CONTENTS 04 Words from the Chairman 10 Honors and Achievements 12 SKFH Overview 22 2014 Operations Review 36 2015 Business Plan 50 Fulfilling Corporate Social Responsibility 60 Financial Highlights Words from the Chairman In 2014, low inflation, low interest rates, and low growth became the new normal in the global economy. Developed countries faced changing demographics, shrinking labor forces, and slowing wealth creation, while emerging economies, pressured by tighter liquidity in the United States, faced capital flight and economic restructuring. In Taiwan, an aging population, rising rates of dementia and disability, and declining birthrates have heightened care problems and market demand. In order to further meet the protection needs of the people of Taiwan, as well as respond to passage of the draft Long-term Care Service Act in 2014, Shin Kong Financial Holding (SKFH) is actively developing care policies and has completed the roll out of a full line of long-term care (LTC), quasi LTC and disability policies as the iron triangle of its LTC product offering. True to the metaphor that "a bicycle must always move forward to maintain balance," SKFH will seize important trends in 2015, such as the Internet of Things and Big Data. The company will integrate "life insurance, banking, hospital, health management and security" channels to provide wealth management, psychological, health, and security related services and share with customers the values of "discovering health and wealth and lighting up a LOHAS life." The company will also actively invest in and apply innovations in mobile banking, online policy application and third-party payment technologies to increase the value of its financial channels and services and drive growth. In 2015, SKFH will actualize its forward-looking business philosophy through specific strategies designed to continue creating value for shareholders. Improving Efficiency, Adjusting Earnings Structure In 2014, SKFH continued a strategy to steadily grow its core businesses. Consolidated total assets reached NT$2.8 trillion, up 10.4% from 2013; shareholders' equity increased to NT$110.85 billion, up 9.8% from the year before; and book value per share reached NT$11.27. Consolidated after-tax profit for the year was stable, at NT$7.92 billion. Shin Kong Life Insurance (SKL) grew its core business in 2014, increasing total premium to NT$210.21 billion, up 23.3% from 2013, while first year premium (FYP) grew 60.0% to NT$90.19 billion in the same period. The company's product strategy in 2014 focused on foreign currency traditional policies, with sales amounting to NT$29.24 billion, or 32.4% of total FYP. Foreign currency policies helped SKL to avoid foreign exchange hedging costs and were exempt from overseas investment ceiling, helping SKL to achieve stable interest spreads with proper asset-liability match and increasing recurring income. Moreover, in response to social change, the company continued to pay attention to the problem of aging demographics and LTC policies with the debut of LTC, quasi LTC and disability policies. These three types of policy contributed NT$1.82 billion to sales in 2014, boosting health insurance FYP to NT$3.50 billion, up 47.7% from 2013 and securing a market share of 12.5%. In 2015, SKL will continue to optimize insurance policy packages, promote sales of whole life and health policies, and reduce cost of liability by over 10 bps. Through properly-managed foreign currency hedging, hedging 4 2014 ANNUAL REPORT 2014 ANNUAL REPORT 5 cost in 2014 was maintained at just 0.37%. The Your Customer) management, as well as expand company also recognized domestic and foreign its customer base, with an aim to achieve 10% cash dividends of NT$8.59 billion, and overall revenue growth. Asset quality remained solid. investment return was 4.41%. Consolidated after- The bank's NPL ratio decreased to 0.26% and tax profit was NT$1.71 billion, and consolidated coverage ratio rose to 486.14%, comparable with total assets exceeded NT$1.9 trillion. In the area of industry standards. Looking ahead in 2015, SKB will investment, Taiwan introduced new rules in June continue to rigorously control risks, promote small 2014 exempting investments in foreign currency and medium enterprise (SME) lending, and expand denominated bonds listed on the domestic over- consumer banking operations. The bank is also the-counter bourse from overseas investment limits. committed to increasing non-interest income ratio. SKL therefore actively invested funds from NT dollar In addition, SKB will continue to expand its cash denominated policies in international bonds. At the management operations and increase NT dollar and end of 2014, such investments amounted to about foreign currency demand deposits to lower funding NT$118.76 billion, with an average yield before costs. hedging of 4.4%, much higher than the yield on Other SKFH subsidiaries also performed well domestic bonds. Funds from the sales of foreign in 2014. Shin Kong Investment Trust (SKIT) issued currency policies also were invested in overseas four public funds and one private equity fund. It bonds. The higher yielding foreign currency assets also achieved an industry-beating average return helped the company to increase its overall recurring of 10.2% on domestic equity funds in the past yield after hedging by 20 bps to 3.52%. year. Shin Kong Property Insurance Agency (SKPIA) Shin Kong Bank (SKB) has also continued posted net income of NT$40 million, with number to maintain strong momentum and solid profits of policies sold increasing to 768,000. across business sectors in recent years. In 2014, the bank posted a consolidated after-tax profit Developing Unique Products, of NT$5.16 billion and a return on equity (ROE) Strengthening Integrated of 13.2%. Operations focused on deposit and Marketing loan adjustments and raising customers' overall SKFH has long closely heeded the issue contribution. Loan balances (including revolving of aging. In 2014, the company continued to credit card balances but excluding overdue develop new types of LTC insurance to provide receivables) increased by 7.0% over 2013 to comprehensive LTC protections for the people of NT$482.54 billion; and deposit balances (excluding Taiwan. The company also has integrated affiliate interbank deposits) reached NT$643.85 billion, resources, bringing together "life insurance, up 4.7% from 2013. SKB also grew fee income banking, hospital, health management, and to optimize its earnings structure. Net fee income security" channels to provide one-stop shopping reached NT$3.04 billion, up 11.8% from 2013. service. Through continuous service innovation, Helped by an 85.4% surge in bancassurance fee moreover, SKL has steadily maintained its first-place income, wealth management income increased position in the LTC insurance market. 8.8% year-on-year and closed the year at NT$1.84 billion. In 2015, SKB will continue to develop SKFH places high importance on cross- bancassurance joint marketing advantages, selling operations. The company leverages internal strengthen insurance product marketing, and channels and resources to cross-sell life insurance, deepen corporate and retail banking to develop banking, securities, investment trust, property and wealth management business with mass affluent casualty insurance and other financial products. customers and achieve its revenue growth target This has not only strengthened operating synergies of about 20%. In the corporate finance sector, among subsidiaries, but also created service value treasury marketing unit (TMU) income reached for customers and increased customer stickiness. NT$1.04 billion, up 130.8% year-on-year. In 2015, SKFH's cross-selling performance has been SKB will continue to strictly implement KYC (Know improving each year, rising from NT$570 million 6 2014 ANNUAL REPORT in 2011 to NT$1.48 billion in 2014. SKB achieved overseas bases in Vietnam, Myanmar, Indonesia and bancassurance cross-sales of NT$16.35 billion, Cambodia. SKFH also increased the paid-in capital representing 35.0% of SKL's total bancassurance of Shin Kong Venture Capital by NT$1 billion in premium. In April 2014, SKB shifted to a joint 2014, while the latter invested US$20 million in marketing model to promote SKL insurance Shin Kong Leasing to expand operation scale and products. Wealth management consultants have profitability. directly registered as life insurance agents and core Further rounding out its offering of e-services, system marketing tools and education training SKL released its "Shin Kong Online" policy resources have been used to further advance application platform in March 2015, making it even insurance sales. In addition, premium income easier to purchase travel insurance. SKB established through joint promotions by MasterLink Securities a cloud platform to provide online applications and SKL amounted to NT$580 million. In the area for deposit, credit, auto loan, mortgage, credit of bank and securities cooperation, MasterLink card and wealth management services. The bank Securities brought over NT$10 billion in demand also plans to partner with a third-party payment deposits to SKB through recommended customers. platform operator in Taiwan to provide services, Furthermore, customers recommended by SKB including collection and payment transfers, opening made order transactions amounting to NT$31.02 stored value payment accounts, stored value and billion at MasterLink Securities. The two companies payment. have therefore mutually helped each other to expand operations. SKPIA sold non-life insurance Strengthening Corporate products with promotional help from SKL agents, increasing premium income in 2014 to NT$1.21 Governance, Increasing Company billion, a nearly three-year high. In the future, SKFH Value will continue to use internal resources and channel SKFH has established an independent board to provide even better services for customers oversight mechanism, professional management and create higher profits for the company and its team, and rigorous internal auditing and control shareholders.