NOTES TO THE FINANCIAL STATEMENTS OF HM COVER

NOTES TO THE FINANCIAL STATEMENTS OF HM COVER

DECEMBER 31 2004

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Note1-Purpose & Constitution

The Association stands= on a mutual basis and is to uphold prestige and safeguard the interests of its Members, for which the Association affords insurance cover and offers professional services. The liability of the Members is limited to the calls and supplementary calls se= t by the directors and in the event of its liquidation, any net assets of the Association are to be returned equitably to those Members insured by it dur= ing its final underwriting year.

Note2-Accounting Principle

a&= nbsp; Accounting Convention=

These F= inancial Statements have been prepared in accordance with the material Accounting Principles based on applicable Chinese accounting standards and Generally Accepted Accounting Principles.

= &nb= sp; = &nb= sp; =

b Accounting Year

These F= inancial Statements reflect the period from Jan.1, 2004 to Dec. 31, 2004.=

c&= nbsp; Annual Accounting and Policy= Year Accounting

The Inc= ome And Expenditure Account is prepared on an annual accounting basis and includes = all the premiums for policies incepting in the year and the cost of claims and reinsurance for the current year and any adjustments relating to earlier ye= ars together with operating expenses, financial expenses and investment income. All revenue transacti= ons appear in the Income And Expenditure Account and= are allocated to a policy year or to a reserve.

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Calls a= nd premiums, reinsurance premiums, claims and claim recoverable from reinsurers or third parties are allocated to the policy years to which they relate. Bo= th the realised and unrealise= d investment income and operating expenses are allocated to the current polic= y year.

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d&= nbsp; Valuation= basis

The Ass= ociation adopts accrual basis in accounting unless otherwise stipulated. The values of all assets except the equity investment of listed company which is stated at its book value at the balance sheet date are to be recorded at historical costs at the time of acquisition.

e&= nbsp; Bookkeeping base currency

The Uni= ted States Dollar is the bookkeeping base currency of the Association. The Association adopts the principle of separate accounting for similar account= s. Balances of RMB accounts at the end of year shall be translated into the US Dollar at the official exchange rate prevailing on December 31,2003. The differences arising from the translation are stated as gains or losses in the Income and Expenditure Account.=

f&= nbsp; Cash Balance

Cash in= hand, bank deposits and other monetary assets are listed separately for their different keeping place and certain purpose in bookkeeping. Their total amo= unt in the name of cash balance is showed as a current asset in the Balance She= et.

g&= nbsp; Calls and Premiums Receivab= le

It refe= rs to the accumulated amount of calls and premiums receivable due from members. The Association conducts the direct write-off method and the bad debts are charged to the reserves directly und= er the Directors decision when the calls and premiums are discovered to be uncollectible.

h&= nbsp; Guarantee=

It refe= rs to cash balance held by domestic or overseas Banks for issuing letters of guarantee.

i&n= bsp; Investments=

The equ= ity method is used when the Association has significant influence, control or co-control over the operation of the invested listed company. In the equity method, the initial = or supplementary investment is firstly recorded at cost but later is adjusted = each year for changes in the equity in the invested company. The Association recognizes the bal= ance from the changes of the equity in the invested company as an investment inc= ome or loss. The cost method is u= sed for other long-term investments.

The inv= estment income includes all the gains and losses.&= nbsp; The investment income(or loss) less the investment management cost is stated in the Income and Expenditure Account.=

Since t= he policy year of 1998 developed the new cover of Hull and Machinery risks, its income ha= s been involved the whole investments of the Association. Ensuring to share equally and separately the full benefits of investments of the Association for the Members of P&I cover and Hull and Machinery cover, the Association distributes the amount of long-term investments together with their benefit= s according to the actual running condition of funds for years.

j&= nbsp; Liabilities Provision<= /span>

Liabili= ties provisions and reinsurance recoveries receivable of open and closed policy years are drawn based on the best estimates of the managers and consent of = the chief underwriter to prepare for the claims which belong to the policy years separately and their difference is charged to the Income and Expenditure Account. They are also stated= in the Balance Sheet separately.

k&= nbsp; Reserves<= span lang=3DEN-US style=3D'font-family:"Times New Roman"'>=

The res= erves are the net assets of the Association and available to meet any deteriorati= on in the open and closed policy years and to contribute to overspill claims, actual or potential investment losses or other certain purposes.

l&= nbsp; Calls and Premiums

Calls a= nd premiums include gross calls, supplementary premiums and release call, less return premiums. These calls and premiums are the total receivable for the whole period of cover provided by the contracts incepting during the accoun= ting period together with any premium adjustments relating to prior accounting periods. The amount of calls = and premiums less reinsurance premiums is credited to the Income and Expenditure Account.

m&= nbsp; Reinsurance Premiums

The lia= bilities of the Association are reinsured above certain levels with other association abroad. This item shows the a= mount of the reinsurance premiums the Association paid to other association abroa= d.

n&= nbsp; Claims=

The cla= ims include all claims incurred during the year, whether paid or estimated, and adjustments for claims outstanding from previous years. The estimates for known outstanding claims are based on the best estimates and judgement of the managers of the likely final cost of individual cases based on curre= nt information. The reinsured recoveries and the claims recoveries from the third party are both as the anti-items to the claims and credited in Income and Expenditure Account.

o&= nbsp; Claims Recoveries From the T= hird Party

It refe= rs to the amount recovered from the third liability party, which is credited into Income and Expenditure Account as the deduction of claims.

p&= nbsp; Reinsured= Recoveries=

The lia= bilities of the Association are reinsured above certain levels with other association abroad. It is the anti-item t= o the claims paid and credited in the Income and Expenditure Account. Accordingly= the reinsurance recoveries receivable is listed as an asset in the Balance Shee= t.

q&= nbsp; Operating= Expenses

These i= nclude management costs and costs of Board of Directors. The management costs cover the cos= t of providing offices, staff, communications, travel and administration. The costs of Directors include the= cost of meetings of members and Board meetings, travels and other costs. It has been drawn on the ratio in = accordance with the board of Director's instruction and is listed in the Income and Expenditure Account.

r&= nbsp; Taxation<= span lang=3DEN-US style=3D'font-family:"Times New Roman"'>=

The Ass= ociation enforces the relevant tax policies of People’s Republic of China.<= o:p>

s&= nbsp; Related Party Disclosures

The Ass= ociation has no share capital and is controlled by the Members who are also the insureds. The subsequent insurance transactions are consequently deemed to be between rel= ated parties but these are the only transactions between the Association and the Members.

Note 3-Reinsur= ance recoveries receivable(see Note 2p)


	2004	2003
Reinsurance recoveries receivable	&nbs= p; 115,851.77	&nbs= p; 18,206.35
Estimated reinsurance recoveries receivable	&nbs= p; 4,314,813.00	&nbs= p; 2,226,529.74
Gross reinsura= nce recoveries receivable	&nbs= p; 4,430,664.77	&nbs= p; 2,244,736.09


Note 4-Long-te= rm investments & Investment income(see Note 2i)

Net investment income
	2004	2003
Long-term investment income	971,348.29	208,801.63
Other investme= nt income	(6,356.55)	20,791.19
Investment inc= ome	964,991.74	229,592.82
Less: Investme= nt management cost	77,199.34	18,367.43
Net investment income	887,792.40	211,225.39

The balance am= ount with P&I current account at the balance sheet date which is credited = in these Financial Statements as the Long-Term Investments is USD2,259,151.78.

Note 5-Liabili= ties provision (see Note 2j)

		2004	2003
	Policy year
	2004	&nbs= p; 1,313,913.00
	2003	&nbs= p; 975,221.00	&nbs= p; 1,905,939.00
	2002	&nbs= p; 1,129,400.00	&nbs= p; 1,608,500.00
	2001	&nbs= p; 130,000.00	&nbs= p; &= nbsp; 212,411.50
	2000	&nbs= p; &= nbsp; 51,000.00	&nbs= p; &= nbsp; &nbs= p; -
	1999	&nbs= p; &= nbsp; 39,336.00	&nbs= p; &= nbsp; 42,256.76
	Total	&nbs= p; 3,638,870.00	&nbs= p; 3,769,107.26
	Gross liabilit= ies provision	&nbs= p; 7,953,683.00	&nbs= p; 5,995,637.00
	Provision recoveries receivable for reinsurance recoveries	(4,314,813.00)	(2,226,529.74)
	Net liabilities provision	3,638,870.00 <= o:p>	3,769,107.26 <= o:p>

Note 6-Reserve= s (see Note 2k)

			2004	2003
	Policy Year
	2004		2,724,613.64
	2003		(149,553.50)	(683,737.22)
	2002		(372,255.46)	(486,604.55)
	2001		(480,495.02)	(518,395.69)
	2000		1,304,589.55	867,362.43
	1999		722,770.71	719,849.95
	1998		1,080,484.28	1,080,484.28
	Total		4,830,154.20	978,959.20

Note 7-Calls &= amp; premiums (see Note 2l/m)

Net Calls & Premiums
		2004	2003
Calls & premiums	A	6,701,061.37	&nbs= p; 5,491,030.75
Reinsurance premiums	B	3,000,693.28	&nbs= p; 3,014,974.32
Net calls & premiums =	A－B	3,700,368.09	&nbs= p; 2,476,056.43


Calls & Premiums
		2004	2003
Policy year
2004		6,821,226.09
2003		(305.00)	&nbs= p; 5,093,603.22
2002		(119,859.72)	&nbs= p; 426,302.53
2001			(28,875.00)
Total		6,701,061.37	&nbs= p; 5,491,030.75


Reinsurance Premiums
		2004	2003
Policy year
2004		3,032,966.35
2003		(85,142.9= 8)	3,014,974.32
2002		52,= 869.91
2001
Total		3,000,693.28	3,014,974.32

Note 8-Claims = (see Note 2n/o/p)
Net Claims
		2004	2003
Gross claims p= aid	A	1,018,988.44	1,814,250.58
Less: Recoveri= es from 3rd party	B	-	&nbs= p; &= nbsp; - <= /span>
Other P&I association	C	689,220.78	(1,651.36)
Net claims pai= d	A-B-C=3DD	329,767.66 =	1,815,901.94
Movement in provision for outstanding claims:
Provision carr= ied forward	7,953,683.00	5,995,637.00
Provision brou= ght forward	(5,995,637.00)	(3,805,529.53)
Transfers to liabilities provision	E	1,958,046.00	2,190,107.47
Less: Movement= in provision for reinsurance recoveries
Provision carr= ied forward	(4,314,813.00)	(2,226,529.74)
Provision brou= ght forward	2,226,529.74	1,274,388.50
Provision for reinsurance recoveries	F	(2,088,283.26)	(952,141.24)
Net changes in claims provision	G=3DE+F	(130,237.26)	1,237,966.23
Net incurred claims	D+G	199,530.40 =	3,053,868.17

Gross Claims Paid
Policy Year	2004	2003	2002	2001	Total
Items
Particular ave= rage	25,200.01	351,486.17	172,494.10	46,242.82	595,423.10
Collision liabilities	57,066.98	227,668.55	11,098.90	39,000.00	334,834.43
Survey fee	16,949.55	24,455.17	5,063.94	-	46,468.66
Correspondents= fee	359.40	3,091.07	3,269.73	8,932.97	15,653.17
Lawyer's fee	-	26,000.00	-	-	26,000.00
Others	514.47	&nbs= p; - <= /span>	94.= 61	- <= /span>	609= .08
Total	100,090.41	632,700.96	192,021.28 =	94,175.79	1,018,988.44

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