inward

reinsurance businesses during the year.

6. Reinsurers’ share of earned premiums, net commission expenses, reinsurers’ share of claims incurred and change in net provision for unexpired risks

2012 2011

$ $

Premiums ceded to reinsurers (380,427,432) (329,796,504)

Change in reinsurers’ share of provision

for unearned premiums (note 21) 14,229,200 19,155,756

Reinsurers’ share of earned premiums (366,198,232) (310,640,748)

Gross commission income 86,260,381 79,323,274

Gross commission expenses (416,688,971) (209,251,587)

Net commission expenses (330,428,590) (129,928,313)

Reinsurers’ share of claims paid 184,729,790 152,738,104


for outstanding claims (note 21) 116,946,316 (128,620,074)

Reinsurers’ share of claims incurred 301,676,106 24,118,030

Change in gross provision for unexpired risks (note 21) (2,763,000) 8,367,500


for unexpired risks (note 21) 21,312,000 (7,670,600)

Change in net provision for unexpired risks 18,549,000 696,900



7. Investment income

2012 2011

$ $

Interest income on

– Available-for-sale investments 89,545,969 88,704,179

– Loans and receivables 11,000,638 2,488,390

100,546,607 91,192,569

Dividend income from equity securities

– Available-for-sale 9,835,820 9,423,519

Bank interest income 12,602,942 12,504,133

Rental income 66,984,337 59,146,377

189,969,706 172,266,598

Included above is interest income and dividend income from listed investments of $78,141,955 and

$7,131,166 respectively (2011: $77,057,792 and $8,118,519) and from unlisted investments of

$22,404,652 and $2,704,654 respectively (2011: $14,134,777 and $1,305,000).

8. Net realised and unrealised gains on investments

2012 2011

$ $

Property related gain

– Fair value gain on investment properties 331,876,314 161,218,483

Investment related (loss)/gain

– Net gain on disposal of available-for-sale securities

– transfer from other comprehensive income (8,256,755) (2,424,556)

– arising in current year 37,465,791 36,954,930

– Impairment loss on available-for-sale securities (4,836,543) (19,288,537)

– Net gain on other investments 3,071,217 7,518,878

359,320,024 183,979,198



9. Profi t before tax

2012 2011

$ $

Profi t before tax is arrived at after charging/(crediting):

Auditor’s remuneration 901,000 850,000

Depreciation of property and equipment 10,787,755 9,536,833

Amortisation of intangible asset 281,928 140,964

Staff costs, including directors’ remuneration

– retirement scheme contributions 7,171,106 7,460,281

– salaries, wages and other benefi ts 101,560,539 121,812,562

108,731,645 129,272,843

Directors’ remuneration

– Fees 494,000 494,000

– Other emoluments 1,626,096 8,332,588

– Retirement scheme contributions 122,002 176,301

Operating lease charges in respect of land and buildings 600,902 407,638

Reversal of net impairment losses

– insurance receivables (1,544,867) (762,841)

– land and buildings (14,337,879) (33,581,141)

Net foreign exchange loss/(gain) 3,187,554 (50,201,173)

Recovery of insurance receivables previously written off (2,400) (3,141)

Gross property rental income (66,984,337) (59,146,377)

Less: Direct outgoings 2,492,351 1,703,373

Net property rental income (64,491,986) (57,443,004)

Net (gain)/loss on disposal of property and equipment (239) 120,287

Bad debts on insurance receivables and other receivables 184,552 269



10. Income tax expense

2012 2011

$ $

Current tax:

Hong Kong 25,886,000 –

The PRC 81,055 –

25,967,055 –

Under/(over)-provision in prior years:

Hong Kong – 685

The PRC – (17,752,989)

– (17,752,304)

Deferred tax charge/(credit): (note 17)

Hong Kong 3,722,000 100,581,000

The PRC (22,142) –

3,699,858 100,581,000

Income tax expense 29,666,913 82,828,696

Hong Kong Profi ts Tax is calculated at 16.5% of the estimated assessable profi t for the year.

Taxation outside Hong Kong is calculated at rates prevailing in the respective jurisdictions.

2012 2011

$ $

Profi t before tax 561,388,845 428,722,908

Tax at the domestic income tax rate of 16.5% 92,629,159 70,739,279

Tax effect of non-deductible expenses 1,591,544 1,047,650

Tax effect of non-taxable income (51,787,205) (29,554,888)

Tax effect of tax losses not recognised 5,070 1,887

Tax effect of taxable income,

previously treated as non-taxable – 70,442,000

Tax effect of net temporary differences not recognised 2,518,764 4,079,366

Tax effect of tax losses utilised this year,

not previously recognised (860,717) (16,181,875)

Effect of different tax rates of group entities

operating in other jurisdiction 22,207 7,581

Over-provision in prior years – (17,752,304)

Tax adjustment arising from change in accounting

policy, not retrospectively adjusted (10,420,000) –

Others (4,031,909) –

Tax charge for the year 29,666,913 82,828,696



11. Profi t attributable to owners of the Company

The consolidated profi t attributable to owners of the Company includes a profi t of $349,334,992 (2011:

$252,697,512) which has been dealt with in the fi nancial statements of the Company.

12. Dividends

2012 2011

$ $

Dividends recognised as distributions during the year

2011 Final – $2.56 per share

(2011: 2010 Final – $3.80 per share) 61,190,957 90,647,064

2011 Interim – $41.13 per share – 981,437,506

61,190,957 1,072,084,570

Subsequent to the end of the reporting period, fi nal dividend in respect of the year ended 31 December

2012 of $2.75 per share (2011: $2.56 per share) has been proposed by the directors and is subject to

approval by the shareholders in general meeting.



13. Property and equipment

The Group

Land and Furniture and

buildings equipment Total

$ $ $

Cost

At 1 January 2011 366,864,680 66,254,440 433,119,120

Exchange adjustments – 16,565 16,565

Additions – 9,980,810 9,980,810

Disposals – (1,249,021) (1,249,021)

Transfer from investment properties

to land and buildings 5,960,000 – 5,960,000

At 31 December 2011 372,824,680 75,002,794 447,827,474

Exchange adjustments – 25 25

Additions – 6,107,193 6,107,193

Disposals – (4,575,951) (4,575,951)

Surplus on revaluation upon transfer from

land and buildings to investment properties 6,536,570 – 6,536,570

Transfer from land and buildings to

investment properties (18,776,570) – (18,776,570)

At 31 December 2012 360,584,680 76,534,061 437,118,741

Depreciation and impairment

At 1 January 2011 68,273,782 45,690,884 113,964,666

Exchange adjustments – 11,802 11,802

Depreciation for the year 2,053,076 7,483,757 9,536,833

Written back on disposals – (1,118,941) (1,118,941)

Reversal of impairment loss (33,581,141) – (33,581,141)

At 31 December 2011 36,745,717 52,067,502 88,813,219

Exchange adjustments – 93 93




Transfer from land and buildings

to investment properties (936,570) – (936,570)

At 31 December 2012 23,546,382 56,229,046 79,775,428

Carrying values

At 31 December 2012 337,038,298 20,305,015 357,343,313

At 31 December 2011 336,078,963 22,935,292 359,014,255



13. Property and equipment (continued)

The Company

Land and Furniture and

buildings equipment Total

$ $ $

Cost

At 1 January 2011 290,049,054 65,411,512 355,460,566

Additions – 9,928,680 9,928,680

Disposals – (1,241,769) (1,241,769)

Transfer from investment properties

to land and buildings 5,960,000 – 5,960,000

At 31 December 2011 296,009,054 74,098,423 370,107,477

Additions – 6,079,415 6,079,415

Disposals – (4,575,951) (4,575,951)

Surplus on revaluation upon transfer from

land and buildings to investment properties 6,536,570 – 6,536,570


to investment properties (18,776,570) – (18,776,570)

At 31 December 2012 283,769,054 75,601,887 359,370,941

Depreciation and impairment

At 1 January 2011 64,026,285 44,941,519 108,967,804




At 31 December 2011 31,822,324 51,266,622 83,088,946





to investment properties (936,570) – (936,570)

At 31 December 2012 17,947,093 55,385,827 73,332,920

Carrying values

At 31 December 2012 265,821,961 20,216,060 286,038,021

At 31 December 2011 264,186,730 22,831,801 287,018,531



13. Property and equipment (continued)

The carrying value of properties shown above comprises:

The Group The Company

2012 2011 2012 2011

$ $ $ $

In Hong Kong

– long leases 329,031,064 333,871,049 257,814,727 261,978,816

– medium-term leases 8,007,234 2,207,914 8,007,234 2,207,914

337,038,298 336,078,963 265,821,961 264,186,730

The directors conducted a review of the Group’s land and buildings with reference to the valuation as at

end of the reporting period by an independent fi rm of surveyors, Jones Lang LaSalle Corporate Appraisal

and Advisory Limited, who have among their staff, associates of Hong Kong Institute of Surveyors, to

determine whether any recognition or reversal of the impairment of certain land and buildings is required.

Reversal of impairment loss of $14,337,879 (2011: $33,581,141) has been recognised in the consolidated

income statement of the Group.

14. Investment properties


$ $

Fair value

At 1 January 2011 1,233,191,518 633,860,000

Additions 1,403,790 –

Fair value adjustment 161,218,483 84,750,000

Net transfer to land and buildings (5,960,000) (5,960,000)

At 31 December 2011 1,389,853,791 712,650,000

Additions 349,895 –

Fair value adjustment 331,876,314 174,340,000

Net transfer from land and buildings 17,840,000 17,840,000

At 31 December 2012 1,739,920,000 904,830,000

Investment properties of the Group were revalued as of 31 December 2012 by an independent fi rm of

surveyors, Jones Lang LaSalle Corporate Appraisal and Advisory Limited, who have among their staff,

associates of the Hong Kong Institute of Surveyors. The valuation was arrived at by direct comparison

approach assuming sale of the property interest in its existing state with the benefi t of immediate vacant

possession and by making reference to comparable sales transactions as available in the relevant market.

The fair value gain of $331,876,314 (2011: $161,218,483) has been recognised in the consolidated income

statement of the Group.

All of the Group’s property interests held under operating leases to earn rentals or for capital appreciation

purposes are measured using the fair value model and are classifi ed and accounted for as investment

properties.



14. Investment properties (continued)

The carrying value of investment properties shown above comprises:


2012 2011 2012 2011

$ $ $ $

In Hong Kong

– long leases 1,601,490,000 1,389,853,791 871,430,000 712,650,000

– medium-term leases 138,430,000 – 33,400,000 –

1,739,920,000 1,389,853,791 904,830,000 712,650,000

15. Interests in subsidiaries

The Company

2012 2011

$ $

Unlisted shares, at cost 362,942,373 344,605,623

Impairment loss (163,850,012) (163,850,014)

199,092,361 180,755,609

Amounts due from subsidiaries 270,000,982 290,992,835

Amounts due to subsidiaries (127,271,709) (127,595,245)

Allowance for impaired amounts (8,759,581) (8,759,581)

133,969,692 154,638,009

333,062,053 335,393,618

The amounts due from subsidiaries are unsecured and have no fi xed terms of repayment. Interest is

charged at a range from 0% to 0.8% (2011: 0% to 0.68%) per annum on the outstanding balance.

There is no movement in the allowance for impairment loss on the investment cost (2011: reversal of

$19,998) and amounts due from subsidiaries (2011: reversal of $82,038,465) during the year based on the

estimated recoverable amount from the future cash fl ows of the relevant subsidiaries.



15. Interests in subsidiaries (continued)

All of the companies listed below are controlled subsidiaries as defi ned under note 3 and have been

consolidated into the Group’s consolidated fi nancial statements.

Name of Company

Place and date of

incorporation/

establishment and

operation

Particulars of issued

and paid up capital

Proportion of

ownership interest

Held by the Company Principal activities

2012 2011

Canon Limited Hong Kong

22 October 1999

1,000,000 ordinary

shares of $1 each

100% 100% Property investment

Charter Firm Limited Hong Kong

22 October 1999

1,000,000 ordinary

shares of $1 each


Chellink Investment Limited Hong Kong

19 September 1991

65,384,000 ordinary

shares of $1 each


China Insurance Group

Realty Company Limited

Hong Kong

21 June 1994

10,000,000 ordinary

shares of $1 each


The Ming An Insurance

Service Company

(Hong Kong) Limited

(formerly known as

Equity Survey Claim

Service Company Limited)

Hong Kong

24 October 1995

1,000,000 ordinary

shares of $1 each

100% 100% Provision of insurance

claim survey services

Jacton Limited Hong Kong

22 October 1999

1,000,000 ordinary

shares of $1 each


Joyful Box Inc. The British Virgin Islands/

Hong Kong

5 July 2000

1 ordinary share

of US$1 each

100% 100% Inactive

King System Limited The British Virgin Islands/

Hong Kong

5 July 2000

1 ordinary share

of US$1 each

100% 100% Inactive

Ming An (Overseas) Inc. The Republic of Panama/

Hong Kong

7 May 1980

100 ordinary shares

of US$4,000 each

100% 100% Inactive

Onah Investments Limited Hong Kong

13 August 1991

105,730,000 ordinary

shares of $1 each




15. Interests in subsidiaries (continued)

Name of Company

Place and date of

incorporation/

establishment and

operation

Particulars of issued

and paid up capital

Proportion of

ownership interest

Held by the Company Principal activities

2012 2011

Orient Sino Development

Limited

Hong Kong

6 February 1996

2 ordinary

shares of $1 each

100% 100% Provision of property

agency services to

group companies

深圳中保尚乘保險經紀有限公司 (note 1)

The PRC

12 October 2006

Registered capital

of RMB20,000,000

(2011: RMB5,000,000)

100% 100% Insurance broker

Victory Max Limited Hong Kong

11 August 1999

1,000,000 ordinary

shares of $1 each


Note:

(1) The company is a PRC limited company.

16. Intangible assets

The Group and

the Company

$

Cost

At 1 January 2011 –

Additions 3,524,097

At 31 December 2011 and 2012 3,524,097

Amortisation

At 1 January 2011 –

Charge for the year 140,964

At 31 December 2011 140,964

Charge for the year 281,928

At 31 December 2012 422,892

Carrying value

At 31 December 2012 3,101,205

At 31 December 2011 3,383,133

The above intangible assets representing golf club memberships have fi nite useful lives and are amortised

on a straight-line basis over the estimated useful lives of 12.5 years.



17. Deferred taxation

For the purpose of presentation in the consolidated statement of fi nancial position, certain deferred tax

assets and liabilities have been offset. The following is the analysis of the deferred tax balances for fi nancial

reporting purposes:

The Group

2012 2011

$ $

Deferred tax assets 22,142 –

Deferred tax liabilities (35,103,000) (31,381,000)

(35,080,858) (31,381,000)

The Company

2012 2011

$ $

Deferred tax liabilities (22,596,000) (23,147,000)

The following are the deferred tax assets and liabilities recognised and movements thereon during the

current and prior years:

The Group

Temporary

difference

from

investment

properties,

property and

Tax losses equipment Others Total

$ $ $ $

At 1 January 2011 91,789,000 (22,589,000) – 69,200,000

Charge to profi t or loss (60,526,000) (40,055,000) – (100,581,000)

At 31 December 2011 31,263,000 (62,644,000) – (31,381,000)

(Charge)/credit to profi t or loss (11,030,000) 7,308,000 22,142 (3,699,858)

At 31 December 2012 20,233,000 (55,336,000) 22,142 (35,080,858)



17. Deferred taxation (continued)

The Company

Temporary

difference

from

investment

properties,

property and

Tax losses of properties Total

$ $ $

At 1 January 2011 77,882,000 (8,682,000) 69,200,000

Charge to profi t or loss (70,229,000) (22,118,000) (92,347,000)

At 31 December 2011 7,653,000 (30,800,000) (23,147,000)

(Charge)/credit to profi t or loss (7,653,000) 8,204,000 551,000

At 31 December 2012 – (22,596,000) (22,596,000)

Deferred tax assets and liabilities are recognised for certain unutilised tax losses and taxable temporary

differences in accordance with the accounting policy as set out in note 3. As those deferred tax assets can

only be recognised to the extent that it is probable that future taxable profi ts will be available against which

the unused tax credits can be utilised, management’s judgement is required to assess the probability of

future taxable profi ts.

In the previous year, due to the latest development of a query issued by the Inland Revenue Department

of Hong Kong in relation to the taxability of certain investment income in previous years, the Group had

reassessed the potential tax exposure and, accordingly reversed the deferred tax assets arising from

tax losses by approximately $434,481,000 as the amount was considered utilised by this potential tax

exposure.

At the end of the reporting period, the Group and the Company have estimated unused tax losses of

approximately $204,726,000 and $nil (2011: $263,090,000 and $46,382,000) available for offset against

future profi ts, respectively. A deferred tax asset has been recognised in the Group’s consolidated statement

of financial position and the Company’s statement of financial position in respect of approximately

$122,624,000 and $nil (2011: $189,473,000 and $46,382,000) of such losses respectively. No deferred tax

asset has been recognised in the Group’s consolidated statement of fi nancial position and the Company’s

statement of fi nancial position in respect of the remaining tax losses of approximately $82,102,000 and $nil

(2011: $73,617,000 and $nil) respectively due to the unpredictability of future profi ts streams, which will not

expire under current tax legislation.

Management’s assessment is constantly reviewed and additional deferred tax assets are recognised if it

becomes probable that future taxable profi ts will allow the deferred tax assets to be recovered.

There are no other signifi cant unrecognised deferred tax for the year or at the end of the reporting period.



18. Investments in securities

The Group and the Company

Available-for-sale

securities

2012 2011

$ $

Debt securities

– Financial institutions: Unlisted 83,423,870 100,412,572

– Government: Unlisted 5,327,000 5,316,000

– Others: Unlisted 123,857,921 109,234,520

– Others: Listed 1,504,416,798 1,257,956,038

1,717,025,589 1,472,919,130

Certifi cates of deposits

– Listed – 7,821,912

– Unlisted 5,027,500 4,951,500

5,027,500 12,773,412

Equity securities

– Listed 144,849,915 219,740,002

– Unlisted 106,138,209 32,967,851

250,988,124 252,707,853

Other

– Unlisted 328,000 328,000

Total 1,973,369,213 1,738,728,395

Representing:

Listed

– Hong Kong 403,461,900 364,976,657

– Overseas 1,245,804,813 1,120,541,295

Unlisted 324,102,500 253,210,443

1,973,369,213 1,738,728,395

Market value of listed securities 1,649,266,713 1,485,517,952

Current 180,337,512 265,969,334

Non-current 1,793,031,701 1,472,759,061

1,973,369,213 1,738,728,395



18. Investments in securities (continued)

The maturity profi le of the investments in debt securities and the average effective interest rate are as

follows:

The Group

and the Company

2012 2011

$ $

Within 1 year 35,487,597 38,932,034

2-5 years 552,673,739 371,545,491

More than 5 years 1,128,864,253 1,062,441,605

1,717,025,589 1,472,919,130

Effective interest rate (per annum) 5.7% 6.1%

The maturity profi le of the investments in certifi cates of deposits and the average effective interest rate are

as follows:

The Group

and the Company

2012 2011

$ $

2-5 years 5,027,500 4,951,500

More than 5 years – 7,821,912

5,027,500 12,773,412

Effective interest rate (per annum) 1.7% 1.2%



19. Insurance receivables

The Group

and the Company

2012 2011

$ $

Premium receivable under direct business 207,240,195 170,597,714

Amounts due under reinsurance contracts 112,684,688 60,928,718

Less: allowance for impaired debts (15,607,483) (17,181,702)

304,317,400 214,344,730

Deposits retained by cedants 231,018 195,008

304,548,418 214,539,738

Amounts expected to be settled within 1 year

– Premium receivable under direct business 206,956,384 169,187,991

– Amounts due under reinsurance contracts 97,077,205 45,147,282

304,033,589 214,335,273

The Group normally allows a credit period ranging from 0 day to 90 days for premium receivables under

direct business and 50 days to 90 days for the amounts due from reinsurance contracts after the quarterly

statements have been sent.

An ageing analysis of the insurance receivables (excluding deposits retained by cedants) that are not

individually impaired, is as follows:

The Group

and the Company

2012 2011

$ $

Neither past due nor impaired 286,780,158 194,962,950

Less than 3 months past due 14,664,316 15,632,717

More than 3 months past due but less

than 12 months past due 2,707,688 3,659,668

Over 1 year past due 165,238 1,499,118

304,317,400 215,754,453

Receivables of $286,780,158 (2011: $194,962,950) of the Group and the Company that were neither past

due nor impaired relate to a wide range of policyholders and reinsurers for whom there is no recent history

of default.



19. Insurance receivables (continued)

Receivables of $17,537,242 (2011: $20,791,503) of the Group and the Company that were past due but

not impaired relate to a number of independent policyholders and reinsurers that have a good track record

with the Group and the Company. Based on past experience, management believes that no individual

impairment allowance is necessary in respect of these balances as there has not been a signifi cant change

in credit quality and the balances are still considered fully recoverable. The Group and the Company do not

hold any collateral over these balances.

Impairment losses in respect of insurance receivables are recorded using an allowance account unless

the Group and the Company have ascertained that recovery of the amount is remote, in which case the

impairment loss is written off against insurance receivables directly.

Movement in the allowance for impaired debts

The Group

and the Company

2012 2011

$ $

At 1 January 17,181,702 16,363,127

Written back of impairment loss, net (1,544,867) (762,841)

Exchange difference (29,352) (6,428)

Reclassifi cation – 1,587,844

At 31 December 15,607,483 17,181,702

Individual allowance 15,607,483 15,771,979

Collective allowance – 1,409,723

15,607,483 17,181,702

Regarding the amount of impaired debts of $15,607,483 (2011: $17,181,702), various actions have been

taken to recover the debts, but these debts have not been recovered and hence impairment is provided.

The allowance for individually impaired receivables of the Group and the Company relates to reinsurers

that were in fi nancial diffi culties and the management assessed that the receivables are expected not to be

recovered. The Group and the Company do not hold any collateral over these balances.



20. Other receivables


2012 2011 2012 2011

$ $ $ $

Deposits 12,297,499 12,013,449 8,119,582 7,826,732

Prepayments 2,573,100 504,710 2,554,436 407,316

Interest receivables 19,430,519 17,413,281 19,309,472 17,361,168

Other receivables 38,594,855 25,952,388 33,211,303 21,253,042

72,895,973 55,883,828 63,194,793 46,848,258

Amounts expected to be

settled within 1 year 64,689,739 47,938,481 55,000,191 38,910,637

As at 31 December 2012 and 2011, none of other receivables are past due or impaired.



21. Insurance funds


2012 2011

Gross Reinsurance Net Gross Reinsurance Net

$ $ $ $ $ $


At 1 January 1,689,469,194 (586,861,737) 1,102,607,457 1,774,402,239 (715,481,811) 1,058,920,428

Movements during the year 201,742,588 (116,946,316) 84,796,272 (84,933,045) 128,620,074 43,687,029

At 31 December 1,891,211,782 (703,808,053) 1,187,403,729 1,689,469,194 (586,861,737) 1,102,607,457

Current 399,775,101 (144,574,342) 255,200,759 427,035,865 (210,682,421) 216,353,444

Non-current 1,491,436,681 (559,233,711) 932,202,970 1,262,433,329 (376,179,316) 886,254,013

Provision for unearned premiums

At 1 January 266,360,124 (61,539,537) 204,820,587 223,067,355 (42,383,781) 180,683,574

Movements during the year 225,405,285 (14,229,200) 211,176,085 43,292,769 (19,155,756) 24,137,013

At 31 December 491,765,409 (75,768,737) 415,996,672 266,360,124 (61,539,537) 204,820,587

Current 486,753,259 (74,107,413) 412,645,846 262,737,696 (59,588,800) 203,148,896

Non-current 5,012,150 (1,661,324) 3,350,826 3,622,428 (1,950,737) 1,671,691


At 1 January 23,509,000 8,701,000 32,210,000 31,876,500 1,030,400 32,906,900

Movements during the year 2,763,000 (21,312,000) (18,549,000) (8,367,500) 7,670,600 (696,900)

At 31 December 26,272,000 (12,611,000) 13,661,000 23,509,000 8,701,000 32,210,000

Current 26,004,232 (12,453,270) 13,550,962 23,189,284 8,757,827 31,947,111

Non-current 267,768 (157,730) 110,038 319,716 (56,827) 262,889

Insurance funds

At 31 December 2,409,249,191 (792,187,790) 1,617,061,401 1,979,338,318 (639,700,274) 1,339,638,044

Current 912,532,592 (231,135,025) 681,397,567 712,962,845 (261,513,394) 451,449,451

Non-current 1,496,716,599 (561,052,765) 935,663,834 1,266,375,473 (378,186,880) 888,188,593



21. Insurance funds (continued)

Analysis of movements in provision for outstanding claims


2012 2011


$ $ $ $ $ $

At 1 January 1,689,469,194 (586,861,737) 1,102,607,457 1,774,402,239 (715,481,811) 1,058,920,428

Claims arising in current year 720,922,153 (347,601,117) 373,321,036 698,862,078 (258,657,945) 440,204,133

Change in claims arising in prior years (475,714) 45,925,011 45,449,297 (361,966,635) 234,539,915 (127,426,720)

Settlement of claims arising in current year (146,539,288) 71,646,650 (74,892,638) (64,681,370) 11,449,101 (53,232,269)

Settlement of claims arising in prior years (372,164,563) 113,083,140 (259,081,423) (357,147,118) 141,289,003 (215,858,115)

At 31 December 1,891,211,782 (703,808,053) 1,187,403,729 1,689,469,194 (586,861,737) 1,102,607,457

Analysis of movements in provision for unearned premiums


2012 2011


$ $ $ $ $ $

At 1 January 266,360,124 (61,539,537) 204,820,587 223,067,355 (42,383,781) 180,683,574

Premiums written/(ceded)

during the year 1,467,569,326 (380,427,432) 1,087,141,894 952,238,827 (329,796,504) 622,442,323

Premiums earned during the year (1,242,164,041) 366,198,232 (875,965,809) (908,946,058) 310,640,748 (598,305,310)

At 31 December 491,765,409 (75,768,737) 415,996,672 266,360,124 (61,539,537) 204,820,587

Analysis of movements in provision for unexpired risks


2012 2011


$ $ $ $ $ $

At 1 January 23,509,000 8,701,000 32,210,000 31,876,500 1,030,400 32,906,900

Net provision established

during the year 2,763,000 (21,312,000) (18,549,000) (8,367,500) 7,670,600 (696,900)

At 31 December 26,272,000 (12,611,000) 13,661,000 23,509,000 8,701,000 32,210,000




Process used to determine the insurance funds

Each notifi ed claim is assessed on a separate case by case basis. A claim reserving manual is maintained

for each major class of insurance. The estimation of the reserve of a reported claim is made by an

experienced claim handler based on the relevant claim reserving manual and the information and the claim

amount submitted by the claimant and is checked by the supervisor of the responsible claim handler before

updating the information into the claims system. The amount of a case reserve is reviewed and revised

regularly to refl ect the latest development of the claim and the change of the external environment.

Provision for claims incurred but not reported is estimated using a range of statistical methods such as the

paid and incurred loss development methods and the BF method.

Provision for unearned premiums is the portion of written premiums relating to the period of risk after

the end of the reporting period which is deferred to subsequent accounting periods. Unearned premium

reserve is calculated using the 1/365th method.

Provision for unexpired risks represents the excess of the estimated value of claims and claims handling

costs likely to arise after the end of the reporting period from contracts concluded before that date over and

above the provision for unearned premiums relating to those contracts. The provision for unexpired risks is

assessed separately for each class of insurance. The provision for unexpired risks is made when the sum of

the ultimate loss and claim expense ratios exceeds 100% of unearned premiums.

Assumptions methodologies and sensitivities

A comprehensive annual loss and premium reserve review is conducted semi-annually. These reviews

are conducted for each class of business. The reserve analysis for each business class is performed by

the internal and qualifi ed external actuarial personnel. In completing these actuarial reserve analyses, the

actuarial personnel are required to make numerous assumptions. Key assumptions used in estimating

claims liabilities are as follows:

– The past claims development experience can be used to project future claims development and

hence the ultimate claims costs.

– There are no signifi cant changes in the legal, social or economic environment that may affect the cost,

frequency or future reporting of claims.

During both years presented, there were no signifi cant changes in the key assumptions used by the Group

in estimating insurance funds.

The Group’s approach to the estimation of claims liabilities is based on the paid and incurred loss

development methods, supplemented by the BF method. The incurred and paid loss development methods

are methods that use historical patterns of claim emergence to project future emergence of losses. The

BF method relies on a gradual transition from an expected loss ratio to an experience-related development

approach. The BF method is applied to the more recent underwriting years. The ultimate loss ratio (the

estimated undiscounted ultimate losses divided by the earned premiums) for each class is determined by

using the methods mentioned above.




Assumptions methodologies and sensitivities (continued)

In the estimation of the net premium liabilities, the Group has made reference to the projected ultimate loss

ratios and the expected claims handling cost ratios. The projected ultimate loss ratios are applied to the

Group’s actual unearned premiums to estimate the ultimate losses for the unexpired risks. The sum of the

best estimate of the ultimate losses and claims handling costs is the Group’s best estimate of the premium

liabilities. In the case that the best estimate of the premium liability of a class is greater than its unearned

premiums which is determined by using the 1/365th method, a provision for unexpired risks is made in the


Due to the potential variability of the assumptions used, the actual emergence of losses vary in the estimate

of losses included in the Group’s consolidated fi nancial statements, particularly when settlements may

not occur until well into the future (i.e. long-tail businesses). Long tail classes written by the Group mainly

include employees’ compensation (“EC”) and motor insurance.

The Group has assessed the impact of a hypothetical 3% (2011: 1%) increase or decrease in the ultimate

loss ratios of all classes on the Group’s profi t/(loss) before tax and the details are set out in note 32.

22. Amounts due from/to related parties

The Group

Due from related parties Due to related parties

2012 2011 2012 2011

$ $ $ $

Ultimate holding company – 1 – –

Intermediate holding companies 552,756,059 550,515,993 – 9,131

Immediate holding company 92,742 45,324 – –

Fellow subsidiaries 195,084,607 390,092 3,251,464 7,228,618

747,933,408 550,951,410 3,251,464 7,237,749

The Company


2012 2011 2012 2011

Intermediate holding companies 552,756,059 550,515,993 – 9,131

Immediate holding company 92,742 45,324 – –

Fellow subsidiaries 195,065,139 390,092 3,251,466 7,228,618

747,913,940 550,951,409 3,251,466 7,237,749

The amount due from an intermediate holding company include loans to China Taiping Insurance Holdings

Company Limited (“CTIH”) of $547,992,400 (2011: $548,020,000) which are unsecured, bearing interest

rate at a range from 3% to 3.24% (2011: 1.6%) per annum and repayable within one year.

Except for the above, all other amounts are unsecured, interest-free and have no fi xed terms of repayment.



23. Pledged deposit

As at 31 December 2012, a deposit of $20,000,000 (2011: nil) was pledged to a fi nancial institution for

providing security in connection with a reinsurance arrangement.

24. Cash and cash equivalents


2012 2011 2012 2011

$ $ $ $

Deposits with banks and

other fi nancial institutions

with original maturity less

than 3 months 498,644,889 387,768,744 477,848,478 367,784,308

Cash at bank and in hand 399,365,755 338,377,597 382,357,710 329,661,673

Cash and cash equivalents 898,010,644 726,146,341 860,206,188 697,445,981

As at 31 December 2012, cash at bank carried interest at average market rates of 0.01% (2011: 0.01%)

per annum. The deposits with banks and other fi nancial institutions carried fi xed interest rates which range

from 0.6% to 3.4% (2011: 0.4% to 2.0%) per annum.



25. Insurance payables

The Group

and the Company

2012 2011

$ $

Amounts due under direct business 74,912,553 56,567,208

Amounts due under reinsurance contracts accepted 1,308,248 2,394,603

Amounts due under reinsurance contracts ceded 147,281,075 143,479,848

223,501,876 202,441,659

Deposits from reinsurers retained 128,518,664 84,809,696

352,020,540 287,251,355

Amounts expected to be settled within 1 year:

– Amounts due under direct business 74,869,982 56,567,208

– Amounts due under reinsurance contracts accepted 1,308,242 2,394,315

– Amounts due under reinsurance contracts ceded 147,011,179 143,479,848

223,189,403 202,441,371

26. Other payables


2012 2011 2012 2011

$ $ $ $

Deposits 18,956,503 16,746,412 1,095,365 1,007,465

Salary payables 34,056,154 33,805,102 33,656,648 33,805,102

Other payables 47,925,079 37,769,231 36,890,020 25,961,854

100,937,736 88,320,745 71,642,033 60,774,421

Amounts expected to be

settled within 1 year 97,241,844 84,802,071 67,963,168 57,255,748



27. Capital and reserves

2012 & 2011

Number of Share

shares capital

$

Ordinary Shares of $100 each

Authorised:

At beginning and end of year 28,000,000 2,800,000,000

Issued and fully paid:


Deferred Shares of $100 each

Authorised, issued and fully paid:

At beginning and end of year 2,000,000 200,000,000

Total

Authorised:


Issued and fully paid:


The holders of ordinary shares are entitled to receive dividends as declared from time to time and are

entitled to one vote per share at meetings of the Company. All ordinary shares rank equally with regard to

the Company’s residual assets.

The holders of deferred shares are entitled to receive a fi xed non-cumulative dividend at the rate of 1% per

annum for any fi nancial year of the Company in respect of which the net profi ts of the Company available

for dividend exceed $100 billion. Deferred shares do not carry the right to vote nor participate in the profi ts

or assets of the Company. On winding up of the Company, the deferred shareholders would be entitled

out of the surplus assets of the Company to a return of the capital paid up on the deferred shares held by

them respectively after a total sum of $100 billion have been distributed in such winding up in respect of the

ordinary shares of the Company.



27. Capital and reserves (continued)

Nature and purpose of reserves of the Group

Capital reserve

Capital reserve represents the goodwill arising from consolidation which had previously been taken directly

to this reserve (i.e. goodwill which arose before 1 January 2002) and will not be recognised in profi t or loss

on disposal or impairment of the acquired business or under any circumstances.

Exchange reserve

The exchange reserve comprises all foreign exchange differences arising from the translation of the fi nancial

statements of the PRC subsidiary. The reserve is dealt with in accordance with the accounting policies set

out in note 3.

Fair value reserve

The fair value reserve comprises the cumulative net change in the fair value of available-for-sale securities

held at the end of the reporting period and is dealt with in accordance with the accounting policies in note

3.

Properties revaluation reserve

The revaluation reserve has been set up for properties and is dealt with in accordance with the accounting

policies set out in note 3.



27. Capital and reserves (continued)

Nature and purpose of reserves of the Group (continued)

The movement of fair value reserve and retained profi ts of the Company is as follows:

Properties

Fair value revaluation Retained

reserve reserve profi ts Total

$ $ $ $

At 1 January 2011 59,550,918 12,572,389 1,119,468,938 1,191,592,245

Profi t for the year – – 334,755,975 334,755,975

Other comprehensive (expense)/income

for the year


Net fair value changes

arising during the year (143,368,844) – – (143,368,844)

Reclassifi cation adjustments to

profi t or loss upon disposal 2,424,556 – – 2,424,556

Reclassifi cation adjustment to

profi t or loss on impairment 19,261,858 – – 19,261,858

Total comprehensive (expense)/income

for the year (121,682,430) – 334,755,975 213,073,545

Dividends recognised as distributions – – (1,072,084,570) (1,072,084,570)

At 31 December 2011 (62,131,512) 12,572,389 382,140,343 332,581,220

Profi t for the year – – 351,302,250 351,302,250

Other comprehensive income for the year


Net fair value changes arising

during the year 175,568,436 – – 175,568,436

Reclassifi cation adjustments to

profi t or loss upon disposal 8,256,755 – – 8,256,755

Reclassifi cation adjustment to

profi t or loss on impairment 4,832,117 – – 4,832,117

– Revaluation gain arising from

reclassifi cation of own-use

properties to investment properties – 6,536,570 – 6,536,570

Total comprehensive income for the year 188,657,308 6,536,570 351,302,250 546,496,128

Dividends recognised as distributions – – (61,190,957) (61,190,957)

At 31 December 2012 126,525,796 19,108,959 672,251,636 817,886,391



28. Capital commitments

At the end of the reporting period, the Group had capital commitments outstanding as follows:

2012 2011

$ $

Capital expenditure in respect of the acquisition of

property and equipment contracted for but not

provided for in the consolidated fi nancial statements – 169,348

There is no capital commitment for the Company as at the end of the reporting period.

29. Operating lease commitments

As lessor

All of the investment properties of the Group and the Company are held for use under operating leases.

At the end of the reporting period, the Group and the Company had contracted with tenants for the

following future minimum lease payments:


2012 2011 2012 2011

$ $ $ $

Within 1 year 61,434,481 58,763,249 32,415,678 31,325,677

After 1 year but within 5 years 46,954,028 55,601,956 18,310,546 34,835,370

108,388,509 114,365,205 50,726,224 66,161,047

The Group and the Company have leased out investment properties under operating leases. The leases

typically ran for an initial period of two to three years, with an option to renew the leases after that date

at which time all terms are renegotiated. Lease payments are usually adjusted annually to refl ect market

rentals. None of the leases includes contingent rentals.



30. Capital risk management

The Group’s primary objectives when managing capital are to safeguard the Group’s ability to continue

as a going concern, so that it can continue to provide returns for shareholders and benefi ts for other

stakeholders, by pricing products and services commensurately with the level of risk and by securing

access to fi nance at a reasonable cost.

The Group actively and regularly reviews and manages its capital structure to maintain a balance between

the higher shareholder returns that might be possible with higher levels of borrowings and the advantages

and security afforded by a sound capital position, and makes adjustments to the capital structure in light of

changes in economic conditions.

The Group defines equity as the Group’s and the Company’s capital. As at 31 December 2012,

the Group’s and the Company’s capital amounted to $3,879,994,688 and $3,403,886,391 (2011:

$3,214,107,687 and $2,918,581,220) respectively.

Pursuant to Chapter 41 of the Hong Kong Insurance Companies Ordinance, the Company is required to

maintain an excess of assets over liabilities of not less than a required solvency margin. During 2012 and

2011, the Company complied with the solvency margin requirements as set out by the relevant authority in

Hong Kong.

31. Financial instruments and insurance contracts

Categories of fi nancial instruments and insurance contracts


2012 2011 2012 2011

$ $ $ $

Financial assets

Loans and receivables

(including cash and

cash equivalents) 1,754,845,685 1,383,381,095 1,688,840,485 1,344,509,058

Available-for-sale securities 1,973,369,213 1,738,728,395 1,973,369,213 1,738,728,395

Financial liabilities

At amortised cost 104,189,200 95,558,494 74,893,499 68,012,170

The Group

and the Company

2012 2011

$ $

Insurance assets

Insurance receivables 304,548,418 214,539,738

Reinsurers’ share of provision

for outstanding claims 703,808,053 586,861,737

Insurance liabilities

Insurance payables 352,020,540 287,251,355

Provision for outstanding claims 1,891,211,782 1,689,469,194



32. Insurance and fi nancial risk management

The core business of the Group is direct and inward insurance business. The Group has a risk management

framework which controls exposure to risks relevant to its business. The Underwriting Committee, the

Claims Committee, the Investment Committee and the Internal Audit Committee are set up to identify,

control and monitor the Group’s exposure to all risks, and recommend the necessary measures to mitigate

them. These committees, which consist of members of the senior management, are chaired by the Chief

Executive Offi cer and regular meetings are held to review and revise the Group’s underwriting guidelines,

claims procedures and investment strategies.

Insurance risk

Insurance risk management objectives and policies

The nature of an insurance contract is to protect policyholders from random and unpredictable events.

Policyholders transfer risks to insurers through insurance contracts. Uncertainty is an inherent part of

insurance, and uncertainty arising from insurance contracts can have a material effect on the amount,

timing and uncertainty of the Group’s future cash fl ows. The occurrence of events, and the severity and

frequency of loss follow stochastic processes. Changes in the general price level, legislation and judicial

interpretation may have a signifi cant effect on the level of claims reserves. There may be signifi cant time lags

between the reporting and settlement of claims. Reserves are established by analysing historical records

of underwriting results and claims development, subject to rigorous reviews by external actuaries. The

Group assesses the accumulation of risks and aggregate exposure regularly, and may arrange additional

reinsurance to control the aggregate exposure.

The Group delegates underwriting authority to experienced underwriters. Each underwriting department

has an underwriting manual for each class of business, approved by the Underwriting Committee, which

specifi es the authority of underwriters at each level. Each underwriting manual states clearly the minimum

gross premium per policy and the maximum sum insured per policy as well as the probable maximum loss

which underwriters at each level can underwrite. Risks that exceed the underwriting authority of the head of

the underwriting department have to be reviewed and approved by the Underwriting Committee.

The Group also arranges both treaty reinsurance and facultative reinsurance in accordance with

international practice. Treaty reinsurance provides automatic reinsurance cover under specifi c reinsurance

contract terms and conditions. Facultative reinsurance is reinsurance of individual risk. Each contract is

arranged separately. The choice of reinsurance contract depends on market conditions, market practice

and the nature of business. Facultative reinsurance is arranged when an individual risk is not covered by

treaty reinsurance or exceeds treaty reinsurance capacity.

Reinsurance does not mitigate the Group’s obligation to direct insurance policyholders in the event that

reinsurers default on claims, and therefore the Group’s fi nancial position may be affected by the solvency of

reinsurers, and disputes on reinsurance contracts and claims settlement. To reduce such risks, the Group

and its intermediate holding company, China Taiping Insurance Group (HK) Company Limited (“TPG(HK)”),

monitor the fi nancial strength of the Group’s reinsurers on a regular basis. Furthermore, the Group

selects reinsurers from the list of reinsurers approved by TPG(HK) and adheres to TPG(HK)’s reinsurance

guidelines.



32. Insurance and fi nancial risk management (continued)

Insurance risk (continued)

Major concentration of insurance risk

Management of the Group uses its best effort to maintain a balanced insurance business portfolio in order

to diversify its underwriting risks.

The following tables provide an analysis of insurance risk of the Group and the Company by written

premiums before and after reinsurance of the major business classes and represents the best available

measure of risk exposure.


2012 2011

Gross Net Gross Net

written written written written

premiums premiums premiums premiums

$ $ $ $

Property damage

– Fire 194,737,139 57,880,118 168,973,593 53,965,428

Motor 607,599,738 579,923,979 198,949,954 173,496,362

Employees’ compensation/

employers’ liability and

general liability 333,258,124 265,382,204 314,346,347 250,153,770

Hull and Logistics 193,603,129 87,826,116 143,199,226 54,670,608

Most of the insurance contracts are annually renewable and the underwriters have the right to refuse

renewal or to change the terms and conditions of contracts at renewal to reduce insurance risk.





Major concentration of insurance risk (continued)

The share of total gross premium written by geographical location is as follows:

2012 2011

% %

Hong Kong 73 100

The PRC 27 –

Sensitivity to insurance risk

The sensitivity of profi t for the year and net assets of the Group and the Company to reasonably possible

changes in key risk variables in calculating the provision for outstanding claims at 31 December 2012 and

2011 is as follows:


2012 2011

Profi t after Profi t after

tax Net assets tax Net assets

$ $ $ $

3 percent (2011: 1 percent)

increase in ultimate loss ratio

of the previous three years (36,003,000) (36,003,000) (10,677,000) (10,677,000)

3 percent (2011: 1 percent)

increase in provision for

adverse deviation (28,494,000) (28,494,000) (8,861,000) (8,861,000)

The sensitivity set out above is for illustrative only. The increase in the percentage used for sensitivity

is based on management judgement with respect to recent development of certain claim cases. In

management’s opinion, the sensitivity analysis is unrepresentative of the insurance risk as the year end

exposure does not refl ect the exposure during the year. The sensitivity has not taken into actions that could

be taken by management to mitigate the effect of changes in ultimate loss ratio and provision for adverse

deviation, nor for any consequential changes, that could accompany such changes.





Claims development

Analysis of claims development – gross


Prior years 2007 2008 2009 2010 2011 2012 Total

$ $ $ $ $ $ $ $

2012

Direct and facultative inward business:

Estimate of cumulative claims

– End of the accident year 10,295,416,287 623,314,627 978,264,809 582,129,215 618,955,631 698,862,078 720,922,154

– One year later 10,336,769,545 552,174,718 635,593,523 588,167,290 547,117,260 626,253,445

– Two years later 13,114,567,787 507,245,485 595,284,267 540,590,559 590,650,780

– Three years later 12,528,046,834 450,395,492 556,565,570 573,990,173

– Four years later 11,971,951,699 415,184,433 563,391,082

– Five years later 11,631,905,772 406,796,126

– Six years later 10,804,362,994


for the year ended

31 December 2012 10,804,362,994 406,796,126 563,391,082 573,990,173 590,650,780 626,253,445 720,922,154 14,286,366,754

Cumulative payments to

31 December 2012 (10,639,752,865) (361,601,638) (445,580,437) (342,685,324) (282,129,308) (177,676,144) (146,539,289) (12,395,965,005)

Liabilities recognised in the

consolidated statement of fi nancial

position as at 31 December 2012 164,610,129 45,194,488 117,810,645 231,304,849 308,521,472 448,577,301 574,382,865 1,890,401,749

Inward treaty business as at

31 December 2012 810,033

Total gross liabilities included in the


position (note 21) 1,891,211,782





Claims development (continued)

Analysis of claims development – gross (continued)



$ $ $ $ $ $ $ $

2011




– One year later 9,507,114,175 829,655,370 552,174,718 635,594,523 588,167,290 547,117,260

– Two years later 12,364,520,615 750,047,172 507,245,485 595,284,267 540,590,559


– Four years later 11,219,548,730 752,402,969 415,184,433

– Five years later 10,900,377,678 731,528,094


Estimate of cumulative

claims for the year ended

31 December 2011 10,076,148,713 731,528,094 415,184,433 556,565,570 540,590,559 547,117,260 698,862,078 13,565,996,707


31 December 2011 (9,931,482,793) (678,752,140) (340,114,477) (380,755,645) (270,382,863) (211,091,866) (64,681,370) (11,877,261,154)





31 December 2011 733,641

Total gross liabilities included in

the consolidated statement

of fi nancial position (note 21) 1,689,469,194






Analysis of claims development – net of reinsurance



$ $ $ $ $ $ $ $

2012




– One year later 5,692,992,059 340,374,120 387,611,571 383,829,982 360,330,335 419,670,431

– Two years later 6,832,774,569 345,727,052 346,173,738 372,821,574 402,275,312


– Four years later 6,031,219,970 296,321,499 345,121,238

– Five years later 5,895,479,028 292,356,312




31 December 2012 5,507,465,848 292,356,312 345,121,238 400,248,972 402,275,312 419,670,431 373,321,034 7,740,459,147


31 December 2012 (5,430,818,324) (260,615,204) (253,167,422) (237,392,719) (174,196,957) (122,782,189) (74,892,636) (6,553,865,451)





31 December 2012 810,033

Total net liabilities included in








Analysis of claims development – net of reinsurance (continued)



$ $ $ $ $ $ $ $

2011




– One year later 5,364,645,854 328,346,205 340,374,120 387,611,571 383,829,982 360,330,335

– Two years later 6,565,227,883 267,546,686 345,727,052 346,173,738 372,821,574


– Four years later 5,769,780,259 261,439,711 296,321,499

– Five years later 5,644,610,665 250,868,363




31 December 2011 5,265,264,713 250,868,363 296,321,499 335,954,589 372,821,574 360,330,335 440,204,133 7,321,765,206


31 December 2011 (5,194,408,893) (220,611,421) (247,039,584) (202,988,777) (178,409,070) (123,201,376) (53,232,269) (6,219,891,390)





31 December 2011 733,641

Total net liabilities included in






Liquidity risk

The Group is exposed to daily calls on its available cash resources to settle claims arising from insurance

contracts. There is a risk that cash will not be available to settle claims liabilities when due.

The Group has established procedures to monitor and control its daily cash fl ow by placing surplus funds

as one-month bank deposits so as to mature at weekly intervals in order to meet unexpected cash demand

and to comply with the regulatory solvency requirement.

The following table presents an analysis of the remaining contractual maturity of insurance liabilities and

other fi nancial liabilities of the Group and the Company as at 31 December 2012 and 2011 based on the

agreed repayment terms, except the insurance funds, which is based on the expected maturity determined

from historical data.

The Group

Carrying Within 1 year More than

amount 1 year to 5 years 5 years

$ $ $ $

2012

Insurance payables 352,020,540 351,708,067 312,473 –

Provision for outstanding claims 1,891,211,782 399,775,101 1,008,148,337 483,288,344

Other fi nancial liabilities 104,189,200 100,493,308 3,695,892 –

2,347,421,522 851,976,476 1,012,156,702 483,288,344

2011

Insurance payables 287,251,355 287,251,067 288 –

Provision for outstanding claims 1,689,469,194 427,035,865 846,941,444 415,491,885


2,072,279,043 806,326,753 850,460,405 415,491,885




Liquidity risk (continued)

The Company

Carrying Within 1 year More than

amount 1 year to 5 years 5 years

$ $ $ $

2012

Insurance payables 352,020,540 351,708,067 312,473 –

Provision for outstanding claims 1,891,211,782 399,775,101 1,008,148,337 483,288,344


2,318,125,821 822,697,802 1,012,139,675 483,288,344

2011

Insurance payables 287,251,355 287,251,067 288 –

Provision for outstanding claims 1,689,469,194 427,035,865 846,941,444 415,491,885


2,044,732,719 778,780,429 850,460,405 415,491,885

Credit risk

Credit risk is risk due to uncertainty in a counterparty’s ability to meet its obligations. The Group has

exposure to credit risk in both insurance and investment operations. The maximum exposure to credit risk

is represented by the carrying amount of each fi nancial or insurance asset in the consolidated statement of

fi nancial position after deducting any impairment allowance.

The Group is subject to the credit risk of its insurance receivables. The creditworthiness of these

counterparties is considered by reviewing their fi nancial strength prior to fi nalisation of any contract and

transactions. The Group maintains records of the payment history for signifi cant contract holders with

whom they conduct regular business. In this regard, the directors of the Company expect that the credit

risk of the Group is signifi cantly reduced.

Reinsurance is used to manage insurance risk. This does not, however, discharge the liability of the

Group as the primary insurer. If a reinsurer fails to pay a claim for any reason, the Group remains liable

for the payment to the policyholder. To reduce such risks, a list of approved reinsurers is maintained and

reviewed regularly and the reinsurance business across various reinsurers is dispersed. Business may only

be ceded to companies appearing on the approved list. Reinsurers are ultimately selected on the basis of

their fi nancial condition, history of cooperation, quality of service and price of their reinsurance products. In

addition, strict debt collection procedures are established and closely followed by the Group.

Specifi cally, the exposure of credit risk relates to reinsurers’ share of insurance funds (excluding provision

for unearned premiums) and reinsurance debtors. For reinsurers’ share of insurance funds (excluding

provision for unearned premiums), the Group monitors the fi nancial stability of the reinsurers periodically

and makes cash calls to reinsurers on signifi cant claims to reduce the risk of default. In addition, statements

of account are sent quarterly to reinsurers to verify the balances due from/to them.




Credit risk (continued)

The Group is also subject to the credit risk of the intermediaries, such as agents and brokers, direct

sales and other fi nancial institutions, which act as distribution channels. As a result, strict internal policies

are followed to closely monitor and assess the fi nancial strength of each intermediary. Based on such

assessment, credit periods up to a maximum of four months are extended to the Group’s largest and most

reputable intermediaries.

The Group’s investments in debt securities are subject to credit risk. Deterioration of the fi nancial condition

or results of operations of the issuers of these instruments may cause a delay in payments of principal

or interest when due, and may also result in potential loss in the market value of the securities. As at 31

December 2012 and 2011, none of debt securities held by the Group and the Company was impaired. It is

the Group’s policy to invest in bonds with ratings of investment grade or above, to limit exposure to credit

risk.

The credit risk on fi xed bank deposits is limited because the counterparties are banks with high credit-

ratings assigned by international credit-rating agencies.

The Group’s concentration of credit risk by geographical location arises mainly from Hong Kong, except for

amounts due from related parties which have approximately 26% (2011: nil) of the balance arising from the

PRC.

Market risk

Market risk is the risk of loss of fair value resulting from adverse fl uctuations in interest rates, equity prices

and foreign currencies.

The Group is exposed to market risk from its investment portfolio and insurance activities. Market risk is

managed by setting the maximum allowed risk limit for each type of risk approved by the board of directors

annually and by monitoring any adverse deviation from these allowed risk limits on an ongoing basis.

Sensitivity analysis is performed and reviewed by the board of directors and the Investment Committee on a

half-yearly basis. In management’s opinion, the sensitivity analysis is unrepresentative of the market risk as

the year end exposure does not refl ect the exposure during the year.

The sensitivities do not incorporate actions that could be taken by management to mitigate the effect of the

changes in interest rates, foreign exchange rates and equity prices, nor for any consequential changes, that

could accompany such changes.




Market risk (continued)

Interest rate risk

Interest rate risk is the risk to the earnings or market value of the investment portfolio due to the uncertainty

in the future interest rates. The exposure of the Group and the Company to fair value interest rate risk

primarily results from the holding of debt securities carrying interest at fi xed rates. As at 31 December

2012, the Group and the Company held debt securities and certifi cates of deposits of approximately

$1,722 million (2011: $1,451 million) which carry interest at fi xed rates. The market price of these debt

securities fl uctuates with changes in interest rates. When interest rates rise, the market value of these debt

securities may fall. When interest rates fall, the market value of these securities may rise. The Group’s debt

securities include government bonds, bonds issued by fi nancial institutions and corporate bonds with a

rating at or higher than investment grade. Interest rate risks may also affect the Group’s future investments.

The Group’s exposure to interest rates on fi nancial assets are detailed in the respective notes to the


The Group and the Company are also exposed to cash fl ow interest rate risk in relation to investments in

variable-rate debt securities and certifi cates of deposits amounting to $nil (2011: $35 million) and bank

deposits amounting to $260 million (2011: $109 million) and $246 million (2011: $102 million) respectively.

The Group’s debt securities portfolio is managed by Taiping Assets Management (HK) Company Limited

(“TPA(HK)”) and Hang Seng Investment Management Limited (“HSIML”) under the direction of the Group’s

Investment Committee. The Group manages its exposure to risks associated with interest rate fl uctuations

through quarterly review of its investment portfolio by its Investment Committee, annual in-depth review of

the Group’s investment policy together with TPA(HK) and HSIML and consultation with external fi nancial

investment experts. TPA(HK) and HSIML provide the Group with a monthly report on its investment

portfolio, and the Group monitors trends to refi ne its investment policy accordingly. The Group’s goal is

to maintain liquidity, to preserve capital, to generate stable returns and to achieve better asset to liability

matching.

Sensitivity analysis

As at 31 December 2012, if the interest rate had been 50 basis points higher, with all other variables held

constant, the Group’s and the Company’s fair value reserve of available-for-sale fi xed rate debt securities

may decrease by $50,878,858 (2011: $39,516,053). A signifi cant drop in fair value may result in an

impairment to be recognised in profi t or loss. However, if the interest rate had been 50 basis points lower,

with all other variables held constant, there would be an equal but opposite impact on the fair value of the

fi xed interest debt securities and the fair value reserve.

As at 31 December 2012 and 2011, if the interest rate had been 50 basis points higher/lower, with all other

variables held constant, the directors of the Company consider that the change in interest rate on variable-

rate debt securities, certifi cates of deposits and bank deposits has immaterial impact on the Group’s and

Company’s profi t or loss.

The sensitivity analysis above has been determined assuming that the change in interest rates had occurred

at the end of the reporting period. The analysis is performed on the same basis for 2011.





Foreign currency risk

The Group’s reporting currency is $. The Group has exposure to foreign currency risk as the Group has

underwritten insurance policies and collected premiums in currencies other than the functional currencies of

respective group entities that hold certain assets and liabilities in such currencies.

Other than HK$, the Group transacts business mainly in the United States dollar (“USD”) and RMB. USD

and RMB assets mainly comprise investments in securities, cash and cash equivalents and reinsurers’

share of provision for claims liabilities whereas USD and RMB liabilities mainly comprise provision for claims

liabilities and insurance payables. The currency position of assets and liabilities is monitored by the Group

periodically.

The table below summarises the Group’s exposure to foreign currency exchange rate risk as at 31

December 2012 and 2011. Included in the table are the carrying amounts of the fi nancial instruments and

insurance contracts in $ categorised by the original currency.

The Group

Assets/liabilities

denominated in

functional

currencies of

the respective

HKD RMB USD Others entities Total

$ $ $ $ $ $

2012

Financial assets and

insurance assets – 463,313,671 2,201,536,022 26,248,439 2,133,852,974 4,824,951,106

Financial liabilities and

insurance liabilities 31,189 368,079,899 272,944,616 11,134,782 2,213,268,155 2,865,458,641

2011


insurance assets 21,851 416,489,098 1,716,803,308 28,320,858 1,814,714,387 3,976,349,502


insurance liabilities 2,504 10,645,321 154,448,882 18,783,085 2,178,268,375 2,362,148,167





Foreign currency risk (continued)

The table below summarises the Company’s exposure to foreign currency exchange rate risk as at 31

December 2012 and 2011. Included in the table are the carrying amounts of the fi nancial instruments and

insurance contracts of the Company in $ categorised by the original currency.

The Company

Assets/liabilities

denominated in

functional

currencies of

the respective

RMB USD Others entities Total

$ $ $ $ $

2012


insurance assets 463,313,671 2,201,535,415 26,248,439 2,067,848,381 4,758,945,906


insurance liabilities 368,079,899 272,944,616 11,134,782 2,184,003,933 2,836,163,230

2011


insurance assets 416,489,098 1,716,789,985 28,320,858 1,775,877,524 3,937,477,465


insurance liabilities 10,645,321 154,448,882 18,783,085 2,150,724,555 2,334,601,843





Foreign currency risk (continued)

Sensitivity analysis

The Group and the Company have assessed that a hypothetical 5% appreciation in RMB would increase

profi t after tax by approximately $3,976,000 (2011: $16,944,000). However, a hypothetical 5% depreciation

in RMB would have an equal but opposite impact on profi t/loss after tax.

The Group and the Company have assessed that a hypothetical 1% appreciation in USD would increase

profit after tax by approximately $16,104,000 (2011: $13,046,000). However, a hypothetical 1%

depreciation in USD would have an equal but opposite impact on profi t/loss after tax.

The sensitivity analysis has been determined assuming that the change in foreign exchange rates had

occurred at the end of the reporting period and had been applied to each of the group entities’ exposure

to currency risk for fi nancial instruments in existence at that date, and that all other variables, in particular

interest rates, remain constant. The analysis is performed on the same basis for 2011. In management’s

opinion, the sensitivity analysis is unrepresentative of the foreign currency risk as the year and the exposure

at reporting date does not refl ect the exposure during the year.

Equity price risk

The equity portfolio is managed by TPA(HK) and HSIML under the direction of the Investment Committee.

Pursuant to the investment guidelines, both TPA(HK) and HSIML may not invest more than 30% of the

funds under its management in equity securities. The Group manages the exposure to equity price risks

through quarterly review of the investment portfolio by the Investment Committee, annual in-depth review of

the investment policy together with TPA(HK) and HSIML and consultation with external fi nancial investment

experts.

The following tables indicate the approximate change in the Group’s and the Company’s fair value reserves

in response to reasonably possible changes in the relevant stock market index (for listed investments) to

which the Group has signifi cant exposure at the end of the reporting period:


2012 2011

Increase/ Increase/

(decrease) (decrease)

in the Effect in the Effect

relevant on fair relevant on fair

risk value risk value

variable reserve variable reserve

$ $

Stock market index in respect

of listed investments:

Hang Seng Index 20% 29,488,850 20% 46,169,143

Hang Seng Index (20%) (29,488,850) (20%) (46,169,143)





Equity price risk (continued)

The sensitivity analysis has been determined assuming that the reasonably possible changes in the relevant

stock market index had occurred at the end of the reporting period and had been applied to the exposure

to equity price risk in existence at that date. It is also assumed that the fair values of the Group’s equity

investments would change in accordance with the historical correlation with the relevant stock market

index, that none of the Group’s available-for-sale investments would be considered impaired as a result

of a reasonably possible decrease in the relevant stock market index, and that all other variables remain

constant. The analysis is performed on the same basis for 2011. In management’s opinion, the sensitivity

analysis is unrepresentative of the equity price risk as the year and the exposure at the reporting date does

not refl ect the exposure during the year.

Fair value measurements recognised in the statement of fi nancial position

The fair value of fi nancial assets and fi nancial liabilities are determined as follows:

• the fair values of unlisted available-for-sale securities, as set out in note 18, are determined based on

quoted bid prices available from the relevant dealers and brokers;

• the fair values of fi nancial assets with standard terms and conditions and traded on active liquid

markets are determined with reference to quoted market bid prices; and

• the fair values of other fi nancial assets and fi nancial liabilities are determined in accordance with

generally accepted pricing models based on discounted cash fl ow analysis using prices or rates from

observable current market transactions as inputs.

The following table provides an analysis of financial instruments that are measured subsequent to

initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is

observable.

• Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active market

for identical assets or liabilities.

• Level 2 fair value measurements are those derived from inputs other than quoted prices included

within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e.

derived from prices).

• Level 3 fair value measurements are those derived from valuation techniques that include inputs for

the asset or liability that are not based on observable market data (unobservable inputs).




Fair value measurements recognised in the statement of fi nancial position (continued)

2012

Level 1 Level 2 Level 3 Total

$ $ $ $



Listed equity securities 144,849,915 – – 144,849,915

Unlisted equity securities – 92,006,068 14,132,141 106,138,209

Listed debt securities 1,504,416,798 – – 1,504,416,798

Unlisted debt securities – 212,608,791 – 212,608,791

Certifi cates of deposits – 5,027,500 – 5,027,500

Other – – 328,000 328,000

1,649,266,713 309,642,359 14,460,141 1,973,369,213

2011

Level 1 Level 2 Level 3 Total

$ $ $ $



Listed equity securities 219,740,002 – – 219,740,002

Unlisted equity securities – – 32,967,851 32,967,851

Listed debt securities 1,257,956,038 – – 1,257,956,038

Unlisted debt securities – 214,963,092 – 214,963,092

Certifi cates of deposits 7,821,912 4,951,500 – 12,773,412

Other – – 328,000 328,000

1,485,517,952 219,914,592 33,295,851 1,738,728,395




Fair value measurements recognised in the statement of fi nancial position (continued)

Reconciliation of Level 3 fair value measurements of fi nancial assets

Unlisted equity securities

and other securities

2012 2011

$ $

At 1 January 33,295,851 54,100,290

Gains or losses recognised in:

– profi t or loss on impairment (2,943,817) (10,098,373)

– profi t or loss on disposal 5,295,031 12,089,341

– other comprehensive income (5,528,989) 2,621,534

Purchases 218,705 408,380

Disposals/return of capital (15,823,049) (25,825,321)

Exchange difference (53,591) –

At 31 December 14,460,141 33,295,851



33. Material related party transactions

Recurring transactions with related parties

Notes 2012 2011

$ $

Transactions with the TPG and its

subsidiaries (excluding CTIH Group)

(“Taiping Group”):

Business ceded from fellow subsidiaries

– Inward reinsurance premiums (i) 4,029,313 132,810

Gross written premiums (i) 1,565,519 1,393,658

Rental income (ii) 14,195,054 10,231,224

Building management fee (iii) (3,784,382) (3,856,246)

Back offi ce service fees (iv) (1,021,816) (668,209)

Training fee (v) – (1,006,992)

Transactions with the CTIH Group:

Business ceded from fellow subsidiaries (vi)

– Inward reinsurance premiums 395,525,694 141,554

– Commission expense (178,138,609) (32,209)

– Claims paid (13,802,748) –

Business ceded to fellow subsidiaries (vii)

– Outward reinsurance premiums (59,819,629) (46,677,074)

– Commission income 16,368,849 13,715,561

– Claims recoveries received 24,450,063 17,448,026

Rental income (viii) 4,247,027 3,171,394

Loan interest income (ix) 10,996,635 2,488,390

Brokerage commission income (x) 1,149,424 113,483

Investment management fees (xi) (4,720,933) (4,427,710)

Notes:

Taiping Group

Taiping Group includes TPG and its subsidiaries and associates, other than the entities under CTIH Group as defi ned below.

(i) The Group received gross written premiums and ceded in business from Taiping Group. The terms and conditions

of these contracts that are comparable to those offered by the Group to independent third parties and by the third

party ceding companies, were on normal commercial terms and on an arm’s length basis and in accordance with the

Group’s risk management policy.

(ii) The Group leased a number of offi ces, residential units and car parking spaces including units in China Taiping Tower,

China Insurance Group Building and Fortress Metro Tower to China Taiping Insurance Group (HK) Company Limited

(“TPG(HK)”) and its subsidiaries (other than CTIH Group) and received rental income. The terms and conditions of these

tenancy agreements were negotiated on an arm’s length basis and were entered into on normal commercial terms.



33. Material related party transactions (continued)

Recurring transactions with related parties (continued)

Notes: (continued)

Taiping Group (continued)

(iii) The Group paid building management fees to an associate of TPG for providing building management services to the

Group in respect of China Taiping Tower. The management fee charged by the associate was determined by reference

to the area occupied by the Group and the price was determined on an arm’s length basis.

(iv) A fellow subsidiary of the Group provided back offi ce services to the Group and received service fees from the Group.

(v) The Group paid a training fee to TPG(HK) for providing training services to directors, employees, agents and sales

representatives of the Group. The training fee charged by TPG(HK) was determined by reference to the proportion

of the number of persons from the Group that receive the training services to the total number of persons to which

the training services are provided and/or other reasonable bases as may be determined by the Group and TPG(HK).

TPG(HK) didn’t charge training fee for the current year.

CTIH Group

CTIH Group includes CTIH and its subsidiaries.

(vi) The Group assumed ceded in business from Taiping General Insurance Company Limited (“TPI”) and Taiping Reinsurance

Company Limited (“TPRe”), subsidiaries of CTIH, and incurred commission and claims and made other related payments.

The terms and conditions of these reinsurance contracts were similar to those offered by the third party ceding companies

and were negotiated on an arm’s length basis and were entered into on normal commercial terms.

(vii) The Group ceded gross written premiums to TPRe and TPI, subsidiaries of CTIH, and generated commission and

claims recoveries and made other related payments. The terms and conditions of these reinsurance contracts were

similar to those offered by the third party ceding companies and were negotiated on an arm’s length basis and were

entered into on normal commercial terms.

(viii) The Group leased a number of offi ces and a car parking space in China Taiping Tower to CTIH Group and received

rental income. The terms and conditions of these tenancy agreements were negotiated on an arm’s length basis and

were entered into on normal commercial terms.

(ix) The Group lent CTIH Group a sum of HK$400,000,000 and RMB120,000,000 in August and November 2011 respectively

at interest rate of 1.6% per annum and the loans were renewed in August and November 2012 at interest rate of 3%

and 3.24%, respectively. The terms and conditions of the loan agreements were negotiated on an arm’s length basis

and were entered into on normal commercial terms.

(x) The Group received brokerage commission income from TPI, a subsidiary of CTIH, for providing introducing service to

TPI in respect of insurance business in the PRC. The terms and conditions of the brokerage agreement were negotiated

on an arm’s length basis and were entered into on normal commercial terms.

(xi) The Group paid investment management fees to TPA(HK), a subsidiary of CTIH, for provision of investment consultancy

services. The fees were calculated on the basis of (a) a certain percentage of the increase in the net asset value

of the investment fund; and/or (b) a performance bonus fee representing a certain percentage of the amount of net

investment return at the end of the relevant calendar year in excess of an amount equivalent to a certain percentage

of the daily average balance of the settlor’s subscription monies or the increase in the net asset value of the relevant

investment fund managed by TPA(HK); and/or (c) such other bases as may be agreed by the parties to the investment

management agreement.




Transactions with other state-owned enterprises in the PRC

The Group operates in an economic regime currently predominated by entities directly or indirectly owned

by the PRC government through its government authorities, agencies, affi liations and other organisations

(“state-owned entities”).

Transactions with other state-owned entities include but are not limited to the following:

– insurance and other intermediary services; and

– rendering and receiving of utilities and other services.

These transactions are conducted in the ordinary course of the Group’s business on terms similar to those

that would have been entered into with non-state-owned entities. The Group has also established its pricing

strategy and approval processes for major products and services, such as underwriting insurance contracts

and commission income. Such pricing strategy and approval processes do not depend on whether the

customers are state-owned entities or not. Having due regard to the substance of the relationships and the

signifi cance of the transactions with other state-owned entities, the directors are of the opinion that none of

other transactions are material related party transactions that require separate disclosure.

Outstanding balances with related parties

The Group


2012 2011 2012 2011

$ $ $ $

Taiping Group 971,961 387,006 908,393 1,263,483

CTIH Group 746,961,447 550,564,404 2,343,071 5,974,266

The Company


2012 2011 2012 2011

$ $ $ $

Taiping Group 971,961 387,005 908,393 1,263,483

CTIH Group 746,941,979 550,564,404 2,343,073 5,974,266

Amounts due from CTIH Group include loans to CTIH at $547,992,400 (2011: $548,020,000) which are

unsecured, bearing interest rate at a range of 3% to 3.24% (2011: 1.6%) per annum and repayable within

one year.

Except for the above, all other balances with the Taiping Group and CTIH Group are unsecured, interest-

free and have no fi xed terms of repayments.




Key management personnel remuneration

Remuneration for key management personnel, including amounts paid to the Company’s directors as

disclosed in note 9, is as follows:

2012 2011

$ $

Short-term employee benefi ts 13,838,824 19,730,081

Post-employment benefi ts 926,672 725,911

14,765,496 20,455,992

34. Retirement benefi ts plans

The Group operates a Mandatory Provident Fund Scheme (the “MPF scheme”) under the Hong Kong

Mandatory Provident Fund Schemes Ordinance and a Staff Provident Fund Scheme (the “SPF scheme”)

under the Occupational Retirement Schemes Ordinance for employees employed under the jurisdiction

of the Hong Kong Employment Ordinance. Both schemes are defi ned contribution retirement plans

administered by independent trustees. Under the MPF scheme, the employer and its employees are

each required to contribute an amount equal to 5% of the employees’ relevant income (but subject to

the maximum relevant income of $25,000 (2011: $20,000) per month). Contributions to the MPF scheme

vest immediately. For the SPF scheme, the Group is required to make contributions based on a certain

percentage of the relevant employees’ salaries which is dependent on their length of service with the

Group. Forfeited contributions to the SPF scheme are used to reduce the Group’s future contributions.

During the year ended 31 December 2012, forfeited contributions used to reduce the Group’s future

contributions amounted to $21,419 (2011: nil).

The Group’s total pension cost charged to the consolidated income statements for both years is disclosed

in note 9.

Five Year Financial Summary


2012 2011 2010 2009 2008

Consolidated Consolidated Consolidated Consolidated Consolidated

$ $ $ $ $

Turnover 1,467,569,326 952,238,827 2,738,792,287 2,232,323,988 1,969,887,435

Gross written premiums 1,467,569,326 952,238,827 2,738,792,287 2,232,323,988 1,969,887,435

Change in gross provision for unearned premiums (225,405,285) (43,292,769) (255,324,303) (40,218,294) (239,325,806)

Gross earned premiums 1,242,164,041 908,946,058 2,483,467,984 2,192,105,694 1,730,561,629

Reinsurers’ share of earned premiums (366,198,232) (310,640,748) (522,014,368) (502,707,375) (512,435,088)

Net earned premiums 875,965,809 598,305,310 1,961,453,616 1,689,398,319 1,218,126,541

Net commission expenses (330,428,590) (129,928,313) (194,612,089) (279,053,676) (285,006,933)

Gross claims paid (518,703,851) (421,828,488) (1,232,071,533) (1,120,288,341) (961,533,523)

Change in gross provision for outstanding claims (201,742,588) 84,933,045 (7,258,277) 55,783,135 68,921,480

Gross claims incurred (720,446,439) (336,895,443) (1,239,329,810) (1,064,505,206) (892,612,043)

Reinsurers’ share of claims incurred 301,676,106 24,118,030 232,640,752 212,829,575 250,019,694

Net claims incurred (418,770,333) (312,777,413) (1,006,689,058) (851,675,631) (642,592,349)

Change in net provision for unexpired risks 18,549,000 696,900 14,529,100 (9,448,000) (7,720,000)

Other operating expenses (124,637,705) (149,673,206) (885,872,818) (731,804,908) (569,392,181)

Underwriting profi t/(loss) 20,678,181 6,623,278 (111,191,249) (182,583,896) (286,584,922)

Investment income 189,969,706 172,266,598 188,598,931 213,010,436 240,296,234

Net realised and unrealised gains/(losses)

on investments 359,320,024 183,979,198 206,868,278 162,798,492 (251,784,123)

Other net gains/(losses) 22,906,084 89,841,284 16,511,527 14,429,137 (26,168,162)

Administrative and other expenses (31,485,150) (23,987,450) (18,964,244) (21,457,994) (22,491,027)

Profi t/(loss) from operations 561,388,845 428,722,908 281,823,243 186,196,175 (346,732,000)

Share of (loss)/profi t of an associate – – – (104,254) 506,466

Gain on disposal of a subsidiary – – 1,326,652,352 – –

Profi t/(loss) before tax 561,388,845 428,722,908 1,608,475,595 186,091,921 (346,225,534)

Income tax expense (29,666,913) (82,828,696) (81,189,394) (2,378,603) (120,462)

Profi t/(loss) for the year 531,721,932 345,894,212 1,527,286,201 183,713,318 (346,345,996)

Five Year Financial Summary


2012 2011 2010 2009 2008

Consolidated Consolidated Consolidated Consolidated Consolidated

$ $ $ $

(restated) (restated)

Assets

Statutory deposits – – – 220,575,716 220,268,135

Property and equipment 357,343,313 359,014,255 319,154,454 467,182,846 470,887,860

Interests in leasehold land held for own

use under operating leases – – – 99,974,405 98,847,513

Investment properties 1,739,920,000 1,389,853,791 1,233,191,518 1,095,100,000 1,087,710,000

Intangible assets 3,101,205 3,383,133 – – –

Interest in an associate – – – – 4,180,421

Deferred tax assets 22,142 – 69,200,000 69,200,000 69,306,841

Investments in securities 1,973,369,213 1,738,728,395 1,804,455,243 2,292,553,965 2,474,758,513

Other investments – – – 34,072,200 34,017,900

Insurance receivables 304,548,418 214,539,738 184,522,096 334,060,310 291,553,045

Other receivables 72,895,973 55,883,828 1,314,109,860 68,975,915 91,377,069

Reinsurers’ share of insurance funds 792,187,790 639,700,274 756,835,192 974,406,020 1,113,887,300

Amounts due from related parties 747,933,408 550,951,410 446,376 663,173,141 27,167,640

Pledged deposits 20,000,000 – – – 83,276,242


more than three months 18,579,050 50,904,226 1,505,846 92,663,441 123,223,221

Cash and cash equivalents 898,010,644 726,146,341 940,870,604 1,159,196,385 1,132,424,847

6,927,911,156 5,729,105,391 6,624,291,189 7,571,134,344 7,322,886,547

Liabilities (3,047,916,468) (2,514,997,704) (2,562,520,852) (3,797,877,705) (3,876,560,087)

Net assets 3,879,994,688 3,214,107,687 4,061,770,337 3,773,256,639 3,446,326,460


Share capital 2,586,000,000 2,586,000,000 2,586,000,000 2,586,000,000 2,586,000,000

Reserves 1,293,994,688 628,107,687 1,475,770,337 1,187,256,639 860,326,460

Total equity 3,879,994,688 3,214,107,687 4,061,770,337 3,773,256,639 3,446,326,460

Properties Held for Investment


Particulars of properties held for investment by the Group are as follows:

Held by Category of

Location the Group the lease Use

1. Car Parking Space Nos. 129, 136, 139, 100% Long lease Commercial

141, 142, 145, 155, 157-161, 165, 167,

169, 172-174, 183 and 184 on Level 1 (3B)

of the Garage Building City Garden

No. 233 Electric Road

North Point

Hong Kong

2. Car Parking Space Nos. 22 & 23 100% Long lease Commercial

on Level 3 (1B) of the Garage Building

City Garden

No. 233 Electric Road

North Point

Hong Kong

3. Room Nos. 1604 on 16th Floor, 100% Long lease Commercial

1702-1704 on 17th Floor

and 2401-2404 on 24th Floor

China Insurance Group Building

No. 141 Des Voeux Road Central

No. 73 Connaught Road Central

and No. 61-65 Gilman Street

Central

Hong Kong

4. Unit 06 on 35th Floor of Tower A and 100% Long lease Residential

Unit 02 on 29th Floor of Tower B Fortress Metro Tower

No. 238 King’s Road

North Point

Hong Kong

5. Units 02 on 22nd Floor and 100% Medium lease Commercial

23rd Floor of Tower B

Fortress Metro Tower

No. 238 King’s Road

North Point

Hong Kong

6. 2nd Floor 100% Medium lease Commercial

Silvercorp International Tower

Nos. 707-713 Nathan Road

Mongkok

Kowloon

7. Offi ce 1 on 4th Floor 100% Medium lease Commercial

Yuen Long Trade Centre

Nos. 99-109 Castle Peak Road

Yuen Long

New Territories

Properties Held for Investment


Held by Category of

Location the Group the lease Use

8. Offi ce No. 1501 on 15th Floor 100% Long lease Commercial

Island Centre, No. 1 Great George Street

Causeway Bay

Hong Kong

9. Flats A and B on 4th Floor and 100% Medium lease Residential

5th Floor (Duplex) (with the Terrace)

No. 1 Vista Avenue, La Vista

Discovery Bay City

Lantau Island

New Territories

10. Flat G on 1st Floor of Costa Court 100% Medium lease Residential

No. 28 Costa Avenue, La Costa

Discovery Bay City

Lantau Island

New Territories

11. Flat D on 1st Floor 100% Medium lease Residential

No. 9 Middle Lane

Midvale Village

Discovery Bay City

Lantau Island

New Territories

12. House Nos. 67 and 104 100% Medium lease Residential

Seabee Lane

Headland Village No. 67 and 104 Seabee Lane

Discovery Bay City

Lantau Island

New Territories

13. Shops 6A & 6B on Ground Floor 100% Medium lease Commercial

Parkes Commercial Centre

Nos. 2-8 Parkes Street

Jordan

Kowloon

14. 30th and 31st Floor 100% Long lease Commercial

China Insurance Group Building

No. 141 Des Voeux Road Central

No. 73 Connaught Road Central

and Nos. 61-65 Gilman Street

Central

Hong Kong

15. Shop A&B on G/F & M/F, 100% Long lease Commercial

1-5/F, Rm. 601-603 on 6/F, 7/F, 9-12/F,

14-17/F, 22-24/F, Phase I, and

Shop C on G/F & M/F, 1-7/F,

9-12/F, 14-17/F, 21/F, 23/F,

Phase II, China Taiping Tower

No. 8 Sunning Road

Causeway Bay

Hong Kong

china taiping insurance (hk) company limited china taiping

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