2Q17 / 1H17 earnings jumped 165% / 86% y-o-y on strong performance across life,non-life and banking business.    Looking past VNB decline. 2Q17 / 1H17 earnings at Cathay Life jumped 116% /107% mainly on another c.TWD16.2bn realized gains on equities (vs TWD17.6bn in1Q17). While value of new business (VNB) fell 39% y-o-y in 1H17 owing to migrationto lower-margin investment linked products (keeping first year premium (FYP) growthpositive) and the management seems less confident in meeting VNB target of 2015level (TWD57.6bn) in 2017, the negative impact was partly offset by lower expenseratio associated and we are assured by management commitment to 3-5% long-termaverage VNB growth target. Hedging cost dropped from 1.55% in 1Q17 to 1.11% in1H17, implying c.90bp improvement in 2Q17 and demonstrating the benefits fromcross-hedging. Unrealized gains on AFS financial assets still managed increasec.TWD35bn in spite of c.TWD45.4bn realized in 1H17 on equity and debt.    Positive NIM surprise. 2Q17 / 1H17 earnings at Cathay United Bank (CUB)increased 50% / 13% y-o-y. Net interest margin (NIM) in 2Q17 rose 7bp q-o-q,outperforming peers (out of those that have reported) which at best showed stableNIM. Drivers of NIM pick-up are 1.1ppt q-o-q increase in FX loan mix and 0.5pptincrease in SME loan mix and reduction in lower-yielding government-related loansdespite lower loan-deposit ratio (LDR). Management is looking for mid-single-digitdecline in fee income ratio for 2017e and slower loan growth in 2H17.    Upgrade to Buy and increase our target price by 5% to TWD56. We raise our2017-19e earnings estimates by average c.12% (see page 3 for details). Risk-rewardis attractive at current valuation with (i) Cathay Life benefiting from subsiding andmore-stable-than-peers hedging cost given the savings from cross-hedging andhigher FX volatility reserve, (ii) potential for investment yield enhancement in light ofthe TWD27bn increase in AFS unrealized gains despite TWD16bn gains alreadyrealized on equities in 2Q17 and (iii) more resilient net interest margin performancethan peers. Key downside risks are (i) renewed hedging cost pressure from anotherround of TWD appreciation, (ii) further slides in US treasury yield and credit spread,(iii) unexpected losses on equities and (iv) a shift to lower-margin products.

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