WASHINGTON, D.C. 20549
(Name, Telephone, E-mail and/or Facsimile number and Address of Company
Contact Person)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Securities for which there is a reporting obligation pursuant to Section 15(d) of the
Act:
Indicate the number of outstanding shares of each of the Issuer’s
classes of capital or common stock as of the close of the period covered by the annual report.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated
filer,” “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check
one):
If an emerging growth company that prepares its financial statements
in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards † provided pursuant to Section 13(a) of the Exchange Act.
☐
† The term “new or revised financial accounting
standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification
after April 5, 2012.
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution
of securities under a plan confirmed by a court.
PART I
|
Item 1.
|
Identity
of Directors, Senior Management and Advisers
|
Not Applicable.
Item 2.
|
Offer
Statistics and Expected Timetable
|
Not Applicable.
|
A.
|
Selected Financial Data
|
In November 2017, we disposed of Fanhua Bocheng
Insurance Brokerage Co., Ltd., or Bocheng, which is the primary operating entity of our insurance brokerage segment. Accordingly,
the insurance brokerage segment was accounted as discontinued operations. Consolidated statements of operations for the years ended
2013, 2014, 2015 and 2016 have been restated to conform to the current presentation.
The following selected consolidated statements
of income data for the years ended December 31, 2015, 2016 and 2017 and the consolidated balance sheets data as of December 31,
2016 and 2017 have been derived from our audited consolidated financial statements, which are included in this annual report beginning
on page F-1. The selected consolidated statements of income data for the years ended December 31, 2013 and 2014 and the selected
consolidated balance sheets data as of December 31, 2013, 2014 and 2015 have been derived from our consolidated financial
statements, which are not included in this annual report.
Our historical results do not necessarily
indicate results expected for any future periods. The selected consolidated financial data should be read in conjunction
with, and are qualified in their entirety by reference to, our audited consolidated financial statements and related notes
and “Item 5. Operating and Financial Review and Prospects” below. Our audited consolidated financial statements
are prepared and presented in accordance with U.S. GAAP.
|
|
For the Year Ended December 31,
|
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
(in
thousands, except shares, per share and per ADS data
)
|
Consolidated Statements of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
1,418,512
|
|
|
|
1,624,410
|
|
|
|
2,155,264
|
|
|
|
3,746,471
|
|
|
|
3,780,217
|
|
|
|
581,008
|
|
Life insurance business
|
|
|
199,421
|
|
|
|
197,208
|
|
|
|
319,916
|
|
|
|
990,541
|
|
|
|
2,424,444
|
|
|
|
372,630
|
|
P&C insurance business
|
|
|
1,219,091
|
|
|
|
1,427,202
|
|
|
|
1,835,348
|
|
|
|
2,755,930
|
|
|
|
1,355,773
|
|
|
|
208,378
|
|
Claims adjusting
|
|
|
261,206
|
|
|
|
292,981
|
|
|
|
303,846
|
|
|
|
336,413
|
|
|
|
308,256
|
|
|
|
47,378
|
|
Others
|
|
|
13,888
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total net revenues
|
|
|
1,693,606
|
|
|
|
1,917,391
|
|
|
|
2,459,110
|
|
|
|
4,082,884
|
|
|
|
4,088,473
|
|
|
|
628,386
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
(1,094,843
|
)
|
|
|
(1,261,887
|
)
|
|
|
(1,675,262
|
)
|
|
|
(2,906,791
|
)
|
|
|
(2,864,882
|
)
|
|
|
(440,324
|
)
|
Life insurance business
|
|
|
(138,982
|
)
|
|
|
(129,357
|
)
|
|
|
(205,313
|
)
|
|
|
(673,230
|
)
|
|
|
(1,636,340
|
)
|
|
|
(251,501
|
)
|
P&C insurance business
|
|
|
(955,861
|
)
|
|
|
(1,132,530
|
)
|
|
|
(1,469,949
|
)
|
|
|
(2,233,561
|
)
|
|
|
(1,228,542
|
)
|
|
|
(188,823
|
)
|
Claims adjusting
|
|
|
(142,245
|
)
|
|
|
(167,676
|
)
|
|
|
(181,370
|
)
|
|
|
(199,810
|
)
|
|
|
(194,525
|
)
|
|
|
(29,898
|
)
|
Others
|
|
|
(8,933
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
operating costs
|
|
|
(1,246,021
|
)
|
|
|
(1,429,564
|
)
|
|
|
(1,856,632
|
)
|
|
|
(3,106,601
|
)
|
|
|
(3,059,407
|
)
|
|
|
(470,222
|
)
|
Selling expenses
|
|
|
(95,990
|
)
|
|
|
(105,169
|
)
|
|
|
(125,041
|
)
|
|
|
(502,802
|
)
|
|
|
(221,785
|
)
|
|
|
(34,088
|
)
|
General and administrative expenses
(1)
|
|
|
(343,308
|
)
|
|
|
(387,362
|
)
|
|
|
(448,989
|
)
|
|
|
(481,947
|
)
|
|
|
(534,145
|
)
|
|
|
(82,096
|
)
|
Total
operating costs and expenses
|
|
|
(1,685,319
|
)
|
|
|
(1,922,095
|
)
|
|
|
(2,430,662
|
)
|
|
|
(4,091,350
|
)
|
|
|
(3,815,337
|
)
|
|
|
(586,406
|
)
|
Income
(loss) from continuing operations
|
|
|
8,287
|
|
|
|
(4,704
|
)
|
|
|
28,448
|
|
|
|
(8,466
|
)
|
|
|
273,136
|
|
|
|
41,980
|
|
Other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
8,886
|
|
|
|
44,240
|
|
|
|
65,624
|
|
|
|
115,275
|
|
|
|
191,784
|
|
|
|
29,477
|
|
Interest income
|
|
|
84,214
|
|
|
|
82,216
|
|
|
|
57,206
|
|
|
|
6,901
|
|
|
|
25,891
|
|
|
|
3,980
|
|
Others, net
|
|
|
(4,601
|
)
|
|
|
2,030
|
|
|
|
20,964
|
|
|
|
10,341
|
|
|
|
14,284
|
|
|
|
2,195
|
|
Income
from continuing operations before income taxes, share of income of affiliates and discontinued operations
|
|
|
96,786
|
|
|
|
123,782
|
|
|
|
172,242
|
|
|
|
124,051
|
|
|
|
505,095
|
|
|
|
77,632
|
|
Income tax expense
|
|
|
(26,924
|
)
|
|
|
(23,637
|
)
|
|
|
(25,553
|
)
|
|
|
(27,249
|
)
|
|
|
(167,803
|
)
|
|
|
(25,791
|
)
|
Share of income of affiliates
|
|
|
20,621
|
|
|
|
30,649
|
|
|
|
26,924
|
|
|
|
48,293
|
|
|
|
108,944
|
|
|
|
16,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from continuing operations
|
|
|
90,483
|
|
|
|
130,794
|
|
|
|
173,613
|
|
|
|
145,095
|
|
|
|
446,236
|
|
|
|
68,585
|
|
Net income from discontinued operations, net of tax
|
|
|
9,501
|
|
|
|
35,286
|
|
|
|
41,868
|
|
|
|
22,543
|
|
|
|
5,480
|
|
|
|
842
|
|
Net
income
|
|
|
99,984
|
|
|
|
166,080
|
|
|
|
215,481
|
|
|
|
167,638
|
|
|
|
451,716
|
|
|
|
69,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to the noncontrolling interests
|
|
|
4,341
|
|
|
|
4,320
|
|
|
|
5,395
|
|
|
|
10,591
|
|
|
|
2,488
|
|
|
|
382
|
|
Net income attributable to the Company’s shareholders
|
|
|
95,643
|
|
|
|
161,760
|
|
|
|
210,086
|
|
|
|
157,047
|
|
|
|
449,228
|
|
|
|
69,045
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operation
|
|
|
0.09
|
|
|
|
0.13
|
|
|
|
0.14
|
|
|
|
0.12
|
|
|
|
0.36
|
|
|
|
0.06
|
|
Net income from discontinued operation
|
|
|
0.01
|
|
|
|
0.03
|
|
|
|
0.04
|
|
|
|
0.02
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Net income
|
|
|
0.10
|
|
|
|
0.16
|
|
|
|
0.18
|
|
|
|
0.14
|
|
|
|
0.36
|
|
|
|
0.06
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operation
|
|
|
0.09
|
|
|
|
0.13
|
|
|
|
0.14
|
|
|
|
0.11
|
|
|
|
0.36
|
|
|
|
0.06
|
|
Net income from discontinued operation
|
|
|
0.01
|
|
|
|
0.03
|
|
|
|
0.03
|
|
|
|
0.02
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Net income
|
|
|
0.10
|
|
|
|
0.16
|
|
|
|
0.17
|
|
|
|
0.13
|
|
|
|
0.36
|
|
|
|
0.06
|
|
Net income per ADS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operation
|
|
|
1.81
|
|
|
|
2.60
|
|
|
|
2.92
|
|
|
|
2.32
|
|
|
|
7.20
|
|
|
|
1.11
|
|
Net income from discontinued operation
|
|
|
0.11
|
|
|
|
0.62
|
|
|
|
0.73
|
|
|
|
0.39
|
|
|
|
0.09
|
|
|
|
0.02
|
|
Net income
|
|
|
1.92
|
|
|
|
3.22
|
|
|
|
3.65
|
|
|
|
2.71
|
|
|
|
7.29
|
|
|
|
1.13
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operation
|
|
|
1.81
|
|
|
|
2.58
|
|
|
|
2.79
|
|
|
|
2.23
|
|
|
|
7.20
|
|
|
|
1.11
|
|
Net income from discontinued operation
|
|
|
0.10
|
|
|
|
0.61
|
|
|
|
0.70
|
|
|
|
0.37
|
|
|
|
0.09
|
|
|
|
0.02
|
|
Net income
|
|
|
1.91
|
|
|
|
3.19
|
|
|
|
3.49
|
|
|
|
2.60
|
|
|
|
7.29
|
|
|
|
1.13
|
|
Shares used in calculating net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
998,861,526
|
|
|
|
1,005,842,212
|
|
|
|
1,151,705,374
|
|
|
|
1,160,592,325
|
|
|
|
1,231,698,725
|
|
|
|
1,231,698,725
|
|
Diluted
|
|
|
1,000,570,018
|
|
|
|
1,012,591,387
|
|
|
|
1,203,323,521
|
|
|
|
1,208,821,796
|
|
|
|
1,261,223,049
|
|
|
|
1,261,223,049
|
|
_________________________
|
(1)
|
Including
share-based compensation expenses of RMB45.3 million, RMB23.6 million, RMB17.7 million,
RMB4.9 million and nil for the years ended December 31, 2013, 2014, 2015, 2016 and 2017,
respectively.
|
|
|
As of December 31,
|
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
(in thousands)
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
2,284,847
|
|
|
|
2,099,468
|
|
|
|
1,115,172
|
|
|
|
236,952
|
|
|
|
363,746
|
|
|
|
55,907
|
|
Total current assets
|
|
|
3,177,801
|
|
|
|
3,301,726
|
|
|
|
3,513,061
|
|
|
|
3,694,564
|
|
|
|
4,132,527
|
|
|
|
635,158
|
|
Total assets
|
|
|
3,560,730
|
|
|
|
3,748,486
|
|
|
|
4,014,428
|
|
|
|
4,238,568
|
|
|
|
4,737,742
|
|
|
|
728,178
|
|
Total current liabilities
|
|
|
339,425
|
|
|
|
335,440
|
|
|
|
488,448
|
|
|
|
747,119
|
|
|
|
661,860
|
|
|
|
101,725
|
|
Total liabilities
|
|
|
413,968
|
|
|
|
414,226
|
|
|
|
580,859
|
|
|
|
834,474
|
|
|
|
749,349
|
|
|
|
115,172
|
|
Noncontrolling interests
|
|
|
118,665
|
|
|
|
123,508
|
|
|
|
116,139
|
|
|
|
117,242
|
|
|
|
111,342
|
|
|
|
17,113
|
|
Total equity
|
|
|
3,146,762
|
|
|
|
3,334,260
|
|
|
|
3,433,569
|
|
|
|
3,404,094
|
|
|
|
3,988,393
|
|
|
|
613,006
|
|
Total liabilities and shareholders’ equity
|
|
|
3,560,730
|
|
|
|
3,748,486
|
|
|
|
4,014,428
|
|
|
|
4,238,568
|
|
|
|
4,737,742
|
|
|
|
728,178
|
|
Exchange Rate Information
Our business is primarily conducted in China
and all of our revenues are denominated in RMB. This annual report contains translations of RMB amounts into U.S. dollars at specific
rates solely for the convenience of the readers. Unless otherwise noted, all translations from RMB to U.S. dollars in this annual
report were made at a rate of RMB 6.5063 to US$1.00, the noon buying rate in effect as of December 29, 2017 in The City of New
York for cable transfers of RMB, as set forth in H.10 weekly statistical release of the Federal Reserve Bank of New York. We make
no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the
case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through
direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On April 13, 2018,
the noon buying rate was RMB6.2725 to US$1.00.
The following table sets forth information concerning
exchange rates between the RMB and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience
and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our future periodic
reports or any other information to be provided to you.
|
|
Noon Buying Rate
|
|
|
(RMB per US$1.00)
|
Period
|
|
Period
End
|
|
Average
(1)
|
|
Low
|
|
High
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
6.0537
|
|
|
|
6.1412
|
|
|
|
6.2438
|
|
|
|
6.0537
|
|
2014
|
|
|
6.2046
|
|
|
|
6.1704
|
|
|
|
6.2591
|
|
|
|
6.0402
|
|
2015
|
|
|
6.4778
|
|
|
|
6.2869
|
|
|
|
6.4896
|
|
|
|
6.1870
|
|
2016
|
|
|
6.9430
|
|
|
|
6.6549
|
|
|
|
6.9580
|
|
|
|
6.4480
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October
|
|
|
6.6328
|
|
|
|
6.6254
|
|
|
|
6.6533
|
|
|
|
6.5712
|
|
November
|
|
|
6.6090
|
|
|
|
6.6200
|
|
|
|
6.6385
|
|
|
|
6.5967
|
|
December
|
|
|
6.5063
|
|
|
|
6.5932
|
|
|
|
6.6210
|
|
|
|
6.5063
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6.2841
|
|
|
|
6.4233
|
|
|
|
6.5263
|
|
|
|
6.2841
|
|
February
|
|
|
6.3280
|
|
|
|
6.3183
|
|
|
|
6.3471
|
|
|
|
6.2649
|
|
March
|
|
|
6.2726
|
|
|
|
6.3174
|
|
|
|
6.3565
|
|
|
|
6.2685
|
|
April (through April 13)
|
|
|
6.2725
|
|
|
|
6.2889
|
|
|
|
6.3045
|
|
|
|
6.2655
|
|
_____________________________
Source: H.10 weekly statistical
release of the Federal Reserve Bank of New York
|
(1)
|
Annual averages are calculated from
month-end rates. Monthly averages are calculated using the average of the daily rates
during the relevant period.
|
|
B.
|
Capitalization and Indebtedness
|
Not Applicable.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not Applicable.
Risks Related to Our Business and Our Industry
If and when our contracts
with insurance companies are suspended or changed, our business and operating results will be materially and adversely affected.
We primarily act as agents for insurance companies
in distributing their products to retail customers. We also provide claims adjusting services principally to insurance companies.
Our relationships with the insurance companies are governed by agreements between us and the insurance companies. We have entered
into strategic partnership agreements with most of our major insurance company partners for the distribution of life, property
and casualty insurance products and the provision of claims adjusting services at the corporate headquarters level. While this
approach allows us to obtain more favorable terms from insurance companies by combining the sales volumes and service fees of our
affiliated insurance agencies and claims adjusting firms, it also means that the termination of a major contract could have a material
adverse effect on our business. Under the framework of the headquarter-to-headquarter agreements, our affiliated insurance agencies
and claims adjusting firms generally also enter into contracts at a local level with the respective provincial, city and district
branches of the insurance companies. Generally, each branch of these insurance companies has independent authority to enter into
contracts with our affiliated insurance agencies and claims adjusting firms, and the termination of a contract with one branch
has no significant effect on our contracts with the other branches. See “Item 4. Information on the Company — B. Business
Overview — Insurance Company Partners.” These contracts establish, among other things, the scope of our authority,
the pricing of the insurance products we distribute and our fee rates. These contracts typically have a term of one year and certain
contracts can be terminated by the insurance companies with little advance notice. Moreover, before or upon expiration of a contract,
the insurance company that is a party to that contract may agree to renew it only with changes in material terms, including the
amount of commissions and fees we receive, which could reduce our revenues from that contract.
For the year ended December 31, 2017, our top
five insurance company partners were Huaxia Life Insurance Co., Ltd., or Huaxia, Tian'an Life Insurance Co., Ltd., or Tian'an,
China Pacific Property Insurance Co., Ltd., or CPIC, Ping An Property & Casualty Insurance Company of China, Ltd., or Ping
An and PICC Property and Casualty Company Limited, or PICC P&C. Among these top five partners, each of Huaxia and Tian'an accounted
for more than 10% of our total net revenues individually in 2017, with Huaxia accounting for 24.2% and Tian'an for 22.3%.
On March 1, 2017, our subsidiaries were notified
verbally by PICC P&C's local branches that PICC P&C was temporary suspending its business cooperation with us on areas
such as insurance agency, brokerage and claims adjustment because certain of PICC P&C’s senior management members were
being investigated by the government. We have resumed our business cooperation with PICC P&C in certain regions during the
fourth quarter of 2017 and have resumed the settlement of the account receivables from PICC P&C. Part of PICC P&C related
receivables were transferred to the buyer at the time of the disposal of the P&C entities. For further information on this
disposal, please see “Item 4. – Information on the Company – C. Organizational Structure – Recent Principal
Changes in Corporate Structure ”.
If our investments in our
mobile and online platforms are not successful, our business and results of operations may be materially and adversely affected.
We have devoted significant efforts to developing
and managing our mobile and online platforms. On January 1, 2012, we launched Baowang (www.baoxian.com), an online insurance platform
which allows customers to search for and purchase a wide range of insurance products, including travel insurance, accident insurance
and homeowner insurance from various insurance carriers. In October 2012, we launched CNpad Auto, the mobile workstation of our
proprietary sales support system, which enables sales agents to help their clients compare prices, policy benefits and services
from different insurance carriers’ auto insurance policies, and to apply for and complete the purchase of the policy that
best suits their clients’ needs anywhere and anytime. In August 2014, we unveiled eHuzhu (www.ehuzhu.com), an online non-profit
mutual aid platform that provides low-cost risk-protection programs on a mutual aid basis among program members. In August 2014,
we also rolled out Chetong.net (www.chetong.net), an online-to-offline public service platform for the insurance industry that
integrates claims adjustment and auto service resources from around the country to provide claims services such as damage assessment
and loss estimations. In 2015, we sold approximately 80% of the equity interests in the operating entity of Chetong.net to its
management and employees. In September 2017, we launched Lan Zhanggui, an internet-based all-in-one platform which integrates several
of our existing online platforms and allows our agents to access and purchase a wide variety of insurance products, including life
insurance, auto insurance, accident insurance, travel insurance and standard health insurance products from multiple insurance
companies on their mobile devices. In the next few years, we intend to continue to devote significant resources to improving the
technology and content of our existing online and mobile initiatives. However, our efforts to develop our mobile and online platforms
may not be successful or yield the benefits that we anticipate. In addition, our expansion may depend on a number of factors, many
of which are beyond our control, including but not limited to:
|
·
|
the effectiveness of our marketing campaigns to build brand recognition among consumers and our
ability to attract and retain customers;
|
|
·
|
the acceptance of third-party e-commerce platforms as an effective channel for underwriters to
distribute their insurance products;
|
|
·
|
the acceptance of CNpad Auto and Lan Zhanggui as effective tools for sales agents;
|
|
·
|
public concerns over security of e-commerce transactions and confidentiality of information;
|
|
·
|
increased competition from insurance companies which directly sell insurance products through their
own websites, call centers, portal websites which provide insurance product information and links to insurance companies’
websites, and other professional insurance intermediary companies which may launch independent websites in the future;
|
|
·
|
further improvement in our information technology system designed to facilitate smoother online
transactions; and
|
|
·
|
further development and changes in applicable rules and regulations which may increase our operating
costs and expenses, impede the execution of our business plan or change the competitive landscape.
|
On July 27, 2015, the China Insurance
Regulatory Commission, or CIRC, promulgated the Interim Measures for the Supervision of Internet Insurance Business, or Interim
Measures, which immediately became effective and sets forth the qualifications and procedures for insurance intermediaries to operate
internet insurance businesses in China. As advised by our PRC counsel, we have obtained the necessary approvals and licenses and
our operations meet the qualification requirements of the Interim Measures. Since online insurance distribution has emerged only
recently in China and is evolving rapidly, the CIRC may promulgate and implement new laws and regulations to govern this sector
from time to time. We cannot assure you that our operations will always be consistent with the changes and further development
of regulations applicable to us or we will be able to obtain necessary approvals and licenses as required on a timely basis.
Any failure to successfully identify
the risks as part of our expansion into the online and mobile insurance distribution business may have a material adverse impact
on our growth, business prospects and results of operations, which could lead to a decline in the price of our ADSs.
In addition, our efforts to enhance
our technological capabilities and establish a leading position in the online and mobile insurance distribution and online claims
settlement markets require us to incur significant research and development and marketing expenses which may adversely impact our
profitability in the near term.
If we fail to attract and
retain productive agents, especially entrepreneurial agents, and qualified claims adjustors, our business and operating results
could be materially and adversely affected.
A substantial portion of our sales of property
and casualty insurance products and all of our sales of life insurance products are conducted through our individual sales agents,
who are not our employees. Some of these sales agents are significantly more productive than others in generating sales. In recent
years, some entrepreneurial management staff or senior sales agents of major insurance companies in China have chosen to leave
their employers or principals and become independent agents. We refer to these individuals as entrepreneurial agents. An entrepreneurial
agent is usually able to assemble and lead a team of sales agents. We have been actively recruiting and will continue to recruit
entrepreneurial agents to join our distribution and service network as our sales agents. Entrepreneurial agents have been instrumental
to the development of our life insurance business. In addition, we rely entirely on our in-house claims adjustors to provide claims
adjusting services. Because claims adjustment requires technical skills, the technical competence of claims adjustors is essential
to establishing and maintaining our brand image and relationships with our customers. If we are unable to attract and retain the
core group of highly productive sales agents, particularly entrepreneurial agents, and qualified claims adjustors, our business
could be materially and adversely affected. Competition for sales personnel and claims adjustors from insurance companies and other
insurance intermediaries may also force us to increase the compensation of our sales agents, in-house sales representatives and
claims adjustors, which would increase operating costs and reduce our profitability.
Because our industry is highly
regulated, any material changes in the regulatory environment could change the competitive landscape of our industry or require
us to change the way we do business. The administration, interpretation and enforcement of the laws and regulations currently applicable
to us could change rapidly. If we fail to comply with applicable laws and regulations, we may be subject to civil and criminal
penalties or lose the ability to conduct business with our clients, which could materially and adversely affect our business and
results of operations.
We operate in a highly regulated industry. The
laws and regulations applicable to us are evolving and may change rapidly. We could be required to spend significant time and resources
in complying with any material changes in the regulatory environment, which could change the competitive environment of our industry
significantly and cause us to lose some or all of our competitive advantages. The attention of our management team could be diverted
to these efforts to comply or cope with an evolving regulatory or competitive environment. For example, the PRC Insurance Law and
related regulations were amended in 2002, 2009, 2014 and 2015. The 2015 amendments involved a number of significant changes to
the regulatory regime, including eliminating the requirement for any insurance agent, broker or claims adjusting practitioners
to obtain a qualification certificate issued by the CIRC. The elimination of the certificate requirement may result in an increase
in competition for our business and in misconduct by sales or service persons, in particularly sales misrepresentation. In addition,
the general increase misconduct in the industry could potentially harm the reputation of the industry and have an adverse impact
on our business.
On March 13, 2018, CIRC and CBRC were merged
to form the Chinese Banking and Insurance Regulatory Committee (“CBIRC”). This new organization replaced the CIRC as
the regulatory authority for the supervision of the Chinese insurance industry. There is uncertainty as to how the regulatory environment
might change as a result of the merger. If we fail to adapt to new rules and regulations promulgated by the CBIRC, it could adversely
affect our business and results of operations.
The CBIRC and its predecessor have extensive
authority to supervise and regulate the insurance industry in China. In exercising its authority, the CIRC and CBIRC are given
wide discretion, and the administration, interpretation and enforcement of the laws and regulations applicable to us involve uncertainties
that could materially and adversely affect our business and results of operations. The People’s Bank of China and other government
agencies may promulgate new rules governing online financial services. In July 2015, ten government agencies including the People’s
Bank of China, the Ministry of Finance and CIRC promulgated a guidance letter on how to promote the healthy growth of internet
financial services, which set forth the principles of supervising based on the rule of law, appropriate level of regulation, proper
categorization, cooperation among different government agencies and promoting innovation. Not only may the laws and regulations
applicable to us change rapidly, but it is sometimes unclear how they apply to our business. For example, the laws and regulations
applicable to our online and mobile platforms may be unclear. Errors created by our products or services may be determined or alleged
to be in violation of the applicable laws and regulations. Any failure of our products or services to comply with these laws and
regulations could result in substantial civil or criminal liability; could adversely affect demand for our services; could invalidate
all or portions of some of our customer contracts; could require us to change or terminate some portions of our business; could
require us to refund portions of our services fees; could cause us to be disqualified from serving customers; and could have a
material and adverse effect on our business.
Although we have not had any material violations
to date, we cannot assure you that our operations will always comply with the interpretation and enforcement of the laws and regulations
implemented by the CBIRC. Any determination by a provincial or national government agency that our activities or those of our vendors
or customers violate any of these laws could subject us to civil or criminal penalties, could require us to change or terminate
some portions of our operations or business, or could disqualify us from providing services to insurance companies or other customers;
and, thus could have an adverse effect on our business.
Our business could be negatively
impacted if we are unable to adapt our services to regulatory changes in China.
China’s insurance regulatory regime is
undergoing significant changes. Some of these changes and the further development of regulations applicable to us may result in
additional restrictions on our activities or more intensive competition in this industry. For example, both the Provisions on the
Supervision of Professional Insurance Agencies and the Provisions on the Supervision of Insurance Brokerages
were
amended in December 2015. Pursuant to these amendments,
an insurance agency or brokerage firm is allowed to apply for a
business permit from the CIRC and a business license from the local administration of industry and commerce, or AIC, simultaneously
while previously an insurance agency or brokerage firm had to obtain a business permit issued by the CIRC before it could apply
for a business license from and register with the relevant local AIC. Prior approval by the CIRC is no longer required for an insurance
agency or brokerage firm to establish or divest a branch office or subsidiary. In addition, pursuant to the amendment to
the
Provisions on the Supervision of Insurance Claims Adjusting Firms, insurance claim adjusting firms are no longer required to have
a minimum registered capital of RMB2 million.
See “Item 4. Information on the Company — B. Business Overview
— Regulation.” While these changes may enable us to expand our branches more rapidly, it may also accelerate the growth
of professional insurance intermediaries in China and intensify competition among insurance agencies, insurance brokerage firms
and claims adjusting firms. Our business operations and growth outlook could be materially and adversely affected if we cannot
adapt our business to the regulatory and industry changes.
We may be unsuccessful in
identifying and acquiring suitable acquisition candidates, which could adversely affect our growth.
We may pursue acquisition of companies that can
complement our existing business, diversify our product offerings and improve our customers’ experience in the future. However,
there is no assurance that we can successfully identify suitable acquisition candidates. Even if we identify suitable candidates,
we may not be able to complete an acquisition on terms that are commercially acceptable to us. Our competitors may be able to outbid
us for these acquisition targets. If we are unable to complete acquisitions, our growth strategy may be impeded and our earnings
or revenue growth may be negatively affected.
If we fail to integrate acquired
companies efficiently, or if the acquired companies do not perform to our expectations, our business and results of operations
may be adversely affected.
Even if we succeed in acquiring suitable target
companies, our ability to integrate an acquired entity and its operations is subject to a number of factors. These factors include
difficulties in the integration of acquired operations and retention of personnel, entry into unfamiliar markets, unanticipated
problems or legal liabilities, tax and accounting issues. The need to address these factors may divert management’s attention
from other aspects of our business and materially and adversely affect our business prospects. In addition, costs associated with
integrating newly acquired companies could negatively affect our operating margins.
Furthermore, the acquired companies may not perform
to our expectations for various reasons, including legislative or regulatory changes that affect the insurance products in which
a company specializes, the loss of key clients after the acquisition closes, general economic factors that impact a company in
a direct way and the cultural incompatibility of an acquired company’s management team with us. If an acquired company cannot
be operated at the same profitability level as our existing operations, the acquisition would have a negative impact on our operating
margin. Our inability to successfully integrate an acquired entity or its failure to perform to our expectations may materially
and adversely affect our business, prospects, results of operations and financial condition.
Competition in our industry
is intense and, if we are unable to compete effectively, we may lose customers and our financial results may be negatively affected.
The insurance intermediary industry in China
is highly competitive, and we expect competition to persist and intensify. In insurance product distribution, we face competition
from insurance companies that use their in-house sales force, exclusive sales agents, telemarketing and internet channels to distribute
their products, and from business entities that distribute insurance products on an ancillary basis, such as commercial banks,
postal offices and automobile dealerships, as well as from other professional insurance intermediaries. In our claims adjusting
business, we primarily compete with other independent claims adjusting firms. We compete for customers on the basis of product
offerings, customer services and reputation. Many of our competitors have greater financial and marketing resources than we do
and may be able to offer products and services that we do not currently offer and may not offer in the future. The disruption of
business cooperation with PICC P&C may cause us to lose our competitive advantages in certain areas. If we are unable to compete
effectively against those competitors, we may lose customers and our financial results may be negatively affected.
Because the commission and
fee revenue we earn on the sale of insurance products is based on premiums, commission and fee rates set by insurance companies,
any decrease in these premiums, commission or fee rates may have an adverse effect on our results of operations.
We are engaged in the life insurance, property
and casualty insurance and claims adjusting businesses and derive revenues primarily from commissions and fees paid by the insurance
companies whose policies our customers purchase and to whom we provide claims adjusting services. The commission and fee rates
are set by insurance companies and are based on the premiums that the insurance companies charge or the amount recovered from insurance
companies. Commission and fee rates and premiums can change based on the prevailing economic, regulatory, taxation-related and
competitive factors that affect insurance companies. These factors, which are not within our control, include the ability of insurance
companies to place new business, underwriting and non-underwriting profits of insurance companies, consumer demand for insurance
products, the availability of comparable products from other insurance companies at a lower cost, the availability of alternative
insurance products such as government benefits and self-insurance plans, as well as the tax deductibility of commissions and fees
and the consumers themselves. In addition, premium rates for certain insurance products, such as the mandatory automobile liability
insurance that each automobile owner in the PRC is legally required to purchase, are tightly regulated by CIRC.
In October 2017 we started to implement a platform
business model for auto insurance business. See “Item 4. Business Overview — Insurance Aggregator Site Partners”
for a more detailed description of the platform business model. We derived a portion of the revenues from platform fees paid by
businesses which distribute auto insurance products through our CNpad-based insurance aggregating platform. The platform fee rates
are set at a certain percentage based on the insurance premiums transacted over CNpad. The fee rates can change based on the prevailing
economic, regulatory, taxation-related and competitive factors that affect the third party aggregator sites which are not within
our control.
Because we do not determine, and cannot predict,
the timing or extent of premium or commission and fee rate changes, we cannot predict the effect any of these changes may have
on our operations. Any decrease in premiums or commission and fee rates may significantly affect our profitability. In addition,
our budget for future acquisitions, capital expenditures and other expenditures may be disrupted by unexpected decreases in revenues
caused by decreases in premiums or commission and fee rates, thereby adversely affecting our operations.
Quarterly and annual variations
in our commission and fee revenue may unexpectedly impact our results of operations.
Our commission and fee revenue is subject to
both quarterly and annual fluctuations as a result of the seasonality of our business, the timing of policy renewals and the net
effect of new and lost business. During any given year, our commission and fee revenue derived from distribution of property and
casualty insurance products is highest during the fourth quarter and is lowest during the first quarter. Life insurance commission
revenue is the highest in the first quarter and lowest in the fourth quarter of any given year as much of the Jumpstart Sales activities
of life insurance companies occurs in January and February during which life insurance companies would increase their sales efforts
by offering more incentives for insurance agents and insurance intermediaries to increase sales, while the preparation for the
Jumpstart Sales starts in the fourth quarter of each year. The factors that cause the quarterly and annual variations are not within
our control. Specifically, consumer demand for insurance products can influence the timing of renewals, new business and lost business,
which generally includes policies that are not renewed, and cancellations. As a result, you may not be able to rely on quarterly
or annual comparisons of our operating results as an indication of our future performance.
Our operating structure may
make it difficult to respond quickly to operational or financial problems, which could negatively affect our financial results.
We currently operate through our wholly-owned
or majority-owned insurance agencies and claims adjusting firms located in 30 provinces in China. These companies report their
results to our corporate headquarters monthly. If these companies delay either reporting results or informing corporate headquarters
of negative business developments such as losses of relationships with insurance companies, regulatory inquiries or any other negative
events, we may not be able to take action to remedy the situation in a timely fashion. This in turn could have a negative effect
on our financial results. In addition, if one of these companies were to report inaccurate financial information, we might not
learn of the inaccuracies on a timely basis and be able to take corrective measures promptly, which could negatively affect our
ability to report our financial results.
Our future success depends
on the continuing efforts of our senior management team and other key personnel, and our business may be harmed if we lose their
services.
Our future success depends heavily upon the continuing
services of the members of our senior management team and other key personnel, in particular, Mr. Chunlin Wang, or Mr. Wang, our
chairman of the board of directors and chief executive officer, and Mr. Peng Ge, or, Mr. Ge, our chief financial officer. If one
or more of our senior executives or other key personnel, are unable or unwilling to continue in their present positions, we may
not be able to replace them easily, or at all. As such, our business may be disrupted and our financial condition and results of
operations may be materially and adversely affected. Competition for senior management and key personnel in our industry is intense
because of a number of factors including the limited pool of qualified candidates. We may not be able to retain the services of
our senior executives or key personnel, or attract and retain high-quality senior executives or key personnel in the future. As
is customary in the PRC, we do not have insurance coverage for the loss of our senior management team or other key personnel.
In addition, if any member of our senior management
team or any of our other key personnel joins a competitor or forms a competing company, we may lose customers, sensitive trade
information, key professionals and staff members. Each of our executive officers and key employees has entered into an employment
agreement with us which contains confidentiality and non-competition provisions. These agreements generally have an initial term
of three years, and are automatically extended for successive one-year terms unless terminated earlier pursuant to the terms of
the agreement. See “Item 6. Directors, Senior Management and Employees — A. Directors and Senior Management —
Employment Agreements” for a more detailed description of the key terms of these employment agreements. If any disputes arise
between any of our senior executives or key personnel and us, we cannot assure you of the extent to which any of these agreements
may be enforced.
Salesperson and employee
misconduct is difficult to detect and deter and could harm our reputation or lead to regulatory sanctions or litigation costs.
Salesperson and employee misconduct could result
in violations of law by us, regulatory sanctions, litigation or serious reputational or financial harm. Misconduct could include:
|
·
|
making misrepresentations when marketing or selling insurance to customers;
|
|
·
|
hindering insurance applicants from making full and accurate mandatory disclosures or inducing
applicants to make misrepresentations;
|
|
·
|
hiding or falsifying material information in relation to insurance contracts;
|
|
·
|
fabricating or altering insurance contracts without authorization from relevant parties, selling
false policies, or providing false documents on behalf of the applicants;
|
|
·
|
falsifying insurance agency business or fraudulently returning insurance policies to obtain commissions;
|
|
·
|
colluding with applicants, insureds, or beneficiaries to obtain insurance benefits;
|
|
·
|
engaging in false claims; or
|
|
·
|
otherwise not complying with laws and regulations or our control policies or procedures.
|
On April 24, 2015, the PRC Insurance Law was
amended and consequently on December 3, 2015, the CIRC amended the Provisions on the Supervision of Professional Insurance Agencies,
the Provisions on the Supervision of Insurance Brokerages and the Provisions on the Supervision of Insurance Claims Adjusting Firms.
These amendments have made a number of significant changes to the regulatory regime, including eliminating the requirement for
an insurance agent, broker or claims adjusting practitioner to obtain a qualification certificate issued by the CIRC. The elimination
of the certificate requirement may result in an increase in misconduct by sales or service persons, in particularly sales misrepresentation.
We have internal policies and procedures to deter salesperson or employee misconduct. However, the measures and precautions we
take to prevent and detect these activities may not be effective in all cases. We cannot assure you, therefore, that salesperson
or employee misconduct will not lead to a material adverse effect on our business, results of operations or financial condition.
In addition, the general increase in misconduct in the industry could potentially harm the reputation of the industry and have
an adverse impact on our business.
Our investments in certain
financial products may not yield the benefits we anticipate or incur financial loss, which could adversely affect our cash position.
In order to improve our return on capital, we
may from time to time, upon board approval, invest certain portion of our cash in financial products, such as trust products, with
terms of one to two years. These products may involve various risks, including default risks, interest risks, and other risks.
We cannot guarantee these investments will yield the returns we anticipate and we could suffer financial loss resulting from the
purchase of these financial products.
If we fail to maintain an
effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or
prevent fraud.
We are subject to reporting obligations under
U.S. securities laws. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules adopted by the Securities
and Exchange Commission, or the SEC, every public company is required to include a management report on the company’s internal
controls over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the
company’s internal controls over financial reporting. In addition, an independent registered public accounting firm must
attest to and report on the effectiveness of the company’s internal controls over financial reporting.
Our management has concluded that our internal
control over financial reporting was effective as of December 31, 2017. See “Item 15. Controls and Procedures.” However,
there is no assurance that we will be able to maintain effective internal controls over financial reporting in the future. If we
fail to do so, we may not be able to produce reliable financial reports and prevent fraud. Moreover, if we are not able to conclude
that we have effective internal controls over financial reporting, investors may lose confidence in the reliability of our financial
statements, which would negatively impact the trading price of our ADSs. Our reporting obligations as a public company, including
our efforts to comply with Section 404 of the Sarbanes-Oxley Act, will continue to place a significant strain on our management,
operational and financial resources and systems for the foreseeable future.
We may face legal action
by former employers or principals of entrepreneurial agents who join our distribution and service network.
Competition for productive sales agents is
intense within the Chinese insurance industry. When an entrepreneurial agent leaves his or her employer or principal to join our
distribution and service network as our sales agent, we may face legal action by his or her former employer or principal of the
entrepreneurial agent on the ground of unfair competition or breach of contract. As of the date of this annual report, there has
been no such action filed or threatened against us. We cannot assure you that this will not happen in the future. Any such legal
actions, regardless of merit, could be expensive and time-consuming and could divert resources and management’s attention
from the operation of our business. If we were found liable in such a legal action, we might be required to pay substantial damages
to the former employer or principal of the entrepreneurial agent, and our business reputation might be harmed. Moreover, the filing
of such a legal action may discourage potential entrepreneurial agents from leaving their employers or principals, thus reducing
the number of entrepreneurial agents we can recruit and potentially harming our growth prospects.
If we are unable to successfully
expand into the consumer financial services and wealth management sectors, our business and results of operations may be adversely
affected.
In order to better serve our customers’
needs for diversified and comprehensive financial services, we have expanded into complementary business areas, such as consumer
finance and wealth management, to leverage our existing sales network, customer resources and operating platform. For example,
in October 2009, we acquired 20.6% equity interest in Sincere Fame International Limited, or Sincere Fame, which owns 100% of the
equity interests in China Financial Services Group Limited, or CFSG, a consumer financial services provider. In November 2010,
we formed a joint venture, named Fanhua Puyi Investment Management Co., Ltd., or Puyi Investment, (which we later renamed as Fanhua
Puyi Fund Sales Co. Ltd., or Puyi Fund Sales, after obtaining the license to distribute mutual funds in March 2013) in which we
beneficially own 15.4% of the equity interests. Puyi Fund Sales is a financing platform for mutual funds and trust companies. If
we decide to offer wealth management products in the future, our efforts to do so may not be successful and may subject us to risks
associated with operating in the consumer financial services sectors in China, including but not limited to, changes in monetary
or industry policies and other economic measures that may affect our cooperation with financial institutions and their product
supply, as well as competition from other consumer credit brokerage companies and other financial services companies that offer
wealth management products. Any failure to successfully identify, execute and integrate acquisitions, investments, joint ventures
and alliances as part of any attempted expansion into the consumer financial services sector may have a material adverse impact
on our growth, business prospects and results of operations, which could lead to a decline in the price of our ADSs.
If we are required to write
down goodwill and other intangible assets, our financial condition and results may be materially and adversely affected.
When we acquire a business, the amount of the
purchase price that is allocated to goodwill and other intangible assets is determined by the excess of the fair value of purchase
price and any controlling interest over the net identifiable tangible assets acquired. As of December 31, 2017, goodwill represented
RMB109.9 million (US$16.9 million), or 2.8% of our total shareholders’ equity, and other net intangible assets represented
RMB17.2 million (US$2.6 million), or 0.4% of our total shareholders’ equity. Our management performs impairment assessment
annually and we did not recognize any impairment loss between 2013 and 2017. Under current accounting standards, if we determine
that goodwill or intangible assets are impaired, we will be required to write down the value of such assets and recognize corresponding
impairment charges. As we implement our growth strategy through acquisitions, goodwill and intangible assets may comprise an increasingly
larger percentage of our shareholders’ equity. As such, any write-down related to such goodwill and intangible assets may
adversely and materially affect our shareholders’ equity and financial results.
Any significant failure in
our information technology systems could have a material adverse effect on our business and profitability.
Our business is highly dependent on the ability
of our information technology systems to timely process a large number of transactions across different markets and products at
a time when transaction processes have become increasingly complex and the volume of such transactions is growing rapidly. The
proper functioning of our financial control, accounting, customer database, customer service and other data processing systems,
together with the communication systems of our various subsidiaries and our main offices in Guangzhou, is critical to our business
and our ability to compete effectively. We cannot assure you that our business activities would not be materially disrupted in
the event of a partial or complete failure of any of these primary information technology or communication systems, which could
be caused by, among other things, software malfunction, computer virus attacks or conversion errors due to system upgrading. In
addition, a prolonged failure of our information technology system could damage our reputation and materially and adversely affect
our future prospects and profitability.
We may face potential liability,
loss of customers and damage to our reputation for any failure to protect the confidential information of our customers.
Our customer database
holds confidential information concerning our customers. We may be unable to prevent third parties, such as hackers or criminal
organizations, from stealing information provided by our customers to us. Confidential information of our customers may also be
misappropriated or inadvertently disclosed through employee misconduct or mistake. We may also in the future be required to disclose
to government authorities certain confidential information concerning our customers.
In addition, many
of our customers pay for our insurance services through third-party online payment services. In such transactions, maintaining
complete security during the transmission of confidential information, such as personal information, is essential to maintaining
consumer confidence. We have limited influence over the security measures of third-party online payment service providers. In addition,
our third-party merchants may violate their confidentiality obligations and disclose information about our customers. Any compromise
of our security or third-party service providers' security could have a material adverse effect on our reputation, business, prospects,
financial condition and results of operations.
If we are accused
of failing to protect the confidential information of our customers, we may be forced to expend significant financial and managerial
resources in defending against these accusations and we may face potential liability. Any negative publicity may adversely affect
our public image and reputation. In addition, any perception by the public that online commerce is becoming increasingly unsafe
or that the privacy of customer information is vulnerable to attack could inhibit the growth of online services generally, which
in turn may reduce the number of our customers.
If we are unable to respond
in a timely and cost-effective manner to rapid technological change in the insurance intermediary industry, it may result in an
adverse effect.
The insurance industry is increasingly influenced
by rapid technological change, frequent new product and service introductions and evolving industry standards. For example, the
insurance intermediary industry has increased use of the internet to communicate benefits and related information to consumers
and to facilitate information exchange and transactions. We believe that our future success will depend on our ability to continue
to anticipate technological changes and to offer additional product and service opportunities that meet evolving standards on a
timely and cost-effective basis. There is a risk that we may not successfully identify new product and service opportunities or
develop and introduce these opportunities in a timely and cost-effective manner. In addition, product and service opportunities
that our competitors develop or introduce may render our products and services uncompetitive. As a result, we can give no assurances
that technological changes that may affect our industry in the future will not have a material adverse effect on our business and
results of operations.
We face risks related to
health epidemics, severe weather conditions and other catastrophes, which could materially and adversely affect our business.
Our business could be materially and adversely
affected by the outbreak of avian flu, severe acute respiratory syndrome, or SARS, another health epidemic, severe weather conditions
or other catastrophes. In April 2009, influenza A (H1N1), a new strain of flu virus commonly referred to as “swine flu,”
was first discovered in North America and quickly spread to other parts of the world, including China. In January and February
2008, a series of severe winter storms afflicted extensive damages and significantly disrupted people’s lives in large portions
of southern and central China. In May 2008, an earthquake measuring 8.0 on the Richter scale hit Sichuan Province in southwestern
China, causing huge casualties and property damages. In February 2013, H7N9 Avian influenza was first discovered in Shanghai, China
and quickly widened its geographical spread in China. Because our business operations rely heavily on the efforts of individual
sales agents, in-house sales representatives and claims adjustors, any prolonged recurrence of avian flu or SARS, or the occurrence
of other adverse public health developments such as influenza A (H1N1) and Zika Virus, severe weather conditions such as the massive
snow storms in January and February 2008 and other catastrophes such as the Sichuan earthquake may significantly disrupt our staffing
and otherwise reduce the activity level of our work force, thus causing a material and adverse effect on our business operations.
Risks Related to Our Corporate Structure
If the PRC government finds that the structure for operating
part of our China business does not comply with applicable PRC laws and regulations, we could be subject to severe penalties.
Historically, PRC laws and regulations have restricted
foreign investment in and ownership of insurance intermediary companies. As a result, we conducted our insurance intermediary business
through contractual arrangements among our PRC subsidiaries, consolidated affiliated entities including Xinbao Investment and Dianliang
Information and their individual shareholders between December 2005 and May 2016.
In recent years, some rules and regulations governing
the insurance intermediary sector in China have begun to encourage foreign investment. For instance, under the Closer Economic
Partnership Arrangement, or CEPA, Supplement IV signed in July 2007 and CEPA Supplement VIII signed on December 13, 2011, between
the PRC Ministry of Commerce and the governments of Hong Kong and Macao Special Administrative Region, local insurance agencies
in Hong Kong and Macao are allowed to set up wholly-owned insurance agency companies in Guangdong Province if they meet certain
threshold requirements. On December 26, 2007, the CIRC issued an Announcement on the Establishment of Wholly-owned Insurance Agencies
in Mainland China by Hong Kong and Macao Insurance Agencies, which sets forth specific qualification criteria for implementation
purposes. On August 26, 2010, the CIRC released a Circular on the Cancellation of the Fifth Batch of Administrative Approval Items,
pursuant to which foreign ownership in a professional insurance intermediary in excess of 25% only requires a filing to be made
with the relevant authorities and no longer requires prior approval. On March 13, 2015, the National Development and Reform Commission
and Ministry of Commerce jointly issued the Catalogue for the Guidance of Foreign Investment Industries
(Revision 2015), or the CGFII 2015 Revision, pursuant to which insurance brokerage firms are removed from the list of industries
subject to foreign investment restriction.
We operated online insurance distribution business
through Baoxian.com which was subject to foreign investment restriction. On June 19, 2015, the Ministry of Industry and Information
Technology published a Notice on Removing the Foreign Ownership Restriction in Online Data Processing and Transaction Processing
Business (Operating E-commerce), or the No. 196 Notice. Foreign ownership in online data processing and transaction process business
is allowed to increase to 100% as long as the foreign-invested entities obtain necessary licenses to conduct the business. However,
there remains uncertainty with regards to the implementation of the No. 196 Notice and the administrative procedures with regards
to the application of the data processing and transaction process business licenses.
Following the changes in applicable foreign investment
regulations, we commenced a restructuring of our company in October 2011 and subsequently terminated all the contractual arrangements
among our PRC subsidiaries and consolidated entities such as Xinbao Investment and Dianliang Information, which became our wholly-owned
subsidiaries in 2016. As a result, we obtained direct controlling equity ownership in all of our insurance intermediary companies
and our online platforms in 2016. See “Item 4. Information on the Company — C. Organizational Structure.”
If our direct ownership of our online platforms
is found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required
permits or approvals, the relevant PRC regulatory authorities, including the CIRC, will have broad discretion in dealing with such
violations, including:
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revoking the business and operating licenses of our PRC subsidiaries;
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restricting or prohibiting any related-party transactions among our PRC subsidiaries;
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imposing fines or other requirements with which we, our PRC subsidiaries may not be able to comply;
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requiring us, our PRC subsidiaries to restructure the relevant ownership structure or operations;
or
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restricting or prohibiting us from providing additional funding for our business and operations
in China.
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Any of these or similar actions could cause disruptions
to our business, as well as reduce our revenues, profitability and cash flows.
In January 2015, the Ministry of Commerce, or
the MOC, published a draft of the proposed Foreign Investment Law, which expands the definition of foreign investment and introduces
the principle of “actual control” in determining whether a company is considered a foreign-invested enterprise, or
an FIE. The draft Foreign Investment Law specifically provides that entities established in China but “controlled”
by foreign investors will be treated as FIEs, whereas an entity set up in a foreign jurisdiction would nonetheless be, upon market
entry clearance by the MOC, treated as a PRC domestic investor provided that the entity is “controlled” by PRC entities
and/or citizens. In this connection, “control” is broadly defined in the draft law to cover the following summarized
categories: (i) holding 50% of more of the voting rights of the subject entity; (ii) holding less than 50% of the voting rights
of the subject entity but having the power to secure at least 50% of the seats on the board or other equivalent decision making
bodies, or having the voting power to exert material influence on the board, the shareholders’ meeting or other equivalent
decision making bodies; or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the
subject entity’s operations, financial matters or other key aspects of business operations. Once an entity is determined
to be an FIE, it will be subject to the foreign investment restrictions or prohibitions set forth in a “negative list,”
to be separately issued by the State Council later, if the FIE is engaged in the industry listed in the negative list. Unless the
underlying business of the FIE falls within the negative list, which calls for market entry clearance by the MOC, prior approval
from the government authorities as mandated by the existing foreign investment legal regime would no longer be required for establishment
of the FIE.
There is uncertainty regarding the draft Foreign
Investment Law, including, the content of its final form and the timing of its adoption and implementation. It is uncertain whether
the internet industry or online operation will be subject to the foreign investment restrictions or prohibitions set forth in the
“negative list” to be issued. If the enacted version of the Foreign Investment Law and the final “negative list”
mandate further actions, such as MOC market entry clearance, to be completed by companies, we face uncertainties as to whether
such clearance can be timely obtained, or at all.
PRC regulation of loans and
direct investment by offshore holding companies to PRC entities may delay or prevent us from making loans to our PRC subsidiaries
or making additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and
our ability to fund and expand our business.
We are an offshore holding company conducting
our operations in China through PRC subsidiaries in order to provide additional funding to our PRC subsidiaries, we may make loans
to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries.
Any loans we make to any of our directly-held
PRC subsidiaries (which are treated as foreign-invested enterprises under PRC law), namely, Fanhua Zhonglian Enterprise Image Planning
(Shenzhen) Co., Ltd., or Zhonglian Enterprise, and Fanhua Xinlian Information Technology Consulting (Shenzhen) Co., Ltd., or Xinlian
Information, cannot exceed statutory limits and must be registered with the State Administration of Foreign Exchange, or the SAFE,
or its local counterparts. Under applicable PRC law, the Chinese regulators must approve the amount of a foreign-invested enterprise’s
registered capital, which represents shareholders’ equity investments over a defined period of time, and the foreign-invested
enterprise’s total investment, which represents the total of the company’s registered capital plus permitted loans.
The registered capital/total investment ratio cannot be lower than the minimum statutory requirement and the excess of the total
investment over the registered capital represents the maximum amount of borrowings that a foreign-invested enterprise is permitted
to have under PRC law. Our directly-held PRC subsidiaries were allowed to incur a total of HK$300 million (US$38.4 million) in
foreign debts as of March 31, 2018. If we were to provide loans to our directly-held PRC subsidiaries in excess of the above amount,
we would have to apply to the relevant government authorities for an increase in their permitted total investment amounts. The
various applications could be time-consuming and their outcomes would be uncertain. Concurrently with the loans, we might have
to make capital contributions to these subsidiaries in order to maintain the statutory minimum registered capital/total investment
ratio, and such capital contributions involve uncertainties of their own, as discussed below. Furthermore, even if we make loans
to our directly-held PRC subsidiaries that do not exceed their current maximum amount of borrowings, we will have to register each
loan with the SAFE or its local counterpart within 15 days after the signing of the relevant loan agreement. Subject to the conditions
stipulated by the SAFE, the SAFE or its local counterpart will issue a registration certificate of foreign debts to us within 20
days after reviewing and accepting our application. In practice, it may take longer to complete such SAFE registration process.
Any loans we make to any of our indirectly-held
PRC subsidiaries (those PRC subsidiaries which we hold indirectly through Zhonglian Enterprise and Xinlian Information), all of
which are treated as PRC domestic companies rather than foreign-invested enterprises under PRC law, are also subject to various
PRC regulations and approvals. Under applicable PRC regulations, medium- and long-term international commercial loans to PRC domestic
companies are subject to approval by the National Development and Reform Commission. Short-term international commercial loans
to PRC domestic companies are subject to the balance control system effected by the SAFE. Due to the above restrictions, we are
not likely to make loans to any of our indirectly-held PRC subsidiaries.
Any capital contributions we make to our PRC
subsidiaries, including directly-held and indirectly-held PRC subsidiaries, must be approved by the PRC Ministry of Commerce or
its local counterparts, and registered with the SAFE or its local counterparts. Such applications and registrations could be time
consuming and their outcomes would be uncertain.
We cannot assure you that we will be able to
complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with
respect to future loans by us to our PRC subsidiaries, or with respect to future capital contributions by us to our PRC subsidiaries.
If we fail to complete such registrations or obtain such approvals, our ability to capitalize or otherwise fund our PRC operations
may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.
On August 29, 2008, SAFE promulgated Circular
142, a notice regulating the conversion by a foreign-invested company of its capital contribution in foreign currency into RMB.
The notice requires that the capital of a foreign-invested company settled in RMB converted from foreign currencies shall be used
only for purposes within the business scope as approved by the authorities in charge of foreign investment or by other government
authorities and as registered with the State Administration for Industry and Commerce and, unless set forth in the business scope
or in other regulations, may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of
the flow and use of the capital of a foreign-invested company settled in RMB converted from foreign currencies. The use of such
RMB capital may not be changed without SAFE’s approval, and may not in any case be used to repay RMB loans if the proceeds
of such loans have not been used. Violations of Circular 142 will result in severe penalties, including heavy fines. As a result,
Circular 142 may significantly limit our ability to provide additional funding to our PRC subsidiaries through our directly-held
PRC subsidiaries in the PRC, which may adversely affect our ability to expand our business.
However, on March 30, 2015, SAFE promulgated
Circular 19, a notice on reforming the administrative approach regarding the settlement of the foreign exchange capitals of foreign-invested
enterprises, which became effective on June 1, 2015. The new notice states that foreign-invested enterprises shall be allowed to
settle their foreign exchange capitals on a discretionary basis. The discretionary settlement by a foreign-invested enterprise
of its foreign exchange capital shall mean that the foreign-invested enterprise may, according to its actual business needs, settle
with a bank the portion of the foreign exchange capital in its capital account for which the relevant foreign exchange bureau has
confirmed monetary contribution rights and interests (or for which the bank has registered the account-crediting of monetary contribution).
For the time being, foreign-invested enterprises are allowed to settle 100% of their foreign exchange capitals on a discretionary
basis. The SAFE may adjust the foregoing percentage as appropriate according to balance of payments situations. As a result, Circular
19 will relax the limitation of our ability to provide additional funding to our PRC subsidiaries through our directly-held PRC
subsidiaries in the PRC.
Risks Related to Doing Business in China
Adverse economic, political
and legal developments in China could have a material adverse effect on our business.
Substantially all of our business operations
are conducted in China. Accordingly, our results of operations, financial condition and prospects are subject to a significant
degree to economic, political and legal developments in China. China’s economy differs from the economies of most developed
countries in many respects, including with respect to the amount of government involvement, level of development, growth rate,
control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 30
years or so, growth has been uneven across different regions and among various economic sectors of China. Economic growth in China
has been slowing in the past few years and dropped to 6.9% for 2017, according to data released by the PRC government in January
2018. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources.
However, these measures may not be successful in transforming the Chinese economy or spurring growth. While some of these measures
benefit the overall PRC economy, they may also have a negative effect on us. For example, our financial condition and results of
operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable
to us.
Although the PRC government has implemented
measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership
of productive assets and the establishment of improved corporate governance in business enterprises, the PRC government still owns
a substantial portion of productive assets in China. In addition, the PRC government continues to play a significant role in regulating
industry development by imposing industrial policies. The PRC government also exercises significant control over China’s
economic growth through the allocation of resources, controlling payment of foreign currency- denominated obligations, setting
monetary policy and providing preferential treatment to particular industries or companies. Actions and policies of the PRC government
could materially affect our ability to operate our business.
Uncertainties with respect
to the PRC legal system could adversely affect us.
We conduct our business primarily through our
subsidiaries in China. Our operations in China are governed by PRC laws and regulations. Our subsidiaries are generally subject
to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned
enterprises. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited
precedential value.
Although since 1979, PRC legislation and regulations
have significantly enhanced the protections afforded to various forms of foreign investments in China, China has not developed
a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities
in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published
decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties.
In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on
a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies
and rules until some time after the violation. In addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention.
Governmental control of currency
conversion may affect the value of your investment.
The PRC government imposes controls on the
convertibility of the RMB into foreign currencies and the remittance of currency out of China. Under existing PRC foreign exchange
regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from the SAFE by complying with certain procedural requirements.
However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted
out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also
at its discretion restrict access in the future to foreign currencies for current account transactions. Under our current corporate
structure, the primary source of our income at the holding company level is dividend payments from our PRC subsidiaries. Shortages
in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to
pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. If the foreign exchange
control system prevents us from obtaining sufficient foreign currency to satisfy our currency needs, we may not be able to pay
dividends in foreign currencies to our shareholders, including holders of our ADSs.
The PRC Enterprise Income
Tax Law may increase the enterprise income tax rate applicable to some of our PRC subsidiaries, which could have a material adverse
effect on our result of operations.
According to the PRC Enterprise Income Tax
Law, or the EIT Law, which became effective on January 1, 2008, as further clarified by subsequent tax regulations implementing
the EIT Law, foreign-invested enterprises and domestic enterprises are subject to enterprise income tax, or EIT, at a uniform rate
of 25%, unless otherwise provided. Enterprises that were established and enjoyed preferential tax treatments before March 16, 2007
will continue to enjoy such preferential tax treatments in the following manners: (1) in the case of preferential tax rates, for
a five-year transition period starting from January 1, 2008, during which the EIT rate of such enterprises will gradually increase
to the uniform 25% EIT rate by January 1, 2012; or (2) in the case of preferential tax exemption or reduction with a specified
term, until the expiration of such term. However, if such an enterprise has not enjoyed the preferential treatments yet because
of its failure to make a profit, its term for preferential treatments will be deemed to start from 2008.
As a result of the implementation of the EIT
Law, certain preferential tax treatments enjoyed by some of our subsidiaries expired on January 1, 2008. According to the EIT Law
and related regulations, the preferential tax rates enjoyed by some of our PRC subsidiaries incorporated in Shenzhen, a special
economic zone, will gradually increase to the uniform 25% EIT rate during the five year transition period. An increase in the EIT
rates for those entities pursuant to the EIT Law could result in an increase in our effective tax rate, which could materially
and adversely affect our results of operations.
Our global income or the
dividends we receive from our PRC subsidiaries may be subject to PRC tax under the EIT Law, which could have a material adverse
effect on our results of operations.
Under the EIT Law, an enterprise established
outside of the PRC with “de facto management bodies” within the PRC is considered a resident enterprise and will be
subject to the EIT at the rate of 25% on its worldwide income. The Implementation Rules of the EIT Law, or the Implementation Rules,
define the term “de facto management bodies” as “establishments that carry out substantial and overall management
and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” If
we are deemed a resident enterprise, we may be subject to the EIT at 25% on our global income, except that the dividends we receive
from our PRC subsidiary will be exempt from the EIT. If we are considered a resident enterprise and earn income other than dividends
from our PRC subsidiaries, a 25% EIT on our global income could significantly increase our tax burden and materially and adversely
affect our cash flow and profitability.
We have been advised by our PRC counsel, Global
Law Office, that pursuant to the EIT Law and the Implementation Rules, dividends payable by a foreign-invested enterprise in China
to its foreign investors will be subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation
has a tax treaty with China that provides for a different withholding arrangement. Pursuant to the Arrangement between the PRC
and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion, or the Double
Taxation Arrangement, which became effective on January 1, 2007, dividends from our PRC subsidiaries paid to us through our Hong
Kong wholly-owned subsidiary InsCom HK Limited may be subject to a withholding tax at a rate of 5%. The British Virgin Islands,
where our wholly-owned subsidiary and the 100% shareholder of Zhonglian Enterprise and Xinlian Information is incorporated, does
not have such a tax treaty with China. Under the EIT Law and the Implementation Rules, if we are regarded as a resident enterprise,
the dividends we receive from our PRC subsidiaries will be exempt from the EIT. If, however, we are not regarded as a resident
enterprise, our PRC subsidiaries will be required to pay a 5% or 10% withholding tax, as the case may be, for any dividends they
pay to us. As a result, the amount of fund available to us to meet our cash requirements, including the payment of dividends to
our shareholders and ADS holders, could be materially reduced.
Under the EIT Law, dividends
payable by us and gains on the disposition of our shares or ADSs could be subject to PRC taxation.
We have been advised by our PRC counsel, Global
Law Office, that because there remains uncertainty regarding the interpretation and implementation of the EIT Law and its Implementation
Rules, it is uncertain whether any dividends to be distributed by us, if we are regarded as a PRC resident enterprise, to our non-PRC
shareholders and ADS holders would be subject to any PRC withholding tax. If we are required under the EIT Law to withhold PRC
income tax on our dividends payable to our non-PRC corporate shareholders and ADS holders, or if gains on the disposition of our
shares or ADSs are subject to the PRC EIT, your investment in our ADSs or ordinary shares may be materially and adversely affected.
We rely principally on dividends
and other distributions on equity paid by our subsidiaries to fund any cash and financing requirements we may have, and any limitation
on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.
We are a holding company, and we rely principally
on dividends from our subsidiaries in China for our cash requirements, including any debt we may incur. Current PRC regulations
permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with
PRC accounting standards and regulations. In addition, each of our PRC subsidiaries is required to set aside at least 10% of its
after-tax profits each year as reported in its PRC statutory financial statements, if any, to fund a statutory reserve until such
reserve reaches 50% of its registered capital. In addition, each of our PRC subsidiaries that are considered foreign-invested enterprises
is required to further set aside a portion of its after-tax profits as reported in its PRC statutory financial statements to fund
the employee welfare fund at the discretion of its board. These reserves are not distributable as cash dividends. As of December
31, 2017, the total retained earnings of our PRC subsidiaries available for dividend distributions were RMB2.2 billion (US$339.7
million). Furthermore, if our subsidiaries in China incur debt on their own behalf in the future, the instruments governing the
debt may restrict their ability to pay dividends or make other payments to us. Any limitation on the ability of our subsidiaries
to distribute dividends or other payments to us could materially and adversely limit our ability to grow, make investments or acquisitions
that could be beneficial to our businesses, pay dividends, or otherwise fund and conduct our business.
PRC regulations relating
to the establishment of offshore special purpose companies by PRC residents and employee stock options granted by overseas-listed
companies may increase our administrative burden, restrict our overseas and cross-border investment activity, or otherwise adversely
affect us. If our shareholders who are PRC residents, or our PRC employees who are granted or exercise stock options, fail to make
any required registrations or filings under such regulations, we may be unable to distribute profits and may become subject to
liability under PRC laws.
On October 21, 2005, the SAFE issued a Notice
on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via
Overseas Special Purpose Vehicles, generally known in China as SAFE Circular 75, requiring PRC residents to register with the local
SAFE branch before establishing or controlling any company outside of China, referred to in the notice as an “offshore special
purpose company,” for the purpose of raising capital backed by assets or equities of PRC companies. PRC residents that are
shareholders of offshore special purpose companies established before November 1, 2005 were required to register with the local
SAFE branch before March 31, 2006. On July 4, 2014, the SAFE issued the Notice on the Administration of Foreign Exchange Involved
in Overseas Investment, Financing and Return on Investment Conducted by PRC Residents via Special-Purpose Companies, or SAFE Circular
37, simultaneously repealing SAFE Circular 75. SAFE Circular 37 also requires PRC residents to register with relevant Foreign Exchange
Bureau for foreign exchange registration of overseas investment before making contribution to a special purpose company, or SPC,
with legitimate holdings of domestic or overseas assets or interests. See “Item 4. Information on the Company — B.
Business Overview — Regulation — Regulations on Foreign Exchange — Foreign Exchange Registration of Offshore
Investment by PRC Residents.”
We have requested our beneficial owners who
to our knowledge are PRC residents to make the necessary applications, filings and amendments as required under SAFE Circular 37
and other related rules. We attempt to comply, and attempt to ensure that our beneficial owners who are subject to these rules
comply with the relevant requirements. However, we cannot assure you that all of our beneficial owners who are PRC residents will
comply with our request to make or obtain any applicable registrations or comply with other requirements under SAFE Circular 37
or other related rules. The failure of these beneficial owners to timely amend their SAFE registrations pursuant to SAFE Circular
37 or the failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set
forth in SAFE Circular 37 may subject such beneficial owners to fines and legal sanctions and may also limit our ability to contribute
capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to our company or otherwise
adversely affect our business.
On December 25, 2006, the People’s Bank
of China, or the PBOC, promulgated the Measures for the Administration of Individual Foreign Exchange, and on January 5, 2007,
the SAFE further promulgated implementation rules for those measures. We refer to these regulations collectively as the Individual
Foreign Exchange Rules. The Individual Foreign Exchange Rules became effective on February 1, 2007. According to these regulations,
PRC citizens who are granted shares or share options by a company listed on an overseas stock market according to its employee
share option or share incentive plan are required, through the PRC subsidiary of such overseas listed company or any other qualified
PRC agent, to register with the SAFE and to complete certain other procedures related to the share option or other share incentive
plan. Foreign exchange income received from the sale of shares or dividends distributed by the overseas listed company may be remitted
into a foreign currency account of such PRC citizen or be exchanged into Renminbi. Our PRC citizen employees who have been granted
share options became subject to the Individual Foreign Exchange Rules upon the listing of our ADSs on the Nasdaq stock exchange.
On February 15, 2012, SAFE promulgated the
Notice of the State Administration of Foreign Exchange on Issues Related to Foreign Exchange Administration in Domestic Individuals'
Participation in Equity Incentive Plans of Companies Listed Abroad, or the No. 7 Notice, which supersedes the Operation Rules on
Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed
Company, or the Stock Option Rule, in its entirety and immediately became effective upon circulation. According to the No. 7 Notice,
domestic individuals, which include any directors, supervisors, senior managerial personnel or other employees of a domestic company
who are Chinese citizens (including citizens of Hong Kong, Macao and Taiwan) or foreign individuals who consecutively reside in
the territory of RPC for one year, who participate in the same equity incentive plan of an overseas listed company shall, through
the domestic companies they serve, collectively entrust a domestic agency to handle issues like foreign exchange registration,
account opening, funds transfer and remittance, and entrust an overseas institution to handle issues like exercise of options,
purchasing and sale of related stocks or equity, and funds transfer. As an overseas publicly listed company, we and our employees
who have been granted stock options or any type of equity awards may be subject to the No. 7 Notice. If we or our employees who
are subject to the No. 7 Notice fail to comply with these regulations, we may be subject to fines and legal sanctions. See “Item
4. Information on the Company — B. Business Overview — Regulation — Regulations on Foreign Exchange — SAFE
Regulations on Employee Share Options.”
Fluctuation in the value
of the RMB may have a material adverse effect on your investment.
The value of the RMB against the U.S. dollar
and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. On July
21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy,
t
he PRC government allowed the RMB to appreciate by more than 20% against the U.S. dollar
between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the
RMB and the U.S. dollar remained within a narrow band. Since June 2010, the PRC government has allowed the RMB to appreciate slowly
against the U.S. dollar again, though there have been periods when the U.S. dollar has appreciated against the Renminbi as well.
In April 2012, the trading band was widened to 1%, and in March 2014 it was further widened to 2%, which allows the Renminbi to
fluctuate against the U.S. dollar by up to 2% above or below the central parity rate published by the PBOC. In August 2015, the
PBOC changed the way it calculates the mid-point price of Renminbi against U.S. dollar, requiring the market-makers who submit
for the PBOC’s reference rates to consider the previous day’s closing spot rate, foreign-exchange demand and supply
as well as changes in major currency rates. This change, and other changes such as widening the trading band that may be implemented,
may increase volatility in the value of the Renminbi against foreign currencies. It is difficult to predict how market forces or
PRC or United States government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
Our revenues and costs are mostly denominated
in the RMB, and a significant portion of our financial assets are also denominated in RMB. We rely on dividends and other fees
paid to us by our subsidiaries in China. Any significant appreciation or depreciation of the RMB against the U.S. dollar may affect
our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars.
For example, a further appreciation of the RMB against the U.S. dollar would make any new RMB-denominated investments or expenditures
more costly to us, to the extent that we need to convert U.S. dollars into RMB for such purposes. An appreciation of the RMB against
the U.S. dollar would also result in foreign currency translation losses for financial reporting purposes when we translate our
U.S. dollar denominated financial assets into the RMB, as the RMB is our reporting currency. Conversely, a significant depreciation
of the RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our reported earnings, and may adversely
affect the price of our ADSs.
The M&A Rule could also
make it more difficult for us to pursue growth through acquisitions.
The M&A Rule also established additional
procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex,
including requirements in some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction
in which a foreign investor takes control of a PRC domestic enterprise. To date, we have conducted our acquisitions in China exclusively
through subsidiaries that used to be our PRC consolidated affiliated entities. In the future, we may grow our business in part
by directly acquiring complementary businesses. Complying with the requirements of the new regulations to complete such transactions
could be time consuming, and any required approval processes, including obtaining approval from the Ministry of Commerce, may prevent
us from completing such transactions on a timely basis, or at all, which could affect our ability to expand our business or maintain
our market share.
The PRC Labor Contract Law
and its implementing rules may adversely affect our business and results of operations.
On June 29, 2007, the Standing Committee of the
National People’s Congress of China enacted the Labor Contract Law, which became effective on January 1, 2008. On September
18, 2008, the State Council adopted the implementing rules for the Labor Contract Law, which became effective upon adoption. On
December 28, 2012, the Standing Committee of the National People's Congress of China promulgated the Decision on Revising the Labor
Contract Law, which became effective on July 1, 2013. The Labor Contract Law and its implementing rules together with the aforesaid
revising decision impose and will impose greater liabilities on employers and significantly affect the cost of an employer’s
decision to reduce its workforce. In the event that we decide to significantly reduce our workforce, the Labor Contract Law and
its implementing rules together with the aforesaid revising decision could adversely affect our ability to effect these changes
cost-effectively or in the manner we desire, which could lead to a negative impact on our business and results of operations.
Risks Related to Our ADSs
The market price for our
ADSs may be volatile.
The market price for our ADSs may be volatile
and subject to wide fluctuations in response to factors including the following:
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actual or anticipated fluctuations in our quarterly operating results;
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changes in financial estimates by securities research analysts;
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conditions in the Chinese insurance industry;
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changes in the economic performance or market valuations of other insurance intermediaries;
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announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint
ventures or capital commitments;
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addition or departure of key personnel;
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fluctuations of exchange rates between the RMB and U.S. dollar or other foreign currencies;
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potential litigation or administrative investigations;
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sales of additional ADSs; and
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general economic or political conditions in China and abroad.
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In addition, the securities market has from time
to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies.
These market fluctuations may also materially and adversely affect the market price of our ADSs.
We may need additional capital,
and the sale of additional ADSs or other equity securities could result in additional dilution to our shareholders.
We believe that our current cash and cash equivalents
and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for the foreseeable future. We
may, however, require additional cash resources due to changed business conditions or other future developments, including any
investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may
seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result
in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and
could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will
be available in amounts or on terms acceptable to us, if at all.
Substantial future sales
of our ordinary shares or ADSs, or the perception that these sales could occur, could cause the price of our ADSs to decline.
Additional sales of our ADSs in the public market,
or the perception that these sales could occur, could cause the market price of our ADSs to decline. If any existing shareholder
or shareholders sell a substantial amount of ordinary shares in the form of ADSs, the market price of our ADSs could decline. In
addition, we may issue additional ordinary shares as considerations for future acquisitions. If we do so, your ownership interests
in our company would be diluted and this in turn could have an adverse effect on the price of our ADSs.
Our corporate actions are
substantially controlled by our officers, directors and principal shareholders.
As of March 31, 2018, our executive officers,
directors and principal shareholders beneficially owned approximately 42.8% of our outstanding shares. These shareholders could
exert substantial influence over matters requiring approval by our shareholders, including electing directors and approving mergers
or other business combination transactions, and they may not act in the best interests of other noncontrolling shareholders. This
concentration of our share ownership also may discourage, delay or prevent a change in control of our company, which could deprive
our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the
price of our ADSs. These actions may be taken even if they are opposed by our other shareholders.
You may not have the same
voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your right
to vote.
Except as described in this annual report and
in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares evidenced by our
ADSs on an individual basis. Holders of ADSs may instruct the depositary to exercise the voting rights attaching to the shares
represented by the ADSs. If no instructions are received by the depositary on or before a date established by the depositary, the
depositary shall deem the holders to have instructed it to give a discretionary proxy to a person designated by us to exercise
their voting rights. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you,
or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right
to vote.
You may not be able to participate
in rights offerings and may experience dilution of your holdings as a result.
We may from time to time distribute rights to
our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary will not
offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either
registered under the Securities Act of 1933 or exempt from registration under the Securities Act with respect to all holders of
ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to
endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of
any exemptions from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our
rights offerings and may experience dilution in their holdings as a result.
You may be subject to limitations
on transfer of your ADSs.
Your ADSs are transferable on the books of the
depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection
with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally
when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because
of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any
other reason.
You may face difficulties
in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited, because we
are incorporated under Cayman Islands law, conduct substantially all of our operations in China and most of our directors and officers
reside outside the United States. In addition, Cayman Islands securities laws provide significantly less protection to investors
as compared to U.S. laws.
We are incorporated in the Cayman Islands, and
conduct substantially all of our operations in China through our subsidiaries in China. Most of our directors and officers reside
outside the United States and some or all of the assets of those persons are located outside of the United States. As a result,
it may be difficult for you to effect service of process within the United States or elsewhere outside China upon these persons.
It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions
of the U.S. federal securities laws against us and our officers and directors, most of whom are not residents in the United States
and some or all of whose assets are located outside of the United States. In addition, there is uncertainty as to whether the courts
of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or our officers and directors predicated
upon the civil liability provisions of the securities laws of the United States or any state. Our PRC counsel has advised us that
China does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement
of judgment of courts. It is also uncertain whether the Cayman Islands or PRC courts would entertain or be competent to hear original
actions brought in the Cayman Islands or the PRC against us or our officers and directors predicated upon the securities laws of
the United States or any state.
Our corporate affairs are governed by our amended
and restated memorandum and articles of association as amended and restated from time to time and by the Companies Law (2018 Revision)
(hereinafter, the "Cayman Companies Law") and common law of the Cayman Islands. The rights of shareholders to take legal
action against our directors, actions by noncontrolling shareholders and the fiduciary duties of our directors to us under Cayman
Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived
in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive,
but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors
under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States.
In particular, because Cayman Islands law has no legislation specifically dedicated to the rights of investors in securities, and
thus no statutorily defined private causes of action specific to investors in securities such as those found under the Securities
Act or the Securities Exchange Act of 1934 in the United States, it provides significantly less protection to investors. In addition,
Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United
States.
As a result of all of the above, our public shareholders
may have more difficulty in protecting their interests through actions against our management, directors or controlling shareholders
than would shareholders of a corporation incorporated in a jurisdiction in the United States.
The audit report included in this annual report has been prepared
by auditors whose work may not be inspected fully by the Public Company Accounting Oversight Board and, as such, you may be deprived
of the benefits of such inspection.
Deloitte Touche Tohmatsu, our independent registered
public accounting firm that issues the audit reports included in our annual reports filed with the SEC, as an auditor of companies
that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United
States), or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance
with the laws of the United States and professional standards.
Many of our auditor’s other clients have
substantial operations within mainland China, and the PCAOB has been unable to complete inspections of the work of our auditor
within mainland China without the approval of the Chinese authorities. Thus, our auditor and its audit work are not currently inspected
fully by the PCAOB.
Inspections of other firms that the PCAOB has
conducted outside mainland China have identified deficiencies in those firms’ audit procedures and quality control procedures,
which can be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections in mainland
China prevents the PCAOB from regularly evaluating our auditor’s audit procedures and quality control procedures as they
relate to their work in mainland China. As a result, investors may be deprived of the benefits of such regular inspections.
The inability of the PCAOB to conduct full inspections
of auditors in mainland China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or
quality control procedures as compared to auditors who primarily work in jurisdictions where the PCAOB has full inspection access.
Investors may lose confidence in our reported financial information and the quality of our financial statements.
If additional remedial measures are imposed on the “big
four” PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings
brought by the SEC alleging the firms' failure to meet specific criteria set by the SEC, with respect to requests for the production
of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Securities
Exchange Act of 1934, as amended, or the Exchange Act.
Starting in 2011 the Chinese affiliates of the
“big four” accounting firms, (including our independent registered public accounting firm) were affected by a conflict
between US and Chinese law. Specifically, for certain US listed companies operating and audited in mainland China, the SEC and
the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however,
advised and directed that under China law they could not respond directly to the US regulators on those requests, and that requests
by foreign regulators for access to such papers in China had to be channeled through the CSRC.
In late 2012 this impasse led the SEC to commence
administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the
Chinese accounting firms, (including our independent registered public accounting firm). A first instance trial of the proceedings
in July 2013 in the SEC's internal administrative court resulted in an adverse judgment against the firms. The administrative law
judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that
proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the
Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests
by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests,
and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate
production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial
measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate,
an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against
a firm, or in extreme cases the resumption of the current proceeding against all four firms.
In the event that the SEC restarts the administrative
proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult
or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined
to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about
any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed
companies and the market price of our ADSs may be adversely affected.
If our independent registered public accounting
firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered
public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined
not to be in compliance with the requirements of the Exchange Act of 1934, as amended. Such a determination could ultimately lead
to the delisting of our ordinary shares from the Nasdaq Global Select Market or deregistration from the SEC, or both, which would
substantially reduce or effectively terminate the trading of our ADSs in the United States.
Our articles of association
contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and
ADSs.
Our articles of association contain provisions
limiting the ability of others to acquire control of our company or cause us to enter into change-of-control transactions. These
provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing
market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction.
For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in
one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special
rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms
of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares,
in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in
control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares,
the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially
and adversely affected.
You may have to rely primarily
on price appreciation of our ADSs for any return on your investment.
Our board of directors has discretion as to whether
to distribute dividends, subject to applicable laws. Although our board of directors has announced a policy to declare and pay
dividends on a quarterly basis, the amount and form of future dividends will depend on, among other things, our future results
of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our
subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly,
the return on your investment in our ADSs will likely depend primarily upon any future price appreciation of our ADSs. There is
no guarantee that our ADSs will appreciate in value or even maintain the price at which you purchased the ADSs. You may not realize
a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.
We believe we were a passive
foreign investment company for the taxable year ended December 31, 2017, which generally will subject United States Holders of
our ADSs or ordinary shares to special and adverse tax rules.
Based on the market price of our ADSs, the value
of our assets, and the composition of our income and assets, we believe that we were a passive foreign investment company, or PFIC,
for United States federal income tax purposes for our taxable year ended December 31, 2017. In addition, we believe that it is
likely that one or more of our subsidiaries were also PFICs for such year. A non-United States corporation will be treated as a
PFIC for United States federal income tax purposes for any taxable year if, applying applicable look-through rules, either (1)
at least 75% of its gross income for such year is passive income or (2) at least 50% of the value of its assets (determined based
on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or
are held for the production of passive income. We must make a separate determination after the close of each taxable year as to
whether we were a PFIC for that year. Because the value of our assets for purposes of the PFIC test will generally be determined
by reference to the market price of our ADSs or ordinary shares, our PFIC status will depend in large part on the market price
of the ADSs or ordinary shares, which may fluctuate significantly. Unless the market price of our ADSs increases or we reduce the
amount of cash, short term investments and other passive assets we hold sufficiently from current levels, we are likely to remain
a PFIC for future taxable years.
Because we believe we were a PFIC for the taxable
year ended December 31, 2017, United States Holders (as defined in “Item 10. Additional Information — E. Taxation —
United States Federal Income Taxation”) of our ADSs or ordinary shares generally will be subject to special and adverse tax
rules with respect to any “excess distribution” received from us and any gain from a sale or other disposition of the
ADSs or ordinary shares. See “Item 10. Additional Information — E. Taxation — United States Federal Income Taxation
— Passive Foreign Investment Company.”
Item 4.
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Information on the Company
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A. History and Development of the Company
History of Our Corporate Structure
Our founders, Mr. Yinan Hu, or Mr. Hu and Mr.
Qiuping Lai, or Mr. Lai, formed two PRC companies, Guangzhou Nanyun Car Rental Services Co., Ltd. and Guangdong Nanfeng Automobile
Association Co., Ltd., initially to provide automobile-related services, such as car rental and emergency services. In 1999, we
began distributing automobile insurance products and automobile loans on an ancillary basis. In 2001, our founders transferred
their interests in the two PRC companies to China United Financial Services Holdings Limited (then known as China Automobile Association
Holdings Limited), or China United Financial Services, a British Virgin Islands company, as part of a series of transactions in
which Cathay Capital Group, a private equity group, made an investment in China United Financial Services by subscribing for 40%
of the equity interests.
In June 2004, as part of its corporate restructuring
to facilitate international fundraising, China United Financial Services incorporated CISG Holdings Ltd., or CISG Holdings, in
the British Virgin Islands to be the holding company for its insurance agency and brokerage businesses. China United Financial
Services transferred to CISG Holdings all of its rights and interests in four PRC insurance intermediary companies it then controlled.
In September 2004, Cathay Capital Group subscribed for approximately 27.8% of the equity interests in CISG Holdings.
In December 2005, an entity affiliated with CDH
Growth Capital Holdings Company Limited, or CDH Growth Capital Holdings, a private equity firm, subscribed for approximately 26.4%
of the equity interests in CISG Holdings, through CDH China Holdings Management Company Limited. In January 2015, CDH Growth Capital
Holdings agreed to sell all of its equity interests in our company to certain members of our management.
In anticipation of our initial public offering,
we incorporated CNinsure Inc. in the Cayman Islands in April 2007. In July 2007, CNinsure Inc., on a 10,000-for-one basis, issued
its ordinary shares to the then existing shareholders of CISG Holdings in exchange for all of the outstanding shares of CISG Holdings.
After this restructuring transaction, CNinsure Inc. became the ultimate holding company of our group.
On October 31, 2007, we listed our ADSs on the
Nasdaq Global Market under the symbol “CISG.” We and certain selling shareholders of our company, completed the initial
public offering of 13,526,773 ADSs, each representing 20 ordinary shares, on November 5, 2007.
On July 14, 2010, we completed a follow-on public
offering of 4,600,000 ADSs, each representing 20 ordinary shares.
In October 2012, we obtained license approval
from the CIRC to establish an insurance sales service group company and renamed Shenzhen Nanfeng Investment, our wholly-owned subsidiary
in the PRC, as “Fanhua Insurance Sales Service Group Company Limited”, or Fanhua Group Company, to serve as the holding
company of our PRC operating entities.
On December 6, 2016, our shareholders approved
the change of our company name from CNinsure Inc. to Fanhua Inc. Our ticker symbol was changed to “FANH” subsequently.
In April 2017, we issued and sold 66,000,000
ordinary shares to Fosun Industrial Holdings Limited for a total purchase price of US$29,162,100. Fosun held 5.34% of the total
outstanding ordinary shares of the company at the time of the share issuance post-closing and its purchased shares were subject
to a one-year lock-up.
History of Our Business Operation
We began our insurance intermediary business
in 1999 by distributing automobile insurance products and automobile loans on an ancillary basis and expanded our product offerings
to other property and casualty insurance products in 2002. We commenced life insurance distribution by acquiring three life insurance
agencies in 2006 and began to offer claims adjusting services by acquiring four claims adjusting firms in 2008. In June 2010, we
established an insurance brokerage business unit to expand our product offerings from retail to commercial lines.
We have grown both organically and through acquisitions.
Since 2002, we expanded our operations nationwide by establishing 21 insurance agencies and two insurance brokerage firms and acquiring
majority interests in 21 insurance agencies (excluding Datong and its subsidiaries) and five claims adjusting firms.
In October 2017, as part of our transition towards
the fee-based platform model, we entered into a share purchase agreement with Beijing Cheche Technology Co., Ltd., or Cheche,
which operates an online auto insurance platform. Under this agreement, we sold the equity interests in Fanhua Times Sales
& Service Co., Ltd., 17 other P&C insurance agencies and one insurance brokerage firm, to Cheche. For further information
on this transaction, please see “Item 4. – Information on the Company – C. Organizational Structure – Recent
Principal Changes in Corporate Structure ”. In November 2017, we disposed of Bocheng, the operating entity of our insurance
brokerage business to a third party.
In recent years, we have devoted significant
efforts to developing and managing our mobile and online platforms. In 2010, we acquired a majority equity interest in InsCom Holdings
Limited, or InsCom Holdings, to build an e-commerce insurance platform. In April 2014, we established Dianliang Information, as
the holding company for eHuzhu (www.ehuzhu.com), an online mutual aid platform that we launched in July 2014.
In order to better serve our customers’
needs for diversified and comprehensive financial services, we have made investments in complementary business areas, such as consumer
finance and wealth management, to leverage our existing sales network, customer resources and operating platform. In October 2009,
we acquired 20.6% equity interest in Sincere Fame International Limited, or Sincere Fame, which owns 100% of the equity interests
in China Financial Services Group Limited, or CFSG, a consumer financial services provider. In November 2010, we formed a joint
venture, named Fanhua Puyi Investment Management Co., Ltd., or Puyi Investment, (which we later renamed as Fanhua Puyi Fund Sales
Co. Ltd., or Puyi Fund Sales, after obtaining the license to distribute mutual funds in March 2013) in which we beneficially own
15.4% of the equity interests. In November 2016, Puyi Fund Sales issued and sold new shares to its management and key employees.
As a result, our equity interests in Puyi Fund Sales were diluted from 19.5% to 15.4%.
Our principal executive offices are located at
27/F, Pearl River Tower, No. 15 West Zhujiang Road, Guangzhou, Guangdong 510623, People’s Republic of China. Our telephone
number at this address is +86-20-8388-6888. Our registered office is at the offices of Maples Corporate Services Limited, PO Box
309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands, or at such other place as our board of directors may decide. Our agent
for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.
Capital Expenditure
Our capital expenditures have been used primarily
to construct, upgrade and maintain our online platforms. See “Item 5. Operating and Financial Review and Prospects –
B. Liquidity and Capital Resources.”
We are a leading independent online-to-offline
financial services provider in China. Through our online platforms and offline sales and service network, we distribute to individual
and institutional customers in China a wide variety of property, casualty and life insurance products underwritten by domestic
and foreign insurance companies operating in China and provide insurance claims adjusting services, such as damage assessments,
surveys, authentications and loss estimations.
We distribute insurance products to customers
primarily through our sales agents, and provide claims adjustment services through our claims adjustors. With 579,348 sales agents,
1,253 claims adjustors and 683 sales and service outlets as of March 31, 2018, our distribution and service network reaches 30
out of 31 provinces in China, including some of the most economically developed regions and affluent cities.
Technological developments and the growth of
mobile internet access have significantly changed the way we operate our business.
We operate several online platforms, which we
define as websites and Internet-enabled applications that aggregate insurance product offerings from various insurance companies:
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CNpad Auto - internet-based application for our sales agents, through which they can access and purchase auto insurance products
from multiple insurance companies on their mobile devices for their clients. CNpad Auto had 418,342 activated accounts as of March
31, 2018.
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Baowang
(www.baoxian.com) - an online insurance platform that allows customers to directly
compare and shop for hundreds of accident, health, travel and homeowner insurance products from dozens of insurance companies online.
As of March 31, 2018, Baowang has over 1.6 million registered members.
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Lan Zhanggui - an internet-based all-in-one application which integrates our existing online platforms
and allows our agents to access and purchase a wide variety of insurance products, including life insurance, auto insurance, accident
insurance, travel insurance, and standard health insurance products from multiple insurance companies, through one integrated account
on mobile devices. As of March 31, 2018, Lan Zhanggui has over 579,348 registered users.
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eHuzhu
(www.ehuzhu.com) - an online non-profit mutual aid platform that provides low-cost
alternative risk-protection programs on a mutual aid basis among program members. eHuzhu primarily offers programs that cover mutual
aid for cancer for three different age groups and accidental death. When a member signs up for a program offered by eHuzhu, he
or she agrees to provide financial aid to and is entitled to receive financial aid from other program members in case of any claims
covered under such program. The amount of financial aid that each member can claim is up to RMB300,000, with the maximum contribution
from each member limited to RMB3 for each valid claim. As of March 31, 2018, eHuzhu has attracted over 3.1million registered members.
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As of March 31, 2018, we had one e-commerce insurance
platform and one online mutual aid platform, and 12 insurance intermediary companies in the PRC, of which nine were insurance agencies
including two with national operating licenses and three were insurance claims adjusting firms. We also own (i) 20.6% of the equity
interests in Sincere Fame International Limited, a financial service company which is primarily engaged in the origination and
management of small loans made to individuals, loan repackaging and mortgage agency services to individuals, (ii) 15.4% of the
equity interests in Fanhua Puyi Fund Sales Co., Ltd., a wealth management service company, and (iii) 8.9% of the equity interests
in Shenzhen Chetong Network Co., Ltd., an online insurance claims services provider.
The professional insurance intermediary
sector in China is still at its early stage of development. We believe this offers substantial opportunities for further
growth. The proliferation of internet access also presents us with lots of opportunities to improve our operation efficiency
and directly reach out to a much broader customer base. We intend to take advantage of these opportunities to increase our
market share by aggressively expanding our sales force and offline distribution and service network, broadening our product
portfolio and developing our online platforms,.
Segment Information
As of December 31, 2016, we operated three segments:
(1) the insurance agency segment, which mainly consists of providing agency services for P&C insurance products and life insurance
products to individual clients, (2) the insurance brokerage segment, which mainly consists of providing P&C and life insurance
brokerage services to institutional clients, and (3) the claims adjusting segment, which consists of providing pre-underwriting
survey services, claim adjusting services, disposal of residual value services, loading and unloading supervision services, and
consulting services. However, these three segments were reduced to two in 2017 due to the disposal of the brokerage segment and
we retained only the insurance agency segment and claims adjusting segment as of December 31, 2017.
Insurance Agency Segment
Our insurance agency segment accounted for 87.6%,
91.8% and 92.5% of our net revenues from continuing operations in 2015, 2016 and 2017, respectively. Revenue from this segment
is derived from two broad categories of insurance products: (i) property and casualty insurance products, and (ii) life insurance
products, both primarily focused on meeting the insurance needs of individuals.
Life Insurance Products
We expect the sale of life insurance products
to be the major source of our revenue in the next several years. The life insurance products we distribute can be broadly classified
into the categories set forth below. Due to constant product innovation by insurance companies, some of the insurance products
we distribute combine features of one or more of the categories listed below:
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Individual Health Insurance.
The individual health insurance products we distribute primarily
consist of critical illness insurance products, which provide guaranteed benefits for specified serious illnesses and medical insurance,
which provides conditional reimbursement for medical expenses during the coverage period. In return, the insured makes periodic
payment of premiums over a pre-determined period.
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Individual Endowment Life Insurance.
The individual endowment products we distribute generally
provide insurance coverage for the insured for a specified time period and maturity benefits if the insured reaches a specified
age. The individual endowment products we distribute also provide to a beneficiary designated by the insured guaranteed benefits
upon the death of the insured within the coverage period. In return, the insured makes periodic payment of premiums over a pre-determined
period, generally ranging from five to 25 years.
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Individual Annuity.
The individual annuity products we distribute generally provide annual
benefit payments after the insured attains a certain age, or for a fixed time period, and provide lump sum payment at the end of
the coverage period. In addition, the beneficiary designated in the annuity contract will receive guaranteed benefits upon the
death of the insured during the coverage period. In return, the purchaser of the annuity products makes periodic payments of premiums
during a pre-determined accumulation period.
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Individual Whole Life Insurance.
The individual whole life insurance products we distribute
provide insurance for the insured person’s entire life in exchange for the periodic payment of fixed premiums over a pre-determined
period, generally ranging from five to 20 years, or until the insured reaches a certain age. The face amount of the policy or,
for some policies, the face amount plus accumulated interest is paid upon the death of the insured.
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Individual Term Life Insurance.
The individual term life insurance products we distribute
provide insurance coverage for the insured for a specified time period or until the attainment of a certain age, in return for
the periodic payment of fixed premiums over a pre-determined period, generally ranging from five to 20 years. Term life insurance
policies generally expire without value if the insured survives the coverage period.
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Group Life Insurance.
We distribute several group life insurance products, including group
health insurance. These group products generally have a policy period of one year and require a single premium payment.
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Participating Insurance.
The participating insurance products we distribute not only provide
insurance coverage but also pay dividends generated from the profits of the insurance company providing the policy. The dividends
are typically paid on an annual basis over the life of the policy. In return, the insured makes periodic payments of premiums over
a pre-determined period, generally ranging from five to 25 years.
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The life insurance products we distributed in
2017 were primarily underwritten by Huaxia, Tian'an, Taikang Life Insurance Co., Ltd., Greatwall Life Insurance Co., Ltd. and ICBC
AXA Life Insurance Co., Ltd.
Property and Casualty Insurance Products
Our main property and casualty insurance product
is automobile insurance. In addition, we also offer individual accident insurance, travel insurance, disability income insurance,
commercial property insurance, construction insurance products and other property and casualty products. The property and casualty
insurance products we distribute to individual customers can be further classified into the following categories:
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Automobile Insurance.
Automobile insurance is the largest segment of property and casualty
insurance in the PRC in terms of gross written premiums. We distribute both standard automobile insurance policies and supplemental
policies, which we refer to as riders. The standard automobile insurance policies we sell generally have a term of one year and
cover damages caused to the insured vehicle by collision and other traffic accidents, falling or flying objects, fire, explosion
and natural disasters. We also sell standard third-party liability insurance policies, which cover bodily injury and property damage
caused by an accident involving an insured vehicle to a person not in the insured vehicle. The riders we distribute cover additional
losses, such as liability to passengers, losses arising from vehicle theft and robbery, broken glass and vehicle body scratches.
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Individual Accident Insurance.
The individual accident insurance products we distribute
generally provide a guaranteed benefit during the coverage period, which usually is one year or a shorter period, in the event
of death or disability of the insured as a result of an accident, or a reimbursement of medical expenses to the insured in connection
with an accident. These products typically require only a single premium payment for each coverage period. Because most of the
individual accident insurance products we distribute are underwritten by property and casualty insurance companies, we classify
individual accident insurance products as property and casualty insurance products.
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Travel Insurance.
The travel insurance products we distribute are short-term insurance providing
guaranteed benefit in the event of death or disability and covering travel-related emergencies and losses, either within one's
own country, or internationally. These products typically require only a single premium payment for each coverage period.
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Disability Income Insurance.
The disability income insurance products we distribute generally
have a term of one year and provide supplementary income before the insured can get back to their regular employment or for a specified
period in the event of illness or disability. These products typically require only a single premium payment for each coverage
period. Because most of the disability income insurance products we distribute are underwritten by property and casualty insurance
companies, we classify them as property and casualty insurance products.
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Homeowner Insurance.
The homeowner insurance products we distribute primarily cover the
damage to the insured house, furniture and household electrical appliance caused by a number of standard risks such as fire, flood
and explosion.
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The property and casualty insurance products
we distributed in 2017 were primarily underwritten by CPIC, PICC P&C, Ping An, Taiping and China United Property and Casualty
Insurance Company Limited., or CIC.
Value-added Services
In conjunction with the sale of automobile insurance
products, we provide our customers with a number of value-added services under our service slogan, “You take care of driving,
and we’ll take care of the rest.” For example, we assist our customers with obtaining vehicle licenses and subsequent
annual inspections. We maintain 24-hour service hotlines in most of our principal markets. When an accident involving an insured
vehicle occurs within these markets, our service staff can arrive at the scene quickly after being notified through the 24-hour
service hotline and provide onsite assistance to our customers. Fees derived from these services related to insurance products
are recorded as net revenues from property insurance business.
Claims
Adjusting Segment
Total net revenues derived from our claims adjusting
segment accounted for 12.4%, 8.2% and 7.5% of our total net revenue in 2015, 2016 and 2017, respectively. We offer the following
insurance claims adjusting services:
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Pre-underwriting Survey.
Before an insurance policy is sold, we conduct a survey of the
item to be insured to assess its current value and help our clients determine the insurable value and the amount to be insured.
We also help our clients assess the underwriting risk with respect to the item to be insured through surveys, appraisals and analysis.
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Claims Adjusting.
When an accident involving the insured subject matter has occurred, we
conduct an onsite survey to determine the cause of the accident and assess damage. We then determine the extent of the loss to
the insured subject matter and prepare and submit a report to the insurance company summarizing our preliminary findings. Upon
final conclusion of the case, we prepare and submit a detailed report to the insurance company setting forth details of the accident,
cause of the loss, details of the loss, adjustment and determination of loss, an indemnity proposal and, where appropriate, a request
for payment.
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Disposal of Residual Value.
In the course of providing claims adjusting services, we also
can appraise the residual value of the insured property and offer suggestions on the disposal of such property. Upon appointment
by the insurance company, we handle the actual disposal of the insured property through auction, discounted sale, lease or other
means.
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Loading and Unloading Supervision.
Upon appointment by ship owners, shippers, consignees
or insurance companies, we can monitor and record the loading and unloading processes of specific cargos.
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Consulting Services.
We provide consulting services to both the insured and the insurance
companies on risk assessment and management, disaster and damage prevention, investigation, and loss assessment.
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We primarily provided claims adjusting services
to Ping An, CPIC, Taiping P&C, PICC P&C and China Life P&C in 2017.
As competition intensifies and the insurance
market becomes more mature in China, we believe there will be a further division of labor in the insurance intermediary sector.
We expect that more insurance companies will choose to outsource claims adjusting functions to professional service providers while
they focus on the core aspects of their business, including product development and asset and risk management. We believe we are
well-positioned to capture such outsourcing opportunities.
Seasonality
See “Item 5. Operating and Financial Review
and Prospects — A. Operating Results — Factors Affecting Our Results of Operations — Seasonality.”
Distribution and Service Network and Marketing
We have an offline distribution and service network
that, as of March 31, 2018, consisted of one insurance sales and service group, nine insurance agencies including two with national
operating licenses, and three claims adjusting firms, with 683 sales and service branches and outlets, 579,348 registered independent
sales agents and 1,253 in-house claims adjustors. Our distribution and service network covers 30 provinces and reaches some of
the most economically developed regions and wealthiest cities in China, such as Beijing, Shanghai, Guangzhou and Shenzhen.
The following table sets forth additional information
concerning our distribution and service network as of March 31, 2018, broken down by provinces:
Province
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Number of Sales
and Service Outlet
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Number of Sales
Agents
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Number of In-
house Adjustors
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Shandong
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144
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183,755
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48
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Guangdong
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40
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71,436
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207
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Hebei
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67
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57,412
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69
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Sichuan
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86
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45,497
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68
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Hunan
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63
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28,490
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17
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Jiangsu
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34
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27,599
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102
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Guangxi
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22
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27,133
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39
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Shaanxi
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7
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20,052
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63
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Zhejiang
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29
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19,719
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76
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Fujian
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32
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16,340
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8
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Anhui
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26
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15,359
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4
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Liaoning
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24
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11,357
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40
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Tianjin
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4
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10,909
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24
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Chongqing
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|
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17
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10,441
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31
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Hubei
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18
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10,348
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43
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Inner Mongolia
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7
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7,481
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9
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Yunan
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|
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12
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5,483
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16
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Shanxi
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|
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7
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4,263
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|
|
10
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Henan
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|
|
3
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|
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3,979
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22
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Beijing
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|
|
10
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|
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1,593
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163
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Jiangxi
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8
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702
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27
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Shanghai
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|
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11
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|
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—
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103
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Hainan
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|
|
2
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|
|
|
—
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|
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14
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Jilin
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|
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2
|
|
|
|
—
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|
|
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13
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Guizhou
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|
|
2
|
|
|
|
—
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|
|
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13
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Qinghai
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|
|
1
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|
|
|
—
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|
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6
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Xinjiang
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|
|
1
|
|
|
|
—
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|
|
|
5
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Gansu
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|
|
1
|
|
|
|
—
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|
|
|
5
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Heilongjiang
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|
|
2
|
|
|
|
—
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|
|
|
4
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Ningxia
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|
|
1
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|
|
|
—
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|
4
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Total
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683
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579,348
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1,253
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We market and sell personal lines of property
and casualty insurance products and life insurance products to customers through both registered independent sales agents, who
are not our employees, and our in-house sales representatives. We also market and sell accidental, health, travel and homeowner
insurance products directly to customers through our online platform Baowang (www.baoxian.com). We market and sell insurance claims
adjusting services primarily to insurance companies through our in-house professional claims adjustors and to non-affiliated service
representatives through Chetong.net, an online service platform, by bidding for claims adjusting business contracts.
Customers
We sell property and casualty insurance products
including automobile insurance, individual accident insurance, homeowner insurance products, liability insurance, travel insurance
as well as life insurance products including health insurance, endowment insurance, annuity insurance, whole life insurance and
term life insurance primarily to individual customers. Customers for the life insurance products we distribute are primarily individuals
under 50 years of age. For the year ended December 31, 2017, no single individual customer of insurance products accounted for
more than 1% of our net revenues. Our customers for the claims adjusting services are primarily insurance companies.
As of December 31, 2017, we had accumulated approximately
9.0 million individual customers and 1.7 million institutional customers. By providing certain value-added services to these customers
at no additional charge, we seek to build a loyal customer base that generates referrals and cross-selling opportunities.
Insurance Company Partners
As of March 31, 2018, we had established business
relationships with 79 insurance companies in the PRC. In the Chinese insurance market, local branches of insurance companies generally
have the authority to enter into contracts in their own names with insurance intermediaries. Historically, we have entered into
and maintained business relationships with insurance companies at the local level. That is, our insurance agencies and claims adjusting
firms enter into contracts with different local branches of an insurance company that are located within their respective regions.
The termination of a business relationship between one of our insurance agencies or claims adjusting firms and a local branch of
an insurance company generally would have no significant impact on the business relationships between our other insurance agencies
and claims adjusting firms and the other branches of the same insurance company. However, termination or suspension of a business
relationship between us and the headquarters of an insurance company may significantly impact the business relationships at the
local level. For example, on March 1, 2017, we were notified verbally by PICC P&C's local branches that PICC P&C was temporarily
suspending its business cooperation with Fanhua on areas such as insurance agency, brokerage and claims adjustment businesses because
certain of PICC P&C’s senior management members were being investigated by the government. As a result, all the business
relationship between our subsidiaries and PICC P&C’s local branches were temporarily suspended until the fourth quarter
of 2017. Since 2007, we have sought to establish business relationships with insurance companies at the corporate headquarters
level in order to leverage the combined sales volumes of our various affiliated insurance agencies and brokerages located in different
parts of China. As of March 31, 2018, we had outstanding contracts with 34 life insurance companies and 45 property and casualty
insurance companies at the corporate headquarters level for the distribution of insurance products and outsourcing of claims adjusting
services.
Insurance Aggregator Site Partners
In October 2017, we started to implement a platform
business model for auto insurance business. Under the new business model, we no longer enter into contracts with property and casualty
insurance companies for the distribution of auto insurance products through our individual sales agents to earn profits from the
commission spread. Rather, we operate CNpad as a public auto insurance transaction platform which connects insurance distributors
with our sales agents and charges insurance distributors technology service fees based on the volume of insurance premiums they
transact through CNpad. A technology service fee is typically much smaller than the commission we previously received from insurance
companies, though our costs are minimal. As of March 31, 2018, we had entered into technology service agreements with one internet-based
insurance sales company, allowing it to offer auto insurance policies through CNpad.
Competition
A number of industry players are involved in
the distribution of insurance products in the PRC. We compete for customers on the basis of product offerings, customer services
and reputation. Because we primarily distribute individual insurance products, our principal competitors include:
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Professional insurance intermediaries.
The professional insurance intermediary sector in
China is highly fragmented, accounting for only 7.0% of the total insurance premiums generated in China in 2015, according to the
latest Chinese Insurance Intermediary Market Report. Several insurance intermediary companies have received private equity or venture
capital funding in recent years and are actively pursuing expansion. We believe that we can compete effectively with these insurance
intermediary companies with our long operating history, strong brand recognition, a strong and stable team of managers and sales
professionals, leading online platforms and diversified product offerings. With increasing consolidation expected in the insurance
intermediary sector in the coming years, we expect competition within this sector to intensify.
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Insurance companies.
The distribution of individual life insurance products in China historically
has been dominated by insurance companies, which usually use both in-house sales forces and exclusive sales agents to distribute
their own products. In addition, in recent years several major insurance companies have increasingly used telemarketing and the
internet to distribute auto insurance. We believe that we can compete effectively with insurance companies because we focus only
on distribution and offer our customers a broad range of insurance products underwritten by multiple insurance companies.
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Entities that offer insurance products online.
In recent years, domestic insurance companies,
internet companies and professional insurance intermediaries have begun to engage in the internet insurance business. However,
each of their insurance e-commerce operations has its own limitations. The insurance products offered on an insurance company’s
website are usually confined to those under its own brand. Most internet companies have limited experience in insurance operation
with limited or no offline sales and service support. Our better brand recognition, larger sales scale and broader sales and service
network differentiate us from other professional insurance intermediaries. We believe that we can compete effectively with these
business entities because our online insurance platforms offer users access to a broad range of insurance products underwritten
by multiple insurance companies’ good after-sale services that are backed by our nation-wide service network and better user
experience.
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Other business entities.
In recent years, business entities that distribute insurance products
as an ancillary business, primarily commercial banks and postal offices, have been playing an increasingly important role in the
distribution of insurance products, especially life insurance products. However, the insurance products distributed by these entities
are mostly confined to those related to their main lines of business, such as investment-related life insurance products. We believe
that we can compete effectively with these business entities because we offer our customers a broader variety of products.
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In addition to individual insurance products,
we also distribute commercial property and casualty insurance products. As a result, we also compete, to a lesser degree, with
insurance intermediaries that focus on the distribution of commercial property and casualty insurance products. We believe that
we can compete effectively with these business entities because we can leverage our leading position in the distribution of individual
insurance products and provision of property-related claims services, including our strong relationship with insurance companies,
existing abundant customer resources and large distribution network.
We compete primarily with the other major claims
adjusting firms in China, particularly Min Tai’an Insurance Surveyors & Loss Adjusters Co., Ltd., or Min Tai’an.
We believe that we can compete effectively with Min Tai’an and other major insurance claims adjusting firms because we offer
our customers a diversified range of claims adjusting services covering property insurance, automobile insurance and marine and
cargo insurance and are able to leverage the business relationships we have developed with insurance companies through the distribution
of property and casualty insurance products.
Intellectual Property
Our brand, trade names, trademarks, trade secrets
and other intellectual property rights distinguish our business platform, services and products from those of our competitors and
contribute to our competitive advantage in the professional insurance intermediary sector. To protect our intellectual property,
we rely on a combination of trademark, copyright and trade secret laws as well as confidentiality agreements with our employees,
sales agents, contractors and others. As of March 31, 2018, we had 43 registered trademarks in China, including our corporate logo.
Our main website is
www.fanhuaholdings.com
.
Regulation
Regulations of the Insurance
Industry
The insurance industry in the PRC is highly regulated.
Between 1998 and March 2018, CIRC was the regulatory authority responsible for the supervision of the Chinese insurance industry.
In March 2018, the CBIRC, was established as the result of the merger between CIRC and CBRC, replacing CIRC as the regulatory authority
for the supervision of the Chinese insurance industry. Insurance activities undertaken within the PRC are primarily governed by
the Insurance Law and the related rules and regulations.
Initial
Development of Regulatory Framework
The Chinese Insurance Law was enacted in 1995.
The original insurance law, which we refer to as the 1995 Insurance Law, provided the initial framework for regulating the domestic
insurance industry. Among the steps taken under the 1995 Insurance Law were the following:
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Licensing of insurance companies and insurance intermediaries, such as agencies and brokerages.
The 1995 Insurance Law established requirements for minimum registered capital levels, form of organization, qualification of senior
management and adequacy of the information systems for insurance companies and insurance agencies and brokerages.
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Separation of property and casualty insurance businesses and life insurance businesses. The 1995
Insurance Law classified insurance between property, casualty, liability and credit insurance businesses, on the one hand, and
life, accident and health insurance businesses on the other, and prohibited insurance companies from engaging in both types of
businesses.
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Regulation of market conduct by participants. The 1995 Insurance Law prohibited fraudulent and
other unlawful conduct by insurance companies, agencies and brokerages.
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Substantive regulation of insurance products. The 1995 Insurance Law gave insurance regulators
the authority to approve the basic policy terms and premium rates for major insurance products.
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Financial condition and performance of insurance companies. The 1995 Insurance Law established
reserve and solvency standards for insurance companies, imposed restrictions on investment powers and established mandatory reinsurance
requirements, and put in place a reporting regime to facilitate monitoring by insurance regulators.
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Supervisory and enforcement powers of the principal regulatory authority. The principal regulatory
authority, then the PBOC, was given broad powers under the 1995 Insurance Law to regulate the insurance industry.
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Establishment
of the CIRC and 2002 Amendments to the Insurance Law
China’s insurance regulatory regime was
further strengthened with the establishment of the CIRC in 1998. The CIRC was given the mandate to implement reform in the insurance
industry, minimize insolvency risk for Chinese insurers and promote the development of the insurance market.
The 1995 Insurance Law was amended in 2002 and
the amended insurance law, which we refer to as the 2002 Insurance Law, became effective on January 1, 2003. The major amendments
to the 1995 Insurance Law include:
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Authorizing the CIRC to be the insurance supervisory and regulatory body nationwide. The 2002 Insurance
Law expressly grants the CIRC the authority to supervise and administer the insurance industry nationwide.
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Expanding the permitted scope of business of property and casualty insurers. Under the 2002 Insurance
Law, property and casualty insurance companies may engage in the short-term health insurance and accident insurance businesses
upon the CIRC’s approval.
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Providing additional guidelines for the relationship between insurance companies and insurance
agents. The 2002 Insurance Law requires an insurance company to enter into an agent agreement with each insurance agent that will
act as an agent for that insurance company. The agent agreement sets forth the rights and obligations of the parties to the agreement
as well as other matters pursuant to law. An insurance company is responsible for the acts of its agents when the acts are within
the scope authorized by the insurance company.
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Relaxing restrictions on the use of funds by insurance companies. Under the 2002 Insurance Law,
an insurance company may use its funds to make equity investments in insurance-related enterprises, such as asset management companies.
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Allowing greater freedom for insurance companies to develop insurance products. The 2002 Insurance
Law allowed insurance companies to set their own policy terms and premium rates, subject to the approval of, or a filing with,
the CIRC.
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2009
Amendments to the Insurance Law
The 2002 Insurance Law was amended again in 2009
and the amended insurance law, which we refer to as the 2009 Insurance Law, became effective on October 1, 2009. The major amendments
to the 2009 Insurance Law include:
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Strengthening protection of the insured’s interests. The 2009 Insurance Law added a variety
of clauses such as incontestable clause, abstained and estoppels clause, common disaster clause and amending immunity clause, claims-settlement
prescription clause, reasons for claims rejection and contract modification clause.
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Strengthening supervision on the qualification of the shareholders of the insurance companies and
setting forth specific qualification requirements for the major shareholders, directors, supervisors and senior managers of insurance
companies.
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Expanding the business scope of insurers and further relaxing restriction on the use of fund by
insurers.
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Strengthening supervision on solvency of insurers with stricter measures.
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Tightening regulations governing the administration of insurance intermediary companies, especially
those relating to behaviors of insurance agents.
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According to the 2009 Insurance Law, the minimum
registered capital required to establish an insurance agency or insurance brokerage as a company must comply with the PRC Company
Law. The registered capital or the capital contribution of insurance agencies or insurance brokerages must be paid-up capital in
cash. The 2009 Insurance Law also sets forth some specific qualification requirements for insurance agency and brokerage practitioners.
The senior managers of insurance agencies or insurance brokerages must meet specific qualification requirements, and their appointments
are subject to approval of the CIRC. Personnel of an insurance agency or insurance brokerage engaging in the sales of insurance
products must meet the qualification requirements set by the CIRC and obtain a qualification certificate issued by the CIRC. Under
the 2009 Insurance Law, the parties to an insurance transaction may engage insurance adjusting firms or other independent appraisal
firms that are established in accordance with applicable laws, or persons who possess the requisite professional expertise, to
conduct assessment and adjustment of the insured subject matters. Additionally, the 2009 Insurance Law specifies additional legal
obligations for insurance agencies and brokerages.
2014
Amendments to the Insurance Law
The 2002 Insurance Law was amended again in 2014
and the amended insurance law, which we refer to as the 2014 Insurance Law, became effective on August 31, 2014. The major amendments
of the 2014 Insurance Law include:
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Relaxing restrictions on actuaries. The 2014 Insurance Law no longer requires Insurance companies
shall employ actuaries recognized by the insurance regulatory authority under the State Council. However, an insurance company
shall also engage professionals, and establish an actuarial reporting system and a compliance reporting system as before.
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2015
Amendments to the Insurance Law
The 2014 Insurance Law was amended again in 2015
and the amended insurance law, which we refer to as the 2015 Insurance Law, became effective on April 24, 2015. The major amendments
of the 2015 Insurance Law include:
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Eliminating the requirement for an insurance agent or broker to obtain a qualification certificate
issued by the CIRC before providing any insurance agency or brokerage services.
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Relaxing the requirement for the establishment or other significant corporate events of an insurance
agency or brokerage firm. For example, an insurance agency or brokerage firm is allowed to apply for a business permit from the
CIRC and a business license from the local AIC simultaneously under the 2015 Insurance Law, while an insurance agency or brokerage
firm had to apply for and receive a business permit issued by the CIRC before it could apply for a business license from and register
with the relevant local AIC under the 2014 Insurance Law. Prior approval by the CIRC is no longer required for the divesture or
mergers of insurance agencies or brokerage firms, the change of their organizational form, or the establishment or winding-up of
a branch by an insurance agency or brokerage firm.
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The
CIRC and the CBIRC
The CBIRC, which was formed by the merger of
China Banking Regulatory Commission (“CBRC”) and CIRC in March, 2018, inherits the authority of CIRC, has extensive
authority to supervise insurance companies and insurance intermediaries operating in the PRC, including the power to:
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promulgate regulations applicable to the Chinese insurance industry;
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investigate insurance companies and insurance intermediaries;
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establish investment regulations;
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approve policy terms and premium rates for certain insurance products;
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set the standards for measuring the financial soundness of insurance companies and insurance intermediaries;
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require insurance companies and insurance intermediaries to submit reports concerning their business
operations and condition of assets;
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order the suspension of all or part of an insurance company or an insurance intermediary’s
business;
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approve the establishment, change and dissolution of an insurance company, an insurance intermediary
or their branches;
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review and approve the appointment of senior managers of an insurance company, an insurance intermediary
or their branches; and
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punish insurance companies or intermediaries for improper behaviors or misconducts.
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Regulation
of Insurance Agencies
The principal regulation governing insurance
agencies in China is the Provisions on the Supervision of Professional Insurance Agencies, or the POSPIA, promulgated by the CIRC
on September 25, 2009 and effective on October 1, 2009, which has been amended by (i) the Decision on Revising the POSPIA issued
by the CIRC and effective on April 27, 2013, and (ii) the second amendment to the POSPIA issued by the CIRC and effective on October
19, 2015. According to the POSPIA, the establishment of an insurance agency is subject to minimum registered capital requirement
and other requirements and to the approval of the CIRC. The term “insurance agency” refers to an entity that meets
the qualification requirements specified by the CIRC, has obtained the license to conduct an insurance agency business with the
approval of the CIRC, engages in the insurance business by and within the authorization of, and which collects commissions from,
insurance companies. An insurance agency may take any of the following forms: (i) a limited liability company; or (ii) a joint
stock limited company. According to the CIRC’s Decision on Revising the Regulatory Provisions on Professional Insurance Agencies,
or the Insurance Agency Decision, promulgated on April 27, 2013, unless otherwise stipulated by the CIRC, the minimum registered
capital for establishing a new insurance agency is RMB50 million instead of RMB2 million for a regional insurance agency and RMB10
million for a nationwide insurance agency as previously required. An additional increase of registered capital is no longer required
to establish a branch or sales office. Pursuant to the Notice of the CIRC on Further Clarifying Certain Issues Relating to the
Access to the Professional Insurance Intermediary Market, a professional insurance agency that was established prior to the promulgation
of the Insurance Agency Decision and has a registered capital of no more than RMB50 million may apply to establish branches only
in the province in which it is registered. A professional insurance agency company that was established prior to the promulgation
of the Insurance Agency Decision, has a registered capital of not more than RMB50 million and has already established branches
in provinces other than its place of registration may apply to establish additional branches in those provinces. An insurance agency
may engage in the following insurance agency businesses:
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selling insurance products on behalf of the insurance companies;
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collecting insurance premiums on behalf of the insurance companies;
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conducting loss surveys and handling claims of insurance businesses on behalf of the insurer principal;
and
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other business activities approved by the CIRC.
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The name of an insurance agency must contain
the words “insurance agency” or “insurance sales.” The license of an insurance agency is valid for a period
of three years. An insurance agency shall submit a written report to the CIRC within five days from the date of occurrence of any
of the following matters:(i) change of name or a branch’s name;(ii) change of domicile or a branch's business premises;(iii)
change of names of sponsors or major shareholders;(iv) change of major shareholders;(v) change of registered capital;(vi) major
changes to equity structure;(vii) amendment to the articles of association; (viii) divestment of a branch; (ix) establishment of
a branch; (x) spin-off of or merger with an insurance agency or (xi) changes of organizational form. According to the Measures
on the Supervision and Administration of Insurance Brokers and Insurance Claims Adjustors issued by the CIRC in January 2013, personnel
of an insurance agency and its branches engaging in the sales of insurance products or relevant loss survey and claim settlement
shall comply with the conditions prescribed by the CIRC. The senior managers of an insurance agency or its branches must meet specific
qualification requirements set forth in the revised Regulatory Provisions on Professional Insurance Agencies. The appointment of
the senior managers of an insurance agency or its branches is subject to review and approval of the CIRC.
Regulation
of Insurance Brokerages
The principal regulation governing insurance
brokerages is the Provisions on the Supervision of Insurance Brokerages, or the POSIB, promulgated by the CIRC on September 18,
2009 and effective on October 1, 2009, which has been amended by (i) the Decision on Revising the POSIB issued by the CIRC and
effective on April 27, 2013, and (ii) the amendment to the POSIB issued by the CIRC and effective on October 19, 2015. According
to the POSIB, the establishment of an insurance brokerage is subject to the approval of the CIRC. The term “insurance brokerage”
refers to an entity engaging in the insurance brokering business that meets the qualification requirements specified by the CIRC
and has obtained the license to operate an insurance brokering business with the approval of the CIRC. Insurance brokering business
includes both direct insurance brokering, which refers to brokering activities on behalf of insurance applicants or the insured
in their dealings with the insurance companies, and reinsurance brokering, which refers to brokering activities on behalf of insurance
companies in their dealings with reinsurance companies. An insurance brokerage may take any of the following forms: (i) a limited
liability company; or (ii) a joint stock limited company. According to the Decision on Revising the Regulatory Provisions on the
Supervision of Insurance Brokerages, or the Insurance Brokerage Decision, promulgated on April 27, 2013, unless otherwise stipulated
by the CIRC, the minimum registered capital for establishing a new insurance brokerage is RMB50 million instead of RMB10 million
as previously required. An additional increase of registered capital is no longer required for establishing a branch or sales office.
Pursuant to the Notice of the CIRC on Further Clarifying Certain Issues Relating to the Access for Professional Insurance Intermediary
Companies Market, a professional insurance brokerage company that was established prior to the promulgation of the Insurance Brokerage
Decision and has a registered capital of no more than RMB50 million may apply to establish branches only in the province in which
it is registered. A professional insurance brokerage company that was established prior to the promulgation of the Insurance Brokerage
Decision, has a registered capital of not more than RMB50 million and has already established branches in provinces other than
its place of registration may apply to establish additional branches in those provinces. Insurance brokerage companies that provide
internet insurance services must have a registered capital of not less than RMB50 million, unless they were already engaged in
internet insurance services prior to the promulgation of the Insurance Brokerages Decision.
An insurance brokerage may conduct the following
insurance brokering businesses:
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making insurance proposals, selecting insurance companies and handling the insurance application
procedures for the insurance applicants;
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assisting the insured or the beneficiary to claim compensation;
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reinsurance brokering business;
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providing consulting services to clients with respect to disaster and damage prevention, risk assessment
and risk management; and
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other business activities approved by the CIRC.
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The name of an insurance brokerage must contain
the words “insurance brokerage.” The license of an insurance brokerage is valid for a period of three years. An insurance
brokerage shall submit a written report to the CIRC within five days from the date of occurrence of any of the following matters:
(i) change of name or a branch’s name; (ii) change of domicile or a branch's business premises; (iii) change of names of
sponsors or major shareholders; (vi) change of major shareholders; (v) change of registered capital; (vi) major changes to equity
structure; (vii) amendment to the articles of association; or (viii) divestment of a branch. Personnel of an insurance brokerage
and its branches who engage in any of the insurance brokering businesses described above must comply with the qualification requirements
prescribed by the CIRC. The senior managers of an insurance brokerage must meet specific qualification requirements set forth in
the Provisions on the Supervision of Insurance Brokerages. Appointment of the senior managers of an insurance brokerage is subject
to review and approval by the CIRC.
Regulation
of Insurance Claims Adjusting Firms
The principal regulations governing insurance
adjusting firms are the Provisions on the Supervision of Insurance Claims Adjusting Firms, or the POSICAF, issued by the CIRC on
September 18, 2009 and effective on October 1, 2009, which has been amended by (i) the Decision on Revising the POSICAF issued
by the CIRC on September 29, 2013 and effective on December 1, 2013, and (ii) the amendment to POSICAF issued by the CIRC and effective
on October 19, 2015, or the 2015 Amendment. According to the POSICAF, the term “insurance adjusting firm” refers to
an entity that is established in accordance with applicable laws and regulations and with the approval of the CIRC and engages
in the assessment, survey, authentication, loss estimation and adjustment of the insured subject matters upon the entrustment of
the parties concerned. An insurance adjusting firm may take any of the following forms: (i) a limited liability company; (ii) a
joint stock limited company; or (iii) a partnership.
Upon approval of the CIRC, an insurance adjusting
firm may engage in the following businesses:
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inspecting, appraising the value of and assessing the risks of the subject matter before it is
insured;
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surveying, inspecting, estimating the loss of and adjusting the insured subject matter after loss
has been incurred;
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risk management consulting; and
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other business activities approved by the CIRC.
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The name of an insurance adjusting firm must
contain the words “insurance adjusting” and must avoid duplicating names of existing insurance claims adjusting firms.
The license of an insurance adjusting firm is valid for a period of three years. In any of the following situations, an insurance
adjusting firm shall submit a written report to the CIRC when it within five days from the date the resolution for change has been
passed: (i) change of name or a branch’s name; (ii) change of domicile or a branch's business premises; (iii) change of names
of sponsor, major shareholders or capital contributors; (iv) change of major shareholders or capital contributors; (v) major changes
to the equity structure or the proportion of capital contributions; (vi) change of registered capital or capital contributions;
(vii) amendment to the articles of association or the partnership agreement; (viii) division, merger and dissolution or any change
in the form of organization; (ix) divestment of a branch; (ix) establishment of a branch; (x) division of or merger with an insurance
agency or (xi) change of organizational form. Personnel of an insurance adjusting firm or its branches engaged in any of the insurance
adjusting businesses described above comply with the qualification requirements prescribed by the CIRC. The senior managers of
an insurance adjusting firm must meet specific qualification requirements set forth in the Provisions on the Supervision of Insurance
Claims Adjusting Firms. Appointment of the senior managers of an insurance adjusting firm or its branches is subject to review
and approval by the CIRC.
Regulation
of Ancillary-Business Insurance Agencies
The principal regulation governing ancillary-business
insurance agencies is the Interim Measures on the Administration of Ancillary-Business Insurance Agency issued by the CIRC on and
effective as of August 4, 2000. The term “ancillary-business insurance agencies” refer to entities that are engaged
by insurers to handle insurance business on behalf of insurers while concurrently engaging in another non-insurance-related business.
Ancillary-business insurance agencies must meet the qualifications requirements set forth in this regulation. Upon reviewing and
approving the qualifications of an entity applying to become an ancillary-business insurance agency, the CIRC will issue a “License
for Ancillary-Business Insurance Agency,” which will be valid for three years. An ancillary-business insurance agency may
only undertake insurance business on behalf of one insurance company, and the scope of the undertaken business is limited to the
scope specified in the License for Ancillary- Business Insurance Agency.
Regulation
of Insurance Salespersons
The principal regulation governing individual
insurance salespersons is the Measures on the Supervision and Administration of Insurance Salespersons issued by the CIRC on January
6, 2013 and effective on July 1, 2013, which replaced the Provisions on the Administration of Insurance Salespersons promulgated
on April 6, 2006 and effective on July 1, 2006. Under this regulation, the term “insurance salesperson” refers to an
individual who sells insurance products for an insurance company, including those who are engaged by insurance companies or by
insurance agencies. A person must be registered with the CIRC’s Insurance Intermediaries Regulatory Information System and
obtain a “Practice Certificate of Insurance Salespersons” issued by the insurance company or insurance agency to which
he or she belongs in order to conduct insurance sales activities.
Pursuant to the 2015 Insurance Law and the amended
POSPIA, a sales person is no longer required to pass the qualification examination organized by the CIRC or insurance industry
committees to obtain a Qualification Certificate.
Regulation of Insurance Brokers and Insurance
Adjustors
The principal regulation governing insurance
brokerage practitioners and insurance adjustment practitioners is the Measures on the Supervision and Administration of Insurance
Brokers and Insurance Claims Adjustors issued by the CIRC on January 6, 2013 and effective on July 1, 2013. A person also must
be registered with the CIRC’s Insurance Intermediary Supervision Information System and obtain a “Practice Certificate
of Insurance Brokers” or “Practice Certificate of Claims Adjustors” issued by the insurance brokerage firm or
insurance claims adjusting company to which he or she belongs in order to conduct insurance brokerage or claims adjustment activities.
An insurance broker is not allowed to conduct insurance brokerage activities on behalf of himself or herself.
Pursuant to the 2015 Insurance Law and the amended
POSIB and POSICAF, an insurance brokerage practitioner or insurance claims adjustment practitioner is no longer required to pass
the qualification examination organized by the CIRC or insurance industry committees to obtain a “Qualification Certificate
of Insurance Brokers” or a “Qualification Certificate of Claims Adjustors.”
Regulation of Insurance Intermediary Service
Group Companies
The principal regulation governing insurance
intermediary groups is the Provisional Measures for Supervision and Administration of the Insurance Intermediary Service Group
Companies (for Trial Implementation) issued by the CIRC on September 22, 2011 with immediate effect. According to the regulation,
the term “insurance intermediary service group company” refers to a professional insurance intermediary company that
is established in accordance with applicable laws and regulations and with the approval of the CIRC that exercises sole or shared
control of, or is able to exert major influence over, at least two subsidiaries that are professional insurance intermediary companies
primarily engaged in the insurance intermediary business.
An insurance intermediary service group company
must have:
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a registered capital of at least RMB100 million;
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no record of material violation by investors of applicable laws and regulations in the previous
three years;
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at least five subsidiaries, among which at least two are professional insurance intermediary companies
which contribute at least 50% of the total revenues of the group;
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chairman (Executive director) and the senior management with qualifications stipulated by the CIRC;
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perfect governance structure, sound organization, effective risk management and internal control
management system; and
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business premises and office equipment which are suitable for the development of the businesses.
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The name of an insurance intermediary service
group must contain the words “Group” or “Holding.” Its principal business must be equity investment, management
and provision of supporting services. An insurance intermediary service group company shall, submit a written report to the CIRC
and its local counterparts at the place of registration within five working days after the date of occurrence of the following:
(i) changing its registered name or address; (ii) changing its registered capital; (iii) changing its equity structure by more
than 5% or shareholders holding more than 5% of shares; (iv) changing its articles of association; (v) establishing, acquiring,
merging or closing its subsidiary; (vi) engaging in related party transactions between member companies; (vii) disincorporating;
(viii) significantly changing its business scope; or (ix) making a major strategic investment, suffering a significant investment
loss or experiencing other material events or emergencies that affect or may affect the business management, financial status or
risk control of the group. Senior managers of an insurance intermediary service group company must meet specific qualification
requirements and appointment of the senior managers of an insurance intermediary service group company is subject to review and
approval by the CIRC.
Content
Related to Insurance Industry in the Legal Documents of China’s Accession to the WTO
According to the Circular of the CIRC on Distributing
the Content Related to Insurance Industry in the Legal Documents of China’s Accession to the World Trade Organization, or
WTO, for the life insurance sector, within three years of China’s accession to the WTO on December 11, 2001, geographical
restrictions were to be lifted, equity joint venture companies allowed to provide health insurance, group insurance, and pension/annuity
services to Chinese citizens and foreign citizens, and for there to be no other restrictions except those on the proportion of
foreign investment (no more than 50%) and establishment conditions. For the non-life insurance sector, within three years of China’s
accession, the geographical restrictions were to be lifted and no restrictions allowed other than establishment conditions. For
the insurance brokerage sector, within five years of China’s accession, the establishment of wholly foreign-funded subsidiary
companies was to be allowed, and no restriction other than establishment conditions and restrictions on business scope.
Content
Related to Insurance Industry in the Closer Economic Partnership Arrangements
Under CEPA Supplement IV signed in July 2007
and CEPA Supplement VIII signed in December 2011, local insurance agencies in Hong Kong and Macao are allowed to set up wholly-owned
insurance agency companies and conduct insurance intermediary businesses in Guangdong Province (including Shenzhen) on a pilot
basis if they fulfill the following criteria:
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The applicant must have operated an insurance brokerage businesses in Hong Kong and Macao for over
10 years;
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The applicant's average annual revenue of insurance brokerage business for the past three years
before application must not be less than HKD500,000 and the total assets as at the end of the year before application must not
be less than HKD500,000;
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Within the years before application, there has been no serious misconduct or record of disciplinary
action; and
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The applicant must have set up a representative office in mainland China for over one year
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Regulations on Internet Insurance
The principal regulation governing the operation
of internet insurance business is the Interim Measures for the Supervision of the Internet Insurance Business, or Interim Measures,
promulgated by the CIRC on July 22, 2015 and effective on October 1, 2015. Under the Interim Measures, the term of “internet
insurance business” refers to the business of concluding insurance contracts and providing insurance services by insurance
institutions through self-operated internet platforms, third-party internet platforms or other methods using the internet and mobile
communication and other technologies. Insurance institutions include insurance companies and professional insurance intermediary
companies that are established and registered in accordance with applicable laws and regulations and with the approval of the CIRC.
Professional insurance intermediaries refer to professional insurance agencies, insurance brokerage firms and insurance claims
adjusting firms that can operate in the areas not limited to the provinces where they are registered. Third party internet platforms
refer to internet platforms other than those self-operated by insurance institutions which provide auxiliary services related to
internet technology support to insurance institutions for their internet insurance business activities. Any third party internet
platform that intends to directly engage in the internet insurance business such as underwriting of insurance policies, settlement
of claims, cancellation of insurance policies, handling customers’ complaints and providing other customer services shall
apply and obtain relevant qualifications from the CIRC before engaging in internet insurance business.
Both self-operated internet platforms and third
party internet platforms, through which insurance institutions conduct internet insurance business, shall meet certain requirements
such as obtaining ICP licenses or making ICP filing and maintaining sound internet operation system and information security system.
Insurance institutions shall carefully evaluate
their own risk management and control capacity and customer service capacity, and rationally determine and choose insurance products
and the scope of sales activities suitable for internet operations. The Interim Measures permit insurance companies to sell certain
type of products online in regions outside their registered business areas, which include: (i) personal accident insurance, term
life insurance and general whole life insurance; (ii) individual homeowner insurance, liability insurance, credit insurance and
guarantee insurance; (iii) property insurance business for which the whole service process services from sales and underwriting
of insurance policies to the settlement of claims can be performed independently and completely through the internet; and (iv)
other insurance products specified by the CIRC. The Interim Measures also specifies requirements on disclosure of information regarding
insurance products sold on the internet and provides guidelines for the operations of the insurance institutions that engage in
internet insurance business.
Regulations on Online Financial Services
On July 18, 2015, ten PRC regulatory agencies,
including the PBOC, the CIRC and the CBRC, jointly issued the Guidelines on Promoting the Healthy Development of Internet Finance,
or the Guidelines. The Guidelines encourage insurance companies to leverage Internet technology to transform and upgrade traditional
financial services. The Guidelines also support financial institutions to build innovative international platforms that could conduct
internet insurance business.
The Guidelines set out the basic principles
for promoting the development and the administration of the online insurance sector. The respective regulatory agencies will adopt
new rules and regulations to implement and enforce the principles set out in the Guidelines. As the implementing rules and regulations
of the Guidelines have not been published, there is uncertainty as to how the requirements in the Guidelines will be interpreted
and implemented.
Regulations on Foreign Exchange
Foreign
Currency Exchange
Foreign exchange regulation in China is primarily
governed by the following rules:
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Foreign Currency Administration Rules (1996), as amended pursuant to the Decision on Revising the
Foreign Currency Administration Rules promulgated by the State Council on January 14, 1997 and the Foreign Currency Administration
Rules promulgated by the State Council on August 5, 2008; and
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Administration Rules of the Settlement, Sale and Payment of Foreign Exchange.
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Under the Foreign Currency Administration Rules,
the RMB is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related
foreign exchange transactions. Conversion of RMB for capital account items, such as direct investment, loan, security investment
and repatriation of investment, however, is still subject to the approval of the SAFE.
Under the Administration Rules of the Settlement,
Sale and Payment of Foreign Exchange, foreign-invested enterprises may only buy, sell or remit foreign currencies at those banks
authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account
item transactions, obtaining approval from the SAFE. Capital investments by foreign-invested enterprises outside of China are also
subject to limitations, which include approvals by the Ministry of Commerce, the SAFE and the State Development and Reform Commission.
Foreign
Exchange Registration of Offshore Investment by PRC Residents
Pursuant to the SAFE Circular 37, issued on July
4, 2014, prior to making contribution to a SPC with legitimate holdings of domestic or overseas assets or interests, a PRC resident
(including PRC institutions and resident individuals) shall apply to the relevant Foreign Exchange Bureau for foreign exchange
registration of overseas investment. A PRC resident who makes contribution with legitimate holdings of domestic assets or interests
shall apply for registration to the Foreign Exchange Bureau at its place of registration or the Foreign Exchange Bureau at the
locus of the assets or interests of the relevant PRC enterprise. A PRC resident who makes contribution with legitimate holdings
of overseas assets or interests shall apply for registration to the Foreign Exchange Bureau at its place of registration or household
register. Where a registered overseas SPC experiences changes of its PRC resident individual shareholder, its name, operating period
or other basic information, or experiences changes of material matters, such as the increase or reduction of contribution by the
PRC resident individual, the transfer or replacement of equity, or merger or division, the PRC resident shall promptly change the
foreign exchange registration of overseas investment with the Foreign Exchange Bureau concerned. Under SAFE Circular 37, failure
to comply with the registration procedures set forth above may result in the penalties, including imposition of restrictions on
a PRC subsidiary’s foreign exchange activities and its ability to distribute dividends to the SPV. See “Item 3. Key
Information — D. Risk Factors — Risks Related to Doing Business in China — PRC regulations relating to the establishment
of offshore special purpose companies by PRC residents and employee stock options granted by overseas-listed companies may increase
our administrative burden, restrict our overseas and cross-border investment activity, or otherwise adversely affect us. If our
shareholders who are PRC residents, or our PRC employees who are granted or exercise stock options, fail to make any required registrations
or filings under such regulations, we may be unable to distribute profits and may become subject to liability under PRC laws.
SAFE
Regulations on Employee Share Options
On December 25, 2006, the PBOC promulgated the
“Measures for the Administration of Individual Foreign Exchange,” and on January 5, 2007, the SAFE further promulgated
the implementation rules on those measures. Both became effective on February 1, 2007. According to the implementation rules, PRC
citizens who are granted shares or share options by a company listed on an overseas stock market according to its employee share
option or share incentive plan are required, through the PRC subsidiary of such overseas listed company or any other qualified
PRC agent, to register with the SAFE and to complete certain other procedures related to the share option or other share incentive
plan. Foreign exchange income received from the sale of shares or dividends distributed by the overseas listed company may be remitted
into a foreign currency account of such PRC citizen or be exchanged into Renminbi. Our PRC citizen employees who have been granted
share options are subject to the Individual Foreign Exchange Rules.
On March 28, 2007, SAFE promulgated the Operating
Rules for Administration of Foreign Exchange in Domestic Individuals’ Participation in Employee Stock Ownership Plans and
Stock Option plans of Companies Listed Abroad, or the Operating Rules, or the Operating Rules. Stock Option Rule. On February 15,
2012, SAFE promulgated the No. 7 Notice, which supersedes the Stock Option Rule in its entirety and immediately became effective
upon circulation. According to the No. 7 Notice, domestic individuals, which include any directors, supervisors, senior managerial
personnel or other employees of a domestic company who are Chinese citizens (including citizens of Hong Kong, Macao and Taiwan)
or foreign individuals who consecutively reside in the territory of PRC for one year, who participate in the same equity incentive
plan of an overseas listed company shall, through the domestic companies they serve, collectively entrust a domestic agency to
handle issues like foreign exchange registration, account opening, funds transfer and remittance, and entrust an overseas institution
to handle issues like exercise of options, purchasing and sale of related stocks or equity, and funds transfer. Where a domestic
agency needs to remit funds out of China as required for individuals’ participation in an equity incentive plan, the domestic
agency shall apply with the local office of the SAFE for a foreign exchange payment quota on a yearly basis. A domestic agency
shall open a domestic special foreign exchange account in the bank. After repatriation of foreign currency income earned by individuals
from participation in an equity incentive plan, the domestic agency shall request the bank to transfer the funds from its special
foreign currency account to respective personal foreign currency deposit accounts. In the case of any significant change to the
equity incentive plan of a company listed abroad (such as amendment to any major terms of the original plan, addition of a new
plan, or other changes to the original plan due to merger, acquisition or reorganization of the overseas listed company or the
domestic company or other major events), the domestic agency or the overseas trustee, the domestic agency shall, within three months
of the occurrence of such changes, go through procedures for change of foreign exchange registration with the local office of the
SAFE. The SAFE and its branches shall supervise, administer and inspect foreign exchange operations related to individuals’
participation in equity incentive plans of companies listed abroad, and may take regulatory measures and impose administrative
sanctions on individuals, domestic companies, domestic agencies and banks violating the provisions of the No. 7 Notice.
We and our employees who have been granted applicable
equity awards shall be subject to the No. 7 Notice. If we fail to comply with the No. 7 Notice, we and/or our employees who are
subject to the No. 7 Notice may face sanctions imposed by foreign exchange authority or any other PRC government authorities.
Regulations on Dividend Distribution
The principal regulations governing dividend
distributions of wholly foreign-owned companies include:
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Wholly Foreign-Owned Enterprise Law (1986), as amended pursuant to the Decision of the Standing
Committee of the National People's Congress on Revising the Wholly Foreign-Owned Enterprise Law promulgated on October 31, 2000
and The Decision of the Standing Committee of the National People's Congress on Revising the "Law of the People's Republic
of China on Foreign-invested Enterprises" which promulgated on September 3,2016 and took effect on October 1, 2016; and
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Wholly Foreign-Owned Enterprise Law Implementing Rules (1990), as amended pursuant to the Decision
of the State Council on Amending the Rules for the Implementation of the Law on Foreign-Owned Enterprises promulgated by the State
Council on April 12, 2001 and the Decision of the State Council on Amending the Rules for the Implementation of the Law of the
People's Republic of China on Foreign-capital Enterprises which took effect as of the promulgation date of March 1, 2014.
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Under these regulations, wholly foreign-owned
companies in the PRC may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards.
In addition, these wholly foreign-owned companies are required to set aside at least 10% of their respective accumulated profits
each year, if any, to fund certain reserve funds, until the accumulative amount of such fund reaches 50% of its registered capital.
These reserve funds are not distributable as cash dividends.
Regulation on Overseas Listing
On August 8, 2006, six PRC regulatory agencies,
namely, the PRC Ministry of Commerce, the State Assets Supervision and Administration Commission, the State Administration for
Taxation, the State Administration for Industry and Commerce, the CSRC and the SAFE, jointly adopted the Provisions on Foreign
Investors' Merger with and Acquisition of Domestic Enterprises, or the Order No. 10 (2006) which became effective on September
8, 2006. The Order No. 10 (2006) purports, among other things, to require offshore SPVs, formed for overseas listing purposes and
controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an
overseas stock exchange. On September 21, 2006, the CSRC published a notice on its official website specifying documents and materials
required to be submitted to it by SPVs seeking CSRC approval of their overseas listings.
At the time of our initial public offering in
October 2007, while the application of the M&A Rule remained unclear, our then PRC counsel at the time, Commerce & Finance
Law Offices, had advised us that, based on their understanding of the then PRC laws and regulations as well as the procedures announced
on September 21, 2006:
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the CSRC had jurisdiction over our initial public offering;
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the CSRC had not issued any definitive rule or interpretation concerning whether offerings like
our initial public offering are subject to the M&A Rule; and
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despite the above, given that we had completed our inbound investment before September 8, 2006,
the effective date of the M&A Rule, an application was not required under the M&A Rule to be submitted to the CSRC for
its approval of the listing and trading of our ADSs on the Nasdaq Global Market, unless we are clearly required to do so by subsequent
rules of the CSRC.
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See "Item 3. Key Information — D.
Risk Factors — Risks Related to Doing Business in China" — The approval of the China Securities Regulatory Commission,
or the CSRC, may have been required in connection with our initial public offering in October 2007 under a PRC regulation adopted
in August 2006. Based on the advice of our PRC counsel, we did not seek CSRC’s approval for our initial public offering.
Any requirement to obtain prior CSRC approval and a failure to obtain this approval, if required, could have a material adverse
effect on our business, operating results, reputation and trading price of our ADSs.
Regulations on Tax
PRC
Enterprise Income Tax
The PRC EIT is calculated based on the taxable
income determined under the PRC accounting standards and regulations, as well as the EIT law. On March 16, 2007, the National People’s
Congress of China enacted the EIT Law, a new EIT law which became effective on January 1, 2008. On December 6, 2007, the State
Council promulgated the Implementation Rules which also became effective on January 1, 2008. On December 26, 2007, the State
Council issued the Notice on Implementation of Enterprise Income Tax Transition Preferential Policy under the EIT Law, or the Transition
Preferential Policy Circular, which became effective simultaneously with the EIT Law. The EIT Law imposes a uniform EIT rate of
25% on all domestic enterprises and foreign-invested enterprises unless they qualify under certain exceptions. Under the EIT Law,
as further clarified by the Implementation Rules, the Transition Preferential Policy Circular and other related regulations, enterprises
that were established and already enjoyed preferential tax treatments before March 16, 2007 will continue to enjoy them in the
following manners: (i) in the case of preferential tax rates, for a five-year period starting from January 1, 2008, during which
the tax rate will gradually increase to 25%; or (ii) in the case of preferential tax exemption or reduction for a specified term,
until the expiration of such term. However, if such an enterprise has not enjoyed the preferential treatments yet because of its
failure to make a profit, its term for preferential treatment will be deemed to start from 2008. See “Item 3. Key Information
— D. Risk Factors — Risks Related to Doing Business in China — The PRC Enterprise Income Tax Law may increase
the enterprise income tax rate applicable to some of our PRC subsidiaries which could have a material adverse effect on our result
of operations.”
Under the New Income Tax law, enterprises are
classified as either resident or non-resident. A resident enterprise refers to one that is incorporated under the PRC law or under
the law of a jurisdiction outside the PRC with its "de facto management organization" located within the PRC. Non-resident
enterprise refers to one that is incorporated under the law of a jurisdiction outside the PRC with its "de facto management
organization" located also outside the PRC, but which has either set up institutions or establishments in the PRC or has income
originating from the PRC without setting up any institution or establishment in the PRC. Under the New Enterprise Income Tax, Implementation
Regulation, or the New EIT Implementation Regulations, "de facto management organization" is defined as the organization
of an enterprise through which substantial and comprehensive management and control over the business, operations, personnel, accounting
and properties of the enterprise are exercised. Under the New Income Tax Law and the New EIT Implementation Regulation, a resident
enterprise’s global net income will be subject to a 25% EIT rate. On April 22, 2009, the State Administration of Taxation,
or the SAT, issued SAT Circular 82, which provides certain specific criteria for determining whether the "de facto management
body" of a PRC-controlled enterprise that is incorporated offshore is located in China. In addition, the SAT issued a bulletin
on July 27, 2011 providing more guidance on the implementation of Circular 82 and clarifies matters such as resident status determination.
Due to the present uncertainties resulting from the limited PRC tax guidance on this issue and because substantially all of our
operations and all of our senior management are located within China, we may be considered a PRC resident enterprise for EIT purposes,
in which case: (i) we would be subject to the PRC EIT at the rate of 25% on our worldwide income; and (ii) dividends income received
by us from our PRC subsidiaries, however, would be exempt from the PRC withholding tax since such income is exempted under the
EIT Law for a PRC resident enterprise recipient. See “Item 3. Key Information — D.Risk Factors — Risks Related
to Doing Business in China — Our global income or the dividends we receive from our PRC subsidiaries may be subject to PRC
tax under the EIT Law, which could have a material adverse effect on our results of operations.”
PRC
Business Tax and VAT
Taxpayers providing taxable services in China
are required to pay a business tax at a normal tax rate of 5% of their revenues, unless otherwise provided. According to the Announcement
on the VAT Reform Pilot Program of the Transportation and Selected Modern Service Sectors issued by the State Tax Bureau in July
2012, the transportation and some selected modern service sectors, including research and development and technical services, information
technology services, cultural creative services, logistics support services, tangible personal property leasing services, and assurance
and consulting service sectors, should pay value-added tax instead of business tax based on a predetermined timetable (hereinafter
referred to as the “VAT Reform”), effective September 1, 2012 for entities in Beijing and November 1, 2012 for entities
in Guangdong. The VAT Reform expanded nation-wide from August 1, 2013.
In March 2016, during the fourth session of
the 12th National People’s Congress, it was announced that the VAT reform will be fully rolled out and extended to all industries
including construction, real estate, financial services and lifestyle services. Subsequently, the SAT and Ministry of Finance jointly
issued a Notice on Preparing for the Full Implementation of the VAT Reform (Cai Shui [2016] No. 36). Accordingly, we started to
pay value-added tax instead of business tax from May 1, 2016.
Dividend
Withholding Tax
Under the PRC tax laws effective prior to January
1, 2008, dividends paid to foreign investors by foreign-invested enterprises are exempt from PRC withholding tax. Pursuant to the
EIT Law and the Implementation Rules, dividends generated after January 1, 2008 and distributed to us by our PRC subsidiaries through
our BVI subsidiary are subject to a 10% withholding tax, provided that we are determined by the relevant PRC tax authorities to
be a “non-resident enterprise” under the EIT Law. Pursuant to the Double Taxation Arrangement, which became effective
on January 1, 2007, dividends from our PRC subsidiaries paid to us through our Hong Kong wholly-owned subsidiary InsCom HK Limited
may be subject to a withholding tax at a rate of 5%. However, as described above, we may be considered a PRC resident enterprise
for EIT purposes, in which case dividends received by us from our PRC subsidiary would be exempt from the PRC withholding tax because
such income is exempted under the EIT Law for a PRC resident enterprise recipient. In the third quarter of 2017, we applied 10%
withholding tax rate due to the dividends paid by PRC subsidiaries.
As there remains uncertainty regarding the interpretation
and implementation of the EIT Law and the Implementation Rules, it is uncertain whether any dividends to be distributed by us,
if we are deemed a PRC resident enterprise, to our non-PRC shareholders and ADS holders would be subject to any PRC withholding
tax. See “Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China — Under
the EIT Law, dividends payable by us and gains on the disposition of our shares or ADSs could be subject to PRC taxation.”
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C.
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Organizational Structure
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Corporate Structure
Historically, PRC laws and regulations restricted
foreign investment in and ownership of insurance intermediary companies and internet companies. Accordingly, from December 2005
to May 2016, we conducted all or part of our business in China through contractual arrangements among our PRC subsidiaries, then-existing
consolidated affiliated entities and their shareholders. We relied on contractual arrangements to control and receive economic
benefits from our then-existing consolidated affiliated entities, which became our wholly-owned subsidiaries in 2016.
In October 2011, we commenced a restructuring
of our company. Through a series of equity transfers, we had obtained direct controlling equity ownership in all of our insurance
intermediary companies and our online operations by May 2016. The contractual arrangements were terminated between January 2015
and May 2016.
We currently conduct our business in China primarily
through our wholly-owned subsidiary Fanhua Insurance Sales Service Group Company Limited, or Fanhua Group Company, and its subsidiaries.
As of March 31, 2018, we, through Fanhua Group Company, have a controlling equity ownership in 9 insurance agencies, 3 insurance
claims adjusting firms and one ancillary insurance intermediary company which operates Baoxian.com. We also own 20.6% equity interest
of one consumer financial service company, 15.4% equity interest of one wealth management company and 8.9% equity interest of one
online claim adjusting service company.
Fanhua Group Company and its direct and indirect
subsidiaries hold the licenses and permits necessary to conduct our insurance intermediary business and internet insurance distribution
business in China.
Recent Principal Changes in Corporate Structure
In October 2017, we entered into a share purchase
agreement with Cheche, which operates an online auto insurance platform. Under this agreement, we disposed of the equity interests
in 19 P&C insurance intermediary subsidiaries, to Cheche for a total consideration of approximately RMB225.4 million (US$34.6
million), including approximately RMB95.4 million cash consideration and RMB130.0 million in the form of a convertible loan receivable,
which is convertible or collectible in three years and recognized as other non-current assets. We evaluated the convertible loan
receivable's settlement provisions and elected the fair value option afforded in ASC 825, Financial Instruments, to value this
instrument. Under such election, the loan receivable is measured initially and subsequently at fair value, with any changes in
the fair value of the instrument being recorded in the consolidated financial statements as a change in fair value of derivative
instruments. We estimate the fair value of this instrument by first estimating the fair value of the straight debt portion. We
then estimate the fair value of the embedded conversion option based on financial performance and growth rate of revenue of Cheche.
The sum of these two valuations is the fair value of the loan receivable included in other non-current assets. On October 31, 2017,
we used the discounted cash flow method to value the debt portion of the convertible loan receivable and determined the fair value
to be RMB 22.0 million. Based on Cheche's current and expected financial performance, industry trend and expected revenue and margin,
management considered the conversion option to be deeply out of the money and determined the fair value of the option to be immaterial.
As a result, the carrying amount of the convertible loan receivable was adjusted by RMB108.0 million. The total fair value of RMB22.0
million was initially recognized and the balance remained the same and retained in other non-current assets as of December 31,
2017.
The convertible loan receivable also carries
a 10% interest return per annum which could be satisfied by cash or converted into equity interest in Cheche. The related interest
income in 2017 was about RMB0.4 million (US$0.1 million). When the convertible loan receivable expires, we have the right to convert
the loan into the equity interests of Cheche, or recover the principal and interests of the convertible loan receivable according
to the agreement. We recognized approximately RMB0.9 million (US$0.1 million) gain on disposal of these subsidiaries, which was
determined by the excess of the cash consideration and fair value of the convertible loan receivable over the net book value of
the subsidiaries, which was calculated to be approximately RMB116.5 million (US$17.9 million) at the time of disposal. The net
book value of the subsidiaries at the time of disposal also included goodwill allocated to this disposal in the amount of approximately
RMB12.2 million (US$1.9 million).
On November 30, 2017, we disposed of Bocheng
for a total consideration of approximately RMB46.6 million.
The following diagram illustrates our corporate
structure, including our principal subsidiaries, as of March 31, 2018:
The diagram above omits the names of subsidiaries
that are immaterial individually and in the aggregate. For a complete list of our subsidiaries as of March 31, 2018, see Exhibit
8.1 to this annual report.
We have obtained direct controlling equity
ownership in all of our insurance intermediary companies and our online operations and terminated all of the contractual arrangements.
In the opinion of Global Law Office, our PRC legal counsel, the ownership structures of our consolidated affiliated entities and
our subsidiaries in China have complied with all existing PRC laws and regulations since 2012 and the business operations of our
PRC subsidiaries comply in all material respects with existing PRC laws and regulations.
We have been advised by our PRC legal counsel,
however, that there are uncertainties regarding the interpretation and application of PRC laws and regulations. Accordingly, the
PRC regulatory authorities may in the future take a view that is contrary to the above opinion of our PRC legal counsel. We have
been further advised by our PRC counsel that if the PRC government finds that the structure for operating our online operations
does not comply with PRC government restrictions on foreign investment in the internet industry, we could be subject to severe
penalties including being prohibited from continuing operations. See “Item 3. Key Information — D. Risk Factors —
Risks Related to Our Corporate Structure — If the PRC government finds that the structure for operating part of our China
business does not comply with applicable PRC laws and regulations, we could be subject to severe penalties” and “Item
3. Key Information — D. Risk Factors — Risks Related to Doing Business in China — Uncertainties with respect
to the PRC legal system could adversely affect us.” To date we have not encountered any interference or encumbrance from
the PRC government on account of operating our business through these agreements.
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D.
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Property, Plant and Equipment
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Our headquarters are located in Guangzhou,
China, where we leased approximately 2,657.6 square meters of office space as of December 31, 2017. Our subsidiaries and consolidated
affiliated entities leased approximately 72,169.9 square meters of office space as of December 31, 2017. In 2017, our total
rental expenses were RMB50.8 million (US$7.8 million).
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Item 4A.
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Unresolved Staff Comments
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None.
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Item 5.
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Operating
and Financial Review and Prospects
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The following discussion and analysis of our
financial condition and results of operations should be read in conjunction with our consolidated financial statements and the
related notes included in this annual report. This discussion and analysis contains forward-looking statements based upon current
expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth under “Item 3. Key Information — D. Risk Factors”
or in other parts of this annual report.
Factors Affecting Our Results of Operations
As an insurance intermediary in China, our financial
condition and results of operations are affected by a variety of factors, including:
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business relationship with important insurance company partners;
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total premium payments to Chinese insurance companies;
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the extent to which insurance companies in the PRC outsource the distribution of their products
and claims adjusting functions;
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premium rate levels and commission and fee rates;
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the size and productivity of our sales force;
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commission rates for individual sales agents;
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product and service mix;
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share-based compensation expenses; and
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Business Relationship with
Important Insurance Company Partners
We derive significant revenue from our important
insurance company partners. Among the top five of our insurance company partners, each of Huaxia and Tian'an accounted for more
than 10% of our total net revenues from continuing operations individually in 2017, with Huaxia accounting for 24.2%, Tian'an for
22.3% in 2017. As a result, any significant changes to our business relationship with the important insurance company partners
could have a material impact on our revenue and profits.
Total Premium Payments to
Chinese Insurance Companies
The Chinese insurance industry has grown substantially
in the past decade. Between 2007 and 2017, total insurance premiums increased from RMB703.6 billion to RMB3.7 trillion, representing
a compound annual growth rate, or CAGR, of 17.9%, according to the CIRC. We believe that certain macroeconomic and demographic
factors, such as increasing per capita GDP and an aging population, have contributed to and will continue to drive the growth of
the Chinese insurance industry in the long term.
We derive our revenue primarily from commissions
and fees paid by insurance companies, typically calculated as a percentage of premiums paid by our customers to the insurance companies.
Accordingly, industry-wide premium growth will have a positive impact on us. However, there is uncertainty whether the rapid growth
trend will continue. Any downturn in the Chinese insurance industry, whether caused by a general slowdown of the PRC economy or
otherwise, may adversely affect our financial condition and results of operations.
The Extent to Which Insurance
Companies in the PRC Outsource the Distribution of their Products and Claims Adjusting Functions
Historically, insurance companies in the PRC
have relied primarily on their exclusive individual sales agents and direct sales force to sell their products. Only in recent
years, as a result of increased competition and consumers' demand for more choices, have some insurance companies gradually expanded
their distribution channels to include insurance intermediaries such as commercial banks, postal offices, insurance agencies and
insurance brokerages. In addition, because of the increasingly high cost for establishing and maintaining distribution networks
of their own, more and more medium-size insurance companies have chosen to rely primarily on insurance intermediaries to distribute
their products while they focus on other aspects of their business.
As insurance companies in the PRC become more
accustomed to outsourcing the distribution of their products to insurance intermediaries, they may allow insurance intermediaries
to distribute a wider variety of insurance products and may provide more monetary incentives to more productive and effective insurance
intermediaries. These and other similar measures designed to boost sales through insurance intermediaries can have a positive impact
on our financial condition and results of operations. Similarly, as competition intensifies and the insurance market becomes more
mature in China, we expect that more insurance companies will choose to outsource claims adjusting functions to professional service
providers such as our affiliated claims adjusting firms while they focus on the core aspects of their business, including product
development and asset and risk management.
Premium Rate Levels and Commission
and Fee Rates
Because the commissions and fees we receive from
insurance companies for the distribution of insurance products or from third-party internet companies for using our auto insurance
transaction system are generally calculated as a percentage of premiums paid by our customers to the insurance companies, our revenue
and results of operations are affected by premium rate levels and commission and fee rates. Premium rate levels and commission
and fee rates can change based on the prevailing economic conditions, competitive and regulatory landscape, and other factors that
affect insurance companies and third-party internet companies. These other factors include the ability of insurance companies to
place new business, underwriting and non-underwriting profits of insurance companies, consumer demand for insurance products, the
availability of comparable products from other insurance companies at a lower cost, and the tax deductibility of commissions and
fees. In addition, premium rates for certain insurance products, such as the mandatory automobile liability insurance that each
automobile owner in the PRC is legally required to purchase, are tightly regulated by the CIRC. In general, we can negotiate for
better rates as an incentive for generating a larger volume of business.
Since China’s entry into the WTO in December
2001, competition among insurance companies has intensified as a result of a significant increase in the number of insurance companies
and the existing insurance companies’ expansion into new geographic markets. This competition has led to a gradual increase
in the commission and fee rates offered to insurance intermediaries, and such increase has had a positive impact on our results
of operations.
The Size and Productivity
of Our Sales Force
As a distributor of insurance products, we generate
revenue primarily through our sales force, which consists of individual sales agents in our distribution and service network and
a relatively small number of in-house sales representatives. The size of our sales force and its productivity, as measured by the
average number of insurance products sold per person with performance, the average premium per product sold and the average premiums
generated per person with performance during any specified period, directly affect our revenue and results of operations. In recent
years, some entrepreneurial management staffs or senior sales agents of major insurance companies in China have chosen to leave
their employers or principals and become independent agents. We refer to these independent agents as “entrepreneurial agents.”
An entrepreneurial agent is usually able to assemble and lead a team of sales agents. We have been actively recruiting and will
continue to recruit entrepreneurial agents to join our distribution and service network as our sales agents. Entrepreneurial agents
have been instrumental to the development of our life insurance business.
Commission Rates for Individual
Sales Agents
A large component of our operating costs is commissions
paid to our individual sales agents. In order to retain sales agents, we must pay commissions at a level comparable to the commissions
paid by our competitors. Intensified competition for productive sales agents within the Chinese insurance industry and rising salaries
in China have led to a significant increase in commission rates in recent years. The increase in commission rates has had a negative
impact on our results of operations. If we are forced to further increase our commission rates for individual sales agents due
to competition or otherwise, our operating costs will increase correspondingly.
Product and Service Mix
We began distributing automobile insurance products
in 1999 and expanded our product offerings to other property and casualty insurance products in 2002 and then to individual life
insurance products in 2006, primarily to individual customers. We further broadened our service offering to cover insurance claims
adjusting services in 2008. We started to offer insurance brokerage services for commercial line insurance to corporate clients
and reinsurance brokerage services in 2010.
In 2016, our business was divided into three
reporting operating segments: (1) insurance agency, (2) insurance brokerage, and (3) claims adjusting. As a result of the disposal
of the insurance brokerage business in November 2017, our operating segments were reduced to two reporting operating segments.
Insurance Agency Segment
Our largest segment by revenue, the insurance
agency segment, provides a broad range of property and casualty and life insurance products to individual customers.
The property and casualty insurance policies
we distribute are typically for one-year terms, with a single premium payable at the beginning of the term. Accordingly, we receive
a single commission or fee for each property and casualty policy our customers purchase. In order for us to have recurring commission
and fee revenue from property and casualty insurance products, our customers have to renew their policies or purchase new policies
through us every year.
Since October 2017, we have shifted to a platform
business model for auto insurance business. Under the platform business model, the fees we receive from insurance distributors
are calculated based on the volume of insurance premiums they transact through CNpad, which are typically much smaller than the
commissions we previously received from insurance companies, though our costs are minimal.
Most individual life insurance policies we sell
require periodic payment of premiums, typically annually, during a pre-determined payment period, generally ranging from five to
25 years. For each such policy that we sell, insurance companies will pay us a first-year commission and fee based on a percentage
of the first year’s gross premiums, and subsequent commissions and fees based on smaller percentages of the renewal premiums
paid by the insured throughout the payment period of the policy. Therefore, once we sell a life insurance policy with a periodic
payment schedule, it can bring us a steady flow of commission and fee revenue throughout the payment period as long as the insured
meets his or her premium payment commitment.
Because insurance companies pay us first-year
commissions and fees for most life insurance products at rates higher than those for property and casualty insurance products,
and gross margin of life insurance business is higher than that of our property and casualty insurance business, we will make an
effort to sell more life insurance products, which will lead to a positive impact on our revenue and gross margin.
Claims Adjusting Segment
The fees we receive for our claims adjusting
services are calculated based on the types of insurance involved. For services provided in connection with property and casualty
insurance (other than marine cargo insurance and automobile insurance), our fees are calculated as a percentage of the recovered
amount from insurance companies plus travel expenses. For services provided in connection with marine cargo insurance, our fees
are charged primarily on an hourly basis and, in some cases, as a percentage of the amount recovered from insurance companies.
For automobile insurance, our fees are generally fixed and the amounts collected are based on the types of services provided. In
some cases, our fees are charged based on the number of claims adjustors involved in providing the services. We pay our in-house
claims adjustors a base salary plus a commission calculated based on a small percentage of the service fees we receive from insurance
companies or the insured. The claims adjusting business has become and likely will continue to be an important source of our net
revenues. The gross margin and operating margin attributable to the claims adjusting business are higher than those for both property
and casualty insurance products and life insurance products. We expect that revenues from our claims adjusting business as a percentage
of our total net revenues to remain stable over the next few years.
Share-based Compensation
Expenses
Our historical results of operations have been
affected by the share-based compensation expenses incurred. In 2015, 2016 and 2017, we incurred share-based compensation expenses
of RMB17.7 million, RMB4.9 million and nil, respectively. See “Item 5. Operating and Financial Review and Prospects —
A. Operating Results — Key Performance Indicators — Operating Costs and Expenses — Share-based Compensation Expenses”
for a more detailed discussion of our historical share-based compensation expenses. In order to attract and retain the best personnel
for positions of substantial responsibility, provide additional incentive to employees, directors and consultants and promote the
success of our business, we adopted a share incentive plan in October 2007. Under our 2007 Share Incentive Plan, as amended and
restated in December 2008, we may issue an aggregate number of our ordinary shares, equal to 15% of our total number of shares
outstanding immediately after the closing of our initial public offering, to cover awards granted under the plan. See “Item
6. Directors, Senior Management and Employees — B. Compensation — Share Incentives — 2007 Share Incentive Plan.”
All of the share-based compensation expenses related to the options granted under the 2007 Share Incentive Plan have been amortized
as of December 31, 2016.
Seasonality
Our quarterly results of operations are affected
by seasonal variations caused by business mix, insurance companies’ business practices and consumer demand. For property
and casualty insurance business, property and casualty insurance companies, under pressure to meet their annual sales targets,
would increase their sales efforts during the fourth quarter of a year by, for example, offering more incentives for insurance
intermediaries to increase sales. As a result, our commission and fee revenue derived from property and casualty insurance products
for the fourth quarter of a year has generally been the highest among all four quarters. Business activities, including buying
and selling insurance, usually slow down during the Chinese New Year festivities, which occur during the first quarter of each
year. As a result, our commission and fee revenue derived from property and casualty insurance products for the first quarter of
a year has generally been the lowest among all four quarters. For life insurance business, much of the Jumpstart sales activities
of life insurance companies occur during the first quarter of a year while business activities slow down in the fourth quarter
of a year as life insurance companies focus on the preparation for the Jumpstart sales season by launching new products, making
marketing plans and organizing training. During the Jumpstart sales season, life insurance companies will offer incentives that
are more attractive to insurance intermediaries and sales agents to boost sales. Accordingly, our commission and fee revenue derived
from life insurance business is generally the highest in the first quarter of a year and the lowest in the fourth quarter of a
year.
Key Performance Indicators
In the consolidated financial statements as of December 31, 2016,
we operated three segments: (1) insurance agency business segment, which mainly consists of providing agency services for P&C
insurance products and life insurance products to individual clients, (2) insurance brokerage business segment, which mainly consists
of providing P&C and life insurance brokerage services to institutional clients, and (3) claims adjusting segment, which consists
of providing pre-underwriting survey, claim adjusting, disposal of residual value, loading and unloading supervision and consulting
services. As a result of the disposal of brokerage business, we have two remaining operating segments and. the brokerage segment
has been categorized as a discontinued operation. Operating segments are defined as components of an enterprise about which separate
financial information is available and evaluated regularly by our chief operating decision maker in deciding how to allocate resources
and in assessing performance.
Net Revenues
Our revenues are net of PRC business tax. In
2015, 2016 and 2017, we generated net revenues of RMB2.5 billion, RMB4.1 billion and RMB4.1 billion (US$628.4 million), respectively.
We derive net revenues from the following sources:
|
·
|
Insurance agency segment
: commissions paid by insurance companies for the distribution of
(i) life insurance products, and (ii) property and casualty products primarily to individual customers, which accounted for 87.6%,
91.8% and 92.5%
of
our net revenues for 2015, 2016 and 2017, respectively;
|
|
·
|
Claims adjusting segment
: commissions and fees primarily paid by the insurance companies
and, to a lesser degree, by the insureds for the provision of claims adjusting services, which accounted for 12.4
%,
8.2
% and
7.5%
of
our net revenues for 2015, 2016
and 2017, respectively;
|
The following table sets forth our total net
revenues earned from each of our reporting segments both in absolute amounts and as percentages of total net revenues, for the
periods indicated:
|
|
Year Ended December 31,
|
|
|
2015
|
|
2016
|
|
2017
|
|
|
RMB
|
|
%
|
|
RMB
|
|
%
|
|
RMB
|
|
US$
|
|
%
|
|
|
(in thousands except percentages)
|
Agency
|
|
|
2,155,264
|
|
|
|
87.6
|
|
|
|
3,746,471
|
|
|
|
91.8
|
|
|
|
3,780,217
|
|
|
|
581,008
|
|
|
|
92.5
|
|
Life insurance business
|
|
|
319,916
|
|
|
|
13.0
|
|
|
|
990,541
|
|
|
|
24.3
|
|
|
|
2,424,444
|
|
|
|
372,630
|
|
|
|
59.3
|
|
P&C insurance business
|
|
|
1,835,348
|
|
|
|
74.6
|
|
|
|
2,755,930
|
|
|
|
67.5
|
|
|
|
1,355,773
|
|
|
|
208,378
|
|
|
|
33.2
|
|
Claims adjusting
|
|
|
303,846
|
|
|
|
12.4
|
|
|
|
336,413
|
|
|
|
8.2
|
|
|
|
308,256
|
|
|
|
47,378
|
|
|
|
7.5
|
|
Total net revenues
|
|
|
2,459,110
|
|
|
|
100.0
|
|
|
|
4,082,884
|
|
|
|
100.0
|
|
|
|
4,088,473
|
|
|
|
628,386
|
|
|
|
100.0
|
|
Insurance agency segment primarily offers life
insurance products and property and casualty insurance products to individuals. Net revenues from the insurance agency segment
increased from 2015 to 2017 in both absolute amount and as a percentage of our total net revenues.
Net revenues from property and casualty insurance
products, in particular automobile insurance products, have been our primary source of revenue since our inception. While commissions
and fees generated from property and casualty insurance products increased in absolute terms from 2015 to 2016, it decreased significantly
from 2016 to 2017, primarily due to the transition of our property and casualty insurance business from a commission-based business
model to a platform business model, as well as the termination of business cooperation with certain channels and the suspension
of business relationship with PICC P&C from March to November in 2017. Its share as a percentage of our total net revenues
also decreased from 74.6% in 2015 to 33.2% in 2017, primarily reflecting the decrease of property and casualty insurance business
and the significant growth of our life insurance during the corresponding period. Due to the implementation of the platform business
model, under which the fee that we receive from third party internet companies that use our CNpad platform to offer auto insurance
products is based on a significantly lower percentage of insurance premiums than commission fees that we received from insurance
companies for the distribution of auto insurance products, we expect our net revenues derived from property and casualty insurance
business will continue to decrease in 2018. However, as we retain all of the fees that we receive from third party internet companies
as our gross profit instead of retaining the spread of commissions received from insurance companies and those paid out to sales
agents, we expect the impact of the new business model on the gross profit derived from our property and casualty insurance business
to be limited.
We began distributing individual life insurance
products in 2006. Net revenues from life insurance products increased significantly from 2015 to 2017, both in absolute amounts
and as a percentage of our net revenues. We expect life insurance business to grow rapidly and bring in significant revenue that
will represent a higher percentage of our total net revenues in the next several years. We believe this growth will be driven by
a number of factors including stronger demand for traditional life insurance products as a result of the aging population and the
sophistication of Chinese consumers who are increasingly interested in purchasing life insurance.
We began providing claims adjusting services
in 2008. Net revenues from our claims adjusting segment increased from 2015 to 2016 in absolute amounts, and declined from 2016
to 2017, primarily reflecting the suspension of business cooperation with PICC P&C starting from March 2017. We expect that
net revenues from claims adjusting services will be stable as a percentage of our total net revenues in the next few years.
The commissions and fees we receive from the
distribution of insurance products are based on a percentage of the premiums paid by the insured. Commission and fee rates generally
depend on the type of insurance products, the particular insurance company and the region in which the insurance products are sold.
We typically receive payment of the commissions and fees from insurance companies for insurance products on a monthly basis. Some
of the fees are paid to us annually or semi-annually in the form of performance bonuses after we achieve specified premium volume
or policy renewal goals as agreed upon between the insurance companies and us.
The fees we receive from third party internet-based
insurance sales companies are based on a percentage of the premiums transacted over CNpad. We typically receive payment of such
fees on a monthly basis. We are compensated primarily by insurance companies for our claims adjusting services. The fees we receive
for our claims adjusting services depend on the types of insurance involved. For services provided in connection with marine cargo
insurance, our fees are charged primarily on an hourly basis and, in some cases, as a percentage of the amount recovered from insurance
companies. For claims adjusting services related to automobile insurance, our fees are generally fixed on a per claim basis, or
in some cases, on a per head basis. These fees are typically paid to us on a quarterly basis. For services provided in connection
with other property and casualty insurance, our fees are calculated as a percentage of the recovered amount from insurance companies
plus travel expenses. We typically receive payment for these fees on a semi-annual or annual basis.
Operating Costs and Expenses
Our operating costs and expenses consist of costs
incurred in connection with the distribution of insurance products and the provision of claims adjusting services, selling expenses
and general and administrative expenses. The following table sets forth the components of our operating costs and expenses, both
in absolute amounts and as percentages of our net revenues, for the periods indicated.
|
|
Year Ended December 31,
|
|
|
2015
|
|
2016
|
|
2017
|
|
|
RMB
|
|
%
|
|
RMB
|
|
%
|
|
RMB
|
|
US$
|
|
%
|
|
|
(in thousands except percentages)
|
Total net revenues
|
|
|
2,459,110
|
|
|
|
100.0
|
|
|
|
4,082,884
|
|
|
|
100.0
|
|
|
|
4,088,473
|
|
|
|
628,386
|
|
|
|
100.0
|
|
Operating costs
|
|
|
(1,856,632
|
)
|
|
|
(75.5
|
)
|
|
|
(3,106,601
|
)
|
|
|
(76.1
|
)
|
|
|
(3,059,407
|
)
|
|
|
(470,222
|
)
|
|
|
(74.8
|
)
|
Selling expenses
|
|
|
(125,041
|
)
|
|
|
(5.1
|
)
|
|
|
(502,802
|
)
|
|
|
(12.3
|
)
|
|
|
(221,785
|
)
|
|
|
(34,088
|
)
|
|
|
(5.4
|
)
|
General and administrativeexpenses
|
|
|
(448,989
|
)
|
|
|
(18.3
|
)
|
|
|
(481,947
|
)
|
|
|
(11.8
|
)
|
|
|
(534,145
|
)
|
|
|
(82,096
|
)
|
|
|
(13.1
|
)
|
Total operating costs andexpenses
|
|
|
(2,430,662
|
)
|
|
|
(98.9
|
)
|
|
|
(4,091,350
|
)
|
|
|
(100.2
|
)
|
|
|
(3,815,337
|
)
|
|
|
(586,406
|
)
|
|
|
(93.3
|
)
|
Operating
Costs
We incur costs primarily in connection with the
distributions of insurance products and claims adjusting services. The costs that we incurred increased in absolute amounts each
year from 2015 to 2016, primarily as a result of an increase in net revenues and an increase in the size of our sales force. The
operation costs decreased in 2017 as compared with 2016, primarily due to the transition of our property and casualty insurance
business from a commission-based business model to a platform business model, as well as the termination of business cooperation
with certain channels and the suspension of business relationship with PICC P&C. We rely mainly on individual sales agents
and to a much lesser degree, on baoxian.com for the distributions of insurance products. For claims adjusting services, we rely
entirely on our in-house claims adjustors. Costs incurred as a percentage of net revenues were stable from 2015 to 2017. We anticipate
that our costs will increase in absolute amounts as we further grow our business.
Selling Expenses
Our selling expenses primarily consist of:
|
·
|
salaries and employment benefits for employees who work in back office below the provincial management
level;
|
|
·
|
office rental, telecommunications and office supply expenses incurred in connection with sales
activities; and
|
|
·
|
advertising and marketing expenses.
|
We expect that our selling expenses will increase
as we expand our distribution and service network in both existing markets and new geographic regions. As we grow in size, we also
intend to spend more on marketing and advertising to enhance our brand recognition and promote our online platforms. Selling expenses
increased significantly in 2016, as we implemented promotion schemes for P&C business in 2016, and there was no such scheme
in 2015 and 2017.
General
and Administrative Expenses
Our general and administrative expenses principally
comprise:
|
·
|
salaries and benefits for our administrative staff;
|
|
·
|
share-based compensation expenses for managerial and administrative staff;
|
|
·
|
research and development expenses in relation to our mobile and online programs;
|
|
·
|
professional fees paid for valuation, market research, legal and auditing services;
|
|
·
|
bad debt expenses for doubtful receivables;
|
|
·
|
compliance-related expenses, including expenses for professional services;
|
|
·
|
depreciations and amortizations;
|
|
·
|
office rental expenses;
|
|
·
|
travel and telecommunications expenses;
|
|
·
|
entertainment expenses;
|
|
·
|
office supply expenses for our administrative staff; and
|
We expect that our general and administrative
expenses will increase as we hire additional administrative personnel, pay higher labor costs and incur additional costs in connection
with the expansion of our business, and our efforts to develop our e-commerce platform.
Share-based compensation expenses
. Share-based
compensation expenses constituted one of the components of our general and administrative expenses in 2015 and 2016. We incurred
share-based compensation with respect to certain managerial and administrative staff and a small number of sales agents in 2015
and 2016. As the share options have all been vested in 2016, there was no such expenses incurred in 2017. The following table sets
forth our share-based compensation expenses, both in absolute amounts and as percentages of our general and administrative expenses,
for the periods indicated.
|
|
For the Year Ended December 31,
|
|
|
2015
|
|
2016
|
|
2017
|
|
|
RMB
|
|
%
|
|
RMB
|
|
%
|
|
RMB
|
|
US$
|
|
%
|
|
|
(in thousands except percentages)
|
Share-based compensation expenses
|
|
|
17,653
|
|
|
|
3.9
|
|
|
|
4,937
|
|
|
|
1.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Others
|
|
|
431,336
|
|
|
|
96.1
|
|
|
|
477,010
|
|
|
|
99.0
|
|
|
|
534,145
|
|
|
|
82,096
|
|
|
|
100.0
|
|
General and administrative expenses
|
|
|
448,989
|
|
|
|
100.0
|
|
|
|
481,947
|
|
|
|
100.0
|
|
|
|
534,145
|
|
|
|
82,096
|
|
|
|
100.0
|
|
Our share-based compensation expenses in 2015
and 2016 were primarily attributable to the options granted in March 2012. All of the share-based compensation expenses related
to the options granted under the 2007 Share Incentive Plan have been amortized as of December 31, 2016. No share-based compensation
expense was recognized in 2017.
For more information about our share-based compensation
expenses, please see Note 19 to our audited consolidated financial statements included in this annual report.
Taxation
We and each of our subsidiaries file separate income tax returns.
The Cayman Islands, the British Virgin Islands
and Hong Kong
Under the current laws of the Cayman Islands
and the British Virgin Islands, we and our subsidiaries incorporated in the British Virgin Islands are not subject to income or
capital gains taxes. In addition, dividend payments are not subject to withholding tax in those jurisdictions. Our subsidiary incorporated
in Hong Kong is subject to a normal profits tax rate of 16.5% of its assessable profits for the years of assessment ending March
31, 2015, 2016 and 2017. Payment of dividends is not subject to withholding tax in Hong Kong.
PRC
EIT
According to the PRC Enterprise Income Tax Law,
which became effective on January 1, 2008, as further clarified by subsequent tax regulations implementing the EIT law, foreign
invested enterprises and domestic enterprises are subject to enterprise income tax, or EIT, at a uniform rate of 25%.
Pursuant to a Notice
of Preferential Policies of EIT, jointly issued by the PRC Ministry of Finance and the SAT on February 22, 2008, a newly established
software enterprise was entitled to an exemption from EIT for the first two years and a 50% reduction of EIT for the following
three years starting from the first profit-making year. Our wholly-owned subsidiary, Litian Zhuoyue, Shenzhen Fanhua Software Technology
Co., Ltd. (also known as Shenzhen Fanhua Software Technology Co., Ltd.), Ying Si Kang Information and Shenzhen Huazhong United
Technology Co., Ltd., are entitled to the tax holidays under this notice from 2010 to 2014, 2012 to 2016, 2014 to 2018 and 2015
to 2019, respectively.
Business Tax and VAT
In November 2011,
the Ministry of Finance and the State Administration of Taxation jointly issued two circulars setting out the details of the pilot
VAT reform program, which change the charge of sales tax from business tax to VAT for certain pilot industries. The VAT reform
program initially applied only to the pilot industries in Shanghai, and was expanded to eight additional regions, including, among
others, Beijing and Guangdong province, in 2012. In August 2013, the program was further expanded nationwide.
With respect to all
of our PRC entities for the period immediately prior to the implementation of the VAT reform program, revenues from our services
are subject to a 5% PRC business tax. Revenues from our online advertising services are subject to an additional 3% cultural business
construction fee.
In March 2016, during
the fourth session of the 12
th
National People’s Congress, it was announced that the VAT reform will be fully
rolled out and extended to all industries including construction, real estate, financial services and lifestyle services. Subsequently,
the State Administration of Taxation and Ministry of Finance jointly issued a Notice on Preparing for the Full Implementation of
the VAT Reform (Cai Shui [2016] No. 36). Accordingly, revenues from our services are subject to value-added tax instead of business
tax starting from May 1, 2016.
PRC Urban Maintenance and Construction Tax and Education
Surcharge
Any entity, foreign-invested
or purely domestic, or individual that is subject to consumption tax, VAT and business tax is also required to pay PRC urban maintenance
and construction tax. The rates of urban maintenance and construction tax are 7%, 5% or 1% of the amount of consumption tax, VAT
and business tax actually paid depending on where the taxpayer is located. All entities and individuals who pay consumption tax,
VAT and business tax are also required to pay education surcharge at a rate of 3%, and local education surcharges at a rate of
2%, of the amount of VAT, business tax and consumption tax actually paid.
Critical Accounting Policies
We prepare financial statements in accordance
with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported amounts of our assets and
liabilities and the disclosure of our contingent assets and liabilities at the end of each fiscal period, as well as the reported
amounts of revenues and expenses during each fiscal period. We continually evaluate these judgments and estimates based on our
own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future
based on available information and assumptions that we believe to be reasonable. This forms our basis for making judgments about
matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial
reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree
of judgment than others in their application.
The selection of critical accounting policies,
the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes
in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following
accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
Our revenue is derived principally from the
provision of insurance agency and claims adjusting services. We recognize revenue when all of the following have occurred: persuasive
evidence of an agreement with the insurance companies or insurance agencies exists, services have been provided, the fees for such
services are fixed or determinable and collectability of the fee is reasonably assured.
Insurance agency services are considered to
be rendered and completed, and revenue is recognized, at the time an insurance policy becomes effective, that is, when the signed
insurance policy is in place and the premium is collected from the insured. We have met all the four criteria of revenue recognition
when the premiums are collected by us or the respective insurance companies and not before, because collectability is not ensured
until receipt of the premium. Accordingly, we do not accrue any commission and fees prior to the receipt of the related premiums.
No allowance for cancellation has been recognized
for agency business as we estimate, based on its past experience that the cancellation of policies rarely occurs. Any subsequent
commission adjustments in connection with policy cancellations which have been deminims to date are recognized upon notification
from the insurance carriers. Actual commission and fee adjustments in connection with the cancellation of policies were 0.2%, 0.2%
and 0.2% of the total commission and fee revenues during the years ended December 31, 2015, 2016 and 2017, respectively. In connection
with the distribution of life insurance products, we may receive a performance bonus from insurance companies as agreed and per
contract provisions. Once an agency and brokerage company achieves its performance target, typically a certain sales volume, the
bonus will become due. The bonus amount is computed based on the insurance premium amount multiplied by an agreed-upon percentage.
The contingent commissions are recorded when a performance target is being achieved.
Insurance claims adjusting services are considered
to be rendered and completed, and revenue is recognized at the time loss adjusting reports are confirmed being received by insurance
companies. We have met all the four criteria of revenue recognition when the service is provided and the loss adjusting report
is accepted by insurance companies. We do not accrue any service fee before the receipt of an insurance company’s acknowledgement
of receiving the adjusting reports. Any subsequent adjustments in connection with discounts which have been de minims to date are
recognized in revenue upon notification from the insurance companies.
We present revenue net of sales taxes incurred.
The sales taxes amounted to RMB157.2 million, RMB81.9 million and RMB25.2 million (US$3.9 million) for the years ended December
31, 2015, 2016 and 2017, respectively.
Impairment of Goodwill
Goodwill is required to be tested for impairment
at least annually or more frequently if events or changes in circumstances indicate that these assets might be impaired. If we
determine that the carrying value of our goodwill has been impaired, the carrying value will be written down.
To assess potential impairment of goodwill,
we perform an assessment of the carrying value of our reporting units at least on an annual basis or when events and changes in
circumstances occur that would more likely than not reduce the fair value of our reporting units below their carrying value. At
the end of each year, we elect to bypass the option to qualitative assess goodwill impairment. Instead we conduct Step 1 of the
quantitative test, to compare the fair value of a reporting unit with its carrying amount, including goodwill, and if the carrying
value of a reporting unit exceeds its fair value, we would perform the second step in our assessment process and record an impairment
loss to earnings to the extent the carrying amount of the reporting unit’s goodwill exceeds its implied fair value. We estimate
the fair value of our reporting units through internal analysis and external valuations as needed, which utilize income and market
valuation approaches through the application of capitalized earnings and discounted cash flow. These valuation techniques are
based on a number of estimates and assumptions, including the projected future operating results of the reporting unit, appropriate
discount rates and long-term growth rates.
The fair value of each reporting unit is determined
by analysis of discounted cash flows. The significant assumptions regarding our future operating performance are revenue growth
rates, commission and fees growth rates, discount rates and terminal values. If any of these assumptions changes, the estimated
fair value of our reporting units will change, which could affect the amount of goodwill impairment charges, if any.
In 2015, 2016 and 2017, management compared
the carrying value of each reporting unit, including assigned goodwill, to its respective fair value, which is step one of
the two-step impairment test. The fair values of all reporting units were estimated by using the income approach. Based on
this quantitative test, it was determined that the fair value of each reporting unit tested exceeded its carrying amount and,
therefore, step two of the two-step goodwill impairment test was not required. Management concluded that goodwill was not
impaired as of December 31, 2015, 2016 and 2017.
The use of discounted cash flow methodology requires
significant judgments including estimating future revenues and costs, industry economic factors, future profitability, determination
of our weighted average cost of capital and other variables. Although we believe that the assumptions adopted in our discounted
cash flow model are reasonable, those assumptions are inherently unpredictable and uncertain. If the reporting unit is at risk
of failing step one of the impairment test, we will describe the material events, trends and uncertainties that affect the reported
income and the extent to which income is so affected.
Valuation of Convertible Loan Receivable
We use the income approach to value our convertible
loan receivable. The income approach uses valuation techniques to convert future cash flows or earnings to a single present amount
(discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following
these approaches, the types of factors that we may take into account in fair value pricing our convertible loan receivable include,
as relevant: the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which
the portfolio company does business, transaction comparables, and enterprise values, among other factors.
Recent Accounting Pronouncement
In May 2014,
the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, "Revenue from Contracts with Customers (Topic
606)" which amended the existing accounting standards for revenue recognition. The core principle of the new guidance is for
companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration
(that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new guidance also will
result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively
(for example, service revenue and contract modifications) and improve guidance for multiple element arrangements.
Subsequently, the FASB issued the following
various updates affecting the guidance in ASU 2014-09: ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal
versus Agent Considerations; ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing; ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients;
ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. We must adopt ASU 2016-08,
ASU 2016-10, ASU 2016-12 and ASU 2016-20 with ASU 2014-09 (collectively, the "new revenue standards").
In November 2017, the FASB has issued ASU No.
2017-14, Income Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts
with Customers (Topic 606). ASU 2017-14 includes amendments to certain SEC paragraphs within the FASB Accounting Standards Codification
(Codification). ASU 2017-14 amends the Codification to incorporate the following previously issued guidance from the SEC. ‘The
amendments in ASU No. 2017-14 amends the Codification to incorporate SEC Staff Accounting Bulletin (SAB) No. 116 and SEC Interpretive
Release on Vaccines for Federal Government Stockpiles (SEC Release No. 33-10403) that bring existing SEC staff guidance into conformity
with the FASB’s adoption of and amendments to ASC Topic 606, Revenue from Contracts with Customers.
The new revenue standards may be applied retrospectively
to each prior period presented (full retrospective method) or retrospectively with the cumulative effect recognized as of the date
of initial application (the modified retrospective method). We have substantially completed its study on the impact that implementing
this standard will have on its consolidated financial statements, related disclosures and the internal control over financial reporting
as well as whether the effect will be material to the revenue. Based on the results of our study to date, the standard will not
be material to the revenue at adoption. An analysis of the control environment was completed and appropriate updates to the control
processes have been implemented. Additionally, our revenue disclosure will change in fiscal 2018 and beyond. The
new disclosure will require more granularity into the sources of revenue, as well as the assumptions about recognition timing,
and include the selection of certain practical expedients and policy elections. We will use the modified retrospective approach
upon adoption of this guidance effective January 1, 2018. We have assessed the impacts of the new accounting standard and has implemented
accounting and operational processes and controls to ensure compliance with the new standard. We expect there is no material impact
upon adoption of this standard on the consolidated financial statements.
The new standard provides guidance on accounting
for certain revenue-related costs including when to capitalize costs associated with obtaining and fulfilling a contract. As our
commission costs are incurred to obtain contracts where the renewal period is one year or less and renewal costs are commensurate
with the initial contract, we plan to apply a practical expedient and recognize the costs of obtaining a contract as an expense
when incurred.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842), which requires lessees to recognize most leases on the balance sheet. This ASU requires lessees to recognize
a right-of-use asset and lease liability for all leases with terms of more than 12 months. Lessees are permitted to make an accounting
policy election to not recognize the asset and liability for leases with a term of twelve months or less. The ASU does not significantly
change the lessees' recognition, measurement and presentation of expenses and cash flows from the previous accounting standard.
Lessors' accounting under the ASC is largely unchanged from the previous accounting standard. In addition, the ASU expands the
disclosure requirements of lease arrangements. Lessees and lessors will use a modified retrospective transition approach, which
includes a number of practical expedients. For public business entities, the provisions of this guidance are effective for annual
periods beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. We are currently
gathering, documenting and analyzing lease agreements subject to this ASU and anticipate material addition to the consolidated
statements of financial position (upon adoption) of right-of-use assets, offset by the associated liabilities, due to the routine
use of operating leases over time.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is intended
to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by
financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for financial assets
held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial
institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many
of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to
reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation
method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement
users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and
underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements
that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting
for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public business
entities that are U.S. SEC filers, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019. We are in the process of evaluating the impact of adoption of this guidance on our consolidated financial
statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment. This ASU addresses concerns regarding the cost and complexity of the two-step goodwill impairment
test, the amendments in this ASU remove the second step of the test. An entity will apply a one-step quantitative test and record
the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total
amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill
impairment.The update should be applied on a prospective basis. The nature of and reason for the change in accounting principle
should be disclosed upon transition. For public companies, the update is effective for any annual or interim goodwill impairment
tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017.
We
expect there is no material impact upon adoption of this guidance on our consolidated financial statements.
In September 2017, the FASB has issued ASU
No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases
(Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of
Prior SEC Staff Announcements and Observer Comments.” The amendments in ASU No. 2017-13 amends the early adoption date option
for certain companies related to the adoption of ASU No. 2014-09 and ASU No. 2016-02. The effective date is the same as the effective
date and transition requirements for the amendments for ASU 2014-09 and ASU 2016-02.
Results of Operations
The following table sets forth our net revenues,
operating costs and expenses and income from operations by reportable segments for the periods indicated.
In 2015 and 2016, our business was divided
into three reporting operating segments: (1) insurance agency, (2) insurance brokerage, and (3) claims adjusting. The
insurance agency segment provides a broad range of property and casualty and life insurance products to individual customers.
As the result of the disposal of our insurance brokerage business in November 2017, we operated two reporting operating
segments: (1) insurance agency, and (2) claims adjusting as of December 31, 2017. Accordingly, the insurance brokerage
segment was accounted as discontinued operations. Consolidated statements of operations for the years ended 2015 and 2016
have been revised to conform to the current presentation.
|
|
For the Year Ended December 31,
|
|
|
2015
|
|
2015 to 2016
Percentage
Change
|
|
2016
|
|
2016 to 2017
Percentage
Change
|
|
2017
|
|
|
RMB
|
|
%
|
|
RMB
|
|
%
|
|
RMB
|
|
US$
|
|
|
(in thousands except percentages)
|
Consolidated Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
2,155,264
|
|
|
|
73.8
|
|
|
|
3,746,471
|
|
|
|
0.9
|
|
|
|
3,780,217
|
|
|
|
581,008
|
|
Life insurance business
|
|
|
319,916
|
|
|
|
209.6
|
|
|
|
990,541
|
|
|
|
144.8
|
|
|
|
2,424,444
|
|
|
|
372,630
|
|
P&C insurance business
|
|
|
1,835,348
|
|
|
|
50.2
|
|
|
|
2,755,930
|
|
|
|
(50.8
|
)
|
|
|
1,355,773
|
|
|
|
208,378
|
|
Claims adjusting
|
|
|
303,846
|
|
|
|
10.7
|
|
|
|
336,413
|
|
|
|
(8.4
|
)
|
|
|
308,256
|
|
|
|
47,378
|
|
Total
net revenues
|
|
|
2,459,110
|
|
|
|
66.0
|
|
|
|
4,082,884
|
|
|
|
0.1
|
|
|
|
4,088,473
|
|
|
|
628,386
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
(1,675,262
|
)
|
|
|
73.5
|
|
|
|
(2,906,791
|
)
|
|
|
(1.4
|
)
|
|
|
(2,864,882
|
)
|
|
|
(440,324
|
)
|
Life insurance business
|
|
|
(205,313
|
)
|
|
|
227.9
|
|
|
|
(673,230
|
)
|
|
|
143.1
|
|
|
|
(1,636,340
|
)
|
|
|
(251,501
|
)
|
P&C insurance business
|
|
|
(1,469,949
|
)
|
|
|
51.9
|
|
|
|
(2,233,560
|
)
|
|
|
(45.0
|
)
|
|
|
(1,228,542
|
)
|
|
|
(188,823
|
)
|
Claims adjusting
|
|
|
(181,370
|
)
|
|
|
10.2
|
|
|
|
(199,810
|
)
|
|
|
(2.6
|
)
|
|
|
(194,525
|
)
|
|
|
(29,898
|
)
|
Total
operating costs
|
|
|
(1,856,632
|
)
|
|
|
67.3
|
|
|
|
(3,106,601
|
)
|
|
|
(1.5
|
)
|
|
|
(3,059,407
|
)
|
|
|
(470,222
|
)
|
Selling expenses
|
|
|
(125,041
|
)
|
|
|
302.1
|
|
|
|
(502,802
|
)
|
|
|
(55.9
|
)
|
|
|
(221,785
|
)
|
|
|
(34,088
|
)
|
General and administrative expenses
|
|
|
(448,989
|
)
|
|
|
7.3
|
|
|
|
(481,947
|
)
|
|
|
10.8
|
|
|
|
(534,145
|
)
|
|
|
(82,096
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating costs and expenses
|
|
|
(2,430,662
|
)
|
|
|
68.3
|
|
|
|
(4,091,350
|
)
|
|
|
(6.7
|
)
|
|
|
(3,815,337
|
)
|
|
|
(586,406
|
)
|
Income (loss) from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance agency
|
|
|
185,935
|
|
|
|
(57.3
|
)
|
|
|
79,467
|
|
|
|
367.8
|
|
|
|
371,718
|
|
|
|
57,132
|
|
Claims adjusting
|
|
|
11,233
|
|
|
|
163.6
|
|
|
|
29,609
|
|
|
|
(100.2
|
)
|
|
|
(65
|
)
|
|
|
(10
|
)
|
Other
|
|
|
(168,720
|
)
|
|
|
(30.3
|
)
|
|
|
(117,542
|
)
|
|
|
(16.2
|
)
|
|
|
(98,517
|
)
|
|
|
(15,142
|
)
|
Income
(loss) from continuing operations
|
|
|
28,448
|
|
|
|
*
|
|
|
|
(8,466
|
)
|
|
|
*
|
|
|
|
273,136
|
|
|
|
41,980
|
|
Other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
65,624
|
|
|
|
75.7
|
|
|
|
115,275
|
|
|
|
66.4
|
|
|
|
191,784
|
|
|
|
29,477
|
|
Interest income
|
|
|
57,206
|
|
|
|
(87.9
|
)
|
|
|
6,901
|
|
|
|
275.2
|
|
|
|
25,891
|
|
|
|
3,980
|
|
Others, net
|
|
|
20,964
|
|
|
|
(50.7
|
)
|
|
|
10,341
|
|
|
|
38.1
|
|
|
|
14,284
|
|
|
|
2,195
|
|
Income
from continuing operations before income taxes and income of affiliates
|
|
|
172,242
|
|
|
|
(28.0
|
)
|
|
|
124,051
|
|
|
|
307.2
|
|
|
|
505,095
|
|
|
|
77,632
|
|
Income tax expense
|
|
|
(25,553
|
)
|
|
|
6.6
|
|
|
|
(27,249
|
)
|
|
|
515.8
|
|
|
|
(167,803
|
)
|
|
|
(25,791
|
)
|
Share of income of affiliates
|
|
|
26,924
|
|
|
|
79.4
|
|
|
|
48,293
|
|
|
|
125.6
|
|
|
|
108,944
|
|
|
|
16,744
|
|
Net income
from continuing operations
|
|
|
173,613
|
|
|
|
(16.4
|
)
|
|
|
145,095
|
|
|
|
207.5
|
|
|
|
446,236
|
|
|
|
68,585
|
|
Net income from discontinued operations, net of tax
|
|
|
41,868
|
|
|
|
(46.2
|
)
|
|
|
22,543
|
|
|
|
(75.7
|
)
|
|
|
5,480
|
|
|
|
842
|
|
Net income
|
|
|
215,481
|
|
|
|
(22.2
|
)
|
|
|
167,638
|
|
|
|
169.5
|
|
|
|
451,716
|
|
|
|
69,427
|
|
Less:
Net income attributable to the noncontrolling interests
|
|
|
5,395
|
|
|
|
96.3
|
|
|
|
10,591
|
|
|
|
(76.5
|
)
|
|
|
2,488
|
|
|
|
382
|
|
Net
income attributable to the Company’s shareholders
|
|
|
210,086
|
|
|
|
(25.2
|
)
|
|
|
157,047
|
|
|
|
186.1
|
|
|
|
449,228
|
|
|
|
69,045
|
|
__________________________
|
*
|
Not meaningful
for analysis because the percentage change is mathematically undeterminable or involves
a change from income or benefit to loss or expense, or vice versa.
|
Year ended December 31, 2017
Compared to Year Ended December 31, 2016
Net Revenues
Our total net revenues increased slightly by
0.1% from RMB4,082.9 million in 2016 to RMB4,088.5 million (US$628.4 million) in 2017.
|
·
|
Net revenues from our insurance agency segment increased by 0.9% from RMB3,746.5 million in 2016
to RMB3,780.2 million (US$581.0 million) in 2017. The increase was primarily driven by (i) a 144.8% increase in net revenues derived
from the life insurance agency business, from RMB
990.5
million in 2016 to RMB2,424.4 million
(US$372.6 million) in 2017, offset by 50.8% decrease in net revenues derived from the property and casualty insurance agency business,
from RMB
2,755.9
million in 2016 to RMB1,355.8 million (US$208.4 million). The increase
in net revenues generated from the life insurance agency business was primarily due to the growth in the number of sales agents,
establishment of new branches in more regions, and overall industry growth. The decline of the property and casualty insurance
agency business was primarily due to the i) suspension of business cooperation with PICC P&C starting from March 1, 2017, ii)
our decision to cut low margin channel businesses starting from the second quarter of 2017 and (iii) the transition of our P&C
insurance business from a commission-based business model towards a platform management fee-based business model.
|
|
·
|
Net revenues from our claims adjusting segment decreased by 8.4% from RMB336.4 million in 2016
to RMB308.3 million (US$47.4 million) in 2017. The decrease was primarily due to the suspension of business cooperation with PICC
P&C starting from March 1, 2017.
|
Operating Costs and Expenses
Operating costs and expenses decreased by 6.7%
from RMB4,091.4 million in 2016 to RMB3,815.3 million (US$586.4 million) in 2017.
Operating Costs.
Our operating costs
decreased
by 1.5% from RMB3,106.6 million in 2016 to RMB3,059.4 million (US$470.2 million) in 2017, primarily because of a decrease in operating
cost in P&C insurance business.
|
·
|
Operating costs for our insurance agency segment decreased by 1.4% from RMB2,906.8 million in 2016
to RMB2,864.9 million (US$440.3 million) in 2017, primarily driven by (i) an increase of 143.1% in costs for the life insurance
agency business, which is in line with the growth in net revenues from the life insurance agency business offset by (ii) a decrease
of 45.0% in costs for the property and casualty insurance agency business which was mainly due to a decrease in revenue.
|
|
·
|
Operating costs for our claims adjusting segment decreased by 2.6% from RMB199.8 million in 2016
to RMB194.5 million (US$29.9 million) in 2017. The change was primarily in line with the decrease in net revenues from claims adjusting
business.
|
Selling Expenses.
Our selling expenses
decreased by 55.9% from RMB502.8 million in 2016 to RMB221.8 million (US$
34.1
million)
in 2017, primarily attributable to the significant decrease of marketing campaign expenses, which mainly aimed at promoting sales
and gaining market share of our P&C insurance during 2016.
General and Administrative Expenses.
Our general and administrative expenses increased by 10.8% from RMB481.9 million in 2016 to RMB534.1 million (US$82.1 million)
in 2017. The increases were primarily due to the increase in payroll and rental expenses, partially offset by the decrease in share-based
compensation and depreciation expenses.
Income(loss) from Operations
As a result of the foregoing factors, income from operations for
2017 is RMB273.1 million (US$42.0 million), compared with an operating loss of RMB8.5 million in 2016.
|
·
|
Income from operations for our agency insurance segment increased by 367.8% from RMB79.5 million
in 2016 to RMB371.7 million (US$57.1 million) in 2017, which was primarily due to the strong growth of life insurance agency business,
partially offset by the decline in the property and casualty insurance agency business.
|
|
·
|
Loss from operations for our claims adjusting segment in 2017 is RMB65 thousand (US$ 10 thousand),
compared with income from operations for RMB29.6 million in 2016.
|
|
·
|
Other loss from operations represented operating loss incurred by the headquarters which was
not allocated to each business segment. Operating loss incurred by the headquarters decreased by 16.2% from RMB117.5 million
in 2016 to RMB98.5 million (US$15.1 million) in 2017. The change was primarily due to our stringent cost control
and increase in operating efficiency.
|
Other Income
Investment Income.
Investment income
represents income received from short term investments in collective trust products and interbank deposits. Our investment income
increased by 66.4% from RMB115.3 million in 2016 to RMB191.8 million (US$29.5 million) in 2017. The increase was primarily attributable
to more high return short term investment products in 2017.
Interest Income.
Our interest income
increased by 275.2% from RMB6.9 million in 2016 to RMB25.9 million (US$4.0 million) in 2017. The increase was primarily due to
interest related to amounts due from Sincere Fame and Shenzhen Chuangjia Investment Limited Partnership, which beneficially owns
84.6% of Fanhua Puyi Fund Sales Limited.
Income Tax Expense
Our income tax expense increased by 515.8%
from RMB27.2 million in 2016 to RMB167.8 million (US$25.8million) in 2017. The effective tax rate for 2017 was 33.2% compared with
22.0% in 2016. The increase in effective tax rate was primarily due to the withholding income tax provision related to dividend
payments in2017.
Share of Income of Affiliates
Our share of income of affiliates increased
by 125.6% from RMB48.3 million in 2016 to RMB108.9 million (US$16.7 million) in 2017, primarily due to the rapid growth of net
income generated by Sincere Fame, in which we own 20.6% equity interest.
Net Income Attributable to the Non-controlling Interests
Our net income attributable to the non-controlling
interests decreased by 76.5% from RMB10.6 million in 2016 to RMB2.5 million (US$0.4 million) in 2017, primarily due to the decreased
profits from claims adjusting segments as we currently own 44.7% equity interests.
Net Income Attributable to the Company’s Shareholders
As a result of the foregoing, our net income
attributable to our shareholders increased by 186.1% from RMB157.0 million in 2016 to RMB449.2 million (US$69.0 million) in 2017.
Year ended December 31, 2016
Compared to Year Ended December 31, 2015
Net Revenues
Our total net revenues increased by 66.0% from
RMB2,459.1 million in 2015 to RMB4,082.9 million in 2016 primarily attributable to increases in net revenues from our insurance
agency and claims adjusting segments.
|
·
|
Net revenues from our insurance agency segment increased by 73.8% from RMB2,155.3 million in 2015
to RMB3,746.5 million in 2016. The increase was primarily driven by (i) a
50.2
% increase
in net revenues derived from the property and casualty insurance agency business, from RMB
1,835.3
million in 2015 to RMB
2,755.9
million in 2016, and (ii) a
209.6
%
increase in net revenues derived from the life insurance agency business, from RMB
319.9
million
in 2015 to RMB
990.5
million in 2016. The growth of the property and casualty insurance
agency business was primarily due to the substantial progress we have made in implementing multiple strategic initiatives, including
the expansion of our sales network, enhanced cross-selling efforts, the upgrade and promotion of CNpad and the initiation of several
marketing campaigns. The increase in net revenues generated from the life insurance agency business was primarily due to a
244.1
%
increase in commissions derived from the sales of new long-term life insurance policies, which was primarily driven by the successful
implementation of our cross-selling strategy and overall industry growth.
|
|
·
|
Net revenues from our claims adjusting segment increased by 10.7% from RMB303.8 million in 2015
to RMB336.4 million in 2016, primarily due to the growth of our automobile insurance related claims adjusting business.
|
Operating Costs and Expenses
Operating costs and expenses increased by 68.3%
from RMB2,430.7 million in 2015 to RMB4,091.4 million in 2016.
Operating Costs.
Our operating costs
increased by 67.3% from RMB1,856.6 million in 2015 to RMB3,106.6 million in 2016, primarily because of increases in operating costs
for our agency insurance and claims adjusting segments.
|
·
|
Operating costs for our insurance agency segment increased by 73.5% from RMB1,675.3 million in
2015 to RMB2,906.8 million in 2016, primarily driven by (i) an increase of
51.9
% in costs
for the property and casualty insurance agency business, and (ii) an increase of 227.9% in costs for the life insurance agency
business, both of which are in line with the growth in net revenues from the property and casualty agency business and life insurance
agency businesses.
|
|
·
|
Operating costs for our claims adjusting segment increased by 10.2% from RMB181.4 million in 2015
to RMB199.8 million in 2016. The increase was primarily attributable to sales growth.
|
Selling Expenses.
Our selling expenses
increased by 302.1% from RMB125.0 million in 2015 to RMB502.8 million in 2016 primarily attributable to an increase in marketing
campaign expenses, which mainly aimed at promoting sales and gaining market share of our P&C insurance and life insurance business
during 2016.
Marketing campaign expenses were incurred to
increase our market share and attract more agents at certain selected regions that we strategically planned to capture higher market
shares, and not a necessary expense to sell insurance policies. Such expenses were temporary, with the terms of regional programs
terms ranging from one to three months. Marketing campaign expenses were only recognized when such campaigns were officially announced
by us to the agents and such campaigns can be terminated at any time without further notice. We recorded marketing campaign expenses
when the related services are provided. For the years ended December 31, 2015, 2016 and 2017, RMB19.5 million, RMB299.9 million
and nil of marketing campaign expenses were included in the selling expenses, respectively.
General and Administrative Expenses.
Our general and administrative expenses increased by 7.3% from RMB449.0 million in 2015 to RMB481.9 million in 2016. The increases
were primarily due to the increase in payroll expenses by RMB33.8 million and rental expenses by RMB4.2 million and depreciation
expenses by RMB5.2 million, partially offset by the decrease in share-based compensation by RMB12.7 million.
Income (loss) from Operations
As a result of the foregoing factors, income from continuing operations
decreased from RMB28.4 million in 2015 to operation loss RMB8.5 million in 2016.
|
·
|
Income from operations for our agency insurance segment decreased by 57.3% from RMB185.9 million
in 2015 to RMB79.5 million in 2016, which was primarily due to the increase of the marketing campaign expenses. The marketing campaign
expenses were incurred to increase our market share and attract more agents at certain selected regions which we strategically
planned to capture higher market shares in 2016.
|
|
·
|
Income from operations for our claims adjusting segment increased by 164.3% from RMB11.2 million
in 2015 to RMB29.6 million in 2016.
|
|
·
|
Other loss from operations represented operating loss incurred by the headquarters which was
not allocated to each business segment. Operating loss incurred by the headquarters decreased
by
30.3% from RMB168.7 million in 2015 to RMB117.5 million in 2016. The change was primarily due to our stringent
cost control and increase in operating efficiency.
|
Other Income
Investment Income.
Investment income
represents income received from short term investments in collective trust products and interbank deposits. Our investment income
increased by 75.7% from RMB65.6 million in 2015 to RMB115.3 million in 2016. The increase was primarily attributable to an increase
in short term investment products.
Interest Income.
Our interest income
decreased by 87.9% from RMB57.2 million in 2015 to RMB6.9 million in 2016. The decrease was primarily due to a decrease in term
deposits as a result of the increased short-term investments.
Others, Net.
Our other income, net,
decreased by 51.0% from RMB21.0 million in 2015 to RMB10.3 million in 2016.
Income Tax Expense
Our income tax expense increased by 6.3% from
RMB25.6 million in 2015 to RMB27.2 million in 2016. The effective tax rate in 2016 was 22.0% compared with 14.8% in 2015. The increase
in effective tax rate was primarily due to preferential tax treatment enjoyed by one of our subsidiaries in 2015, which was not
available in 2016.
Share of Income of Affiliates
Our share of income of affiliates increased
by 79.4% from RMB26.9 million in 2015 to RMB48.3 million in 2016, primarily due to the rapid growth of net income generated by
Sincere Fame, in which we own 20.6% equity interest.
Net Income Attributable to the Noncontrolling Interests
Our net income attributable to the non-controlling
interests increased by 96.3% from RMB5.4 million in 2015 to RMB10.6 million in 2016, primarily due to increased profits from claims
adjusting segments as we currently own 44.7% equity interests in our claims adjusting firms.
Net Income Attributable to the Company’s Shareholders
As a result of the foregoing, our net income
attributable to our shareholders decreased by 25.2% from RMB210.1 million in 2015 to RMB157.0 million in 2016.
Inflation
Inflation in China has impacted our results of
operations. According to the National Bureau of Statistics of China, the consumer price index in China increased by 2.6%, 2.0%,
1.4%, 2.0% and 1.6% in 2013, 2014, 2015, 2016 and 2017, respectively. Our operating costs and expenses, such as sales agent and
employee compensation and office operating expenses, increased significantly partly as a result of inflation in 2016 and 2017.
Additionally, because a substantial portion of our assets consists of cash and cash equivalents, high inflation significantly reduced
the value and purchasing power of these assets. We are not able to hedge our exposures to higher inflation in China. If high inflation
persists in China in the future, our operational results may continue to be significantly affected.
Foreign Currency
The exchange rate between U.S. dollar and RMB
has declined from an average of RMB8.2264 per U.S. dollar in July 2005 to RMB6.5932 per U.S. dollar in December 2017. The fluctuation
of the exchange rate between the RMB and U.S. dollar and HK dollar resulted in foreign currency translation gain of RMB27.9 million
(US$4.3 million) in 2017, when we translated our financial assets from U.S. dollar and HK dollar into RMB. We have not hedged exposures
to exchange fluctuations using any hedging instruments. See “Item 3. Key Information — D.Risk Factors — Risks
Related to Doing Business in China — Fluctuation in the value of the RMB may have a material adverse effect on your investment.”
and “Item 11. Quantitative and Qualitative Disclosures about Market Risk — Foreign Exchange Risk.”
|
B.
|
Liquidity and Capital Resources
|
Cash Flows and Working Capital
Our principal sources of liquidity have been
cash generated from our operating activities. As of December 31, 2017, we had RMB363.7million (US$55.9 million) in cash and cash
equivalents, and RMB2,498.7million (US$384.0 million) in short term investments. Our cash and cash equivalents consist of cash
on hand, bank deposits and short-term, highly liquid investments that are readily convertible to known amounts of cash, and have
insignificant risk of changes in value related to changes in interest rates. Our principal uses of cash have been to fund payment
of dividends, developments of online projects including Lan Zhanggui, CNpad Auto, Baoxian.com, and eHuzhu, establishment of new
branches and sales outlets, working capital requirements, automobiles and office equipment purchases, office renovation and rental
deposits.
We expect to require cash to fund our ongoing
business needs, particularly the further expansion of our distribution and service network, expansion into the financial services
business and development of online platforms.
We believe that our current cash and cash equivalents
and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for working
capital and capital expenditures, for at least the next 12 months. We may, however, require additional cash due to changing business
conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing cash
is insufficient to meet our requirements, we may seek to sell additional equity securities, debt securities or borrow from lending
institutions. Financing may be unavailable in the amounts we need or on terms acceptable to us, if at all. The sale of additional
equity securities, including convertible debt securities, would dilute our earnings per share. The incurrence of debt would divert
cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants
that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity
or debt financing as required, our business operations and prospects may suffer.
The following table sets forth a summary of our
cash flows for the periods indicated:
|
|
Year Ended December 31,
|
|
|
2015
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
(in thousands)
|
Net cash generated from operating activities
|
|
|
281,304
|
|
|
|
87,846
|
|
|
|
152,127
|
|
|
|
23,381
|
|
Net cash used in investing activities
|
|
|
(1,121,444
|
)
|
|
|
(732,606
|
)
|
|
|
(23,723
|
)
|
|
|
(3,646
|
)
|
Net cash (used in) generated from financing activities
|
|
|
(143,708
|
)
|
|
|
(216,575
|
)
|
|
|
47,558
|
|
|
|
7,310
|
|
Net (decrease) increase in cash and cash equivalents and restricted cash
|
|
|
(983,848
|
)
|
|
|
(861,335
|
)
|
|
|
175,962
|
|
|
|
27,045
|
|
Cash and cash equivalents and restricted cash at the beginning of the year
|
|
|
2,100,546
|
|
|
|
1,132,851
|
|
|
|
273,979
|
|
|
|
42,110
|
|
Cash and cash equivalents and restricted cash at the end of the year
|
|
|
1,132,851
|
|
|
|
273,979
|
|
|
|
439,033
|
|
|
|
67,478
|
|
Operating Activities
Net cash generated from operating activities
amounted to RMB152.1million (US$23.4 million) for the year ended December 31, 2017, primarily attributable to (i) a net income
of RMB451.7 million (US$69.4 million), (ii) adjustments of depreciation of RMB14.1 million (US$2.2 million), amortization of acquired
intangible assets of RMB33.2 million (US$5.1 million) and share of income of affiliates of RMB108.9 million (US$16.7 million),
which were non-cash items, and (iii) an increase of accounts payable of RMB139.5 million (US$21.4 million) and other payable of
RMB22.9 million (US$3.5 million) due to an increase in operational cost and expenses that had been accrued but unsettled in the
fourth quarter of 2017, partially offset by (i) an increase of accounts receivable of RMB140.7 million (US$21.6 million) as a result
of sales growth, and (ii) RMB177.9 million (US$27.3 million) in investment income from collective trust funds and inter-bank deposit.
Net cash generated from operating activities
amounted to RMB87.8 million for the year ended December 31, 2016, primarily attributable to (i) a net income of RMB167.6 million,
(ii) adjustments of depreciation of RMB13.5 million, amortization of acquired intangible assets of RMB20.2 million, compensation
expenses associated with stock options of RMB4.9 million and share of income of affiliates of RMB48.3 million, which were non-cash
items, and (iii) an increase of accounts payable of RMB127.0 million and other payable of RMB142.7 million due to an increase in
the operational cost and expenses that had accrued but unsettled in the fourth quarter of 2016, partially offset by (i) an increase
of accounts receivable of RMB271.3 million as a result of sales growth, and (ii) RMB80.6 million in investment income from collective
trust funds and inter-bank deposit.
Net cash generated from operating activities
amounted to RMB281.3 million for the year ended December 31, 2015, primarily attributable to (i) a net income of RMB215.5 million,
(ii) an add-back of depreciation of RMB18.4 million, amortization of acquired intangible assets of RMB11.6 million and compensation
expenses associated with stock options of RMB17.7 million, which were non-cash items, and (iii) an increase of accounts payable
of RMB33.0 million and other payable of RMB71.5 million due to an increase in the operational expenses that had accrued but unsettled
in the fourth quarter of 2015, partially offset by (i) an increase of accounts receivable of RMB61.4 million as a result of sales
growth and improvement of accounts receivable collections in our claims adjusting segment, (ii) share of income of affiliates of
RMB26.9 million, which was also included in net income but did not have cash flow effect during the period, and (iii) RMB31.1 million
in investment income from collective trust funds and inter-bank deposit.
Investing Activities
Net cash used in investing activities for the
year ended December 31, 2017 was RMB23.7 million (US$3.6 million), primarily attributable to (i) cash used to purchase financial
products including collective trust funds and inter-bank deposits of RMB11.1 billion (US$1.7 billion), (ii) loan to third party
of RMB500.0 million (US$76.8 million), partially offset by proceeds from short term investments of RMB11.5 billion (US$1.8 billion)
that had matured, (iii) purchase of property, plant and equipment of RMB20.9 million (US$3.2 million), and (iv) disposal of subsidiaries
of RMB20.6 million (US$3.2 million).
Net cash used in investing activities for the
year ended December 31, 2016 was RMB732.6 million, primarily attributable to (i) cash used to purchase financial products including
collective trust funds and inter-bank deposits of RMB9.5 billion, and (ii) cash used to purchase intangible assets of RMB60.0 million,
partially offset by (i) proceeds from short term investments of RMB8.8 billion that had matured and (ii) proceeds from disposal
of subsidiaries of RMB29.4 million.
Net cash used in investing activities for the
year ended December 31, 2015 was RMB1.1 billion, primarily attributable to cash used to purchase financial products including collective
trust funds and inter-bank deposits of RMB2.3 billion, partially offset by (i) proceeds from short term investments of RMB994.8
million that had matured and (ii) repayment from related parties of RMB181.2 million.
Financing Activities
Net cash generated from financing activities
was RMB47.6 million (US$7.3 million) for the year ended December 31, 2017 attributable to (i) proceeds of issuance of ordinary
shares upon private placement of RMB201.1 million (US$30.9 million) and proceeds of upon exercise of stock options RMB64.9 million
(US$10.0 million) partially offset by (i) dividend payments of totaling RMB137.2 million (US$21.1 million) and (ii) repayment of
advances from the disposed subsidiary of RMB103.4 million (US$15.9 million).
Net cash used in financing activities was RMB216.6
million for the year ended December 31, 2016, attributable to payments totaling RMB213.5 million for acquisitions of noncontrolling
interests in subsidiaries, partially offset by proceeds of RMB1.1 million received upon exercise of stock options.
Net cash used in financing activities was RMB143.7
million for the year ended December 31, 2015, mainly attributable to payments totaling RMB153.5 million for acquisitions of noncontrolling
interests in subsidiaries.
Capital Expenditures
We incurred capital expenditures of RMB6.7 million,
RMB11.9 million and RMB20.9 million (US$3.2 million) for the years ended December 31, 2015, 2016 and 2017, respectively. Our capital
expenditures have been used primarily to construct our IT infrastructure and online platforms, and to purchase automobiles and
office equipment for newly established insurance intermediary companies. We estimate that our capital expenditures will increase
moderately in the following two or three years as we further expand our distribution and service network in China, and maintain
and upgrade our IT infrastructure and online platforms. We anticipate funding our future capital expenditures primarily with net
cash flows from financing and operating activities.
Borrowings
As of each of December 31, 2016 and 2017, we
had no short-term or long-term bank borrowings.
Holding Company Structure
We are a holding company with no material operations
of our own. We conduct our operations through our subsidiaries in China. As a result, our ability to pay dividends and to finance
any debt we may incur depends upon dividends paid by our subsidiaries. If our subsidiaries incur debt on their own behalf in the
future, the instruments governing their debt may restrict their ability to pay dividends to us. Our wholly owned subsidiaries are
permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards
and regulations. Under PRC law, each of our subsidiaries in China is required to set aside at least 10% of its after-tax profits
as reported in the PRC statutory financial statements each year, if any, to fund a statutory reserve until such reserve reach 50%
of its registered capital, and to further set aside a portion of its after-tax profits to fund the employee welfare fund at the
discretion of its board. Although the statutory reserves can be used, among other ways, to increase the registered capital and
eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as
cash dividends except in the event of liquidation of the companies. Furthermore, the EIT Law that took effect on January 1, 2008
has eliminated the exemption of EIT on dividend derived by foreign investors from foreign-invested enterprises and imposes on foreign-invested
enterprises an obligation to withhold tax on dividend distributed by such foreign-invested enterprises. As of December 31, 2017,
our restricted net asset was RMB2.2 billion (US$343.4 million). This amount is composed of the registered equity of our PRC subsidiaries
and the statutory reserves described above. Our ability to pay dividends primarily depends upon dividends paid by our subsidiaries.
As of December 31, 2017, we had aggregate undistributed earnings of approximately RMB2.2 billion (US$339.7 million) that were available
for distribution, including nil of undistributed earnings of our consolidated affiliated entities. These undistributed earnings
are considered to be indefinitely reinvested, and will be subject to PRC dividend withholding taxes upon distribution.
|
C.
|
Research and Development, Patents and Licenses, etc.
|
None.
Other than as disclosed elsewhere in this annual
report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 2017 to December
31, 2017 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or
capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating
results or financial conditions.
|
E.
|
Off-Balance Sheet Commitments and Arrangements
|
We have not entered into any financial guarantees
or other commitments to guarantee the payment obligations of third parties. We have not entered into any derivative contracts that
are indexed to our shares and classified as shareholders’ equity, or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity
that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development
services with us. As a result, as of December 31, 2017, we did not have any off-balance sheet arrangements that had or were reasonably
likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
|
F.
|
Contractual Obligations
|
The following table sets forth our contractual obligations
and commercial commitments as of December 31, 2017:
|
|
Payment Due by Period
|
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5 years
|
|
|
(in thousands of RMB)
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
106,291
|
|
|
|
40,450
|
|
|
|
61,320
|
|
|
|
4,521
|
|
|
|
—
|
|
Total
|
|
|
106,291
|
|
|
|
40,450
|
|
|
|
61,320
|
|
|
|
4,521
|
|
|
|
—
|
|
Not included in the table above are uncertain
tax liabilities of RMB70.4 million (US$10.8 million). As we are unable to make reasonably reliable estimates of the period of cash
settlement with the respective taxing authority, such liabilities are excluded from the contractual obligations table above.
Other than the contractual obligations and commercial
commitments set forth above, we did not have any other material long-term debt obligations, operating lease obligations, purchase
obligations or other material long-term liabilities as of December 31, 2017.
This annual report on Form 20-F contains statements
of a forward-looking nature. These statements are made under the “safe harbor” provisions of the U.S. Private Securities
Litigation Reform Act of 1995. You can identify some of these forward-looking statements by words or phrases such as “may,”
“will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,”
“plan,” “believe,” “is/are likely to” or other similar expressions. We have based these forward-looking
statements largely on our current expectations and projections about future events and financial trends that we believe may affect
our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include
statements relating to:
|
·
|
our anticipated growth strategies;
|
|
·
|
the anticipated growth of our life insurance business;
|
|
·
|
the anticipated growth of our e-commerce business;
|
|
·
|
our future business development, results of operations and financial condition;
|
|
·
|
factors that affect our future revenues and expenses;
|
|
·
|
the future growth of the Chinese insurance industry as a whole and the professional insurance intermediary
sector in particular;
|
|
·
|
trends and competition in the Chinese insurance industry; and
|
|
·
|
economic and demographic trends in the PRC.
|
You should thoroughly read this annual report
and the documents that we refer to with the understanding that our actual future results may be materially different from and worse
than what we expect. We qualify all of our forward-looking statements by these cautionary statements. We would like to caution
you not to place undue reliance on forward-looking statements and you should read these statements in conjunction with the risk
factors disclosed in “Item 3. Key Information — D. Risk Factors” of this annual report. Those risks are
not exhaustive. We operate in an emerging and evolving environment. New risk factors emerge from time to time and it is impossible
for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking
statement.
You should not rely upon forward-looking statements
as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise, except as required under applicable law.
|
Item 6.
|
Directors,
Senior Management and Employees
|
|
A.
|
Directors and Senior Management
|
The following table sets forth information regarding
our directors and executive officers as of the date of this annual report.
Directors and Executive Officers
|
|
Age
|
|
Position/Title
|
Chunlin Wang
|
|
|
48
|
|
|
Chief Executive Officer and Chairman of the Board of Directors
|
Peng Ge
|
|
|
46
|
|
|
Chief Financial Officer and Director
|
Yinan Hu
|
|
|
52
|
|
|
Director
|
Yunxiang Tang
|
|
|
72
|
|
|
Independent Director
|
Stephen Markscheid.
|
|
|
64
|
|
|
Independent Director
|
Allen Warren Lueth
|
|
|
49
|
|
|
Independent Director
|
Mengbo Yin
|
|
|
62
|
|
|
Independent Director
|
Mr. Chunlin Wang
became our chairman of
the board of directors in September 2017 and has been our chief executive officer since October 2011. He has been our director
in March 2016. From April 2011 to October 2011, he was our chief operating officer. From January 2007 to October 2011, he was vice
president and head of the property and casualty insurance unit of our company. From 2003 to January 2007, he served as assistant
to our chairman. From 2002 to 2005, he served as the general manager of Guangdong Nanfeng, one of our first affiliated insurance
intermediaries in the PRC. From 1998 to 2002, Mr. Wang served as a branch manager at Guangzhou Nanyun Car Rental Services Co.,
Ltd. and later Guangdong Nanfeng Automobile Association Co., Ltd., our predecessors. Mr. Wang received his bachelor’s degree
in law from Central-Southern University of Politics and Law in China.
Mr. Peng Ge
has been our chief financial
officer since April 2008 and became our director in December 2016. From 2005 to April 2008, he served as the general manager of
the finance and accounting department and vice president of our company. From August 2007 to September 2008, he was also a director
of our company. From 1999 to 2005, Mr. Ge headed our Beijing operations. From 1994 to 1999, Mr. Ge was a financial manager at a
subsidiary of China National Native Produce and Animal By-Products Import & Export Corporation. Mr. Ge received his bachelor’s
degree in international accounting and his MBA degree from the University of International Business and Economics in China.
Mr. Yinan Hu
is our co-founder and has
been our director since our inception in 1998. From 1998 to September 2017, he was the chairman of our board of directors. From
1998 to October 2011, Mr. Hu served as our chief executive officer. From 1993 to 1998, Mr. Hu served as chairman of the board of
directors of Guangdong Nanfeng Enterprises Co., Ltd., a company he co-founded that engaged in import and export, manufacturing
of wooden doors and construction. From 1991 to 1995, Mr. Hu was an instructor of money and banking at Guangdong Institute for Managers
in Finance and Trade. Mr. Hu received a bachelor’s degree and a master’s degree in economics from Southwestern University
of Finance and Economics in China.
Mr. Yunxiang Tang
, a senior economist,
has been our independent director since May 2012. Mr. Tang served as general manager of the People's Insurance Company (Group)
of China Limited, or the PICC and chairman of the Board of Directors of PICC P&C, PICC Asset Management Company Limited, PICC
Life Insurance Company Limited and PICC Health Insurance Company Limited from 2000 to 2007. He was the president of Insurance Association
of China from 2001 to 2003 and vice chairman of the CIRC from 1998 to 2000. Prior to that, he served in different senior leadership
roles in the financial regulatory authorities, including head of the PBOC Guangdong Branch and chief of State Administration of
Foreign Exchange, Guangdong Branch and assistant governor of the PBOC.
Mr. Stephen Markscheid
has been our independent
director since August 2007. Mr. Markscheid is currently a venture partner at DealGlobe, a Shanghai based investment bank. He is
a member of the board of directors and a member of the audit committee, compensation committee and/or nomination committee of Jinko
Solar, Inc., Ener-Core Inc., and Hexindai Inc., all of which are public companies listed in U.S and ZZ Capital, a public company
listed in Hong Kong. He is also a trustee of Princeton-in-Asia, a nonprofit social service organization affiliated with Princeton
University. From 2007 to 2015, he was the chief executive officer of Synergenz BioScience, Inc., a genomics company based in Hong
Kong. Prior to that, Mr. Markscheid was the chief executive officer of HuaMei Capital Company, Inc., a Sino-U.S. investment advisory
firm from 2006 to 2007. From 1998 to 2006, Mr. Markscheid worked for GE Capital. During his time with GE Capital, Steve led GE
Capital's business development activities in China and Asia Pacific, primarily acquisitions and direct investments.. Prior to joining
GE, Mr. Markscheid worked as case leader for the Boston Consulting Group throughout Asia from 1994 to 1997. Prior to
that, Mr. Markscheid had been a commercial banker for ten years in London, Chicago, New York, Hong Kong and Beijing with Chase
Manhattan Bank and First National Bank of Chicago. Prior to that, he worked with the US-China Business Council in Washington D.C.
and Beijing. Mr. Markscheid received his bachelor’s degree in East Asian studies from Princeton University, a master’s
degree in international affairs and economics from the School of Advanced International Studies at Johns Hopkins University, and
an MBA degree from Columbia University.
Mr. Allen Lueth
has been our independent
director since August 2007. Mr. Lueth is currently a member of the board of directors of Greatview Aseptic Packaging Company Limited,
a company listed in Hong Kong and Roots & Shoots, a private environmental charity organization. Mr. Lueth is also vice president
of finance of Cardinal Health APAC since May 2017. From 2005 to May 2017, he was vice president of Cardinal Health China and chief
financial officer of under predecessor owner Zuellig Pharma, and has been a member of the board of directors of various group companies.
Mr. Lueth worked for GE Capital from 1998 to 2004 in a variety of roles, including chief financial officer and chief executive
officer for the Taiwan operations, and the representative for China. Earlier, he served with Coopers & Lybrand as an auditor.
Mr. Lueth obtained his certificate as a certified public accountant in 1991 and a certified management accountant in 1994. Mr.
Lueth received his bachelor of science in accounting degree from the University of Minnesota and an MBA degree from the J.L. Kellogg
School of Management at Northwestern University.
Dr. Mengbo Yin
has been our independent
director since September 2008. He is currently a PhD advisor at Southwestern University of Finance and Economics in China, where
he also serves as head of the university’s postgraduate department. Previously, he was the dean of the university’s
school of finance from 1996 to 2007. Professor Yin received his master’s and PhD degrees in finance from Southwestern University
of Finance and Economics in China.
Employment Agreements
Each of our executive officers has entered into
an employment agreement with us. Under these agreements, each of our executive officers is employed for a specified time period.
We may terminate the employment for cause, at any time, without notice or remuneration, for certain acts of the employee, including
but not limited to a conviction or plea of guilty to a felony, negligence or dishonesty to our detriment, failure to perform the
agreed-to duties after a reasonable opportunity to cure the failure and failure to achieve the performance measures specified in
the employment agreement. An executive officer may terminate his employment at any time with one-month prior written notice if
there is a material reduction in his authority, duties and responsibilities or in his annual salary before the next annual salary
review. Furthermore, we may terminate an executive officer’s employment at any time without cause upon two-month advance
written notice. In the event of a termination without cause by us, we will provide the executive officer a lump-sum severance payment
in the amount of RMB500,000, unless otherwise specifically required by applicable law.
Each executive officer has agreed to hold, both
during and after the employment agreement expires or is earlier terminated, in strict confidence and not to use, except as required
in the performance of his duties in connection with the employment, any confidential information, trade secrets and know-how of
our company or the confidential information of any third-party, including our consolidated affiliated entities and our subsidiaries,
received by us. In addition, each executive officer has agreed to be bound by non-competition restrictions set forth in his employment
agreement. Specifically, each executive officer has agreed not to, while employed by us and for one year following the termination
or expiration of the employment agreement, (i) approach our clients, customers or contacts or other persons or entities introduced
to the executive officer for the purpose of doing business with such person or entities, and will not interfere with the business
relationship between us and such persons and/or entities; (ii) assume employment with or provide services as a director for any
of our competitors, or engage, whether as principal, partner or otherwise, in any business which is in direct or indirect competition
with our business; or (iii) seek directly or indirectly, to solicit the services of any of our employees who is employed by us
at the date of the executive officer’s termination, or in the year preceding such termination.
In 2017, the aggregate cash compensation, including
reimbursement of expenses, to our executive officers was approximately RMB1.6 million (US$0.2 million), and the aggregate cash
compensation to our non-executive directors was approximately RMB2.0 million (US$0.3 million). We did not set aside or accrue any
amounts to provide pension, retirement or similar benefits for our executive officers and directors except for statutory social
security payment.
Share Incentives
2007 Share Incentive Plan
Our 2007 Share Incentive Plan is intended to
attract and retain the best available personnel for positions of substantial responsibility, provide additional incentive to employees,
directors and consultants and promote the success of our business. We have reserved 136,874,658 ordinary shares for issuance under
our 2007 Share Incentive Plan, which was approximately 15% of our outstanding ordinary shares at the time we authorized the number
of ordinary shares reserved for issuance. The 2007 Share Incentive Plan expired upon the tenth anniversary of the shareholder approval
of the 2007 Share Incentive Plan.
On November 21, 2008, our board of directors
approved the grant of options to purchase an aggregate of 32,000,000 ordinary shares to various directors, officers and employees
pursuant to the 2007 Share Incentive Plan (the “2008 Option”). The exercise price of these options is US$0.28 per ordinary
share, equal to the closing price of our ADS on the Nasdaq Global Market at the grant date (after adjusting for the 20 ordinary
shares to 1 ADS ratio). The options are scheduled to vest over a four-year period starting from March 31, 2010, subject to the
achievement of certain key performance indicators by the option holders and their continued employment with us. As of March 31,
2018, all of the 2008 Option had been exercised or forfeited.
On March 9, 2009, our board of directors voted
to grant options to purchase an aggregate of 10,000,000 ordinary shares to employees under the amended and restated 2007 Share
Incentive Plan (the “2009 Option”). The exercise price of these options is US$0.34 per ordinary share, equal to the
closing price of our ADS on the Nasdaq Global Select Market at the grant date (after adjusting for the 20 ordinary shares to 1
ADS ratio). These options are scheduled to vest over a four-year period starting from March 31, 2010, subject to the achievement
of certain key performance indicators by the option holders and their continued employment with us. As of March 31, 2018, all of
the 2009 Option had been exercised or forfeited..
On March 12, 2012, pursuant to the amended and
restated 2007 Share Incentive Plan, our board of directors approved the grant of options to certain directors, officers, key employees
and sales agents to purchase an aggregate of 93,445,000 ordinary shares at an exercise price of US$0.30 per ordinary share and
approved the grant of options to two independent directors who are residents of the United States in an aggregate of 3,200,000
ordinary shares at an exercise price of US$0.31 per ordinary share (the “2012 Options”). These options are scheduled
to vest over a five-year period starting from May 31, 2012, subject to the achievement of certain key performance indicators by
certain option holders and all option holders' continued employment with us.
In November 2014, the board and compensation
committee passed a resolution to modify the exercise price of the 2012 Options. Except for the 2012 Options granted to one of the
independent directors who is a US resident, the exercise price of the rest of the 2012 Options was reduced from US$0.30 per ordinary
share (for certain directors, officers, key employees and sales agents) and US$0.31 per ordinary share (for the other independent
director who is a US resident) to US$0.001 per ordinary share while the maximum aggregate award of 96,645,000 ordinary shares was
reduced to 46,722,500 ordinary shares. The options are subject to the same service period. As of December 31, 2014, except
for the options granted to one of the independent directors, outstanding options to purchase 91,327,722 ordinary shares were modified
into 45,663,861 shares options. There was no incremental cost as a result of such option modification. As of March 31, 2018, 2,800,000
ordinary shares underlying the 2012 Options are outstanding and exercisable.
The following paragraphs describe the principal
terms of our amended and restated 2007 Share Incentive Plan as currently in effect.
Types of Awards
. The types of awards we
may grant under our 2007 Share Incentive Plan include the following:
|
·
|
options to purchase our ordinary shares;
|
|
·
|
restricted shares, which represent non-transferable ordinary shares, that may be subject to forfeiture,
restrictions on transferability and other restrictions; and
|
|
·
|
restricted share units, which represent the right to receive our ordinary shares at a specified
date in the future, which may be subject to forfeiture.
|
Awards may be designated in the form of ADSs
instead of ordinary shares. If we designate an award in the form of ADSs, the number of shares issuable under the 2007 Share Incentive
Plan will be adjusted to reflect the ratio of ADSs to ordinary shares.
Eligibility
. We may grant awards to employees,
directors and consultants of our company or any of our related entities, which include our subsidiaries or any entities in which
we hold a substantial ownership interest. However, we may grant options that are intended to qualify as incentive share options,
or ISOs, only to our employees and employees of our majority-owned subsidiaries.
Plan Administration
. The compensation
committee of our board of directors, or a committee designated by the compensation committee, will administer the 2007 Share Incentive
Plan. However, awards made to our independent directors must be approved by the entire board of directors. The compensation committee
or the full board of directors, as appropriate, will determine the individuals who will receive grants, the types of awards to
be granted and terms and conditions of each award grant, including any vesting or forfeiture restrictions.
Award Agreement
. Awards granted under
our 2007 Share Incentive Plan will be evidenced by an award agreement that will set forth the terms, conditions and limitations
for each award. In addition, in the case of options, the award agreement may also specify whether the option constitutes an ISO
or a non-qualifying share option.
Acceleration of Awards upon Corporate Transactions
.
The outstanding awards will accelerate upon occurrence of a change-of-control corporate transaction where the successor entity
does not assume our outstanding awards under the 2007 Share Incentive Plan. In such event, each outstanding award will become fully
vested and immediately exercisable, and the transfer restrictions on the awards will be released and any forfeiture provisions
will terminate immediately before the date of the change-of-control transaction. If the successor entity assumes our outstanding
awards and later terminates the grantee’s service without cause within 12 months of the change-of-control transaction, the
outstanding awards will automatically become fully vested and exercisable.
Exercise Price and Term of Awards
. The
exercise price per share subject to an option will be determined by the plan administrator and set forth in the award agreement
which may be a fixed or variable price related to the fair market value of our ordinary shares;
provided
,
however
,
that no options may be granted to an individual subject to taxation in the United States at less than the fair market value on
the date of grant. To the extent not prohibited by applicable laws or any exchange rule, a downward adjustment of the exercise
prices of any outstanding options may be made in the absolute discretion of the plan administrator and will be effective without
the approval of our shareholders or the approval of the affected participants. If we grant an ISO to an employee who, at the time
of that grant, owns shares representing more than 10% of the voting power of all classes of our share capital, the exercise price
cannot be less than 110% of the fair market value of our ordinary shares on the date of that grant. The term of each award will
be stated in the award agreement. The term of an award shall not exceed 10 years from the date of the grant, except that five years
is maximum term of an ISO granted to an employee who holds more than 10% of the voting power of our share capital.
Amendment and Termination
. Our board of
directors may at any time amend, suspend or terminate the 2007 Share Incentive Plan. Amendments to the 2007 Share Incentive Plan
are subject to shareholder approval to the extent required by law, or stock exchange rules or regulations. Additionally, shareholder
approval will be specifically required to increase the number of shares available for issuance under the 2007 Share Incentive Plan
or to extend the term of an option beyond ten years. Unless terminated earlier, the 2007 Share Incentive Plan will expire and no
further awards may be granted after the tenth anniversary of the shareholder approval of the 2007 Share Incentive Plan.
As of March 31, 2018, options to purchase 2,800,000
ordinary shares were outstanding. The following table summarizes the outstanding options as of March 31, 2018, .
Name
(1)
|
|
Options Outstanding
|
|
Exercise Price
(Per Ordinary Share)(US$)
|
|
Grant Date
|
|
Expiration Date
|
Stephen Markscheid
|
|
|
800,000
|
|
|
|
0.001
|
|
|
March 12, 2012
|
|
March 12, 2022
|
Allen Warren Lueth
|
|
|
1,600,000
|
|
|
|
0.3135
|
|
|
March 12, 2012
|
|
March 12, 2022
|
Mengbo Yin
|
|
|
400,000
|
|
|
|
0.001
|
|
|
March 12, 2012
|
|
March 12, 2022
|
_____________________
(1)
Upon cash exercise of all of the share options beneficially owned by Mr. Chunlin Wang, Mr. Peng Ge and Mr. Yinan Hu in November,
2017, 4,050,000, 5,350,000 and 6,500,000 ordinary shares have been issued to Kingsford Resources, Green Ease and Sea Synergy which
were respectively 100% beneficially owned by Mr. Wang, Mr. Ge and Mr. Hu.
Board of Directors
Our board of directors consists of seven directors.
Under our currently effective amended and restated memorandum and articles of association, a director is not required to hold any
shares in our company by way of qualification. A director may vote with respect to any contract, proposed contract or arrangement
in which he is materially interested. The directors may exercise all the powers of our company to borrow money, mortgage its undertaking,
property and uncalled capital, and issue debentures or other securities whenever money is borrowed or as security for any obligation
of our company or of any third-party. The directors may receive such remuneration as our board of directors may determine from
time to time. There is no age limit requirement for directors.
In compliance with Rule 5605 of the Nasdaq Listing
Rules, a majority of our directors and all of the committee members of our board of directors are independent directors. During
2017, our board of directors met in person or passed resolutions by unanimous written consent 11 times. In addition, our independent
directors held executive sessions without the presence of non-independent directors or members of management twice during 2017.
We have no specific policy with respect to director attendance at our annual general meetings of shareholders.
Committees of the Board of Directors
We have established three committees under the
board of directors: the audit committee, the compensation committee and the corporate governance and nominating committee, and
have adopted a charter for each of the committees. Each committee’s members and functions are described below.
Audit Committee
.
Our audit committee
consists of Allen Lueth (chairman), Stephen Markscheid and Mengbo
Yin
, all of whom satisfy
the “independence” requirements of Rule 5605 of the Nasdaq Listing Rules and Rule 10A-3 under the Securities Exchange
Act of 1934. The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements
of our company. The audit committee is responsible for, among other things:
|
·
|
selecting the independent auditors and pre-approving all auditing and non-auditing services permitted
to be performed by the independent auditors;
|
|
·
|
reviewing with the independent auditors any audit problems or difficulties and management’s
response;
|
|
·
|
reviewing and approving all proposed related-party transactions;
|
|
·
|
discussing the annual audited financial statements with management and the independent auditors;
|
|
·
|
reviewing major issues as to the adequacy of our internal controls and any special audit steps
adopted in light of material control deficiencies;
|
|
·
|
annually reviewing and reassessing the adequacy of our audit committee charter;
|
|
·
|
meeting separately and periodically with management, the independent auditors and the internal
auditor; and
|
|
·
|
reporting regularly to the full board of directors.
|
In 2017, our audit committee held meetings or
passed resolutions by unanimous written consent 4 times.
Compensation Committee
.
Our compensation
committee consists of Stephen Markscheid (chairman),Allen Lueth and Yunxiang Tang, all of whom satisfy the “independence”
requirements of Rule 5605 of the Nasdaq Listing Rules. Our compensation committee assists the board of directors in reviewing and
approving the compensation structure of our directors and executive officers, including all forms of compensation to be provided
to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his
compensation is deliberated. The compensation committee is responsible for, among other things:
|
·
|
reviewing and recommending to the board with respect to the total compensation package for our
chief executive officer;
|
|
·
|
approving and overseeing the total compensation package for our executives other than the chief
executive officer;
|
|
·
|
reviewing and making recommendations to the board with respect to the compensation of our directors;
and
|
|
·
|
reviewing periodically and approving any long-term incentive compensation or equity plans, programs
or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
|
In 2017, our compensation committee held meetings
or passed resolutions by unanimous written consent twice.
Corporate Governance and Nominating Committee
.
Our corporate governance and nominating committee consists of Mengbo Yin(chairman), Allen Lueth and Stephen Markscheid, all
of whom satisfy the “independence” requirements of Rule 5605 of the Nasdaq Listing Rules. The corporate governance
and nominating committee assists our board of directors in identifying individuals qualified to become our directors and in determining
the composition of the board and its committees. The corporate governance and nominating committee is responsible for, among other
things:
|
·
|
identifying and recommending to the board nominees for election or re-election to the board, or
for appointment to fill any vacancy;
|
|
·
|
reviewing annually with the board the current composition of the board in light of the characteristics
of independence, skills, experience and availability of service to us;
|
|
·
|
identifying and recommending to the board the names of directors to serve as members of the audit
committee and the compensation committee, as well as the corporate governance and nominating committee itself;
|
|
·
|
advising the board periodically with respect to significant developments in the law and practice
of corporate governance, as well as our compliance with applicable laws and regulations, and making recommendations to the board
on all matters of corporate governance and on any corrective action to be taken; and
|
|
·
|
monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy
and effectiveness of our procedures to ensure proper compliance.
|
In 2017, our corporate governance and nominating
committee held meetings or passed resolutions by unanimous written consent twice.
Duties of Directors
Under Cayman Islands law, our directors have
a fiduciary duty to act honestly, in good faith and with a view to our best interests. Our directors also have a duty to exercise
the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances.
In fulfilling their duty of care to us, our directors must ensure compliance with our amended and restated memorandum and articles
of association as amended and restated from time to time. In certain limited circumstances, it may be possible for our shareholders
to bring a derivative action on behalf of our company if a duty owed by our directors to our company is breached.
Terms of Directors and Executive Officers
All directors hold office until their successors
have been duly elected and qualified. Outside of certain specified circumstances, including resigning, becoming bankrupt or being
of unsound mind or being absent from board meetings without special leave of absence for six consecutive months, a director may
only be removed by a special resolution of the shareholders. Officers are elected by and serve at the discretion of the board of
directors. We do not have contracts in place with any of our directors providing for benefits upon termination of employment. For
the period during which the directors and executives have served in the office, please see “Item 6. Directors, Senior Management
and Employees — A. Directors and Senior Management.”
Employees, Sales Agents and Training
We had 4,157, 4,579 and 3,344 employees as of
December 31, 2015, 2016 and 2017, respectively. We consider our relations with our employees to be good. The following table sets
forth the number of our employees by function as of December 31, 2017:
|
|
Number of Employees
|
|
% of Total
|
Management and administrative staff
|
|
|
2,009
|
|
|
|
57.3
|
|
Financial and accounting staff
|
|
|
164
|
|
|
|
4.7
|
|
Professional claims adjustors
|
|
|
1,226
|
|
|
|
35.0
|
|
Information technology staff
|
|
|
105
|
|
|
|
3.0
|
|
Total
|
|
|
3,504
|
|
|
|
100.0
|
|
As of December 31, 2015, 2016 and 2017, we had
116,164, 231,592 and 506,231 sales representatives, respectively. 99.9% of these sales representatives are independent sales agents
who are not our employees and are only compensated by commissions. We have contractual relationships with these sales agents. For
the sale of each property and casualty insurance policy or life insurance policy with a single premium payment schedule, we pay
the sales agent who has generated the sale a single commission based on a percentage of the commission and fee we receive from
the insurance company for the sale of that policy. For the sale of each life insurance policy with a periodic premium payment schedule,
we pay the sales agent who has generated the sale periodic commissions based on a percentage of the commissions and fees we receive
from the insurance company for the sale and renewal of that policy, up to the first five years of the premium payment period, and
retain all commissions and fees we continue to receive from insurance companies for the rest of the premium payment period.
Our life insurance sales agents are typically
organized into sales teams with a multilevel hierarchy, typically with five layers. A life insurance sales agent not only receives
a commission for the insurance policies that he or she sells, but also a smaller commission for insurance policies sold by agents
under his or her management.
Our sales agents, in-house sales representatives
and claims adjustors are our most valuable asset and are instrumental in helping us build and maintain long-term relationships
with our customers. Therefore, we place a strong emphasis on training our sales force. We provide trainings to both new sales agents
and existing sales agents, on a monthly or quarterly basis, with a different emphasis. For newly sales agents, we offer orientation
courses that are designed to familiarize them with corporate culture, insurance products, and sales skills. For the existing sales
agents, we offer on-the-job training courses that aim to enhance their sales skills and knowledge of different insurance products.
The following table sets forth information with
respect to the beneficial ownership of our shares, as of March 31, 2018, by:
|
·
|
each of our current directors and executive officers; and
|
|
·
|
each person known to us to own beneficially more than 5% of our shares.
|
As of March 31, 2018, there were 1,300,191,084
ordinary shares outstanding. Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing
the number of shares beneficially owned by a person and the percentage ownership of that person, we include shares that the person
has the right to acquire within 60 days, including through the exercise of any option, warrant or other right or the conversion
of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person.
|
|
Ordinary Shares Beneficially Owned
(1) (2)
|
|
|
Number
|
|
%
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
Chunlin Wang
(3)
|
|
|
23,252,100
|
|
|
|
1.8
|
%
|
Peng Ge
(4)
|
|
|
44,562,260
|
|
|
|
3.4
|
%
|
Yinan Hu
(5)
|
|
|
199,739,310
|
|
|
|
15.4
|
%
|
Stephen Markscheid
|
|
|
*
|
|
|
|
*
|
|
Allen Warren Lueth
|
|
|
*
|
|
|
|
*
|
|
Mengbo Yin
|
|
|
*
|
|
|
|
*
|
|
All Directors and Executive Officers as a Group
(6)
|
|
|
271,053,670
|
|
|
|
20.8
|
%
|
|
|
|
|
|
|
|
|
|
Principal Shareholders:
|
|
|
|
|
|
|
|
|
Sea Synergy Limited
(7)
|
|
|
189,689,110
|
|
|
|
14.6
|
%
|
Qiuping Lai
(8)
|
|
|
206,361,240
|
|
|
|
15.9
|
%
|
Master Trend Limited
(8)
|
|
|
200,961,240
|
|
|
|
15.5
|
%
|
Fosun International Limited
(9)
|
|
|
79,860,720
|
|
|
|
6.1
|
%
|
______________________
|
*
|
Less than
0.5% of our total outstanding ordinary shares.
|
|
†
|
Except
for our independent directors, the business address of our directors and executive officers
is c/o 27/F, Pearl River Tower, No. 15 West Zhujiang Road, Guangzhou, Guangdong 510623,
People’s Republic of China.
|
|
(1)
|
The
number of shares beneficially owned by each director and executive officer includes the
shares beneficially owned by such person, the shares underlying all options held by such
person that have vested.
|
|
(2)
|
Percentage
of beneficial ownership of each director and executive officer is based on 1,300,191,084
ordinary shares outstanding as of March 31, 2018, and the number of ordinary shares underlying
options held by such person that have vested.
|
|
(3)
|
Includes
23,252,100 ordinary shares held by Kingsford Resources Limited, or Kingsford Resources,
which is 100% held by Better Rise Investments. Mr. Wang previously owned 100% of the
equity interests in Better Rise following a series of internal transfers between September
2014 and January 2017 as reported on Schedule 13D/A jointly filed by Kingsford Resources,
Green Ease Investments Limited, or Green Ease, Mr. Wang and Mr. Ge on January 18, 2018.
In March 2018, Mr. Wang donated all of the shares of Better Rise held by him to a family
trust, of which he is the settlor and co-beneficiary. Pursuant to Section 13(d) of the
Exchange Act and the rules promulgated thereunder, Better Rise Investments and Mr. Wang
may be deemed to beneficially own all of the Ordinary Shares of the Issuer held by Kingsford
Resources.
|
|
(4)
|
Includes
44,562,260 ordinary share held by Green Ease, which is 100% held by High Rank Investments
Limited, or High Rank. High Rank was previously 100% owned by Mr. Ge. In March 2018,
Mr. Ge donated all of the shares of High Rank held by him to a family trust, of which
he is the settlor and co-beneficiary. Pursuant to Section 13(d) of the Exchange Act and
the rules promulgated thereunder, High Rank Investments and Mr. Ge may be deemed to beneficially
own all of the Ordinary Shares of the Issuer held by Green Ease.
|
|
(5)
|
Includes
(i) 10,041,200 ordinary shares in the form of ADSs of our company acquired by Mr. Hu
on the open market, and (ii) 189,698,110 ordinary shares of our company directly held
by Sea Synergy Limited, or Sea Synergy. Mr. Hu and his wife previously held approximately
98.6% and 1.4%, respectively, of the total outstanding shares of Sea Synergy. In 2017,
Mrs. Hu transferred the shares of Sea Synergy held by her to Mr. Hu and in March 2018,
Mr. Hu donated all of the shares of Sea Synergy held by him to a family trust, of which
he is the settlor and co-beneficiary. Pursuant to Section 13(d) of the Exchange Act and
the rules promulgated thereunder, Mr. Hu may be deemed to beneficially own all of the
Ordinary Shares of the Issuer held by Green Ease.
|
|
(6)
|
Includes
ordinary shares beneficially owned by all of our directors and executive officers as
a group and ordinary shares underlying all options held by such persons that have vested
or will vest within 60 days after March 31, 2018.
|
|
(7)
|
Includes
189,698,110 ordinary shares of our company directly held by Sea Synergy. In September
2014, Mr. Hu transferred 6,500,000 ordinary shares underlying all the options held by
him to Sea Synergy, which were subsequently converted into ordinary shares upon cash
exercise in November 2017. The registered address of Sea Synergy is P.O. Box 957,
Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.
|
|
(8)
|
Includes
149,052,860 ordinary shares and 51,908,380 ordinary shares in the form of ADSs held by
Master Trend Limited and 5,400,000 Ordinary Shares issued upon cash exercise of options
held by Crown Charm Limited. Mr. Lai beneficially holds 100% of the total outstanding
shares of Master Trend and Crown Charm Limited. The registered address of Master Trend
is 4F, 5F and 1602 Central Tower, No. 28 Queen's Road, Central, Hong Kong.
|
|
(9)
|
As reported
on Schedule 13G filed by Fosun International Limited, or Fosun International, on February
9, 2018, the number includes 693,036 ordinary shares in the form of ADS acquired in the
open market and 66,000,000 ordinary shares subscribed by Fosun Industrial Holdings Limited,
or Fosun Industrial, a wholly-owned subsidiary of Fosun International in a private placement
in April 2017. The percentage of beneficial ownership was calculated based on the total
number of ordinary shares outstanding as of March 31, 2018. The address of the principal
business office of both Fosun International and Fosun Industrial is Room 808, ICBC Tower,
3 Garden Road, Central, Hong Kong.
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None of our existing shareholders have different
voting rights from other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of
control of our company. As of March 31, 2018, J.P. Morgan Chase Bank, N.A., or J.P. Morgan, the depositary for our ADS program,
is our only record holder in the United States, holding approximately 48.9% of our total outstanding ordinary shares. The number
of beneficial owners of our ADSs in the United States is likely much larger than the number of record holders of our ordinary shares
in the United States.
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Item 7.
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Major Shareholders and Related Party Transactions
|
Please refer to “Item 6. Directors, Senior
Management and Employees
¾
E. Share Ownership.”
|
B.
|
Related Party Transactions
|
Amounts Due from an Affiliate and its Subsidiaries
We agreed to grant a revolving loan with a maximum
amount of US$50.0 million (equivalent to RMB318.0 million as per the agreement) to Sincere Fame, and its subsidiaries, pursuant
to a facility letter, or the Facility entered in October 2011. The facility is valid for two years and was renewed for another
two years in October 2013 and October 2015. On January 1, 2012, we and Sincere Fame further entered into a supplemental loan agreement,
which established the legal rights to offset the interests and amounts receivable and payable between us and Sincere Fame, and
all subsidiaries of us and Sincere Fame. These amounts are unsecured, bear interest at 7.3% and are repayable on demand. As of
December 31, 2016 and 2017, the amount due from Sincere Fame and its subsidiaries represented nil in principal receivable, and
RMB32.5 million and nil interest receivable, respectively. The interest receivable is non-interest bearing.
Shares Sold to Employee Companies and Subscription Receivables
from Employee Companies
In November 2014, we entered into share purchase
agreements with companies established on behalf of our employees, or the Employee Companies, for the issuance of up to 100,000,000
ordinary shares of our company. In December 2014, we increased the new shares issued to the employees to 150,000,000 ordinary shares,
representing approximately 13.0% of our then enlarged total share capital upon completion of the transaction. The purchase price
for the 100,000,000 ordinary shares is US$0.27 per ordinary share or US$5.40 per ADS, while the purchase price for the additional
50,000,000 ordinary shares is US$0.29 per ordinary share or US$5.80 per ADS, both of which are the average closing prices for the
20 trading days prior to the board approvals. The shares purchased by the Employee Companies were subject to a 180 days lock-up.
The sale of shares to the Employee Companies was completed on December 17, 2014. As of March 31, 2018, there was 150,000,000 ordinary
shares outstanding held by the Employee Companies.
In order to facilitate the purchase of shares
by our employees as described above, we have granted a loan to Employee Companies. The loans bear interest at a rate of 3.0% per
annum and is repayable upon the sale of the shares by employees, termination of employment or within two years, whichever comes
first. The interest rate is determined with reference to fair market prices and therefore no interest-related compensation expense
is recorded. The repayment of the loan was further extended to June 2018. During the year 2017, the Company received repayment
amounting to RMB 22.2 million (US$ 3.4 million).
Revenues and Other Incomes from Affiliates
The Company charged affiliates interest income
of nil and RMB 8,714 for loans receivable for the years ended December 31, 2016 and 2017, respectively.
Employment Agreements
See “Item 6. Directors, Senior Management
and Employees — A. Directors and Senior Management — Employment Agreements” for a description of the employment
agreements we have entered into with our senior executive officers.
Share Options
Please refer to “Item 6. Directors, Senior
Management and Employees — B. Compensation.”
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C.
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Interests of Experts and Counsel
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Not applicable.
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Item 8.
|
Financial
Information
|
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A.
|
Consolidated Statements and Other Financial Information
|
See “Item 18. Financial Statements.”
Legal Proceedings
We are currently not a party to any material
litigation or other legal proceeding that may have a material adverse impact on our business or operations. However, we are and
may continue to be subject to various claims and legal actions arising in the ordinary course of business.
Dividend Policy
Our board of directors has discretion as to whether
to distribute dividends, subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends
out of profits or share premium account, and provided always that in no circumstances may a dividend be paid if this would result
in our company being unable to pay its debts due in the ordinary course of business. In addition, our shareholders may by ordinary
resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. The timing, amount and form
of dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements
and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions
and other factors deemed relevant by our board of directors.
On February 28, 2017, our board of directors
approved a cash dividend policy, which provided for an annual cash dividend to shareholders of no less than 30% of our net
income attributable to shareholders in the previous fiscal year. On April 20, 2017, our board of directors declared an annual
cash dividend of US$0.006 per ordinary share, or US$0.12 per ADS, payable on or around May 18, 2017 to shareholders of record on
May 8, 2017.
On September 18, 2017, our board of directors
modified the dividend policy to adopt a quarterly payment schedule in lieu of an annual dividend, with the dividend payout ratio
of no less than 50% of net income attributable to the Company's shareholders instead of no less than 30% under the annual dividend
policy previously announced on April 20, 2017. On November 20, 2017, our board of directors declared a quarterly dividend
of US$0.01 per ordinary share, or US$0.20 per ADS payable on or around December 22, 2017 to shareholders
of record on December 8, 2017. On March 9, 2018, our board of directors declared a quarterly dividend of US$0.01 per
ordinary share, or US$0.20 per ADS payable on or around April 10, 2018 to shareholders of record on March 26, 2018.
If we pay any dividends, we will pay our ADS
holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees
and expenses payable thereunder. Any dividend we declare will be distributed by the depositary bank to the holders of our ADSs.
Cash dividends on our ordinary shares, will be paid in U.S. dollars. Currently, we have no plan to repatriate the remaining undistributed
earnings from our subsidiaries in China and we intend to retain all of our available funds held by subsidiaries in China and their
future earnings to operate and expand our business.
We are a holding company incorporated in the
Cayman Islands. We rely on dividends from our subsidiaries in China or share premium to fund our payment of dividends, if any,
to our shareholders. Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits,
if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our subsidiaries in China
is required to set aside a certain amount of its accumulated after-tax profits each year, if any, to fund certain statutory reserves.
These reserves may not be distributed as cash dividends. Further, if our subsidiaries in China incur debt on their own behalf,
the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Furthermore, there
are still uncertainties under the new PRC EIT law and the related regulations regarding whether the dividends we receive from our
PRC subsidiaries or dividends paid to our shareholders will be subject to PRC withholding tax. See “Item 3. Key Information
— D. Risk Factors — Risks Related to Doing Business in China — Our global income or the dividends we receive
from our PRC subsidiaries may be subject to PRC tax under the EIT Law, which could have a material adverse effect on our results
of operations.” and “Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China
— Under the EIT Law, dividends payable by us and gains on the disposition of our shares or ADSs could be subject to PRC taxation.”
We have not experienced any significant changes
since the date of our audited consolidated financial statements included in this annual report.
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Item 9.
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The Offer and Listing
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A.
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Offer and Listing Details
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The following table provides the high and low
trading prices for our ADSs on the Nasdaq Global Select Market for the periods indicated.
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Sales Price
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High
|
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Low
|
|
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US$
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|
US$
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Annual High and Low
|
|
|
|
|
|
|
|
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2013
|
|
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7.00
|
|
|
|
4.75
|
|
2014
|
|
|
9.44
|
|
|
|
4.90
|
|
2015
|
|
|
12.49
|
|
|
|
5.56
|
|
2016
|
|
|
10.35
|
|
|
|
6.19
|
|
2017
|
|
|
24.98
|
|
|
|
6.19
|
|
|
|
|
|
|
|
|
|
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Quarterly Highs and Lows
|
|
|
|
|
|
|
|
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First Quarter of 2016
|
|
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9.38
|
|
|
|
6.47
|
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Second Quarter of 2016
|
|
|
8.48
|
|
|
|
6.19
|
|
Third Quarter of 2016
|
|
|
9.58
|
|
|
|
7.06
|
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Fourth Quarter of 2016
|
|
|
10.35
|
|
|
|
7.71
|
|
First Quarter of 2017
|
|
|
9.61
|
|
|
|
6.79
|
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Second Quarter of 2017
|
|
|
9.26
|
|
|
|
7.31
|
|
Third Quarter of 2017
|
|
|
13.7
|
|
|
|
8.21
|
|
Fourth Quarter of 2017
|
|
|
24.98
|
|
|
|
12.17
|
|
First Quarter of 2018
|
|
|
33.81
|
|
|
|
21.55
|
|
Monthly Highs and Lows
|
|
|
|
|
|
|
|
|
October 2017
|
|
|
15.97
|
|
|
|
12.17
|
|
November 2017
|
|
|
23.94
|
|
|
|
14.25
|
|
December 2017
|
|
|
24.98
|
|
|
|
20.2
|
|
January 2018
|
|
|
31.85
|
|
|
|
22.83
|
|
February 2018
|
|
|
33.7
|
|
|
|
24.42
|
|
March 2018
|
|
|
33.81
|
|
|
|
25.18
|
|
April 2018 (through April 19, 2018)
|
|
|
27.88
|
|
|
|
25.32
|
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Not applicable.
Our ADSs, each representing 20 ordinary shares,
is listed on the Nasdaq Global Select Market under the symbol “FANH.” From October 31, 2007 until December 6, 2016,
our ticker symbol was “CISG.” From October 31, 2007 until January 1, 2009, our ADSs were listed on the Nasdaq Global
Market.
Not applicable.
Not applicable.
Not applicable.
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Item 10.
|
Additional
Information
|
Not applicable.
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B.
|
Memorandum and Articles of Association
|
The following are summaries of material provisions
of our amended and restated memorandum and articles of association, as adopted by our shareholders by special resolution at the
extraordinary general meeting held on December 6, 2016, as well as the Cayman Companies Law insofar as they relate to the material
terms of our ordinary shares.
Registered Office and Objects
The registered office of our company is at the
offices of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands, or at such other
place within the Cayman Islands as our board of directors may decide. The objects for which our company is established are unrestricted
and we have full power and authority to carry out any object not prohibited by the Cayman Companies Law or as the same may be revised
from time to time, or any other law of the Cayman Islands.
Board of Directors
See “Item 6. Directors, Senior Management
and Employees — C. Board Practices — Board of Directors.”
Ordinary Shares
General
. Our authorized share
capital consists of 10,000,000,000 ordinary shares, with a par value of US$0.001 each. All of our outstanding ordinary shares are
fully paid and non-assessable. Certificates representing the ordinary shares are issued in registered form. Our shareholders who
are nonresidents of the Cayman Islands may freely hold and vote their shares.
Dividend Rights
. The holders
of our ordinary shares are entitled to such dividends as may be declared by our board of directors subject to the Companies Law.
Voting Rights
. On a show of hands,
each shareholder present in person or by proxy (or, for a corporation or other non-natural person, present by its duly authorized
representative or proxy) at general meeting shall have one vote and on a poll, shall have one vote for each share registered in
his name in the register of members of our company. Voting at any meeting of shareholders is by show of hands unless a poll is
demanded. A poll may be demanded by the chairman of the meeting or by any one or more shareholders together holding at least ten
percent of our paid up voting share capital, present in person or by proxy.
A quorum required for a meeting of shareholders
consists of shareholders holding in aggregate not less than one-third of our issued voting share capital present in person or by
proxy or, if a corporation or other non-natural person, by its duly authorized representative. We may, but are not obliged, to
hold an annual general meeting of shareholders. General meetings may be convened by our board of directors on its own initiative
or upon a request to the directors by shareholders holding in aggregate not less than one-third of our voting share capital. Advance
notice of at least 14 days is required for the convening of our annual general meeting and other shareholders meetings.
An ordinary resolution to be passed by the shareholders
requires the affirmative vote of a simple majority of the votes attaching to the ordinary shares cast in a general meeting, while
a special resolution requires the affirmative vote of no less than two-thirds of the votes attaching to the ordinary shares cast
in a general meeting. A special resolution is required for important matters such as a change of name. Holders of the ordinary
shares may effect certain changes by ordinary resolution, including consolidating and dividing all or any of our share capital
into shares of larger amount than our existing shares, and canceling any shares which have not been taken or agreed to be taken.
Transfer of Shares
. Subject to
the restrictions of our articles of association, as applicable, any of our shareholders may transfer all or any of his or her ordinary
shares by an instrument of transfer in the usual or common form or any other form approved by our board.
Liquidation
. On a return of capital
on winding up or otherwise (other than on conversion, redemption or purchase of shares), assets available for distribution among
the holders of ordinary shares may be distributed among the holders of the ordinary shares as determined by the liquidator, subject
to sanction of an ordinary resolution of our company.
Calls on Shares and Forfeiture of Shares
.
Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their shares in a notice served
to such shareholders at least 14 days prior to the specified time of payment. The shares that have been called upon and remain
unpaid on the specified time are subject to forfeiture.
Redemption, Repurchase and Surrender
of Shares
. Subject to the provisions of the Companies Law and our articles of association, we may issue shares on terms
that they are subject to redemption, at our option or at the option of the holders, on such terms and in such manner as our board
of directors may determine before the issue of such shares. We also may purchase our own shares, provided that our shareholders
have approved the manner of purchase by ordinary resolution or the manner of purchase is in accordance with that specified in our
articles of association. The manner of purchase specified in our articles of association, which cover purchases of shares listed
on an internationally recognized stock exchange and shares not so listed, is in accordance with Section 37(2) of the Companies
Law or any modification or reenactment thereof for the time being in force. In addition, our company may accept the surrender of
any fully paid share for no consideration. Pursuant to the Cayman Companies Law, upon the repurchase, redemption or surrender of
shares, the board of directors can determine whether or not to cancel those shares or hold them as treasury shares pending cancellation,
transfer or sale. The company must obtain authorization to hold such shares as treasury shares either in accordance with the procedures
set out in the company’s articles of association or (if there are none) by a board resolution before being repurchased, redeemed
or surrendered in accordance with the usual rules and articles.
Variations of Rights of Shares
.
All or any of the special rights attached to any class of shares may, subject to the provisions of the Companies Law, be varied
either with the written consent of the holders of a majority of the issued shares of that class or with the sanction of a special
resolution passed at a general meeting of the holders of the shares of that class.
Inspection of Books and Records
.
Holders of our ordinary shares have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders
or our corporate records. However, we make our annual reports, which contain our audited financial statements, available to our
shareholders. See “Item 10. Additional Information — H. Documents on Display.”
We have not entered into any material contracts
other than in the ordinary course of business and other than those described in “Item 4. Information on the Company”
or elsewhere in this annual report.
See “Item 4. Information on the Company
— B. Business Overview — Regulation — Regulations on Foreign Exchange.”
The following summary of the material Cayman
Islands, PRC and United States federal income tax consequences of an investment in our ADSs or ordinary shares is based upon laws
and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This summary
does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary shares, such as the tax consequences
under state, local and other tax laws.
Cayman Islands Taxation
According to Maples and Calder (Hong Kong) LLP,
our Cayman Islands counsel, the Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income,
gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. No Cayman Islands stamp duty will
be payable unless an instrument is executed in, or after execution brought within the jurisdiction of the Cayman Islands, or produced
before a court of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payment
made to or by our Company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
PRC Taxation
Under the former PRC Income Tax Law for Enterprises
with Foreign Investment and Foreign Enterprises, any dividends payable by foreign-invested enterprises to non-PRC investors were
exempt from any PRC withholding tax. In addition, any interest or dividends payable, or distributions made, by us to holders or
beneficial owners of our ADSs or ordinary shares would not have been subject to any PRC tax, provided that such holders or beneficial
owners, including individuals and enterprises, were not deemed to be PRC residents under the PRC tax law and had not become subject
to PRC tax.
Under the EIT Law, which took effect as of January 1,
2008, enterprises established under the laws of non-PRC jurisdictions but whose “de facto management body” is located
in China are considered “resident enterprises” for PRC tax purposes. Under the implementation regulations issued by
the State Council relating to the new law, “de facto management bodies” are defined as the bodies that have material
and overall management control over the business, personnel, accounts and properties of an enterprise. On April 22, 2009, SAT,
issued SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body”
of a PRC-controlled enterprise that is incorporated offshore is located in China. In addition, the SAT issued a bulletin on July
27, 2011 providing more guidance on the implementation of Circular 82 and clarifies matters such as resident status determination.
Substantially all of our management are currently based in China, and may remain in China in the future. If we were treated as
a “resident enterprise” for PRC tax purposes, we would be subject to PRC income tax on our worldwide income at a uniform
tax rate of 25%, but dividends received by us from our PRC subsidiaries may be exempt from the income tax.
Under the new law and its implementation regulations,
dividends paid to a non-PRC investor are generally subject to a 10% PRC withholding tax, if such dividends are derived from sources
within China and the non-PRC investor is considered to be a non-resident enterprise without any establishment or place of business
within China or if the dividends paid have no connection with the non-PRC investor’s establishment or place of business within
China, unless such tax is eliminated or reduced under an applicable tax treaty. Similarly, any gain realized on the transfer of
ADSs or shares by such investor is also subject to a 10% PRC withholding tax if such gain is regarded as income derived from sources
within China, unless such tax is eliminated or reduced under an applicable tax treaty.
If we were considered a PRC “resident enterprise,”
it is possible that the dividends we pay with respect to our ADSs or ordinary shares, or the gain you may realize from the transfer
of our ADSs or ordinary shares, would be treated as income derived from sources within China and be subject to the 10% PRC withholding
tax.
United States Federal Income Taxation
The following discussion describes the material
United States federal income tax consequences to a United States Holder (as defined below), under current law, of an investment
in our ADSs or ordinary shares. This discussion is based on the federal income tax laws of the United States as of the date of
this annual report, including the United States Internal Revenue Code of 1986, as amended (the “Code”), existing and
proposed Treasury regulations promulgated thereunder, judicial authority, published administrative positions of the United States
Internal Revenue Service (“IRS”) and other applicable authorities, all as of the date of this annual report. All of
the foregoing authorities are subject to change, which change could apply retroactively and could significantly affect the tax
consequences described below. We have not sought any ruling from the IRS with respect to the statements made and the conclusions
reached in the following discussion and there can be no assurance that the IRS or a court will agree with our statements and conclusions.
This summary does not discuss the so-called Medicare tax on net investment income, any United States federal non-income tax laws,
including the United States federal estate and gift tax laws, or the laws of any state, local or non-United States jurisdiction.
This discussion applies only to a United States
Holder (as defined below) that holds ADSs or ordinary shares as capital assets for United States federal income tax purposes (generally,
property held for investment). The discussion neither addresses the tax consequences to any particular investor nor describes all
of the tax consequences applicable to persons in special tax situations, such as:
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·
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banks and certain financial institutions;
|
|
·
|
regulated investment companies;
|
|
·
|
real estate investment trusts;
|
|
·
|
brokers or dealers in stocks and securities, or currencies;
|
|
·
|
persons who use or are required to use a mark-to-market method of accounting;
|
|
·
|
certain former citizens or residents of the United States subject to Section 877 of the Code;
|
|
·
|
entities subject to the United States anti-inversion rules;
|
|
·
|
tax-exempt organizations and entities;
|
|
·
|
persons subject to the alternative minimum tax provisions of the Code;
|
|
·
|
persons whose functional currency is other than the United States dollar;
|
|
·
|
persons holding ADSs or ordinary shares as part of a straddle, hedging, conversion or integrated
transaction;
|
|
·
|
persons holding ADSs or ordinary shares through a bank, financial institution or other entity,
or a branch thereof, located, organized or resident outside the United States;
|
|
·
|
persons that actually or constructively own ADSs or ordinary shares representing 10% or more of
our voting power or value;
|
|
·
|
persons who acquired ADSs or ordinary shares pursuant to the exercise of an employee stock option
or otherwise as compensation;
|
|
·
|
partnerships or other pass-through entities, or persons holding ADSs or ordinary shares through
such entities;
|
|
·
|
persons required to accelerate the recognition of any item of gross income with respect to our
ADSs or ordinary shares as a result of such income being recognized on an applicable financial statement; or
|
|
·
|
persons that hold, directly, indirectly or by attribution, ADSs, ordinary shares or other ownership
interests in us prior to our initial public offering.
|
If a partnership (including an entity or arrangement
treated as a partnership for United States federal income tax purposes) holds our ADSs or ordinary shares, the tax treatment of
a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. A partnership
or a partner in a partnership holding our ADSs or ordinary shares should consult its own tax advisors regarding the tax consequences
of investing and holding our ADSs or ordinary shares.
The following discussion is for informational purposes only and
is not a substitute for careful tax planning and advice. Investors should consult their own tax advisors with respect to the application
of the United States federal income tax laws to their particular situations, as well as any tax consequences arising under the
federal estate or gift tax laws or the laws of any state, local or non-United States taxing jurisdiction and under any applicable
tax treaty.
For purposes of the discussion below, a “United
States Holder” is a beneficial owner of our ADSs or ordinary shares that is, for United States federal income tax purposes:
|
·
|
an individual who is a citizen or resident of the United States;
|
|
·
|
a corporation (or other entity treated as a corporation for United States federal income tax purposes)
created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
|
|
·
|
an estate, the income of which is subject to United States federal income taxation regardless of
its source; or
|
|
·
|
a trust, if (i) a court within the United States is able to exercise primary jurisdiction over
its administration and one or more United States persons have the authority to control all of its substantial decisions or (ii)
in the case of a trust that was treated as a domestic trust under the law in effect before 1997, a valid election is in place under
applicable Treasury regulations to treat such trust as a domestic trust.
|
The discussion below assumes that the representations
contained in the deposit agreement and any related agreement are true and that the obligations in such agreements will be complied
with in accordance with their terms.
ADSs
If you own our ADSs, then you should be treated
as the owner of the underlying ordinary shares represented by those ADSs for United States federal income tax purposes. Accordingly,
deposits or withdrawals of ordinary shares for ADSs should not be subject to United States federal income tax.
The United States Treasury Department and the
IRS have expressed concerns that United States holders of American depositary shares may be claiming foreign tax credits in situations
where an intermediary in the chain of ownership between the holder of an American depositary share and the issuer of the security
underlying the American depositary share has taken actions that are inconsistent with the ownership of the underlying security
by the person claiming the credit. Such actions (for example, a pre-release of an American depositary share by a depositary) also
may be inconsistent with the claiming of the reduced rate of tax applicable to certain dividends received by non-corporate United
States holders of American depositary shares, including individual United States holders. Accordingly, the availability of foreign
tax credits or the reduced tax rate for dividends received by non-corporate United States Holders, each discussed below, could
be affected by actions taken by intermediaries in the chain of ownership between the holder of an ADS and our company.
Passive Foreign Investment Company
Based on the market price of our ADSs, the value
of our assets and the composition of our income and assets, we believe we were a passive foreign investment company (“PFIC”)
for United States federal income tax purposes for our taxable year ending December 31, 2017. A non-United States corporation such
as ourselves will be treated as a PFIC for United States federal income tax purposes for any taxable year if, applying applicable
look-through rules, either:
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·
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at least 75% of its gross income for such year is passive income; or
|
|
·
|
at least 50% of the value of its assets (determined based on a quarterly average) during such year
is attributable to assets that produce or are held for the production of passive income.
|
For this purpose, passive income generally includes
dividends, interest, royalties and rents (other than certain royalties and rents derived in the active conduct of a trade or business
and not derived from a related person). We will be treated as owning a proportionate share of the assets and earning a proportionate
share of the income of any other corporation in which we own, directly or indirectly, more than 25% by value of the stock. Although
the law in this regard is unclear, we treat our VIEs as being owned by us for United States federal income tax purposes, not only
because we exercise effective control over the operation of such entities but also because we are entitled to substantially all
of their economic benefits, and, as a result, we consolidate their results of operations in our consolidated United States GAAP
financial statements.
The composition of our income and assets will
be affected by the market price of our ADSs and how, and how quickly, we spend our liquid assets and the cash we generate from
our operations and raise in any offering. Unless the market price of our ADSs increases or we reduce the amount of cash, short
term investments and other passive assets we hold sufficiently from current levels, we believe that we are likely to remain a PFIC
for future taxable years. However, PFIC status is based on an annual determination that cannot be made until the close of a taxable
year, involves extensive factual investigation, including ascertaining the fair market value of all of our assets on a quarterly
basis and the character of each item of income that we earn, and is subject to uncertainty in several respects. Accordingly, we
cannot assure you that the IRS will not take a contrary position.
If we are a PFIC for any taxable year during
which you hold ADSs or ordinary shares (as we believe we were for 2017 and prior years), we will continue to be treated as a PFIC
with respect to you for all succeeding years during which you hold ADSs or ordinary shares, unless we were to cease to be a PFIC
and you make a “deemed sale” election with respect to the ADSs or ordinary shares, as applicable. If such election
is made, you will be deemed to have sold the ADSs or ordinary shares you hold at their fair market value and any gain from such
deemed sale would be subject to the rules described in the following two paragraphs. After the deemed sale election, so long as
we do not become a PFIC in a subsequent taxable year, your ADSs or ordinary shares with respect to which such election was made
will not be treated as shares in a PFIC and, as a result, you will not be subject to the rules described below with respect to
any “excess distribution” you receive from us or any gain from an actual sale or other disposition of the ADSs or ordinary
shares.
You are strongly urged to consult your tax advisors as to the possibility and consequences of making a deemed sale election
if we are and then cease to be a PFIC and such an election becomes available to you.
If we are a PFIC for any taxable year during
which you hold ADSs or ordinary shares (as we believe we were for 2017 and prior years), then, unless you make a “mark-to-market”
election (as discussed below), you generally will be subject to special and adverse tax rules with respect to any “excess
distribution” that you receive from us and any gain that you recognize from a sale or other disposition, including a pledge,
of the ADSs or ordinary shares. For this purpose, distributions that you receive in a taxable year that are greater than 125% of
the average annual distributions that you received during the shorter of the three preceding taxable years or your holding period
for the ADSs or ordinary shares will be treated as an excess distribution. Under these rules:
|
·
|
the excess distribution or recognized gain will be allocated ratably over your holding period for
the ADSs or ordinary shares;
|
the amount of the excess distribution
or recognized gain allocated to the taxable year of distribution or gain, and to any taxable years in your holding period prior
to the first taxable year in which we were treated as a PFIC, will be treated as ordinary income; and
|
·
|
the amount of the excess distribution or recognized gain allocated to each other taxable year will
be subject to the highest tax rate in effect for individuals or corporations, as applicable, for each such year and the resulting
tax will be subject to the interest charge generally applicable to underpayments of tax.
|
If we are a PFIC for any taxable year during
which a United States Holder holds our ADSs or ordinary shares (as we believe we were for 2017 and prior years) and any of our
non-United States subsidiaries or other corporate entities in which we own equity interests is also a PFIC, such United States
Holder would be treated as owning a proportionate amount (by value) of the shares of each such non-United States entity classified
as a PFIC (each such entity, a lower tier PFIC) for purposes of the application of these rules. United States Holders should consult
their tax advisors regarding the application of the PFIC rules to any of our lower tier PFICs.
If we are a PFIC for any taxable year during
which you hold ADSs or ordinary shares (as we believe we were for 2017 and prior years), then in lieu of being subject to the tax
and interest-charge rules discussed above, you may make an election to include gain on our ADSs or ordinary shares as ordinary
income under a mark-to-market method, provided that our ADSs or ordinary shares constitute “marketable stock” (as defined
below). If you make a mark-to-market election for our ADSs or ordinary shares, you will include in gross income for each year that
we are a PFIC an amount equal to the excess, if any, of the fair market value of the ADSs or ordinary shares you hold as of the
close of your taxable year over your adjusted basis in such ADSs or ordinary shares. You will be allowed a deduction for the excess,
if any, of the adjusted basis of the ADSs or ordinary shares over their fair market value as of the close of the taxable year.
However, deductions will be allowable only to the extent of any net mark-to-market gains on the ADSs or ordinary shares included
in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as any gain from
the actual sale or other disposition of the ADSs or ordinary shares, will be treated as ordinary income. Ordinary loss treatment
will apply to the deductible portion of any mark-to-market loss on the ADSs or ordinary shares, as well as to any loss from the
actual sale or other disposition of the ADSs or ordinary shares, to the extent that the amount of such loss does not exceed the
net mark-to-market gains previously included for such ADSs or ordinary shares. Your basis in the ADSs or ordinary shares will be
adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market election, any distributions we make would
generally be subject to the tax rules discussed below under “ —Dividends and Other Distributions on the ADSs or Ordinary
Shares,” except the lower capital gains rate applicable to qualified dividend income generally would not apply.
The mark-to-market election is available only
for “marketable stock.” Marketable stock is stock that is regularly traded on a qualified exchange or other market,
as defined in applicable Treasury Regulations. Our ADSs, but not our ordinary shares, are listed on the Nasdaq Global Select Market,
which is a qualified exchange or other market for these purposes. Consequently, if the ADSs remain listed on the Nasdaq Global
Select Market and are regularly traded, and you are a holder of ADSs, we expect that the mark-to-market election will be available
to you, but no assurances are given in this regard.
If you make a mark-to-market election, it will
be effective for the taxable year for which the election is made and all subsequent taxable years unless the ADSs are no longer
regularly traded on a qualified exchange or other market, or the IRS consents to the revocation of the election. In light of our
belief that we were a PFIC for 2017, United States Holders are urged to consult their tax advisors regarding the availability of
mark-to-market election, and whether making the election would be advisable in such United States Holder’s particular circumstances.
Because a mark-to-market election cannot be made
for any lower tier PFICs that we may own, if we were a PFIC for any taxable year, a United States Holder that makes the mark-to-market
election may continue to be subject to the tax and interest charges under the general PFIC rules with respect to such United States
Holder’s indirect interest in any investments held by us that are treated as an equity interest in a PFIC for United States
federal income tax purposes.
In certain circumstances, a United States shareholder
in a PFIC may avoid the adverse tax and interest-charge regime described above by making a “qualified electing fund”
election to include in income its share of the corporation’s income on a current basis. However, you may make a qualified
electing fund election with respect to your ADSs or ordinary shares only if we agree to furnish you annually with a PFIC annual
information statement as specified in the applicable Treasury Regulations. We do not intend to prepare or provide the information
that would enable you to make a qualified electing fund election.
A United States Holder that holds our ADSs or
ordinary shares in any year in which we are classified as a PFIC (as we believe we were for 2017 and prior years) will be required
to file an annual report containing such information as the United States Treasury Department may require.
You are strongly
urged to consult your own tax advisor regarding the impact of our being a PFIC for 2017 on your investment in our ADSs and ordinary
shares, as well as the application of the PFIC rules to your investment in our ADSs or ordinary shares and the availability, application
and consequences of the elections discussed above.
Dividends and Other Distributions on the
ADSs or Ordinary Shares
Subject to the passive foreign investment company
rules discussed above, the gross amount of any distribution that we make to you with respect to our ADSs or ordinary shares (including
any amounts withheld to reflect PRC withholding taxes) will be taxable as a dividend, to the extent paid out of our current or
accumulated earnings and profits, as determined under United States federal income tax principles. Such income (including any withheld
taxes) will be includable in your gross income on the day actually or constructively received by you, if you own the ordinary shares,
or by the depositary, if you own ADSs. Because we do not intend to determine our earnings and profits on the basis of United States
federal income tax principles, any distribution paid will generally be reported as a “dividend” for United States federal
income tax purposes. Such dividends will not be eligible for the dividends-received deduction allowed to qualifying corporations
under the Code.
Dividends received by a non-corporate United
States Holder may qualify for the lower rates of tax applicable to “qualified dividend income,” if the dividends are
paid by a “qualified foreign corporation” and other conditions discussed below are met. A non-United States corporation
is treated as a qualified foreign corporation (i) with respect to dividends paid by that corporation on shares (or American depositary
shares backed by such shares) that are readily tradable on an established securities market in the United States or (ii) if such
non-United States corporation is eligible for the benefits of a qualifying income tax treaty with the United States that includes
an exchange of information program. However, a non-United States corporation will not be treated as a qualified foreign corporation
if it is a passive foreign investment company in the taxable year in which the dividend is paid or the preceding taxable year.
We believe that we were a PFIC for our taxable years ended December 31, 2014, 2015, and 2016 and, as discussed above under “E.
Taxation — Passive Foreign Investment Company,” we believe that we were a PFIC for our taxable year ending December
31, 2017.
Under a published IRS Notice, common or ordinary
shares, or American depositary shares representing such shares, are considered to be readily tradable on an established securities
market in the United States if they are listed on the Nasdaq Global Select Market, as are our ADSs (but not our ordinary shares).
Based on existing guidance, it is unclear whether the ordinary shares will be considered to be readily tradable on an established
securities market in the United States, because only the ADSs, and not the underlying ordinary shares, will be listed on a securities
market in the United States We believe, but we cannot assure you, that dividends we pay, if any, on the ordinary shares that are
represented by ADSs, but not on the ordinary shares that are not so represented, will, subject to applicable limitations, including
ineligibility for reduced rates as a result of our being a PFIC, be eligible for the reduced rates of taxation. In addition, if
we are treated as a PRC resident enterprise under the PRC tax law (see “Item 10. Additional Information — Taxation
— PRC Taxation”), then we may be eligible for the benefits of the income tax treaty between the United States and the
PRC. If we are eligible for such benefits, then dividends that we pay on our ordinary shares, regardless of whether such shares
are represented by ADSs, would, subject to applicable limitations, including ineligibility for reduced rates as a result of our
being a PFIC, be eligible for the reduced rates of taxation.
Even if dividends would be treated as paid by
a qualified foreign corporation, a non-corporate United States Holder will not be eligible for reduced rates of taxation if it
does not hold our ADSs or ordinary shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend
date or if the United States Holder elects to treat the dividend income as "investment income" pursuant to Section 163(d)(4)
of the Code. In addition, the rate reduction will not apply to dividends of a qualified foreign corporation if the non-corporate
United States Holder receiving the dividend is obligated to make related payments with respect to positions in substantially similar
or related property.
You should consult your own tax advisors regarding
the availability of the lower tax rates applicable to qualified dividend income for any dividends that we pay with respect to the
ADSs or ordinary shares, as well as the effect of any change in applicable law after the date of this annual report on Form 20-F.
Any PRC withholding taxes imposed on dividends
paid to you with respect to the ADSs or ordinary shares generally will be treated as foreign taxes eligible for credit against
your United States federal income tax liability, subject to the various limitations and disallowance rules that apply to foreign
tax credits generally. For purposes of calculating the foreign tax credit, dividends paid to you with respect to the ADSs or ordinary
shares will be treated as income from sources outside the United States and generally will constitute passive category income.
The rules relating to the determination of the foreign tax credit are complex, and you should consult your tax advisors regarding
the availability of a foreign tax credit in your particular circumstances.
Disposition of the ADSs or Ordinary Shares
You will recognize gain or loss on a sale or
exchange of the ADSs or ordinary shares in an amount equal to the difference between the amount realized on the sale or exchange
and your tax basis in the ADSs or ordinary shares. Subject to the discussion under “E. Taxation — Passive Foreign Investment
Company,” above, such gain or loss generally will be capital gain or loss. Capital gains of a non-corporate United States
Holder, including an individual, that has held the ADS or ordinary share for more than one year currently are eligible for reduced
tax rates. The deductibility of capital losses is subject to limitations.
Any gain or loss that you recognize on a disposition
of the ADSs or ordinary shares generally will be treated as United States-source income or loss for foreign tax credit limitation
purposes. However, if we are treated as a PRC resident enterprise for PRC tax purposes and PRC tax is imposed on gain from the
disposition of the ADSs or ordinary shares (see “Item 10. Additional Information — Taxation — PRC Taxation”),
then a United States Holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may
elect to treat the gain as PRC-source income for foreign tax credit purposes. If such an election is made, the gain so treated
will be treated as a separate class or “basket” of income for foreign tax credit purposes. You should consult your
tax advisors regarding the proper treatment of gain or loss, as well as the availability of a foreign tax credit, in your particular
circumstances.
Information Reporting and Backup Withholding
Information reporting to the IRS and backup withholding
generally will apply to dividends in respect of our ADSs or ordinary shares, and the proceeds from the sale or exchange of our
ADSs or ordinary shares, that are paid to you within the United States (and in certain cases, outside the United States), unless
you furnish a correct taxpayer identification number and make any other required certification, generally on IRS Form W-9 or you
otherwise establish an exemption from information reporting and backup withholding. Backup withholding is not an additional tax.
Amounts withheld as backup withholding generally are allowed as a credit against your United States federal income tax liability,
and you may be entitled to obtain a refund of any excess amounts withheld under the backup withholding rules if you file an appropriate
claim for refund with the IRS and furnish any required information in a timely manner.
United States Holders who are individuals (and
certain entities closely held by individuals) generally will be required to report our name, address and such information relating
to an interest in the ADSs or ordinary shares as is necessary to identify the class or issue of which the ADSs or ordinary shares
are a part. These requirements are subject to exceptions, including an exception for ADSs or ordinary shares held in accounts maintained
by certain financial institutions and an exception applicable if the aggregate value of all “specified foreign financial
assets” (as defined in the Code) does not exceed $50,000.
United States Holders should consult their tax
advisors regarding the application of the information reporting and backup withholding rules.
|
F.
|
Dividends and Paying Agents
|
Not applicable.
Not applicable.
We previously filed with the SEC a registration
statement on Form F-1 (File No. 333-146605) and a prospectus under the Securities Act with respect to the ordinary shares represented
by the ADSs. We also filed with the SEC a related registration statement on Form F-6 (File Number 333-146765) with respect to the
ADSs.
We are subject to periodic reporting and other
informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we are required to file reports,
including annual reports on Form 20-F, and other information with the SEC. All documents filed by us with the SEC can be inspected
and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request
copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for
further information on the operation of the public reference rooms. The SEC also maintains a web site at
www.sec.gov
that
contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with
the SEC using its EDGAR system.
As a foreign private issuer, we are exempt from
the rules of the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and our executive
officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained
in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial
statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.
We intend to furnish J.P. Morgan, the depositary
of our ADSs, with all notices of shareholders’ meeting and other reports and communications that are made generally available
to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our
written request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting
received by the depositary from us.
In accordance with Rule 5250(d) of the Nasdaq
Listing Rules, we will post this annual report on Form 20-F on our website at http://ir.fanhuaholdings.com/sec.cfm. In addition,
we will provide hard copies of our annual report free of charge to shareholders and ADS holders upon request.
|
I.
|
Subsidiary Information
|
For a list of our subsidiaries as of March 31,
2018, see Exhibit 8.1 to this annual report.
|
Item 11.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Interest
Rate Risk
Our exposure to interest rate risk primarily
relates to the interest income generated by bank deposits and short-term, highly-liquid investments with original maturities of
90 days or less. Interest-earning instruments carry a degree of interest rate risk, and our future interest income may be lower
than expected. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates.
We have not used any derivative financial instruments to manage our interest risk exposure. As of December 31, 2017, we had no
short-term or long-term bank borrowings. If we borrow money in future periods, we may be exposed to additional interest rate risk.
Foreign
Exchange Risk
Substantially all of our revenues and expenses
are denominated in RMB. Our exposure to foreign exchange risk primarily relates to a small amount of cash and cash equivalent denominated
in U.S. dollars resulting from the remaining proceeds from our follow-on offering completed in July 2010. We have not hedged exposures
denominated in foreign currencies using any derivative financial instruments. Although in general, our exposure to foreign exchange
risks should be limited, the value of your investment in our ADSs will be affected by the foreign exchange rate between U.S. dollars
and RMB because the value of our business is effectively denominated in RMB, while the ADSs will be traded in U.S. dollars.
The value of the RMB against the U.S. dollar
and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions.
The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the PBOC. On July 21, 2005,
the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under such policy, the RMB
is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. Removal of the U.S.
dollar peg has resulted in an approximately more than 25.0% appreciation of the RMB against the U.S. dollar over the following
eight years. In April 2012, the trading band has been widened to 1%, and in March 2014 it was further widened to 2%, which allows
the Renminbi to fluctuate against the U.S. dollar by up to 2% above or below the central parity rate published by the PBOC. In
August 2015, the PBOC changed the way it calculates the mid-point price of Renminbi against U.S. dollar, requiring the market-makers
who submit for the PBOC’s reference rates to consider the previous day’s closing spot rate, foreign-exchange demand
and supply as well as changes in major currency rates. This change, and other changes such as widening the trading band that may
be implemented, may increase volatility in the value of the Renminbi against foreign currencies. The PRC government may from time
to time make further adjustments to the exchange rate system in the future. To the extent that we need to convert our U.S. dollar
or other currencies-denominated assets into RMB for our operations, appreciation of the RMB against the U.S. dollar or other currencies
would have an adverse effect on the RMB amount we receive from the conversion. We had U.S. dollar-denominated financial assets
amounting to US$26.2 million and HK dollar-denominated financial assets amounting to HK$2.4 million as of December 31, 2017. A
10% appreciation of the RMB against the U.S. dollar and HK dollar would have resulted in a decrease of RMB17.3 million (US$2.7
million) in the value of our U.S. dollar-denominated and HK dollar-denominated financial assets. Conversely, if we decide to convert
our RMB denominated cash amounts into U.S. dollars amounts or other currencies amounts for the purpose of making payments for dividends
on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar or other currencies against the
RMB would have a negative effect on the U.S. dollar or other currencies amount available to us.
|
Item 12.
|
Description of Securities Other than Equity Securities
|
A.
Debt
Securities
Not applicable.
B.
Warrants
and Rights
Not applicable.
C.
Other
Securities
Not applicable.
D.
American
Depositary Shares
Fees Payable by ADS Holders
We have appointed J.P. Morgan as our depositary.
A copy of our Form of Deposit Agreement with J.P. Morgan was filed with the SEC as an exhibit to our Form F-6 registration statement
initially filed on October 17, 2007 and amended on December 7, 2016 and November 28, 2017, or the Deposit Agreement. Pursuant to
the Deposit Agreement, holders of our ADSs may have to pay to J.P. Morgan, either directly or indirectly, fees or charges up to
the amounts set forth in the table below.
Category
|
Depositary Actions
|
Associated Fees
|
(a)
|
Depositing or substituting the underlying shares
|
Each person to whom ADRs are issued against deposits of shares,
including deposits and issuances in respect of:
• Share distributions,
stock split, rights, merger
• Exchange of securities
or any other transaction or event or other distribution affecting the ADSs or the Deposited Securities
|
US$5.00 for each 100 ADSs (or portion thereof) evidenced by the new ADRs delivered
|
(b)
|
Receiving or distributing dividends
|
Distribution of dividends
|
US$0.02 or less per ADS
|
|
|
|
|
(c)
|
Selling or exercising rights
|
Distribution or sale of securities, the fee being in an amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities
|
US$5.00 for each 100 ADSs (or portion thereof)
|
|
|
|
|
(d)
|
Withdrawing an underlying security
|
Acceptance of ADRs surrendered for withdrawal of deposited securities
|
US$5.00 for each 100 ADSs (or portion thereof) evidenced by the ADRs surrendered
|
|
|
|
|
(e)
|
Transferring, splitting or grouping receipts
|
Transfers, combining or grouping of depositary receipts
|
US$1.50 per ADS
|
|
|
|
|
(f)
|
General depositary services, particularly those charged on an annual basis.
|
• Other services performed
by the depositary in administering the ADRs
• Provide information about
the depositary’s right, if any, to collect fees and charges by offsetting them against dividends received and deposited securities
|
US$0.02 per ADS (or portion thereof) not more than once each calendar year and payable at the sole discretion of the depositary by billing Holders or by deducting such charge from one or more cash dividends or other cash distributions
|
|
|
|
|
(g)
|
Expenses of the depositary
|
Expenses incurred on behalf of Holders in connection with
• Compliance with foreign
exchange control regulations or any law or regulation relating to foreign investment
• The depositary's or its
custodian's compliance with applicable law, rule or regulation
• Stock transfer or other
taxes and other governmental charges
• Cable, telex, facsimile
transmission/delivery
• Expenses of the depositary
in connection with the conversion of foreign currency into U.S. dollars (which are paid out of such foreign currency)
• Any other charge payable
by depositary or its agents
|
Expenses payable at the sole discretion of the depositary by billing Holders or by deducting charges from one or more cash dividends or other cash distributions
|
Payment from the Depositary
Direct Payments
J.P. Morgan, as depositary, has agreed to reimburse
certain reasonable company expenses related to our ADR program and incurred by us in connection with the program. For the years
ended December 31, 2016 and 2017, the depositary reimbursed US$0.1 million and US$0.1 million, respectively. For the years ended
December 31, 2016 and 2017, 30% of the depositary reimbursement has been deducted as withholding income tax, respectively. The
amounts the depositary reimbursed are not perforce related to the fees collected by the depositary from ADR holders. The table
below sets forth the types of expenses that J.P. Morgan has agreed to reimburse and the amounts reimbursed for the years ended
December 31, 2016 and 2017.
|
|
For the Year Ended December 31,
|
|
|
2016
|
|
2017
|
|
|
(in thousands of US$)
|
Investor relations
(1)
|
|
|
45.5
|
|
|
|
112.9
|
|
Directors and officers liability insurance
|
|
|
104.4
|
|
|
|
94.8
|
|
Legal fees incurred in connection with preparation of Form 20-F and ongoing SEC compliance and listing requirements
|
|
|
—
|
|
|
|
—
|
|
Listing fees
|
|
|
—
|
|
|
|
—
|
|
Others
|
|
|
—
|
|
|
|
—
|
|
|
|
|
149.9
|
|
|
|
207.7
|
|
______________________
(1)
|
|
Includes expenses in relation with roadshows, press release distribution, maintenance
of investor relations website and printing.
|
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
The accompanying notes are an integral part
of the consolidated financial statements.
FANHUA INC.
Consolidated Statements of Income and Comprehensive Income - Continued
(
In thousands, except for shares and per share data
)
|
|
Year
Ended December 31,
|
|
|
2015
|
|
2016
|
|
2017
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
0.14
|
|
|
|
0.12
|
|
|
|
0.36
|
|
|
|
0.06
|
|
Net income from discontinued operations
|
|
|
0.04
|
|
|
|
0.02
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Net income
|
|
|
0.18
|
|
|
|
0.14
|
|
|
|
0.36
|
|
|
|
0.06
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
0.14
|
|
|
|
0.11
|
|
|
|
0.36
|
|
|
|
0.06
|
|
Net income from discontinued operations
|
|
|
0.03
|
|
|
|
0.02
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Net income
|
|
|
0.17
|
|
|
|
0.13
|
|
|
|
0.36
|
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per American Depositary Shares ("ADS"):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
2.92
|
|
|
|
2.32
|
|
|
|
7.20
|
|
|
|
1.11
|
|
Net income from discontinued operations
|
|
|
0.73
|
|
|
|
0.39
|
|
|
|
0.09
|
|
|
|
0.02
|
|
Net income
|
|
|
3.65
|
|
|
|
2.71
|
|
|
|
7.29
|
|
|
|
1.13
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
2.79
|
|
|
|
2.23
|
|
|
|
7.20
|
|
|
|
1.11
|
|
Net income from discontinued operations
|
|
|
0.70
|
|
|
|
0.37
|
|
|
|
0.09
|
|
|
|
0.02
|
|
Net income
|
|
|
3.49
|
|
|
|
2.60
|
|
|
|
7.29
|
|
|
|
1.13
|
|
Shares used in calculating net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
1,151,705,374
|
|
|
|
1,160,592,325
|
|
|
|
1,231,698,725
|
|
|
|
1,231,698,725
|
|
Diluted
|
|
|
1,203,323,521
|
|
|
|
1,208,821,796
|
|
|
|
1,261,223,049
|
|
|
|
1,261,223,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
215,481
|
|
|
|
167,638
|
|
|
|
451,716
|
|
|
|
69,427
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
6,153
|
|
|
|
2,177
|
|
|
|
(10,664
|
)
|
|
|
(1,639
|
)
|
Changes in fair value of short term investments
|
|
|
—
|
|
|
|
632
|
|
|
|
(632
|
)
|
|
|
(97
|
)
|
Share of other comprehensive gain (loss) of affiliates
|
|
|
37,567
|
|
|
|
(37,911
|
)
|
|
|
1,263
|
|
|
|
194
|
|
Total Comprehensive income
|
|
|
259,201
|
|
|
|
132,536
|
|
|
|
441,683
|
|
|
|
67,885
|
|
Less: Comprehensive income attributable to the noncontrolling interests
|
|
|
5,395
|
|
|
|
10,591
|
|
|
|
2,488
|
|
|
|
382
|
|
Comprehensive income attributable to the Company’s shareholders
|
|
|
253,806
|
|
|
|
121,945
|
|
|
|
439,195
|
|
|
|
67,503
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
FANHUA INC.
Consolidated Statements of Shareholders' Equity
(In thousands, except for shares and per share data)
|
|
Share Capital
|
|
|
|
Treasury
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Share
|
|
Amounts
|
|
Additional
Paid-in
Capital
|
|
Number of
Share
|
|
Amounts
|
|
Statutory
Reserves
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
loss
|
|
Subscription
Receivables
|
|
Noncontrolling
Interests
|
|
Total
|
|
|
|
|
RMB
|
|
RMB
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
Balance
as January 1, 2015
|
|
|
1,150,565,906
|
|
|
|
8,563
|
|
|
|
2,601,401
|
|
|
|
—
|
|
|
|
—
|
|
|
|
198,422
|
|
|
|
764,963
|
|
|
|
(105,106
|
)
|
|
|
(257,491
|
)
|
|
|
123,508
|
|
|
|
3,334,260
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
210,086
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,395
|
|
|
|
215,481
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,491
|
|
|
|
(11,338
|
)
|
|
|
—
|
|
|
|
6,153
|
|
Repurchase of ordinary shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,261,100
|
)
|
|
|
(6,276
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,276
|
)
|
Exercise of share options
|
|
|
4,493,620
|
|
|
|
29
|
|
|
|
(4,787
|
)
|
|
|
2,261,100
|
|
|
|
6,276
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,518
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
17,653
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,653
|
|
Provision for statutory
reserves
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
104,414
|
|
|
|
(104,414
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Acquisition of additional
interests in subsidiaries
|
|
|
—
|
|
|
|
—
|
|
|
|
(160,023
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(27,787
|
)
|
|
|
(187,810
|
)
|
Disposal of a subsidiary
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(721
|
)
|
|
|
721
|
|
|
|
—
|
|
|
|
—
|
|
|
|
473
|
|
|
|
473
|
|
Dividends distributed
to noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,450
|
)
|
|
|
(2,450
|
)
|
Capital injection by
noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,000
|
|
|
|
17,000
|
|
Share of other comprehensive
gain of affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37,567
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37,567
|
|
Balance as of December
31, 2015
|
|
|
1,155,059,526
|
|
|
|
8,592
|
|
|
|
2,454,244
|
|
|
|
—
|
|
|
|
—
|
|
|
|
302,115
|
|
|
|
871,356
|
|
|
|
(50,048
|
)
|
|
|
(268,829
|
)
|
|
|
116,139
|
|
|
|
3,433,569
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
157,047
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,591
|
|
|
|
167,638
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,483
|
|
|
|
(19,306
|
)
|
|
|
—
|
|
|
|
2,177
|
|
Exercise of share options
|
|
|
2,597,400
|
|
|
|
17
|
|
|
|
1,127
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,144
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
4,937
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,937
|
|
Provision for statutory
reserves
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,909
|
|
|
|
(9,909
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Acquisition of additional
interests in a subsidiary
|
|
|
7,416,000
|
|
|
|
49
|
|
|
|
(174,779
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,493
|
)
|
|
|
(179,223
|
)
|
Disposal of subsidiaries
|
|
|
—
|
|
|
|
—
|
|
|
|
16,126
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(434
|
)
|
|
|
434
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,995
|
)
|
|
|
11,131
|
|
Changes in fair value
of short term investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
632
|
|
|
|
—
|
|
|
|
—
|
|
|
|
632
|
|
Share of other comprehensive
loss of affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(37,911
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(37,911
|
)
|
Balance
as of December 31, 2016
|
|
|
1,165,072,926
|
|
|
|
8,658
|
|
|
|
2,301,655
|
|
|
|
—
|
|
|
|
—
|
|
|
|
311,590
|
|
|
|
1,018,928
|
|
|
|
(65,844
|
)
|
|
|
(288,135
|
)
|
|
|
117,242
|
|
|
|
3,404,094
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
FANHUA INC.
Consolidated Statements of Shareholders' Equity — (Continued)
(In thousands, except for shares and per share data)
|
|
Share
Capital
|
|
|
|
Treasury
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Share
|
|
Amounts
|
|
Additional
Paid-in
Capital
|
|
Number
of
Share
|
|
Amounts
|
|
Statutory
Reserves
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
loss
|
|
Subscription
Receivables
|
|
Noncontrolling
Interests
|
|
Total
|
|
|
|
|
RMB
|
|
RMB
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
449,228
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,488
|
|
|
|
451,716
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(27,895
|
)
|
|
|
17,231
|
|
|
|
—
|
|
|
|
(10,664
|
)
|
Exercise of share options
|
|
|
69,118,158
|
|
|
|
458
|
|
|
|
64,488
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64,946
|
|
Provision for statutory
reserves
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,658
|
|
|
|
(30,658
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Private placement
|
|
|
66,000,000
|
|
|
|
455
|
|
|
|
200,632
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
201,087
|
|
Subscription receipt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22,187
|
|
|
|
—
|
|
|
|
22,187
|
|
Distribution of dividend
|
|
|
—
|
|
|
|
—
|
|
|
|
(137,216
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(137,216
|
)
|
Disposal of subsidiaries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(31,210
|
)
|
|
|
31,210
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,388
|
)
|
|
|
(8,388
|
)
|
Changes in fair value
of short term investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(632
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(632
|
)
|
Share of other comprehensive
gain of affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,263
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,263
|
|
Balance
as of December 31, 2017
|
|
|
1,300,191,084
|
|
|
|
9,571
|
|
|
|
2,429,559
|
|
|
|
—
|
|
|
|
—
|
|
|
|
311,038
|
|
|
|
1,468,708
|
|
|
|
(93,108
|
)
|
|
|
(248,717
|
)
|
|
|
111,342
|
|
|
|
3,988,393
|
|
Balance
as of December 31, 2017 in US$
|
|
|
—
|
|
|
|
1,471
|
|
|
|
373,416
|
|
|
|
—
|
|
|
|
—
|
|
|
|
47,806
|
|
|
|
225,737
|
|
|
|
(14,310
|
)
|
|
|
(38,227
|
)
|
|
|
17,113
|
|
|
|
613,006
|
|
The accompanying notes are an integral part
of the consolidated financial statements.
FANHUA INC.
Consolidated Statements of Cash Flows
(
In thousands
)
|
|
Year Ended December 31,
|
|
|
2015
1
|
|
2016
1
|
|
2017
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
215,481
|
|
|
|
167,638
|
|
|
|
451,716
|
|
|
|
69,427
|
|
Adjustments to reconcile net income to net cash generated from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
18,383
|
|
|
|
13,492
|
|
|
|
14,099
|
|
|
|
2,167
|
|
Amortization of intangible assets
|
|
|
11,571
|
|
|
|
20,232
|
|
|
|
33,177
|
|
|
|
5,099
|
|
Allowance for doubtful receivables
|
|
|
7,597
|
|
|
|
2,381
|
|
|
|
11,328
|
|
|
|
1,741
|
|
Compensation expenses associated with stock options
|
|
|
17,653
|
|
|
|
4,937
|
|
|
|
—
|
|
|
|
—
|
|
Loss (gain) on disposal of property, plant and equipment
|
|
|
(126
|
)
|
|
|
115
|
|
|
|
(104
|
)
|
|
|
(16
|
)
|
Investment income
|
|
|
(31,092
|
)
|
|
|
(80,599
|
)
|
|
|
(177,862
|
)
|
|
|
(27,337
|
)
|
Gain on disposal of subsidiaries
|
|
|
—
|
|
|
|
(3,082
|
)
|
|
|
(2,009
|
)
|
|
|
(309
|
)
|
Share of income of affiliates
|
|
|
(26,924
|
)
|
|
|
(48,293
|
)
|
|
|
(108,944
|
)
|
|
|
(16,744
|
)
|
Deferred taxes
|
|
|
(1,067
|
)
|
|
|
(14,736
|
)
|
|
|
9,512
|
|
|
|
1,462
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(61,356
|
)
|
|
|
(271,275
|
)
|
|
|
(140,712
|
)
|
|
|
(21,627
|
)
|
Insurance premium receivables
|
|
|
(1,054
|
)
|
|
|
1,339
|
|
|
|
(4,603
|
)
|
|
|
(707
|
)
|
Other receivables
|
|
|
7,222
|
|
|
|
(6,395
|
)
|
|
|
(207,162
|
)
|
|
|
(31,840
|
)
|
Amounts due from related parties
|
|
|
(8,088
|
)
|
|
|
3,727
|
|
|
|
(8,714
|
)
|
|
|
(1,339
|
)
|
Other current assets
|
|
|
(4,920
|
)
|
|
|
(15,074
|
)
|
|
|
(5,962
|
)
|
|
|
(916
|
)
|
Accounts payable
|
|
|
33,026
|
|
|
|
127,015
|
|
|
|
139,528
|
|
|
|
21,445
|
|
Insurance premium payables
|
|
|
2,244
|
|
|
|
304
|
|
|
|
7,165
|
|
|
|
1,101
|
|
Other payables and accrued expenses
|
|
|
71,506
|
|
|
|
142,720
|
|
|
|
22,901
|
|
|
|
3,520
|
|
Accrued payroll
|
|
|
9,143
|
|
|
|
11,446
|
|
|
|
41,472
|
|
|
|
6,374
|
|
Income taxes payable
|
|
|
6,433
|
|
|
|
29,530
|
|
|
|
69,729
|
|
|
|
10,717
|
|
Dividend received
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
1,537
|
|
Other tax liabilities
|
|
|
15,672
|
|
|
|
2,424
|
|
|
|
(2,428
|
)
|
|
|
(374
|
)
|
Net cash generated
from operating activities
|
|
|
281,304
|
|
|
|
87,846
|
|
|
|
152,127
|
|
|
|
23,381
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of short term investments
|
|
|
(2,308,956
|
)
|
|
|
(9,515,500
|
)
|
|
|
(11,055,424
|
)
|
|
|
(1,699,188
|
)
|
Proceeds from disposal of short term investments
|
|
|
994,839
|
|
|
|
8,825,355
|
|
|
|
11,531,556
|
|
|
|
1,772,368
|
|
Purchase of property, plant and equipment
|
|
|
(6,663
|
)
|
|
|
(11,885
|
)
|
|
|
(20,899
|
)
|
|
|
(3,212
|
)
|
Purchase of intangible asset
|
|
|
—
|
|
|
|
(60,000
|
)
|
|
|
—
|
|
|
|
—
|
|
Proceeds from disposal of property and equipment
|
|
|
539
|
|
|
|
48
|
|
|
|
156
|
|
|
|
24
|
|
__________________________
1
In November 2016,
the FASB issued ASU No. 2016-18 ("ASU 2016-18"), Statement of Cash Flows (Topic 230) - Restricted Cash. This ASU requires
amounts generally described as restricted cash and restricted cash equivalents to be included in cash and cash equivalents when
reconciling beginning-of-period and end of- period total amounts shown on the statement of cash flows. The provisions of ASU 2016-18
are effective for reporting periods beginning after December 15, 2017 and are to be applied retrospectively; early adoption is
permitted. In connection with the adoption of this update, the Group have reclassified RMB10,107 and RMB16,152 of restricted cash
from investing activities to the cash and, cash equivalents, and restricted cash balance in the years ended December 31, 2015 and
2016, respectively, to be consistent with the 2017 presentation.
FANHUA INC.
Consolidated Statements of Cash Flows—(Continued)
(
In thousands
)
|
|
Year Ended December 31,
|
|
|
2015
1
|
|
2016
1
|
|
2017
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
Disposal of subsidiaries, net of cash disposed of RMB4,544 ,RMB1,336 and RMB94,677 (US$14,552) in 2015, 2016 and 2017, respectively
|
|
|
15,476
|
|
|
|
29,376
|
|
|
|
(20,564
|
)
|
|
|
(3,160
|
)
|
Decrease (increase) in other receivables
|
|
|
16,120
|
|
|
|
—
|
|
|
|
(500,000
|
)
|
|
|
(76,849
|
)
|
Additions in investments in non-current assets
|
|
|
(13,980
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Decrease in amounts due from related parties
|
|
|
181,181
|
|
|
|
—
|
|
|
|
41,452
|
|
|
|
6,371
|
|
Net cash used
in investing activities
|
|
|
(1,121,444
|
)
|
|
|
(732,606
|
)
|
|
|
(23,723
|
)
|
|
|
(3,646
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of additional interests in subsidiaries
|
|
|
(153,500
|
)
|
|
|
(213,534
|
)
|
|
|
—
|
|
|
|
—
|
|
Capital injection by noncontrolling interests
|
|
|
17,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Payment for deferred consideration of acquisition of a subsidiary
|
|
|
—
|
|
|
|
(4,185
|
)
|
|
|
—
|
|
|
|
—
|
|
Repayment of advances from a disposed subsidiary
|
|
|
—
|
|
|
|
—
|
|
|
|
(103,446
|
)
|
|
|
(15,899
|
)
|
Proceeds of employee subscriptions
|
|
|
—
|
|
|
|
—
|
|
|
|
22,187
|
|
|
|
3,410
|
|
Proceeds of issuance of ordinary shares upon private placement
|
|
|
—
|
|
|
|
—
|
|
|
|
201,087
|
|
|
|
30,907
|
|
Dividends paid
|
|
|
—
|
|
|
|
—
|
|
|
|
(137,216
|
)
|
|
|
(21,090
|
)
|
Dividend distributed to noncontrolling interests
|
|
|
(2,450
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Proceeds on exercise of stock options
|
|
|
1,518
|
|
|
|
1,144
|
|
|
|
64,946
|
|
|
|
9,982
|
|
Repurchase of ordinary shares
|
|
|
(6,276
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net cash (used
in) generated from financing activities
|
|
|
(143,708
|
)
|
|
|
(216,575
|
)
|
|
|
47,558
|
|
|
|
7,310
|
|
Net (decrease) increase in cash
and cash equivalents, and restricted cash
|
|
|
(983,848
|
)
|
|
|
(861,335
|
)
|
|
|
175,962
|
|
|
|
27,045
|
|
Cash and, cash equivalents and
restricted cash at beginning of year
|
|
|
2,110,546
|
|
|
|
1,132,851
|
|
|
|
273,979
|
|
|
|
42,110
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
6,153
|
|
|
|
2,463
|
|
|
|
(10,908
|
)
|
|
|
(1,677
|
)
|
Cash and,
cash equivalents and restricted cash at end of year
|
|
|
1,132,851
|
|
|
|
273,979
|
|
|
|
439,033
|
|
|
|
67,478
|
|
Reconciliation in amounts on the consolidated Financial position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and, cash equivalents at end of year, excluding held for sale
|
|
|
1,110,865
|
|
|
|
236,952
|
|
|
|
363,746
|
|
|
|
55,907
|
|
Restricted cash at end of year, excluding held for sale
|
|
|
15,327
|
|
|
|
31,996
|
|
|
|
75,287
|
|
|
|
11,571
|
|
Cash and, cash equivalents at end of year, held for sale
|
|
|
4,401
|
|
|
|
3,290
|
|
|
|
—
|
|
|
|
—
|
|
Restricted cash at end of year, held for sale
|
|
|
2,258
|
|
|
|
1,741
|
|
|
|
—
|
|
|
|
—
|
|
Total cash and, cash equivalents and restricted cash
at end of year
|
|
|
1,132,851
|
|
|
|
273,979
|
|
|
|
439,033
|
|
|
|
67,478
|
|
FANHUA INC.
Consolidated Statements of Cash Flows—(Continued)
(
In thousands
)
|
|
Year Ended December 31,
|
|
|
2015
1
|
|
2016
1
|
|
2017
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income taxes paid
|
|
|
4,383
|
|
|
|
4,133
|
|
|
|
103,155
|
|
|
|
15,855
|
|
Non-cash investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of additional interest in subsidiaries
|
|
|
34,310
|
|
|
|
19,551
|
|
|
|
—
|
|
|
|
—
|
|
Disposal of a subsidiary
|
|
|
—
|
|
|
|
—
|
|
|
|
46,582
|
|
|
|
7,160
|
|
For the years ended December 31, 2015, 2016 and 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other receivable and other non-current asset related to disposal of entities
|
|
|
—
|
|
|
|
—
|
|
|
|
64,152
|
|
|
|
6,479
|
|
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
(1)
|
|
Organization and Description of Business
|
Fanhua Inc. (the "Company")
(formally known as "CNinsure Inc.") was incorporated in the Cayman Islands on April 10, 2007 and listed on the Nasdaq
on October 31, 2007. The Company, its subsidiaries and its variable interest entities (the "VIEs") are collectively referred
to as the "Group". The Group is principally engaged in the provision of insurance brokerage and agency services, and
insurance claims adjusting services in the People’s Republic of China (the "PRC"). During 2017, the Group disposed of its insurance brokerage business. See Note 3 for more details.
(2)
|
|
Summary of Significant Accounting Policies
|
|
(a)
|
Basis of Presentation and Consolidation
|
The consolidated financial
statements of the Group have been prepared in accordance with accounting principles generally accepted in the United States of
America ("US GAAP"). The consolidated financial statements include the financial statements of the Company, all its majority-owned
subsidiaries and those VIEs of which the Company is the primary beneficiary from the dates they were acquired or incorporated.
All intercompany balances and transactions have been eliminated in consolidation. In addition, the Group consolidates VIEs of which
it is deemed to be the primary beneficiary and absorbs all of the expected losses and residual returns of the entity. In May 2016,
the Group completed its restructuring and as a result, the Group no longer consolidates any VIE since May 2016.
The preparation of
the consolidated financial statements in conformity with US GAAP requires management of the Group to make a number of estimates
and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period.
The Company's management based their estimates on historical experience
and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent from other sources.
Significant accounting
estimates reflected in the Group's consolidated financial statements included valuation of goodwill, allowance for doubtful receivables,
and the valuation of non-controlling interests of the subsidiaries at acquisition dates. Actual results could differ from those
estimates.
|
(c)
|
Cash and Cash Equivalents and Restricted Cash
|
Cash and cash equivalents
consist of cash on hand, bank deposits and short-term, highly liquid investments that are readily convertible to known amounts
of cash, and have insignificant risk of changes in value related to changes in interest rates.
In its capacity as
an insurance agent and broker, the Group collects premiums from certain insureds and remits the premiums to the appropriate insurance
companies. Accordingly, as reported in the consolidated statements of financial position, "premiums" are receivables
from the insureds of RMB3,750 and RMB9,553 (US$1,468) as of December 31, 2016 and 2017, respectively. Unremitted net insurance
premiums are held in a fiduciary capacity until disbursed by the Group. The Group invests these unremitted funds only in cash accounts
held for a short term, and reports such amounts as restricted cash in the consolidated statements of financial position. Also,
restricted cash balance includes guarantee deposits required by China Insurance Regulatory Commission ("CIRC") in order
to protect insurance premium appropriation by insurance agency and the entrustment deposit received from the members of eHuzhu,
an online mutual aid platform operated by the Group. The restricted cash balance were RMB28,246 and RMB65,734 (US$10,103) as of
December 31, 2016 and 2017, respectively.
|
(d)
|
Short Term Investments
|
Short term investments
are mainly available-for-sale investments in debt securities that do not have a quoted market price in an active market. Except
for short term investments on certain private funds, the majority of the investments are measured at costs which approximate their
fair values in the consolidated statements of financial position. The Group benchmark the costs of other investments against fair
values of comparable investments and reference to product valuation reports as of the balance sheet date, and categorize all fair
value measures of short term investments as level 2 of the fair value hierarchy. Private funds are measured at fair value. No impairment
loss on short term investments was identified for each of the years ended December 31, 2015, 2016 and 2017.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
|
(e)
|
Accounts Receivable and Insurance Premium Receivables
|
Accounts receivable
are recorded at the invoiced amount and do not bear interest. Accounts receivable represent fees receivable on agency and claims
adjusting services primarily from insurance companies. Amounts collected on accounts receivable are included in net cash provided
by operating activities in the consolidated statements of cash flows. The allowance for doubtful accounts is the Group's best estimate
of the amount of probable credit losses in the Group's existing accounts receivable balance. The Group determines the allowance
based on historical write-off experience. The Group reviews its allowance for doubtful accounts regularly. Past due balances over
90 days and over a specified amount are reviewed individually for collectability.
Accounts receivable,
net is analyzed as follows:
|
|
As of December 31,
|
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
Accounts receivable
|
|
|
518,596
|
|
|
|
535,392
|
|
Allowance for doubtful accounts
|
|
|
(16,792
|
)
|
|
|
(20,198
|
)
|
Accounts receivable, net
|
|
|
501,804
|
|
|
|
515,194
|
|
The following table
summarizes the movement of the Group's allowance for doubtful accounts for accounts receivables:
|
|
2015
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
Balance at the beginning of the year
|
|
|
16,587
|
|
|
|
13,246
|
|
|
|
16,792
|
|
Provision for doubtful accounts
|
|
|
4,991
|
|
|
|
3,700
|
|
|
|
14,052
|
|
Write-offs
|
|
|
(8,332
|
)
|
|
|
(154
|
)
|
|
|
(10,646
|
)
|
Balance at the end of the year
|
|
|
13,246
|
|
|
|
16,792
|
|
|
|
20,198
|
|
The following table
summarizes the movement of the Group's allowance for doubtful accounts for other receivables:
|
|
2015
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
Balance at the beginning of the year
|
|
|
1,437
|
|
|
|
4,043
|
|
|
|
2,724
|
|
Provision for doubtful accounts
|
|
|
2,606
|
|
|
|
—
|
|
|
|
—
|
|
Write-offs
|
|
|
—
|
|
|
|
(1,319)
|
|
|
|
(2,724)
|
|
Balance at the end of the year
|
|
|
4,043
|
|
|
|
2,724
|
|
|
|
—
|
|
Insurance premium receivables
consist of insurance premiums to be collected from the insured, and are recorded at the invoiced amount and do not bear interest.
Amounts collected on insurance premium receivables are included in net cash provided by operating activities in the consolidated
statements of cash flows.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
|
(f)
|
Property, Plant and Equipment
|
Property, plant and
equipment are stated at cost. Depreciation and amortization are calculated using the straight-line method over the following estimated
useful lives, taking into account residual value:
|
|
Estimated useful
life (Years)
|
|
Estimated residual
value
|
Building
|
|
20
|
-
|
36
|
|
|
0%
|
|
Office equipment, furniture and fixtures
|
|
3
|
-
|
5
|
|
0%
|
-
|
3%
|
Motor vehicles
|
|
5
|
-
|
10
|
|
0%
|
-
|
3%
|
Leasehold improvements
|
|
|
5
|
|
|
|
0%
|
|
The depreciation methods
and estimated useful lives are reviewed regularly. The following table summarizes the depreciation recognized in the consolidated
statements of income and comprehensive income:
|
|
2015
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
Commission and fees under operating costs
|
|
|
2,056
|
|
|
|
185
|
|
|
|
43
|
|
Selling expenses
|
|
|
1,180
|
|
|
|
1,590
|
|
|
|
2,775
|
|
General and administrative expenses
|
|
|
15,147
|
|
|
|
11,717
|
|
|
|
11,281
|
|
Depreciation for the year
|
|
|
18,383
|
|
|
|
13,492
|
|
|
|
14,099
|
|
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
|
(g)
|
Goodwill and Other Intangible Assets
|
Goodwill and amortization
of intangible assets
Goodwill represents
the excess of costs over fair value of net assets of businesses acquired in a business combination.
Goodwill
is not amortized, but is tested for impairment at the reporting unit level at least on an annual basis at the balance sheet date
or more frequently if certain indicators arise. The Group operated in two reporting units for the year ended December 31, 2017.
The goodwill impairment review is a two-step process. Step 1 consists of a comparison of the fair value of a reporting unit with
its carrying amount. An impairment loss may be recognized if the review indicates that the carrying value of a reporting unit exceeds
its fair value. Estimates of fair value are primarily determined by using discounted cash flows. If the carrying amount of a reporting
unit exceeds its fair value, step 2 requires the fair value of the reporting unit to be allocated to the underlying assets and
liabilities of that reporting unit, resulting in an implied fair value of goodwill. If the carrying amount of the goodwill of the
reporting unit exceeds the implied fair value, an impairment charge is recorded equal to the excess of the carrying amount over
the implied fair value.
The
impairment review is highly judgmental and involves the use of significant estimates and assumptions. These estimates and assumptions
have a significant impact on the amount of any impairment charge recorded. Discounted cash flow methods are dependent upon assumptions
of future sales trends, market conditions and cash flows of each reporting unit over several years. Actual cash flows in the future
may differ significantly from those previously forecasted. Other significant assumptions include growth rates and the discount
rate applicable to future cash flows.
In 2015, 2016 and 2017, management compared the carrying value of each reporting unit, inclusive of assigned
goodwill, to its respective fair value which is the step one of the two-step impairment test. The fair value of all reporting units
was estimated by using the income approach. Based on this quantitative test, it was determined that the fair value of each reporting
unit tested exceeded its carrying amount and, therefore, step 2 of the two-step goodwill impairment test was unnecessary. The management
concluded that goodwill was not impaired as of December 31, 2015, 2016 and 2017.
Identifiable intangibles
assets are required to be determined separately from goodwill based on their fair values. In particular, an intangible asset acquired
in a business combination should be recognized as an asset separate from goodwill if it satisfies either the “contractual-legal”
or “separability” criterion. Intangible assets with a finite economic life are carried at cost less accumulated amortization.
Amortization for identifiable intangible assets categorized as customer relationships are computed using the accelerated method,
while amortization for other identifiable intangible assets are computed using the straight-line method over the intangible assets'
economic lives. Intangible assets with indefinite economic lives are not amortized but carried at cost less any subsequent accumulated
impairment losses. If an intangible asset that is not being amortized is subsequently determined to have a finite economic life,
it will be tested for impairment and then amortized prospectively over its estimated remaining economic life and accounted for
in the same manner as other intangible assets that are subject to amortization. Intangible assets with indefinite economic lives
are tested for impairment annually or more frequently if events or changes in circumstances indicate that they might be impaired.
Separately identifiable
intangible assets consist of brand names, trade names, customer relationships, non-compete agreements, agency agreement and licenses,
and software and systems.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
The intangible assets,
net consisted of the following:
|
|
|
|
|
|
As of December 31, 2016
|
|
|
Useful life
(Years)
|
|
Cost
|
|
Accumulated
amortization
|
|
Accumulated
Impairment loss
|
|
Net carrying
values
|
|
|
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
Brand name
|
|
|
Indefinite
|
|
|
|
20,111
|
|
|
|
—
|
|
|
|
(16,404
|
)
|
|
|
3,707
|
|
Trade name
|
|
9.4
|
to
|
10
|
|
|
8,898
|
|
|
|
(5,750
|
)
|
|
|
—
|
|
|
|
3,148
|
|
Customer relationship
|
|
4.6
|
to
|
9.8
|
|
|
60,696
|
|
|
|
(53,324
|
)
|
|
|
(2,953
|
)
|
|
|
4,419
|
|
Non-compete agreement
|
|
3
|
to
|
6.25
|
|
|
52,195
|
|
|
|
(22,539
|
)
|
|
|
(29,515
|
)
|
|
|
141
|
|
Agency agreement and license
|
|
4.6
|
to
|
9.8
|
|
|
19,924
|
|
|
|
(16,790
|
)
|
|
|
(77
|
)
|
|
|
3,057
|
|
Software and system
|
|
2
|
to
|
10
|
|
|
65,680
|
|
|
|
(20,680
|
)
|
|
|
—
|
|
|
|
45,000
|
|
|
|
|
|
|
|
|
227,504
|
|
|
|
(119,083
|
)
|
|
|
(48,949
|
)
|
|
|
59,472
|
|
|
|
|
|
|
|
As
of December 31, 2017
|
|
|
Useful life
(Years)
|
|
Cost
|
|
Accumulated
amortization
|
|
Accumulated
Impairment loss
|
|
Net carrying
values
|
|
|
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
Brand name
|
|
|
Indefinite
|
|
|
|
16,404
|
|
|
|
—
|
|
|
|
(16,404
|
)
|
|
|
—
|
|
Trade name
|
|
9.4
|
to
|
10
|
|
|
8,898
|
|
|
|
(6,688
|
)
|
|
|
—
|
|
|
|
2,210
|
|
Customer relationship
|
|
4.6
|
to
|
9.8
|
|
|
48,306
|
|
|
|
(45,353
|
)
|
|
|
(2,953
|
)
|
|
|
—
|
|
Non-compete agreement
|
|
3
|
to
|
6.25
|
|
|
50,925
|
|
|
|
(21,410
|
)
|
|
|
(29,515
|
)
|
|
|
—
|
|
Agency agreement and license
|
|
4.6
|
to
|
9.8
|
|
|
14,535
|
|
|
|
(14,458
|
)
|
|
|
(77
|
)
|
|
|
—
|
|
Software and system
|
|
2
|
to
|
10
|
|
|
65,680
|
|
|
|
(50,680
|
)
|
|
|
—
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
204,748
|
|
|
|
(138,589
|
)
|
|
|
(48,949
|
)
|
|
|
17,210
|
|
Aggregate amortization
expenses for intangible assets were RMB11,571, RMB20,232 and RMB33,177 for the years ended December 31, 2015, 2016 and 2017, respectively.
Impairment of intangible
assets with definite lives
The Group evaluates
the recoverability of identifiable intangible assets with determinable useful lives whenever events or changes in circumstances
indicate that these assets' carrying amounts may not be recoverable. The Group measures the carrying amount of identifiable intangible
assets with determinable useful lives against the estimated undiscounted future cash flows associated with each asset. Impairment
exists when the sum of the expected future net cash flows is less than the carrying value of the asset being evaluated. Impairment
loss is calculated as the amount by which the carrying value of the asset exceeds its fair value. Fair value is estimated based
on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment
requires the Group to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require
significant judgment and actual results may differ from assumed and estimated amounts. During the years ended December 31, 2015,
2016 and 2017, the Group recognized no impairment losses on identifiable intangible assets with determinable useful lives.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
Impairment of indefinite-lived
intangible assets
An intangible asset
that is not subject to amortization is tested for impairment at least annually or more frequently if events or changes in circumstances
indicate that the asset might be impaired. Such impairment test is to compare the fair values of assets with their carrying amounts
and an impairment loss is recognized if and when the carrying amounts exceed the fair values. The estimates of fair values of intangible
assets not subject to amortization are determined using various discounted cash flow valuation methodologies. Significant assumptions
are inherent in this process, including estimates of discount rates or market price. Discount rate assumptions are based on an
assessment of the risk inherent in the respective intangible assets. Market prices are based on potential purchase quote from a
third party, if any. During the years ended December 31, 2015, 2016 and 2017, the Group recognized no impairment losses on its
indefinite-lived intangible assets.
The estimated amortization
expenses for the next five years are: RMB15,942 in 2018, RMB942 in 2019, RMB278 in 2020, RMB48 in 2021 and nil in 2022.
|
(h)
|
Other Receivables and Other Current Assets
|
Other receivables and
other current assets mainly consist of loans and amounts due from third parties, advances, deposits, interest receivables, value-added
tax recoverable and prepaid expenses. See Note 4 for details.
|
(i)
|
Investment in Affiliates
|
Affiliated companies
are entities over which the Group has significant influence, but which it does not control. The Group generally considers an ownership
interest of 20% or higher to represent significant influence. Investments in affiliates are accounted for using the equity method.
The Group does not control the affiliates but exerts significant influence over them.
|
(j)
|
Other Non-current Assets
|
Other non-current assets
mainly represent investments in equity security of private companies which the group owns equity interest of less than 20%, over
which the Group exerts no significant influence and are measured initially at cost. Management compared the carrying value of other
non-current assets to its respective fair value. If the carrying amount of the asset exceeds its fair value, an impairment charge
is recognized for the amount by which the carrying value of the asset exceeds the fair value of the asset.
|
(k)
|
Impairment of Long-Lived Assets
|
Property, plant, and
equipment, and purchased intangible assets with definite lives, subject to amortization, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized for the amount by which the carrying value of the asset exceeds the fair value of the asset.
|
(l)
|
Insurance Premium Payables
|
Insurance premium payables
are insurance premiums collected on behalf of insurance companies but not yet remitted as of the balance sheet dates.
|
(m)
|
Subscription Receivables
|
The Group entered into
share purchase agreements with companies established on behalf of its employees (the "Employee Companies") for the issuance
of 100,000,000 ordinary shares at US$0.27 per ordinary share and 50,000,000 ordinary shares at US$0.29 per ordinary share in 2014.
The issue prices are the average closing prices for the 20 trading days prior to the board approval dates of such subscriptions.
The sale of shares to the Employee Companies was completed on December 17, 2014.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
In order to facilitate
the purchase of shares by employees as described above, the Group has granted a loan to the Employee Companies. The loan bears
interest at a rate of 3.0% per annum and is repayable upon the sale of the shares by employees, termination of employment or within
two years, whichever comes first. Please refer to Note 12 for details. The interest rate is determined with reference to fair market
prices and therefore no interest-related compensation expense is recorded. Upon the expiry of the loan agreement on December 17,
2016, the repayment maturity of the loan was further extended to June 2018 and the loan continues to bear interest at a rate of
3.0% per annum.
According to FASB ASC
505-10-45, the loan is recorded as a separate line of deduction from equity in the Group’s consolidated statements of financial
position as of December 31, 2016 and 2017. Interest income accruing from the loan is recognized as non-operating income. During
the year 2017, the Company received repayment of principal in the amount of RMB22,187 (US$3,272) and interest in the amount of
RMB1,331 (US$196).
Treasury
shares represent ordinary shares repurchased by the Group that are no longer outstanding and are held by the Group. The repurchase
of ordinary shares is accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury
stocks.
During the year ended
December 31, 2015, the Group had repurchased a total of 2,261,100 shares from the market for a cash consideration of RMB6,276.
As of December 31, 2015, all the treasury stock had been re-issued for the exercise of stock options. There was no repurchase of
ordinary shares by the Group occurred during the years ended December 31, 2016 and 2017.
Income taxes are accounted
for under the asset and liability method. Deferred income taxes are recognized for temporary differences between the tax basis
of assets and liabilities and their reported amounts in the consolidated financial statements, net operating loss carryforwards
and credits by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will
not be realized.
The Group presents
an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the statements of financial position as a reduction
to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the
extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date
under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance
of a tax position or the tax law of the applicable jurisdiction does not require the Group to use, and the Group does not intend
to use, the deferred tax asset for such purpose, the unrecognized tax benefit is presented in the statements of financial position
as a liability.
In November 2015, the
FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, related to balance sheet classification of deferred taxes.
The ASU requires that deferred tax assets and liabilities be classified as noncurrent in the statements of financial position,
thereby simplifying the current guidance that requires an entity to separate deferred assets and liabilities into current and noncurrent
amount. The Group adopted ASU 2015-17 on a prospective basis in 2016. Accordingly, all net deferred tax assets are presented as
non-current deferred tax assets as of December 31, 2016 and 2017 in the accompanying Consolidated Statements of Financial Position
and Note 11.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
|
(p)
|
Share-based Compensation
|
Employee
share-based compensation
All forms of share-based
payments to employees, including employee stock options and employee stock purchase plans, are treated the same as any other form
of compensation by recognizing the related cost in the consolidated statements of income and comprehensive income. Compensation
cost related to employee stock options or similar equity instruments is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting period. If an award requires satisfaction of one
or more performance or service conditions (or any combination thereof), compensation cost is recognized if the requisite service
is rendered, and no compensation cost is recognized if the requisite service is not rendered. The Group recognizes compensation
cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service
period for the entire award, provided that the amount of compensation cost recognized at any date must at least equal the portion
of the grant-date value of the award that is vested at that date. For awards with both service and performance conditions, if each
tranche has an independent performance condition for a specified period of service, the Group recognizes the compensation cost
of each tranche as a separate award on a straight-line basis; if each tranche has performance conditions that are dependent of
activities that occur in the prior service periods, the Group recognizes the compensation cost on a straight-line basis over the
requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards. No
compensation cost is recognized for instruments that employees forfeit because a service condition or a performance condition is
not satisfied.
Share-based compensation
expenses of RMB17,653, RMB4,937 and nil for the years ended December 31, 2015, 2016 and 2017, respectively, were included in the
general and administrative expenses.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
|
(q)
|
Employee Benefit Plans
|
As stipulated by the
regulations of the PRC, the Group’s subsidiaries and VIEs in the PRC participate in various defined contribution plans organized
by municipal and provincial governments for its employees. The Group is required to make contributions to these plans at a percentage
of the salaries, bonuses and certain allowances of the employees. Under these plans, certain pension, medical and other welfare
benefits are provided to employees. The Group has no other material obligation for the payment of employee benefits associated
with these plans other than the annual contributions described above. The contributions are charged to the consolidated statements
of income and comprehensive income as they become payable in accordance with the rules of the above mentioned defined contribution
plans.
The Group’s revenue
is derived principally from the provision of insurance brokerage, agency and claims adjusting services. The Group recognizes revenue
when all of the following have occurred: persuasive evidence of an agreement with the insurance companies or insurance agencies
exists, services have been provided, the fees for such services are fixed or determinable and collectability of the fee is reasonably
assured.
Insurance agency services
are considered to be rendered and completed, and revenue is recognized, at the time an insurance policy becomes effective, that
is, when the signed insurance policy is in place and the premium is collected from the insured. The Group has met all the four
criteria of revenue recognition when the premiums are collected by the Group or the respective insurance companies and not before,
because collectability is not ensured until receipt of the premium. Accordingly, the Group does not accrue any commission and fees
prior to the receipt of the related premiums.
Insurance brokerage
services revenue is recognized when the signed insurance policy is in place and the premium is collected from the insured and the
commission settlement confirmation is received from insurance companies, because the commission rate for brokerage services is
negotiated case by case and the Group’s fees are fixed when such confirmation is received.
No allowance for cancellation
has been recognized for agency and brokerage businesses as the management of the Group estimates, based on its past experience
that the cancellation of policies rarely occurs. Any subsequent commission adjustments in connection with policy cancellations
which have been deminims to date are recognized upon notification from the insurance carriers. Actual commission and fee adjustments
in connection with the cancellation of policies were 0.2%, 0.2% and 0.2% of the total commission and fee revenues during years
ended December 31, 2015, 2016 and 2017, respectively. For property insurance and life insurance, agency and brokerage services,
the Group may receive a performance bonus from insurance companies as agreed and per contract provisions. Once an agency and brokerage
group achieves its performance target, typically a certain sales volume, the bonus will become due. The bonus amount is computed
based on the insurance premium amount multiplied by an agreed-upon percentage. The contingent commissions are recorded when a performance
target is being achieved.
Insurance claims adjusting
services are considered to be rendered and completed, and revenue is recognized at the time loss adjusting reports are confirmed
being received by insurance companies. The Group has met all the four criteria of revenue recognition when the service is provided
and the loss adjusting report is accepted by insurance companies. The Group does not accrue any service fee before the receipt
of an insurance company’s acknowledgement of receiving the adjusting reports. Any subsequent adjustments in connection with
discounts which have been de minims to date are recognized in revenue upon notification from the insurance companies.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
The Group presents
revenue net of sales taxes incurred. The sales taxes amounted to RMB157,234, RMB81,890 and RMB25,239 for the years ended December
31, 2015, 2016 and 2017, respectively. According to the Announcement on the VAT Reform Pilot Program of the Transportation and
Selected Modern Service Sectors issued by the State Tax Bureau in July 2012, the transportation and some selected modern service
sectors, including research and development (R&D) and technical services, information technology services, cultural creative
services, logistics support services, tangible personal property leasing services, and assurance and consulting service, should
pay value-added tax instead of business tax based on a predetermined timetable (hereinafter referred to as the “VAT Reform”),
effective September 1, 2012 for entities in Beijing and November 1, 2012 for entities in Guangdong. The VAT Reform expanded nation-wide
from August 1, 2013.
In March 2016, during
the fourth session of the 12th National People’s Congress, it was announced that the VAT reform will be fully rolled out
and extended to all industries including construction, real estate, financial services and lifestyle services. Subsequently, the
State Administration of Taxation and Ministry of Finance jointly issued a Notice on Preparing for the Full Implementation of the
VAT Reform (Cai Shui [2016] No. 36). Accordingly, the Group started to pay value-added tax instead of business tax from May 1,
2016.
Total Value-added taxes
paid by the Group during the years ended December 31, 2015, 2016 and 2017 amounted to RMB16,370 RMB160,556 and RMB157,607, respectively.
|
(s)
|
Marketing campaign expense
|
The Group records its
marketing campaign expenses as selling expenses.
Marketing campaign
expenses are incurred to increase the Group's market share and attract more agents in certain selected regions where the Group
strategically plans to capture higher market shares. These costs are not a necessary expense to sell the insurance policy. Such
expenses are temporary with the terms of regional programs ranging from one to three months, cancellable at any time without further
notice. Marketing campaign expenses are only recognized when such campaigns are officially announced by the Group to the agents.
The Group records the marketing campaign expenses when the related services are provided. During the years ended December
31, 2015, 2016 and 2017, RMB19,503, RMB299,885 and Nil of marketing campaign expenses were included in the selling expenses balance,
respectively. The decrease was primarily due to promotional marketing expenses which were paid to sales agents in 2015 and 2016,
while no promotional marketing plan of such nature was launched in the year of 2017.
|
(t)
|
Fair Value of Financial Instruments
|
Fair value is considered
to be the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or
permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact
and considers assumptions that market participants would use when pricing the asset or liability. The established fair value hierarchy
requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant
to the fair value measurement. The three levels of inputs may be used to measure fair value include:
Level 1
|
Applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
|
Level 2
|
Applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
|
Level 3
|
Applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
|
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
The carrying values
of the Group’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, insurance
premium receivables and payables, other receivables, accounts payable and other payables, amounts due from related parties, approximate
their fair values due to the short term nature of these instruments.
Measured at fair
value on a recurring basis
As of December 31,
2016 and 2017, information about inputs into the fair value measurements of the Group’s assets and liabilities that are measured
at fair value on a recurring basis in periods subsequent to their initial recognition is as follows.
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
Description
|
|
As of
December 31,
2016
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
Short-term investments - debt security
|
|
|
2,797,842
|
|
|
|
—
|
|
|
|
2,797,842
|
|
|
|
—
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
Description
|
|
As of
December 31,
2017
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
Short-term investments - debt security
|
|
|
2,498,730
|
|
|
|
—
|
|
|
|
2,498,730
|
|
|
|
—
|
|
The majority of debt
security consists of investments in trust products and asset management plans that normally pay a prospective fixed rate of return.
These investments are recorded at fair values on a recurring basis. The Group benchmarks the costs against fair values of comparable
investments with similar measurement terms, such as prevailing market yields, at the balance sheet date. It is classified as Level
2 of the fair value hierarchy since fair value measurement at reporting date uses significant other observable inputs.
As described in Note 3, the Group disposed of the equity interests in Fanhua Times Sales & Service Co.,
Ltd., and its subsidiaries which primarily conduct P&C insurance business (collectively, the "P&C Insurance Division")
to a third party, call Beijing Cheche Technology Co., Ltd. ("Cheche"), for a consideration including a convertible loan
receivable. The Group evaluated the loan receivable’s settlement provisions and elected the fair value option afforded in
ASC 825, Financial Instruments, to value this instrument. Under such election, the loan receivable is measured initially and subsequently
at fair value, with any changes in the fair value of the instrument being recorded in the consolidated financial statements as
a change in fair value of derivative instruments. The Group estimates the fair value of this instrument by first estimating the
fair value of the straight debt portion. The Group then estimates the fair value of the embedded conversion option based on financial
performance and growth rate of revenue of Cheche. The sum of these two valuations is the fair value of the loan receivable included
in other non-current assets. On October 31, 2017, the Group used the discounted cash flow method to value the debt portion of the
convertible debt and determined the fair value to be RMB 22,000. Based on Cheche's current and expected financial performance,
industry trend and expected revenue and margin, management considered the conversion option to be deeply out of the money and determined
the fair value of the option to be immaterial. Accordingly, further analysis under an option pricing model is considered not necessary.
The total fair value of RMB 22,000 was initially recognized and the balance remained the same and retained in other non-current
assets as of December 31, 2017. The convertible debt is classified as Level 3 of the fair value hierarchy since fair value measurement
uses unobservable inputs.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
Measured at fair
value on a non-recurring basis
The Group measures
certain assets, including the cost method investments, equity method investments and intangible assets, at fair value on a nonrecurring
basis when they are deemed to be impaired. The fair values of these investments and intangible assets are determined based on valuation
techniques using the best information available, and may include management judgments, future performance projections, etc. An
impairment charge to these investments is recorded when the cost of the investment exceeds its fair value and this condition is
determined to be other-than-temporary. Impairment charge to the intangible assets is recorded when their carrying amounts may not
be recoverable.
Goodwill (Note 6) and
intangible assets (Note 2(g)) with indefinite lives are measured at fair value on a nonrecurring basis and they are recorded at
fair value only when impairment is recognized by applying unobservable inputs such as forecasted financial performance of the acquired
business, discount rate, etc. to the discounted cash flow valuation methodology that are significant to the measurement of the
fair value of these assets (Level 3).
The functional currency
of the Company is the United States dollar ("USD"). Assets and liabilities are translated at the exchange rates at the
balance sheet date, equity accounts are translated at historical exchange rates and revenues, expenses, gains and losses are translated
using the average rate for the year. Translation adjustments are reported as cumulative translation adjustments and are shown as
a separate component of other comprehensive income or loss in the consolidated statements of income and comprehensive income. The
Group has chosen the Renminbi ("RMB") as their reporting currency.
The functional currency
of most of the Company’s subsidiaries and VIEs is RMB. Transactions in other currencies are recorded in RMB at the rates
of exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies are translated
into RMB at rates of exchange in effect at the balance sheet dates. Exchange gains and losses are recorded in the consolidated
statements of income and comprehensive income.
|
(v)
|
Foreign Currency Risk
|
The RMB is not a freely
convertible currency. The State Administration for Foreign Exchange, under the authority of the People's Bank of China, controls
the conversion of RMB into foreign currencies. The value of RMB is subject to changes in central government policies and international
economic and political developments that affect supply and demand in the China Foreign Exchange Trading System market of cash and
cash equivalents and restricted cash. The Group had aggregate amounts of RMB253,725 and RMB266,392 of cash and cash equivalents
and restricted cash denominated in RMB as of December 31, 2016 and 2017, respectively.
The consolidated financial
statements of the Group are stated in RMB. Translations of amounts from RMB into USD are solely for the convenience of the readers
and were calculated at the rate of US$1.00 = RMB6.5063, representing the noon buying rate in the City of New York for cable transfers
of RMB on December 29, 2017, the last business day in fiscal year 2017, as set forth in H.10 statistical release of the Federal
Reserve Bank of New York. The translation is not intended to imply that the RMB amounts could have been, or could be, converted,
realized or settled into USD at such rate.
|
(x)
|
Discontinued Operations
|
Under ASC 205-20 "Presentation of Financial Statements - Discontinued Operation", a discontinued operation
may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of
a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal
represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when
any of the following occurs: (1) the component of an entity or group of components of an entity meets the criteria to be classified
as held for sale; (2) the component of an entity or group of components of an entity is disposed of by sale; (3) the component
of an entity or group of components of an entity is disposed of other than by sale (for example, by abandonment or in a distribution
to owners in a spinoff).
In November 2017, the
Group completed the sale of its brokerage business. The Group's results of operations related to discontinued operations have been
restated as discontinued operations on a retrospective basis for all periods presented accordingly. See Note 3 for details.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
As of December 31,
2016, the Group operated three segments: (1) the insurance agency segment, which mainly consists of providing agency services for
P&C insurance products and life insurance products to individual clients, (2) the insurance brokerage segment, which mainly
consists of providing P&C and life insurance brokerage services to institutional clients, and (3) the claims adjusting segment,
which consists of providing pre-underwriting survey services, claim adjusting services, disposal of residual value services, loading
and unloading supervision services, and consulting services. However, these three segments were reduced to two in 2017 due to the
disposal of the brokerage segment further described in Note 3. The Group retained only the insurance agency segment and claims
adjusting segment as of December 31, 2017. Details of these remaining operating segments are further described in Note 21. Operating
segments are defined as components of an enterprise for instead of about which separate financial information is available and
evaluated regularly by the Group's chief operating decision maker in deciding how to allocate resources and in assessing performance.
Substantially all revenues
of the Group are derived in the PRC and all long-lived assets are located in the PRC.
|
(z)
|
Earnings per Share ("EPS") or ADS
|
Basic EPS is calculated
by dividing the net income available to common shareholders by the weighted average number of ordinary shares /ADS outstanding
during the year. Diluted EPS is calculated by using the weighted average number of ordinary shares /ADS outstanding adjusted to
include the potentially dilutive effect of outstanding share-based awards, unless their inclusion in the calculation is anti-dilutive.
Advertising costs are
expensed as incurred. Advertising costs amounted to RMB5,696, RMB18,085 and RMB35,741 for the years ended December 31, 2015, 2016
and 2017, respectively.
Leases where substantially
all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Payments
made under operating leases are charged to the consolidated statements of income and comprehensive income over the lease period.
|
(ac)
|
Accumulated Other Comprehensive Income
|
The Group presents
comprehensive income in the consolidated statements of income and comprehensive income with net income in a continuous statement.
Accumulated other comprehensive
income mainly represents foreign currency translation adjustments and share of other comprehensive income of the affiliates for
the period.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
|
(ad)
|
Recently Issued Accounting Standards Not Yet Adopted
|
In May 2014, the Financial
Accounting Standards Board ("FASB") issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)"
which amended the existing accounting standards for revenue recognition. The core principle of the new guidance is for companies
to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is,
payment) to which the company expects to be entitled in exchange for those goods or services. The new guidance also will result
in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for
example, service revenue and contract modifications) and improve guidance for multiple element arrangements.
Subsequently, the FASB
issued the following various updates affecting the guidance in ASU 2014-09: ASU 2016-08, Revenue from Contracts with Customers
(Topic 606): Principal versus Agent Considerations; ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing; ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients; ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.
The Group must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 with ASU 2014-09 (collectively, the "new revenue
standards").
In November 2017, the
FASB has issued ASU No. 2017-14, Income Statement—Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic
605), and Revenue from Contracts with Customers (Topic 606). ASU 2017-14 includes amendments to certain SEC paragraphs within the
FASB Accounting Standards Codification (Codification). ASU 2017-14 amends the Codification to incorporate the following previously
issued guidance from the SEC. ‘The amendments in ASU No. 2017-14 amends the Codification to incorporate SEC Staff Accounting
Bulletin (SAB) No. 116 and SEC Interpretive Release on Vaccines for Federal Government Stockpiles (SEC Release No. 33-10403) that
bring existing SEC staff guidance into conformity with the FASB’s adoption of and amendments to ASC Topic 606, Revenue from
Contracts with Customers.
The new revenue standards
may be applied retrospectively to each prior period presented (full retrospective method) or retrospectively with the cumulative
effect recognized as of the date of initial application (the modified retrospective method). The Group has substantially completed
its study on the impact that implementing this standard will have on its consolidated financial statements, related disclosures
and the internal control over financial reporting as well as whether the effect will be material to the revenue. Based on the results
of the Group's study to date, the standard will not be material to the revenue at adoption. An analysis of the control environment
was completed and appropriate updates to the control processes have been implemented. Additionally, the Group's revenue
disclosures will change in fiscal 2018 and beyond. The new disclosures will require more granularity into the sources
of revenue, as well as the assumptions about recognition timing, and include the selection of certain practical expedients and
policy elections. The Group will use the modified retrospective approach upon adoption of this guidance effective January 1, 2018.
The Group has assessed the impacts of the new accounting standard and has implemented accounting and operational processes and
controls to ensure compliance with the new standard. The Group expects there is no material impact upon adoption of this standard
on the consolidated financial statements.
The new standard provides
guidance on accounting for certain revenue-related costs including when to capitalize costs associated with obtaining and fulfilling
a contract. As the Group's commission costs are incurred to obtain contracts where the renewal period is one year or less and renewal
costs are commensurate with the initial contract, the Group plans to apply a practical expedient and recognize the costs of obtaining
a contract as an expense when incurred.
In February 2016, the
FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on the balance sheet. This ASU
requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Lessees
are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months
or less. The ASU does not significantly change the lessees' recognition, measurement and presentation of expenses and cash flows
from the previous accounting standard. Lessors' accounting under the ASC is largely unchanged from the previous accounting standard.
In addition, the ASU expands the disclosure requirements of lease arrangements. Lessees and lessors will use a modified retrospective
transition approach, which includes a number of practical expedients. For public business entities, the provisions of this guidance
are effective for annual periods beginning after December 15, 2018, and interim periods within those years, with early adoption
permitted. The Group is currently gathering, documenting and analyzing lease agreements subject to this ASU and anticipates material
addition to the consolidated statements of financial position (upon adoption) of right-of-use assets, offset by the associated
liabilities, due to the routine use of operating leases over time.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
In June 2016, the FASB
issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,
which is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial
instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses
for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable
forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit
loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques
will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which
loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other
financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the
credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative
requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends
the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.
For public business entities that are U.S. SEC filers, the ASU is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2019. The Group is in the process of evaluating the impact of adoption of this guidance
on the Group's consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment. This ASU addresses concerns regarding the cost and complexity of the two-step goodwill impairment
test, the amendments in this ASU remove the second step of the test. An entity will apply a one-step quantitative test and record
the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total
amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill
impairment. The update should be applied on a prospective basis. The nature of and reason for the change in accounting principle
should be disclosed upon transition. For public companies, the update is effective for any annual or interim goodwill impairment
tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. The Group expects there is no material impact upon adoption of this guidance
on the Group's consolidated financial statements.
In September 2017,
the FASB has issued ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases
(Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF
Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments.” The amendments in ASU No. 2017-13 amends
the early adoption date option for certain companies related to the adoption of ASU No. 2014-09 and ASU No. 2016-02. The effective
date is the same as the effective date and transition requirements for the amendments for ASU 2014-09 and ASU 2016-02.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
(3)
|
|
Acquisitions, disposals and reorganization
|
Disposal of subsidiaries
in 2017
|
a.
|
Disposal of Beijing Ruisike Management Consulting Co., Ltd.
|
In January 2017,
the Group disposed of Beijing Ruisike Management Consulting Co., Ltd to a third party, for a total cash consideration of
RMB20,867, which was settled as of December 31, 2017. The Group recognized a gain of RMB2,029 on disposal of this subsidiary,
which was determined by the excess of the sales consideration over the net book value of the subsidiary at the time of
disposal.
|
b.
|
Disposal of Fanhua Times Sales & Service Co., Ltd and its subsidiaries
|
In October 2017, the Group entered into a share transfer agreement with Cheche, which operates an online
auto insurance platform. Under this agreement, the Group disposed of the equity interests in P&C Insurance Division, to
Cheche for a total consideration of RMB225,398, including RMB95,398 cash consideration and RMB130,000 in the form of a convertible
loan receivable, which is convertible or collectible in three years and recognized as other non-current assets. The Group evaluated
the convertible loan receivable's settlement provisions and elected the fair value option afforded in ASC 825, Financial Instruments,
to value this instrument. Under such election, the loan receivable is measured initially and subsequently at fair value, with any
changes in the fair value of the instrument being recorded in the consolidated financial statements as a change in fair value of
derivative instruments. The Group estimates the fair value of this instrument by first estimating the fair value of the straight
debt portion. The Group then estimates the fair value of the embedded conversion option based on the recent development of Cheche.
The sum of these two valuations is the fair value of the loan receivable included in other non-current assets. On October 31, 2017,
the Group used the discounted cash flow method to value the debt portion of the convertible loan receivable and determined the
fair value to be RMB 22,000, and based on Cheche's current and expected financial performance, industry trend and expected revenue
and margin, management considered the conversion option to be deeply out of the money and determined the fair value of the option
to be immaterial. As a result, the carrying amount of the convertible loan receivable was adjusted by RMB108,000. The total fair
value of RMB 22,000 was initially recognized and the balance remained the same and retained in other non-current assets as of December
31, 2017.
The convertible loan
receivable also carries a 10% interest return per annum which could be satisfied by cash or converted equity interest in Cheche.
The related interest income in 2017 is about RMB367. When the convertible loan receivable expires, the Group has the right to convert
to the equity interests of Cheche, or recover the principal and interests of the convertible loan receivable according to the agreement.
The Group recognized RMB884 gain on disposal of these subsidiaries, which was determined by the excess of the cash consideration
and fair value of the convertible loan receivable over the net book value of the subsidiaries, which was calculated to be RMB116,514
at the time of disposal. The net book value of the subsidiaries at the time of disposal also included goodwill allocated to this
disposal in the amount of RMB12,208.
|
c.
|
Disposal of Fanhua Bocheng Brokerage Limited ("Bocheng")
|
In November 2017, the
Group disposed of Bocheng to a third party for a total consideration of RMB46,582. And the consideration receivable was further
offset by the other payables to Bocheng, see Note 18 Non-cash transactions for details. Prior to the disposal, the Group had a
liability due to Bocheng in the amount of RMB103,446, which was settled in December 2017. The Group recognized loss of RMB904 on
the disposal of this subsidiary, which was determined by the excess of the net book value of the subsidiary at the time of disposal
over the sales consideration. As a result of this disposal, brokerage's result of operations should be reclassified to discontinued
operations. Brokerage segment is no longer valid as of December 31, 2017. And accordingly, the segment note disclosure to the prior
year consolidated financial statements have been restated.
As described in Note
2(x), the assets and liabilities of the brokerage business were segregated and reclassified as held for sale in the consolidated
statements of financial position as of December 31, 2016, and the activities of the brokerage business were segregated and reported
as discontinued operations in the consolidated statements of income and comprehensive income for all periods presented.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
The following table
presents a reconciliation of the carrying amounts of major classes of assets and liabilities of the discontinued operations to
total assets and liabilities of the disposal group classified as held for sale in the consolidated statements of financial position
as of December 31, 2016:
|
|
As of December 31,
2016
|
|
|
RMB
|
ASSETS:
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
|
3,290
|
|
Restricted cash
|
|
|
1,741
|
|
Accounts receivable
|
|
|
1,171
|
|
Other receivables
|
|
|
92
|
|
Other current assets
|
|
|
6,670
|
|
Total current assets
|
|
|
12,964
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
Property, plant, and equipment, net
|
|
|
76
|
|
Total non-current assets
|
|
|
76
|
|
|
|
|
|
|
Total assets
|
|
|
13,040
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
|
37,236
|
|
Insurance premium payables
|
|
|
1,741
|
|
Other payables and accrued expenses
|
|
|
40,593
|
|
Accrued payroll
|
|
|
443
|
|
Income taxes payable
|
|
|
70
|
|
Total current liabilities
|
|
|
80,083
|
|
|
|
|
|
|
Total liabilities
|
|
|
80,083
|
|
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
The following table presents a reconciliation
of the major classes of line items constituting pretax from discontinued operations to after-tax profit reported in discontinued
operations for the years ended December 31, 2015, 2016 and 2017:
|
|
Year ended December 31,
|
|
|
2015
|
|
2016
|
|
2017
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
Results of discontinued operations:
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
369,198
|
|
|
|
617,738
|
|
|
|
172,993
|
|
|
|
26,589
|
|
Total operating costs
|
|
|
(293,876
|
)
|
|
|
(503,926
|
)
|
|
|
(163,079
|
)
|
|
|
(25,065
|
)
|
Selling expenses
|
|
|
(18,238
|
)
|
|
|
(86,019
|
)
|
|
|
(190
|
)
|
|
|
(29
|
)
|
General and administrative expenses
|
|
|
(7,010
|
)
|
|
|
(5,287
|
)
|
|
|
(3,380
|
)
|
|
|
(519
|
)
|
Other, net
|
|
|
(7,894
|
)
|
|
|
1,141
|
|
|
|
40
|
|
|
|
6
|
|
Loss on disposal of discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
(904
|
)
|
|
|
(140
|
)
|
Income from discontinued operations before income taxes
|
|
|
42,180
|
|
|
|
23,647
|
|
|
|
5,480
|
|
|
|
842
|
|
Income taxes expense
|
|
|
(312
|
)
|
|
|
(1,104
|
)
|
|
|
—
|
|
|
|
—
|
|
Net income from discontinued operations, net of tax
|
|
|
41,868
|
|
|
|
22,543
|
|
|
|
5,480
|
|
|
|
842
|
|
|
|
Year ended December 31,
|
|
|
2015
|
|
2016
|
|
2017
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
Cash flow from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash generated from (used in) operating activities*
|
|
|
3,093
|
|
|
|
(1,616
|
)
|
|
|
8,992
|
|
|
|
1,382
|
|
Net cash used in investing activities
|
|
|
(34
|
)
|
|
|
(12
|
)
|
|
|
—
|
|
|
|
—
|
|
Net cash generated from financing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net cash increase (decrease) in cash and, cash equivalents, and restricted cash
|
|
|
3,059
|
|
|
|
(1,628
|
)
|
|
|
8,992
|
|
|
|
1,382
|
|
Cash and, cash equivalents and restricted cash at beginning of year
|
|
|
3,600
|
|
|
|
6,659
|
|
|
|
5,031
|
|
|
|
773
|
|
Cash and, cash equivalents, and restricted cash at the disposal date
|
|
|
—
|
|
|
|
—
|
|
|
|
14,023
|
|
|
|
2,155
|
|
Cash and, cash equivalents and restricted cash at end of year
|
|
|
6,659
|
|
|
|
5,031
|
|
|
|
—
|
|
|
|
—
|
|
*Including adjustment for the loss from disposal of the discontinued
operations in the amount of RMB904 in 2017.
As of respective closing
date of each of these disposals in 2017, the Group has completed the closing procedures of all the above transactions and has effectively
transferred its control of these subsidiaries to the respective buyers.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
Acquisition of additional
interests in a subsidiary in 2016
On May 9, 2016, the
Group entered into a share purchase agreement with the minority shareholders of Inscom Holding Limited ("Inscom") to
acquire the remaining 34.9% of the equity interests in Inscom and the outstanding share options of Inscom for a total consideration
of approximately RMB198,776 which consists of (i) RMB179,223 in cash after netting off with the receivable of RMB1,836 in relation
with the exercise of the Inscom share options, and (ii) 7,416,000 ordinary shares of the Company. Upon completion of the acquisition
in May 2016, the Group's equity interests in Inscom increased from 65.1% to 100%.
The schedule below
discloses the effects of changes in the Group’s ownership in subsidiaries on the Group's equity:
|
|
Year ended
December 31, 2016
|
|
|
RMB
|
Net income attributable to the Company's shareholders
|
|
|
157,047
|
|
Decrease in Company's additional paid-in capital for acquisitions of additional equity interests from noncontrolling interests
|
|
|
(174,779
|
)
|
Changes from net income attributable to Company’s shareholders and transfers to noncontrolling interests
|
|
|
(17,732
|
)
|
Disposals of subsidiaries
in 2016
During the year ended
December 31, 2016, the Group disposed of three subsidiaries, including Shandong Fanhua Mintai Insurance Agency Co., Ltd ("Shandong
Mintai"), Guangdong Huajie Insurance Agency Co., Ltd ("Guangdong Huajie") and Dongguan Zhongxin Insurance Agency
Co., Ltd ("Dongguan Zhongxin"), for a total cash consideration of RMB30,712. The Group recognized RMB3,082 gain on disposal
of subsidiaries, which was determined by the excess of the sales consideration over the net book value of the subsidiaries at the
time of disposal.
As of December 31,
2016, the Group has completed the closing procedures of all the above transactions and has effectively transferred its control
of Shandong Mintai, Guangdong Huajie and Dongguan Zhongxin to the respective buyers.
Acquisitions and
reorganization in 2015
Acquisitions of
additional interests in subsidiaries
During the year ended
December 31, 2015, the Group had entered into several agreements to acquire from the non-controlling shareholders of certain of
the Group's subsidiaries the additional interests in those subsidiaries for total consideration of RMB187,810. The Group retains
its controlling financial interests before and after the transactions.
The schedule below
discloses the effects of changes in the Group's ownership in subsidiaries on the Group's equity:
|
|
Year ended
December 31, 2015
|
|
|
RMB
|
Net income attributable to the Company's shareholders
|
|
|
210,086
|
|
Decrease in Company's additional paid-in capital for acquisitions of additional equity interests from noncontrolling interests
|
|
|
(160,023
|
)
|
Changes from net income attributable to Company’s shareholders and transfers to noncontrolling interests
|
|
|
50,063
|
|
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
Reorganization
In June 2015, Fanhua
Insurance Surveyors & Loss Adjustors Holding Co., Ltd. ("FHISLA") introduced two new investors, Shenzhen Yuanqian
Investment Partnership (Limited Partnership) and Shenzhen Longqian Investment Partnership (Limited Partnership), hereinafter referred
to as “Yuanqian” and “Longqian”. Yuanqian and Longqian together subscribed for a total of 12.4% of the
equity interests in FHISLA for a cash consideration of RMB17,000. In July 2015, Fangzhong transferred 44.7% and 42.9% of the equity
interests in FHISLA to Guangdong Meidiya Investment Co., Ltd. (“Meidiya Investments”), a subsidiary of the Group, and
22 individuals, among whom were management members of the claims adjusting segment, for total purchase prices of RMB61,200 and
RMB58,800, respectively. After the FHISLA Restructuring, the Group owns 44.7% of the equity interests and remains the largest shareholder.
The Group continues to exercise substantial control over FHISLA pursuant to shareholders’ agreements signed with Yuanqian,
Longqian and two executive officers of the claims adjusting segment. The Group recorded stock compensation expense of RMB3,400,
being the excess of the estimated fair value of Yuanqian, Longqian and 22 individual’s equity interest in FHISLA over the
consideration paid by the investors.
In July 2015, in order
to align the interests of the founding team of Chetong.net with the growth of the platform, Fangzhong, the subsidiary of the Group
transferred 80.1% of the equity interests in Chetong Network to the management and employees of Chetong Network for cash consideration
of RMB16,020, and 19.9% of the equity interests in Chetong Network to FHISLA for cash consideration of RMB3,980 which approximated
its fair value at the disposal date. As a result, FHISLA and the management and employees of Chetong Network currently hold 19.9%
and 80.1% of Chetong Network, respectively.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
(4)
|
|
Other Receivables, net
|
Other receivables,
net are analyzed as follows:
|
|
As of December 31,
|
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
Advances to staff (i)
|
|
|
9,250
|
|
|
|
14,599
|
|
Advances to entrepreneurial agents (ii)
|
|
|
1,270
|
|
|
|
1,308
|
|
Rental deposits
|
|
|
7,997
|
|
|
|
7,709
|
|
Interest receivables (iii)
|
|
|
17,620
|
|
|
|
23,038
|
|
Loan to third party (iv)
|
|
|
—
|
|
|
|
513,180
|
|
Amount due from third party (v)
|
|
|
—
|
|
|
|
42,152
|
|
Other
|
|
|
12,957
|
|
|
|
29,395
|
|
Other receivables, net
|
|
|
49,094
|
|
|
|
631,381
|
|
|
(i)
|
This represented advances to staff of the Group for daily business operations which are unsecured,
interest-free and repayable on demand.
|
|
(ii)
|
This represented advances to entrepreneurial agents who provide services to the Group. The advances
are used by agents to develop business. The advances were unsecured, interest-free and repayable on demand.
|
|
(iii)
|
This represented accrued interest income on bank deposits and accrued interest on
subscription receivables (Note 2(m)).
|
|
(iv)
|
This represented loan to Shenzhen Chuangjia Investment Partnership Limited ("Chuangjia")
of RMB500,000 and corresponding interest receivable RMB13,180. The loan is secured by the 99% equity share of Chengdu Puyi Bohui
Information Technology Limited ("Puyi Bohui"), a major operating subsidiary of Chuangjia, with interest rate 7.3% per
annum. The loan will be matured in August 2018 according to the agreement.
|
|
(v)
|
This represented the residual balance of uncollected cash consideration due from Cheche,
which is related to the disposal of P&C business. See Note 3 for details.
|
(5)
|
|
Property, Plant and Equipment
|
Property, plant and
equipment, net, is comprised of the following:
|
|
As of December 31,
|
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
Building
|
|
|
12,317
|
|
|
|
12,317
|
|
Office equipment, furniture and fixtures
|
|
|
129,915
|
|
|
|
119,478
|
|
Motor vehicles
|
|
|
23,774
|
|
|
|
10,443
|
|
Leasehold improvements
|
|
|
13,146
|
|
|
|
6,192
|
|
Total
|
|
|
179,152
|
|
|
|
148,430
|
|
Less: Accumulated depreciation
|
|
|
(147,814
|
)
|
|
|
(122,355
|
)
|
Property, plant and equipment, net
|
|
|
31,338
|
|
|
|
26,075
|
|
No impairment for property,
plant and equipment was recorded for the years ended December 31, 2015, 2016 and 2017.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
The movements in
the carrying amount of goodwill by reportable segments are as follows:
|
|
Agency
segment
|
|
|
RMB
|
Balance as of December 31, 2016
|
|
|
122,077
|
|
Eliminated on disposal of the P&C Insurance Division (Note 3)
|
|
|
(12,208
|
)
|
Balance as of December 31, 2017
|
|
|
109,869
|
|
The gross amount of
goodwill and accumulated impairment losses by segment as of December 31, 2016 and 2017 are as follows:
|
|
|
|
Claims
Adjusting
segment
|
|
Total
|
|
|
RMB
|
|
RMB
|
|
RMB
|
Gross as of January 1, 2016
|
|
|
1,096,102
|
|
|
|
21,137
|
|
|
|
1,117,239
|
|
Eliminated on disposal of a subsidiary (Note 3)
|
|
|
(173,608
|
)
|
|
|
—
|
|
|
|
(173,608
|
)
|
Gross as of December 31, 2016
|
|
|
922,494
|
|
|
|
21,137
|
|
|
|
943,631
|
|
Eliminated on disposal of a subsidiary (Note 3)
|
|
|
(790,517
|
)
|
|
|
—
|
|
|
|
(790,517
|
)
|
Gross as of December 31, 2017
|
|
|
131,977
|
|
|
|
21,137
|
|
|
|
153,114
|
|
Accumulated impairment loss as of January 1, 2016
|
|
|
(962,628
|
)
|
|
|
(21,137
|
)
|
|
|
(983,765
|
)
|
Eliminated on disposal of a subsidiary (Note 3)
|
|
|
162,211
|
|
|
|
—
|
|
|
|
162,211
|
|
Accumulated impairment loss as of December 31, 2016
|
|
|
(800,417
|
)
|
|
|
(21,137
|
)
|
|
|
(821,554
|
)
|
Eliminated on disposal of a subsidiary (Note 3)
|
|
|
778,309
|
|
|
|
—
|
|
|
|
778,309
|
|
Accumulated impairment loss as of December 31, 2017
|
|
|
(22,108
|
)
|
|
|
(21,137
|
)
|
|
|
(43,245
|
)
|
Net as of December 31, 2016
|
|
|
122,077
|
|
|
|
—
|
|
|
|
122,077
|
|
Net as of December 31, 2017
|
|
|
109,869
|
|
|
|
—
|
|
|
|
109,869
|
|
The Group performed
the annual impairment analysis as of the balance sheet date. There has been no impairment loss recognized in goodwill for the years
ended December 31, 2015, 2016 and 2017.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
(7)
|
|
Investments in Affiliates
|
As
of December 31, 2016 and 2017, investments in affiliates represent (i) 40% equity interest in Shanghai Teamhead Automobile Surveyors
Co., Ltd. ("Teamhead Automobile") through one of the Group's claim adjusting subsidiaries; the affiliate is a PRC registered
company that provides insurance surveyor and loss adjustors services, and (ii) 20.6% equity interests in Sincere Fame International
Limited ("Sincere Fame") which is a financial services company registered in the BVI and based in Guangzhou, PRC, primarily
engaged in the origination and management of small loans made to individuals, loan repackaging transactions, asset management-related
services to financial institutions and mortgage agency services to individuals.
During
the years ended December 31, 2015, 2016 and 2017, the Group recognized its share of income of affiliates in the amount of RMB26,924,
RMB48,293 and RMB108,944 respectively. During the years ended December 31, 2015, 2016 and 2017, the Group recognized its share
of other comprehensive income of affiliates in the amount of RMB37,567, and other comprehensive loss of RMB 37,911, and other comprehensive
income of RMB1,263, respectively.
Investments as of December 31, 2016 and
2017 were as follows:
|
|
As of December 31,
|
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
Teamhead Automobile
|
|
|
227
|
|
|
|
160
|
|
Sincere Fame
|
|
|
294,349
|
|
|
|
404,623
|
|
Total
|
|
|
294,576
|
|
|
|
404,783
|
|
The summarized financial information of equity method investees is illustrated as below:
|
|
As
of December 31,
|
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
Statements of Financial Position
|
|
|
|
|
Current assets
|
|
|
1,195,048
|
|
|
|
1,745,693
|
|
Non-current assets
|
|
|
6,607,156
|
|
|
|
16,460,862
|
|
Current liabilities
|
|
|
6,679,656
|
|
|
|
13,022,143
|
|
Non-current liabilities
|
|
|
2,617
|
|
|
|
3,355,068
|
|
|
|
Year Ended December 31,
|
|
|
2015
|
|
2016
|
|
2017
|
Results of operation
|
|
RMB
|
|
RMB
|
|
RMB
|
Net Revenues
|
|
|
599,372
|
|
|
|
1,347,800
|
|
|
|
3,424,351
|
|
Gross profit
|
|
|
427,258
|
|
|
|
899,946
|
|
|
|
2,008,070
|
|
Income from operations
|
|
|
158,846
|
|
|
|
287,975
|
|
|
|
804,163
|
|
Net profit
|
|
|
130,647
|
|
|
|
235,366
|
|
|
|
529,524
|
|
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
(8)
|
|
Variable Interest Entities
|
PRC laws and regulations
place certain restrictions on foreign investment in and ownership of insurance agencies, brokerages and on-line business. Accordingly,
the Group conducted some of its operations in China through contractual arrangements among its PRC subsidiaries, two PRC affiliated
entities and the equity shareholders of these PRC affiliated entities, who are PRC nationals.
In recent years, some
rules and regulations governing the insurance intermediary sector in China have begun to encourage foreign investment. The Group
commenced a restructuring which resulted in obtaining controlling equity ownership in a majority of its affiliated insurance intermediary
companies.
In May 2016, the Group
completed its restructuring and all the individual shareholders had transferred their respective equity interest in Shenzhen Dianliang
Information Technology Co., Ltd and Shenzhen Xinbao Investment Management Co., Ltd to subsidiaries of the Company. Thereafter,
the Group conducts all of its operations in China through its directly owned subsidiaries and those VIEs are all eliminated in
the consolidated financial statements.
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
|
RMB
|
|
|
|
RMB
|
|
Total assets
|
|
|
—
|
|
|
|
—
|
|
Total liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2015
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
Net Revenues
|
|
|
108,133
|
|
|
|
33,679
|
|
|
|
—
|
|
Net loss
|
|
|
(14,554
|
)
|
|
|
(4,598
|
)
|
|
|
—
|
|
Net cash generated from (used in) operating activities
|
|
|
37,943
|
|
|
|
(11,536
|
)
|
|
|
—
|
|
Net cash (used in) generated from investing activities
|
|
|
(31,682
|
)
|
|
|
2,601
|
|
|
|
—
|
|
Net cash generated from financing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
(9)
|
|
Other Payables and Accrued Expenses
|
Components of other
payables and accrued expenses are as follows:
|
|
As of December 31,
|
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
|
|
|
|
Business and other tax payables
|
|
|
56,589
|
|
|
|
58,970
|
|
Refundable deposits from employees and agents
|
|
|
23,472
|
|
|
|
30,716
|
|
Professional fees (Note i)
|
|
|
45,745
|
|
|
|
3,372
|
|
Accrued expenses to third parties
|
|
|
70,846
|
|
|
|
33,070
|
|
Payables for addition of office equipment, furniture and fixtures
|
|
|
8,618
|
|
|
|
8,618
|
|
Advances from third parties
|
|
|
19,282
|
|
|
|
14,069
|
|
Insurance compensation claim payable to customers
|
|
|
875
|
|
|
|
—
|
|
Contributions from members of eHuzhu mutual aid program
|
|
|
25,605
|
|
|
|
56,890
|
|
Others (Note ii)
|
|
|
22,426
|
|
|
|
36,189
|
|
Total
|
|
|
273,458
|
|
|
|
241,894
|
|
|
(i)
|
As of December 31, 2016, professional fees mainly represent an amount of RMB39,725 promotion fee
of CNpad and Ehuzhu payable to Sichuan Nawang Technology Co., Ltd. The amount was settled in 2017.
|
|
(ii)
|
Other payables and accrued expenses are unsecured, interest-free and repayable on demand.
|
(10)
|
|
Employee Benefit Plans
|
Employees of the Group
located in the PRC are covered by the retirement schemes defined by local practice and regulations, which are essentially defined
contribution plans. The calculation of contributions for these eligible employees is based on 10% to 22% of the applicable payroll
cost according to the specific requirements of the local regime government.
In addition, the Group
is required by law to contribute certain percentage of applicable salaries for medical insurance benefits, unemployment and other
statutory benefits. The contribution percentages may be different from district to district which is subject to the specific requirement
of local regime government. The PRC government is directly responsible for the payments of the benefits to these employees.
For the years ended
December 31, 2015, 2016 and 2017, the Group contributed RMB47,955, RMB57,090 and RMB66,370, respectively.
The Company is a tax
exempted company incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, the Company is not subject to
tax on their income or capital gains. In addition, upon any payments of dividends by the Company to its shareholders, no Cayman
Islands withholding tax is imposed.
The Group’s subsidiaries
and VIEs incorporated in the PRC are subject to Income Tax in the PRC.
The provision for current income taxes of
the subsidiaries operating in Hong Kong has been calculated by applying the current rate of taxation of 16.5% for the years ended
December 31, 2015, 2016 and 2017, if applicable.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
Pursuant to the relevant
laws and regulations in the PRC, Shenzhen Fanhua Software Technology Co., Ltd ("Fanhua Software"), Shenzhen Huazhong
United Technology Co., Ltd ("Huazhong") and Ying Si Kang Information Technology (Shenzhen) Co., Ltd. ("Ying Si Kang"),
subsidiaries of the Group, were regarded as software companies and thus exempted from PRC Income Tax for two years starting from
its first profit-making year, followed by a 50% reduction for the next three years. For Fanhua Software, year 2012 was the first
profit-making year and accordingly, Fanhua Software has made a 12.5% tax provision for its profits for the years ended December
31, 2015 and 2016. No tax provision made for its profits for the year ended December 31, 2017. For Huazhong, year 2015 was the
first profit-making year and accordingly it has not made any provision for PRC income tax for the years ended December 31, 2015
and 2016, and has made a 12.5% tax provision for its profits for the year ended December 31, 2017. For Ying Si Kang, year 2014
was the first profit-making year and accordingly it has not made any provision for PRC income tax for the year ended
December 31, 2015, and has made a 12.5% tax provision for its profits for the years ended December 31, 2016 and 2017.
The Group accounts
for uncertain income tax positions by prescribing a minimum recognition threshold in the financial statements.
The movements of unrecognized tax benefits
are as follows:
|
|
RMB
|
Balance as of January 1, 2015
|
|
|
53,855
|
|
Change in unrecognized tax benefits
|
|
|
825
|
|
Gross increase in tax positions
|
|
|
15,674
|
|
Balance as of December 31, 2015
|
|
|
70,354
|
|
Change in unrecognized tax benefits
|
|
|
—
|
|
Gross increase in tax positions
|
|
|
2,424
|
|
Balance as of December 31, 2016
|
|
|
72,778
|
|
Change in unrecognized tax benefits
|
|
|
—
|
|
Gross decrease in tax positions
|
|
|
(2,428
|
)
|
Balance as of December 31, 2017
|
|
|
70,350
|
|
The uncertain tax positions
are related to tax years that remain subject to examination by the relevant tax authorities. Based on the outcome of any future
examinations, or as a result of the expiration of statute of limitations for specific jurisdictions, it is reasonably possible
that the related unrecognized tax benefits for tax positions taken regarding previously filed tax returns, might materially change
from those recorded as liabilities for uncertain tax positions in the Group’s consolidated financial statements as of December
31, 2016 and 2017. In addition, the outcome of these examinations may impact the valuation of certain deferred tax assets (such
as net operating losses) in future periods. The Group’s policy is to recognize interest and penalties accrued on any unrecognized
tax benefits, if any, as a component of income tax expense. The Company does not anticipate any significant increases or decreases
to its liability for unrecognized tax benefit within the next twelve months.
According to the PRC
Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of income taxes is due to
computational errors made by the taxpayer. The statute of limitations will be extended to five years under special circumstances,
which are not clearly defined, but an underpayment of income tax liability exceeding RMB100 is specifically listed as a special
circumstance. In the case of a transfer pricing related adjustment, the statute of limitations is ten years. There is no statute
of limitations in the case of tax evasion.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
Income tax expenses
are comprised of the following:
|
|
Year Ended December 31,
|
|
|
2015
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
Current tax expense
|
|
|
26,620
|
|
|
|
41,985
|
|
|
|
158,291
|
|
Deferred tax (income) expense
|
|
|
(1,067
|
)
|
|
|
(14,736
|
)
|
|
|
9,512
|
|
Income tax expense
|
|
|
25,553
|
|
|
|
27,249
|
|
|
|
167,803
|
|
The principal components
of the deferred income tax assets and liabilities are as follows:
|
|
As of December 31,
|
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
Non-current deferred tax assets:
|
|
|
|
|
|
|
|
|
Operating loss carryforward, after offset unrecognized tax benefits in 2016
|
|
|
33,611
|
|
|
|
28,003
|
|
Less: valuation allowances
|
|
|
(25,334
|
)
|
|
|
(25,912
|
)
|
Total
|
|
|
8,277
|
|
|
|
2,091
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
2,604
|
|
|
|
339
|
|
Investment income
|
|
|
11,973
|
|
|
|
—
|
|
Dividend withholding taxes
|
|
|
—
|
|
|
|
16,800
|
|
Total
|
|
|
14,577
|
|
|
|
17,139
|
|
The Group considers
positive and negative evidence to determine whether some portion or all of the deferred tax assets will more likely than not be
realized. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future
profitability, the duration of statutory carry forward periods, the Group’s experience with tax attributes expiring unused
and tax planning alternatives. Valuation allowances have been established for deferred tax assets based on a more-likely-than-not
threshold. The Group’s ability to realize deferred tax assets depends on its ability to generate sufficient taxable income
within the carry forward periods provided for in the tax law. The Group has provided RMB25,334 and RMB25,912 valuation allowance
for the years ended December 31, 2016 and 2017, respectively.
The Group had total
operating loss carry-forwards of RMB150,373 and RMB112,011 as of December 31, 2016 and 2017, respectively. As of December 31, 2017,
the operating loss carry-forwards of RMB15,744, RMB13,925, RMB21,187, RMB21,147 and RMB40,008 are to expire during the years ending
December 31, 2018, 2019, 2020, 2021 and 2022, respectively. During the years ended December 31, 2015, 2016 and 2017, RMB4,251,
RMB29,431 and RMB13,284, respectively, of tax loss carried forward has been expired and canceled.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
Reconciliation between
the provision for income taxes computed by applying the PRC enterprise income rate of 25% to net income before income taxes and
income of affiliates, and the actual provision for income taxes is as follows:
|
|
Year Ended December 31,
|
|
|
2015
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
Income from continuing operations before income taxes, share of income of affiliates and discontinued operations
|
|
|
172,242
|
|
|
|
124,051
|
|
|
|
505,095
|
|
PRC statutory tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Income tax at statutory tax rate
|
|
|
43,061
|
|
|
|
31,013
|
|
|
|
126,274
|
|
Expenses not deductible for tax purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment
|
|
|
685
|
|
|
|
973
|
|
|
|
1,411
|
|
Other
|
|
|
5,176
|
|
|
|
3,691
|
|
|
|
18,863
|
|
Tax exemption and tax relief:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax rate differential
|
|
|
(34,149
|
)
|
|
|
—
|
|
|
|
—
|
|
Change in valuation allowance
|
|
|
(4,194
|
)
|
|
|
(1,332
|
)
|
|
|
578
|
|
Uncertain tax provisions
|
|
|
15,674
|
|
|
|
2,424
|
|
|
|
(2,428
|
)
|
Effect of utilization of deductible temporary difference previously unrecognized
|
|
|
—
|
|
|
|
(12,872
|
)
|
|
|
—
|
|
Deferred income tax for dividend distribution
|
|
|
—
|
|
|
|
—
|
|
|
|
16,800
|
|
Other
|
|
|
(700
|
)
|
|
|
3,352
|
|
|
|
6,305
|
|
Income tax expense
|
|
|
25,553
|
|
|
|
27,249
|
|
|
|
167,803
|
|
Additional PRC income
taxes that would have been payable without the tax exemption amounted to approximately RMB44,381, RMB4,089 and RMB826 for the years
ended December 31, 2015, 2016 and 2017, respectively. Without such exemption, the Group’s basic and diluted net profit per
share for the years ended December 31, 2015, 2016 and 2017 would have been decreased by RMB 0.04, RMB0.00 and RMB0.00.
If the entities were
to be non-resident for PRC tax purposes, dividends paid to it out of profits earned after January 1, 2008 would be subject to a
withholding tax. In the case of dividends paid by PRC subsidiaries, the withholding tax would be 10%, whereas in the case of dividends
paid by PRC subsidiaries which are 25% or more directly owned by tax residents in the Hong Kong Special Administrative Region,
the withholding tax would be 5%. In the third quarter of 2017, the Group applies 10% withholding tax rate due to the dividends
paid by PRC subsidiaries.
Aggregate undistributed
earnings of the Group’s subsidiaries and VIEs in the PRC that are available for distribution to the Group of approximately
RMB2,058,189 and RMB2,209,904 as of December 31, 2016 and 2017 respectively, are considered to be indefinitely reinvested. If those
earnings were to be distributed or they were determined to be no longer permanently reinvested, the Group would have to record
a deferred tax liability in respect of those undistributed earnings of approximately RMB205,819 and RMB220,990, respectively.
On April 20, 2017, the
Company's Board of Directors declared an annual cash dividend of US$0.006 per ordinary share, or US$0.12 per ADS, amounting to
a total of approximately US$7,400. On November 19, 2017, the Company's Board of Directors declared an annual cash dividend of US$0.01
per ordinary share, or US$0.20 per ADS, amounting to a total of approximately US$12,700. As of December 31, 2017, the Company has
paid the dividend to shareholders and provided RMB16,800 deferred income tax for the declared dividend distribution based on a
10% withholding tax rate.
Under applicable accounting
principles, a deferred tax liability should be recorded for taxable temporary differences attributable to the excess of financial
reporting over tax basis, including those differences attributable to a more-than-50-percent-owned domestic subsidiary. However,
recognition is not required in situations where the tax law provides a means by which the reported amount of that investment can
be recovered tax-free and the enterprise expects that it will ultimately use that means.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
During
2017, the Company issued 69,118,158 new shares for the exercise of options, representing 5.32% of the total shares outstanding
as of December 31, 2017.
On
April 6, 2017, the Company announced that it entered into a share purchase agreement with Fosun Industrial Holdings Limited (“Fosun”),
a wholly owned subsidiary of Fosun International Limited (00656.HK) for a private placement of 66,000,000 ordinary shares (equivalent
to 3,300,000 ADS) of the Company, at purchase price of US$0.44185 per ordinary share equivalent to US$8.837 per ADS), for a total
investment of US$29,162.10. The purchase price represents the average closing price of the past 20 trading days prior to the signing
of the share purchase agreement between Fosun and the Company on March 29, 2017. Fosun holds 5.08% of the total shares outstanding
as of December 31, 2017 and its purchased shares are subject to a contractual one-year lock-up.
During
2016, the Company issued 2,597,400 new shares for the exercise of options, representing 0.22% of the total shares outstanding as
of December 31, 2016.
During
2016, the Company issued 7,416,000 new shares for acquisition of additional interest in a subsidiary, representing 0.64% of total
shares outstanding as of December 31, 2016.
During
2015, the Company repurchased 2,261,100 shares from the public market, representing 0.20% of the total shares outstanding as of
December 31, 2015.
During
2015, the Company issued 4,493,620 new shares and utilized 2,261,100 repurchased shares for the exercise of options, representing
0.59% of the total shares outstanding as of December 31, 2015.
In
November 2014, the Group entered into share purchase agreements with the Employee Companies, for the issuance of up to 100,000,000
ordinary shares of the Group. In December 2014, the Group increased the new shares issued to the Employee Companies to 150,000,000
ordinary shares. The total 150,000,000 ordinary shares represented approximately 13.04% of the total enlarged outstanding share
capital as of December 31, 2014. The subscription price for the 100,000,000 ordinary shares is US$0.27 per ordinary share or US$5.40
per ADS, while the subscription price for the additional 50,000,000 ordinary shares is US$0.29 per ordinary share or US$5.8 per
ADS, both of which were the average closing prices for the 20 trading days prior to the board approvals of such transactions. Accordingly,
the Group considers that the employees have subscribed these shares at prices that were set at the best estimation of the future
market prices on issuance date, and the Group has no intention to compensate the employees with a below market price subscription;
therefore, the Group has not recorded any share-based compensation expenses related to any price deviations of the Group’s
ordinary shares from the board approval dates to issuances of these shares. The shares purchased by the Employee Companies are
subject to 180 days lock-up. The sale of shares to the Employee Companies was completed on December 17, 2014.
In
order to facilitate the purchase of shares by employees as described above, the Group has granted a loan to Employee Companies.
The loans bear interest at a rate of 3.0% per annum and is repayable upon the sale of the shares by employees, termination of employment
or within two years, whichever comes first. The interest rate is determined with reference to fair market prices and therefore
no interest-related compensation expense is recorded. Please refer to Note 2(m) for accounting policy details. The repayment of
the loan was further extended to June 2018.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
(13)
|
|
Net Income per Share
|
The computation of
basic and diluted net income per ordinary share is as follows:
|
|
Year Ended December 31,
|
|
|
2015
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
173,613
|
|
|
|
145,095
|
|
|
|
446,236
|
|
Net income from discontinued operations
|
|
|
41,868
|
|
|
|
22,543
|
|
|
|
5,480
|
|
Net income
|
|
|
215,481
|
|
|
|
167,638
|
|
|
|
451,716
|
|
Less: Net income attributable to the noncontrolling interests
|
|
|
5,395
|
|
|
|
10,591
|
|
|
|
2,488
|
|
Net income attributable to the Company’s shareholders
|
|
|
210,086
|
|
|
|
157,047
|
|
|
|
449,228
|
|
Weighted average number of ordinary shares outstanding
|
|
|
1,151,705,374
|
|
|
|
1,160,592,325
|
|
|
|
1,231,698,725
|
|
Basic net income from continuing operations per ordinary share
|
|
|
0.14
|
|
|
|
0.12
|
|
|
|
0.36
|
|
Basic net income from discontinued operations per ordinary share
|
|
|
0.04
|
|
|
|
0.02
|
|
|
|
0.00
|
|
Basic net income per ordinary share
|
|
|
0.18
|
|
|
|
0.14
|
|
|
|
0.36
|
|
Basic net income from continuing operations per ADS
|
|
|
2.92
|
|
|
|
2.32
|
|
|
|
7.20
|
|
Basic net income from discontinued operations per ADS
|
|
|
0.73
|
|
|
|
0.39
|
|
|
|
0.09
|
|
Basic net income per ADS
|
|
|
3.65
|
|
|
|
2.71
|
|
|
|
7.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
173,613
|
|
|
|
145,095
|
|
|
|
446,236
|
|
Net income from discontinued operations
|
|
|
41,868
|
|
|
|
22,543
|
|
|
|
5,480
|
|
Net income
|
|
|
215,481
|
|
|
|
167,638
|
|
|
|
451,716
|
|
Less: Net income attributable to the noncontrolling interests
|
|
|
5,395
|
|
|
|
10,591
|
|
|
|
2,488
|
|
Net income attributable to the Company’s shareholders
|
|
|
210,086
|
|
|
|
157,047
|
|
|
|
449,228
|
|
Weighted average number of ordinary shares outstanding
|
|
|
1,151,705,374
|
|
|
|
1,160,592,325
|
|
|
|
1,231,698,725
|
|
Weighted average number of dilutive potential ordinary shares from share options
|
|
|
51,618,147
|
|
|
|
48,229,471
|
|
|
|
29,524,324
|
|
Total
|
|
|
1,203,323,521
|
|
|
|
1,208,821,796
|
|
|
|
1,261,223,049
|
|
Diluted net income from continuing operations per ordinary share
|
|
|
0.14
|
|
|
|
0.11
|
|
|
|
0.36
|
|
Diluted net income from discontinued operations per ordinary share
|
|
|
0.03
|
|
|
|
0.02
|
|
|
|
0.00
|
|
Diluted net income per ordinary share
|
|
|
0.17
|
|
|
|
0.13
|
|
|
|
0.36
|
|
Diluted net income from continuing operations per ADS
|
|
|
2.79
|
|
|
|
2.23
|
|
|
|
7.20
|
|
Diluted net income from discontinued operations per ADS
|
|
|
0.70
|
|
|
|
0.37
|
|
|
|
0.09
|
|
Diluted net income per ADS
|
|
|
3.49
|
|
|
|
2.60
|
|
|
|
7.29
|
|
(14)
|
|
Distribution of Profits
|
As stipulated by the
relevant PRC laws and regulations applicable to China’s foreign investment enterprise, the Group’s subsidiaries and
VIEs in the PRC are required to maintain non-distributable reserves which include a statutory surplus reserve as of December 31,
2016 and 2017. Appropriations to the statutory surplus reserve are required to be made at not less than 10% of individual company’s
net profit as reported in the PRC statutory financial statements of the Company’s subsidiaries and VIEs. The appropriations
to statutory surplus reserve are required until the balance reaches 50% of the registered capital of respective subsidiaries and
VIEs.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
The statutory surplus
reserve is used to offset future losses. These reserves represent appropriations of retained earnings determined according to PRC
law and may not be distributed. There are no appropriations to reserves by the Company other than the Group’s subsidiaries
and VIEs in the PRC during the periods presented. Amounts contributed to the statutory reserves were RMB311,590 and RMB311,038
as of December 31, 2016 and 2017, respectively.
(15)
|
|
Related Party Balances and Transactions
|
The principal related
party balances and transactions as of and for the years ended December 31, 2016 and 2017 are as follows:
|
a)
|
Amounts due from related parties:
|
|
|
As of December 31,
|
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
Amounts due from an equity method affiliate and its subsidiaries, net (i)
|
|
|
32,495
|
|
|
|
—
|
|
Subscription receivables (Note 2(m) & Note 12)
|
|
|
288,135
|
|
|
|
248,717
|
|
(i) The Group
agreed to grant a revolving loan with a maximum amount of US$50,000 (equivalent to RMB317,990 as per the agreement) to Sincere
Fame and its subsidiaries pursuant to a facility letter entered in October 2011 (the "Facility"). The Facility is valid
for two years and was renewed upon mutual agreement for another two years in October 2013 and October 2015, separately. In April
2017, the Facility was renewed upon mutual agreement for another year. On January 1, 2012, the Group and Sincere Fame further entered
into a supplemental loan agreement, which established the legal rights to offset the interests and amounts receivable or payable
between the Group and Sincere Fame, and all the subsidiaries of the Group and Sincere Fame. The amounts are unsecured and bear
interest at 7.3% and are repayable on demand. As of December 31, 2016 and 2017, the amount due from Sincere Fame and its subsidiaries
represented nil and nil principal receivable, respectively, and RMB32,495 and nil interest receivable, respectively. The interest
receivables is non-interest bearing.
|
b)
|
The Group charged affiliates interest income of RMB8,088, nil and RMB8,714 for loans receivable
for the years ended December 31, 2015, 2016, and 2017, respectively.
|
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
(16)
|
|
Commitments and Contingencies
|
(i) The Group has several
non-cancelable operating leases, primarily for office premises.
Future minimum lease
payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum
operating lease payments as of December 31, 2017 are:
|
|
Minimum Lease
Payment
|
|
|
RMB
|
Year ending December 31:
|
|
|
|
|
2018
|
|
|
40,450
|
|
2019
|
|
|
31,721
|
|
2020
|
|
|
21,156
|
|
2021
|
|
|
8,443
|
|
2022
|
|
|
4,521
|
|
Total
|
|
|
106,291
|
|
Rental expenses incurred
under operating leases for the years ended December 31, 2015, 2016 and 2017 amounted to RMB36,206, RMB40,394 and RMB50,837, respectively.
(17)
|
|
Concentrations of Credit Risk
|
Concentration risks
Details of the customers
accounting for 10% or more of total net revenues are as follows:
|
|
Year ended December 31,
|
|
|
2015
|
|
% of sales
|
|
2016
|
|
% of sales
|
|
2017
|
|
% of sales
|
|
|
RMB
|
|
|
|
RMB
|
|
|
|
RMB
|
|
|
Huaxia Life Insurance Company Limited
("Huaxia")
|
|
|
*
|
|
|
|
*
|
|
|
|
517,759
|
|
|
|
12.7
|
%
|
|
|
990,865
|
|
|
|
24.2
|
%
|
Tianan Life Insurance Company Limited
("Tianan")
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
913,456
|
|
|
|
22.3
|
%
|
PICC Property and Casualty Company Limited ("PICC")
|
|
|
475,742
|
|
|
|
19.3
|
%
|
|
|
878,249
|
|
|
|
21.5
|
%
|
|
|
*
|
|
|
|
*
|
|
China Pacific Property Insurance Co., Ltd. ("CPIC")
|
|
|
287,261
|
|
|
|
11.7
|
%
|
|
|
439,749
|
|
|
|
10.8
|
%
|
|
|
*
|
|
|
|
*
|
|
Ping An Property & Casualty Insurance Company of China, Ltd. ("Ping An").
|
|
|
265,296
|
|
|
|
10.8
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
1,028,299
|
|
|
|
41.8
|
%
|
|
|
1,835,757
|
|
|
|
45.0
|
%
|
|
|
1,904,321
|
|
|
|
46.5
|
%
|
* represented less
than 10% of total net revenues as of the year.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
Details of the customers
which accounted for 10% or more of accounts receivable are as follows:
|
|
As of December 31,
|
|
|
2016
|
|
%
|
|
2017
|
|
%
|
|
|
RMB
|
|
|
|
RMB
|
|
|
Huaxia
|
|
|
101,749
|
|
|
|
20.2
|
%
|
|
|
229,444
|
|
|
|
44.5
|
%
|
PICC
|
|
|
84,257
|
|
|
|
16.8
|
%
|
|
|
*
|
|
|
|
*
|
|
Tianan
|
|
|
75,750
|
|
|
|
15.1
|
%
|
|
|
92,988
|
|
|
|
18.0
|
%
|
|
|
|
261,756
|
|
|
|
52.1
|
%
|
|
|
322,432
|
|
|
|
62.5
|
%
|
* represented less than 10% of account receivables as of the year end.
The Group performs
ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable.
The Group places its
cash and cash equivalents with financial institutions with high-credit ratings and quality.
The Group performs
ongoing credit evaluations on the amounts due from Sincere Fame and its subsidiaries (Note 15(a)(i)). As the Group has significant
influences over the operations of Sincere Fame through its equity investment in Sincere Fame, and in view of the historically positive
operating results of Sincere Fame and its subsidiaries, the Group considered that the credit risks on the amounts due from an affiliate
and its subsidiaries are not significant.
The Group performs
ongoing credit evaluations on the amounts due from Chuangjia (Note 4). As Group obtain 99% equity share pledge of Puyi Bohui, the
major operating subsidiary of Chuangjia, and in view of the positive operating results and decent solvency of Chuangjia, the Group
considered that the credit risks on the amounts due from Chuangjia is not significant.
Currency risk
The proceeds from the
initial public offering and the follow-on offering of the Group were in USD, substantially all of the revenue-generating operations
of the Group are transacted in RMB, which is not freely convertible into foreign currencies. On January 1, 1994, the PRC government
abolished the dual rate system and introduced a single rate of exchange as quoted by the People’s Bank of China. However,
the unification of the exchange rate does not imply convertibility of RMB into USD or other foreign currencies. All foreign exchange
transactions must take place either through the People’s Bank of China or other institutions authorized to buy and sell foreign
exchange or at a swap center. Approval of foreign currency payments by the People’s Bank of China or other institutions requires
submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
(18)
|
|
Non-Cash Transactions
|
The Group entered into
the following non-cash investing and financing activities:
|
|
Year ended December 31,
|
|
|
2015
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
Considerations payable in connection with acquisition of subsidiaries and additional interests in subsidiaries
|
|
|
34,310
|
|
|
|
—
|
|
|
|
—
|
|
Non-cash consideration in connection with acquisition of additional interests in a subsidiary (Note 3)
|
|
|
—
|
|
|
|
19,551
|
|
|
|
—
|
|
Consideration receivable in connection with disposal of brokerage business (Note 3)
|
|
|
—
|
|
|
|
—
|
|
|
|
46,582
|
|
(19)
|
|
Share-based Compensation
|
2012 Option
On March 12, 2012,
the Company granted options ("2012 Options G") to its directors and employees to purchase up to 92,845,000 ordinary shares
of the Company. Pursuant to the option agreements entered into between the Company and the option grantees, the options shall vest
over a five-year service period from 2012 to 2016. The expiration date of the 2012 Options is March 12, 2022. The 2012 Options
G had an exercise price of US$0.30 (RMB1.90) and an intrinsic value of US$0.04 (RMB0.26) per ordinary share, except for the 3,200,000
options granted to the two independent directors which had an exercise price of US$0.31 (RMB1.98) and an intrinsic value of US$0.03(RMB0.17)
per ordinary share. The exercise price for Option G was later modified to US$0.001 (RMB0.006) and the number of shares are reduced
by half with no incremental cost as a result of such option modification. The fair value of the options was determined by using
the Black-Scholes option pricing model.
For
the years ended December 31, 2015, 2016 and 2017, share-based compensation expenses of RMB12,940, RMB4,367 and nil were recognized
in connection with the 2012 Options G, respectively. During the year ended December 31, 2017, 34,570,812 shares of 2012 Options
G had been exercised. During the years ended December 31, 2015, 2016 and 2017, 114,250, 10 and 400,000 shares of 2012 Options G,
respectively, were forfeited due to employee resignations. No share-based compensation expense related to the forfeited options
was recognized.
On March 12, 2012,
the Company granted options ("2012 Options H") to its entrepreneurial agents and captains (non-employees) to purchase
3,800,000 ordinary shares of the Company, of which 3,000,000 and 800,000 options were granted to agents and captains respectively.
Pursuant to the option agreements entered into between the Company and the option grantees, 40% ("Option H1"), 40% ("Option
H2") and 20% ("Option H3") of the 3,000,000 award options granted to agents shall vest in May 31, 2014, 2015 and
2016 of each year respectively; and 40% ("Option H4"), 40% ("Option H5") and 20% ("Option H6") of
the 800,000 award options granted to captains shall vest in May 31, 2013, 2014 and 2015 of each year respectively. The expiration
date of the 2012 Options H is March 12, 2022. The 2012 Options H had an exercise price of US$0.30 (RMB1.90), which was later modified
to US$0.001 (RMB0.006) and an intrinsic value of US$0.04 (RMB0.26) per ordinary share as of the date of grant. The fair value of
the options was determined by using the Black-Scholes option pricing model and revaluated every balance sheet date until the options
was vested.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
For
the years ended December 31, 2015, 2016 and 2017, share-based compensation expenses of RMB1,213, RMB570 and nil were recognized
in connection with the 2012 Options H, respectively. During the year ended December 31, 2017, 875,326 of 2012 Options H had been
exercised. During the years ended December 31, 2014, 2015 and 2016, 284,978, 147,984 and nil shares of 2012 Options H, respectively,
were forfeited due to termination of agency contracts. No share-based compensation expense related to the forfeited options was
recognized.
Prior
to our 2012 Option, the company granted options its employees under 2009 options and 2008 options (collectively the "Options").
The Options shall vest over a four-year period subject to the continuous employment of the option grantees and their key performance
indicators ("KPI") results for the year 2009. The expiration date of the Options is March 31, 2015, which was later modified
to December 31, 2017 with an incremental compensation cost of RMB6,700 charged for the period in which the modification occurred
in December 2013. During the year ended December 31, 2017, 6,226,480 shares and 27,445,540 shares had been exercised for 2009 options
and 2008 options respectively. No share-based compensation expense was recognized for the years ended December 31, 2015, 2016 and
2017.
For each of the three
years ended December 31, 2015, 2016 and 2017, changes in the status of total outstanding options under 2012 Options, 2009 Options
and 2008 Options, were as follows:
|
|
Number of
options
|
|
Weighted
average
exercise price in
RMB
|
|
Aggregate
Intrinsic
Value
RMB
|
Outstanding as of January 1, 2015
|
|
|
82,247,600
|
|
|
|
0.88
|
|
|
|
96,658
|
|
Exercised
|
|
|
(6,754,720
|
)
|
|
|
0.24
|
|
|
|
|
|
Forfeited
|
|
|
(429,328
|
)
|
|
|
0.17
|
|
|
|
|
|
Outstanding as of December 31, 2015
|
|
|
75,063,552
|
|
|
|
0.90
|
|
|
|
148,348
|
|
Exercised
|
|
|
(2,597,400
|
)
|
|
|
0.45
|
|
|
|
|
|
Forfeited
|
|
|
(147,994
|
)
|
|
|
0.01
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
|
72,318,158
|
|
|
|
0.92
|
|
|
|
141,274
|
|
Exercised
|
|
|
(69,118,158
|
)
|
|
|
0.96
|
|
|
|
|
|
Forfeited
|
|
|
(400,000
|
)
|
|
|
0.01
|
|
|
|
|
|
Outstanding as of December 31, 2017
|
|
|
2,800,000
|
|
|
|
1.17
|
|
|
|
16,422
|
|
Exercisable as of December 31, 2017
|
|
|
2,800,000
|
|
|
|
1.17
|
|
|
|
16,422
|
|
As of December 31,
2017, all of the above options were fully vested.
The following table
summarizes information about the Company’s share option plans for the years ended December 31, 2015, 2016 and 2017:
|
|
Year ended December 31,
|
|
|
2015
|
|
2016
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
Weighted-average grant-date fair value per share of options granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total intrinsic value of options exercised
|
|
|
17,399
|
|
|
|
6,406
|
|
|
|
270,419
|
|
Total fair value of share options vested
|
|
|
38,178
|
|
|
|
13,631
|
|
|
|
—
|
|
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
The following table
summarizes information about the Company’s stock option plans as of December 31, 2017, excluding the InsCom options:
|
|
Options
outstanding
|
|
Weighted
average
remaining
contractual life
(Years)
|
|
Weighted
average
exercise price
in RMB
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 Options G
|
|
|
2,800,000
|
|
|
|
4.25
|
|
|
|
1.1683
|
|
|
|
2,800,000
|
|
InsCom Options
For the years ended December 31, 2012, 2013 and 2014, InsCom Holdings Limited ("InsCom"), a private subsidiary of the Group, issued three batches of the options to its entrepreneurial agents and the Group's employees ("InsCom Options"). There is no intrinsic value of the InsCom Options as of the date of grant. As of the grant date of the InsCom Options, the fair values of which were estimated to be of nominal values. The share-based compensation expenses related to the InsCom Options was nil, nil and nil during the years ended December 31, 2015, 2016 and 2017, respectively. During the year ended December 31, 2016, all of the InsCom Options had been exercised when the Company purchased the remaining interest from the minority interest of InsCom. Details of the acquisition is described in Note 3.
(20)
|
|
Restricted Net Assets
|
Relevant PRC statutory
laws and regulations permit payments of dividends by the Group’s PRC subsidiaries only out of their retained earnings, if
any, as determined in accordance with PRC accounting standards and regulations. As a result of these PRC laws and regulations,
the Group’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets either in the form
of dividends, loans or advances. As of December 31, 2016 and 2017, the Company had restricted net assets of RMB2,630,106 and RMB2,245,077
(including nil and nil restricted share capital and statutory reserves of the VIEs), respectively, which were not eligible to be
distributed. The decrease of restricted net assets is mainly due to the disposal of P&C Insurance Division during 2017. These
amounts were comprised of the registered capital of the Company’s PRC subsidiaries and the statutory reserves disclosed in
Note 14.
In the consolidated
financial statements as of December 31, 2016, the Group operated three segments: (1) insurance agency business segment, which mainly
consists of providing agency services for P&C insurance products and life insurance products to individual clients, (2) insurance
brokerage business segment, which mainly consists of providing P&C and life insurance brokerage services to institutional clients,
and (3) claims adjusting segment, which consists of providing pre-underwriting survey, claim adjusting, disposal of residual value,
loading and unloading supervision and consulting services. As a result of the disposal of brokerage business as described in Note
3, the Group has two remaining operating segments. Brokerage segment has been categorized as a discontinued operation. Operating
segments are defined as components of an enterprise about which separate financial information is available and evaluated regularly
by the Group's chief operating decision maker in deciding how to allocate resources and in assessing performance.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
The following table
shows the Group’s operations by business segment for the years ended December 31, 2015, 2016 and 2017. Other includes revenue
and expenses that are not allocated to reportable segments and corporate related items.
|
|
Year ended December 31,
|
|
|
2015
|
|
2016
|
|
2017
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
2,155,264
|
|
|
|
3,746,471
|
|
|
|
3,780,217
|
|
|
|
581,008
|
|
Claims Adjusting
|
|
|
303,846
|
|
|
|
336,413
|
|
|
|
308,256
|
|
|
|
47,378
|
|
Total net revenues
|
|
|
2,459,110
|
|
|
|
4,082,884
|
|
|
|
4,088,473
|
|
|
|
628,386
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
(1,969,329
|
)
|
|
|
(3,667,004
|
)
|
|
|
(3,408,499
|
)
|
|
|
(523,876
|
)
|
Claims Adjusting
|
|
|
(292,613
|
)
|
|
|
(306,804
|
)
|
|
|
(308,321
|
)
|
|
|
(47,388
|
)
|
Other
|
|
|
(168,720
|
)
|
|
|
(117,542
|
)
|
|
|
(98,517
|
)
|
|
|
(15,142
|
)
|
Total operating costs and expenses
|
|
|
(2,430,662
|
)
|
|
|
(4,091,350
|
)
|
|
|
(3,815,337
|
)
|
|
|
(586,406
|
)
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
185,935
|
|
|
|
79,467
|
|
|
|
371,718
|
|
|
|
57,132
|
|
Claims Adjusting
|
|
|
11,233
|
|
|
|
29,609
|
|
|
|
(65
|
)
|
|
|
(10
|
)
|
Other
|
|
|
(168,720
|
)
|
|
|
(117,542
|
)
|
|
|
(98,517
|
)
|
|
|
(15,142
|
)
|
Income (loss) from operations
|
|
|
28,448
|
|
|
|
(8,466
|
)
|
|
|
273,136
|
|
|
|
41,980
|
|
|
|
As of December 31,
|
|
|
2016
|
|
2017
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
US$
|
Segment assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
2,245,122
|
|
|
|
680,602
|
|
|
|
104,607
|
|
Claims Adjusting
|
|
|
256,004
|
|
|
|
271,616
|
|
|
|
41,747
|
|
Other
|
|
|
1,724,402
|
|
|
|
3,785,524
|
|
|
|
581,824
|
|
Total assets held for sale
|
|
|
13,040
|
|
|
|
-
|
|
|
|
-
|
|
Total
assets
|
|
|
4,238,568
|
|
|
|
4,737,742
|
|
|
|
728,178
|
|
Substantially all of
the Group’s revenues for the three years ended December 31, 2015, 2016 and 2017 were generated from the PRC. A substantial
portion of the identifiable assets of the Group is located in the PRC. Accordingly, no geographical segments are presented.
FANHUA INC.
|
|
Notes to the Consolidated Financial Statements
|
(In thousands, except for shares and per share data)
|
On March 9, 2018, the Company's Board of
Directors declared a quarterly dividend of US$0.01 per ordinary share, or US$0.20 per ADS, amounting to a total of US$13,002. The dividend has been paid to shareholders of record on March 26, 2018.
SCHEDULE 1—CONDENSED FINANCIAL
STATEMENTS OF THE COMPANY
Statements of Financial Position
(
In thousands, except for shares and
per share data
)
|
|
As of December 31,
|
|
|
2016
|
|
2017
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
US$
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
10,746
|
|
|
|
169,413
|
|
|
|
26,038
|
|
Other receivables and amounts due from subsidiaries and affiliates
|
|
|
1,742,796
|
|
|
|
1,641,554
|
|
|
|
252,302
|
|
Total current assets
|
|
|
1,753,542
|
|
|
|
1,810,967
|
|
|
|
278,340
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
1,571,844
|
|
|
|
2,126,599
|
|
|
|
326,853
|
|
Total
assets
|
|
|
3,325,386
|
|
|
|
3,937,566
|
|
|
|
605,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other payables and accrued expenses
|
|
|
8,108
|
|
|
|
2,415
|
|
|
|
370
|
|
Amounts due to subsidiaries
|
|
|
30,426
|
|
|
|
58,100
|
|
|
|
8,930
|
|
Total
liabilities
|
|
|
38,534
|
|
|
|
60,515
|
|
|
|
9,300
|
|
Ordinary shares (Authorized shares:10,000,000,000 at US$0.001 each; issued and outstanding shares: 1,165,072,926 and 1,300,191,084 as of December 31, 2016 and 2017, respectively)
|
|
|
8,658
|
|
|
|
9,571
|
|
|
|
1,471
|
|
Additional paid-in capital
|
|
|
2,301,655
|
|
|
|
2,429,559
|
|
|
|
373,416
|
|
Retained earnings
|
|
|
1,330,518
|
|
|
|
1,779,746
|
|
|
|
273,543
|
|
Accumulated other comprehensive loss
|
|
|
(65,844
|
)
|
|
|
(93,108
|
)
|
|
|
(14,310
|
)
|
Subscription receivables
|
|
|
(288,135
|
)
|
|
|
(248,717
|
)
|
|
|
(38,227
|
)
|
Total
shareholders’ equity
|
|
|
3,286,852
|
|
|
|
3,877,051
|
|
|
|
595,893
|
|
Total
liabilities and shareholders' equity
|
|
|
3,325,386
|
|
|
|
3,937,566
|
|
|
|
605,193
|
|
SCHEDULE
1—CONDENSED FINANCIAL STATEMENTS OF THE COMPANY
—(Continued)
Statements of Income and Comprehensive
Income
(
In thousands
)
|
|
Year Ended December 31,
|
|
|
2015
|
|
2016
|
|
2017
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
General and administrative expenses
|
|
|
(19,839
|
)
|
|
|
(9,938
|
)
|
|
|
(4,435
|
)
|
|
|
(682
|
)
|
Interest income
|
|
|
15,913
|
|
|
|
8,271
|
|
|
|
2,229
|
|
|
|
343
|
|
Equity in earnings of subsidiaries
|
|
|
214,012
|
|
|
|
158,714
|
|
|
|
451,434
|
|
|
|
69,384
|
|
Net income
|
|
|
210,086
|
|
|
|
157,047
|
|
|
|
449,228
|
|
|
|
69,045
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
6,153
|
|
|
|
2,177
|
|
|
|
(10,664
|
)
|
|
|
(1,639
|
)
|
Changes in fair value of short term investments
|
|
|
—
|
|
|
|
632
|
|
|
|
(632
|
)
|
|
|
(97
|
)
|
Share of other comprehensive income (loss) of affiliates
|
|
|
37,567
|
|
|
|
(37,911
|
)
|
|
|
1,263
|
|
|
|
194
|
|
Comprehensive
income attributable to the Company's shareholders
|
|
|
253,806
|
|
|
|
121,945
|
|
|
|
439,195
|
|
|
|
67,503
|
|
SCHEDULE
1—CONDENSED FINANCIAL STATEMENTS OF THE COMPANY
— (Continued)
Statements of Shareholders’ Equity
(
In thousands, except for shares)
|
|
Share Capital
|
|
|
|
Treasury
Stock
|
|
|
|
|
|
|
|
|
|
|
Number of
Share
|
|
Amounts
|
|
Additional
Paid-in
Capital
|
|
Number of
Share
|
|
Amounts
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Subscription
Receivables
|
|
Total
|
|
|
|
|
RMB
|
|
RMB
|
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
|
RMB
|
Balance as of January 1, 2015
|
|
|
1,150,565,906
|
|
|
|
8,563
|
|
|
|
2,601,401
|
|
|
|
—
|
|
|
|
—
|
|
|
|
963,385
|
|
|
|
(105,106
|
)
|
|
|
(257,491
|
)
|
|
|
3,210,752
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
210,086
|
|
|
|
—
|
|
|
|
—
|
|
|
|
210,086
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,491
|
|
|
|
(11,338
|
)
|
|
|
6,153
|
|
Repurchase of ordinary shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,261,100
|
)
|
|
|
(6,276
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,276
|
)
|
Exercise of share options
|
|
|
4,493,620
|
|
|
|
29
|
|
|
|
(4,787
|
)
|
|
|
2,261,100
|
|
|
|
6,276
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,518
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
17,653
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,653
|
|
Acquisition of additional
interests in a subsidiary
|
|
|
—
|
|
|
|
—
|
|
|
|
(160,023
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(160,023
|
)
|
Share
of other comprehensive income in affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37,567
|
|
|
|
—
|
|
|
|
37,567
|
|
Balance as of December
31, 2015
|
|
|
1,155,059,526
|
|
|
|
8,592
|
|
|
|
2,454,244
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,173,471
|
|
|
|
(50,048
|
)
|
|
|
(268,829
|
)
|
|
|
3,317,430
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
157,047
|
|
|
|
—
|
|
|
|
—
|
|
|
|
157,047
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,483
|
|
|
|
(19,306
|
)
|
|
|
2,177
|
|
Exercise of share options
|
|
|
2,597,400
|
|
|
|
17
|
|
|
|
1,127
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,144
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
4,937
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,937
|
|
Acquisition of additional
interests in a subsidiary
|
|
|
7,416,000
|
|
|
|
49
|
|
|
|
(174,779
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(174,730
|
)
|
Disposal of subsidiaries
|
|
|
—
|
|
|
|
—
|
|
|
|
16,126
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,126
|
|
Changes in fair value
of short term investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
632
|
|
|
|
—
|
|
|
|
632
|
|
Share
of other comprehensive loss in affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(37,911
|
)
|
|
|
—
|
|
|
|
(37,911
|
)
|
Balance as of December
31, 2016
|
|
|
1,165,072,926
|
|
|
|
8,658
|
|
|
|
2,301,655
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,330,518
|
|
|
|
(65,844
|
)
|
|
|
(288,135
|
)
|
|
|
3,286,852
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
449,228
|
|
|
|
—
|
|
|
|
—
|
|
|
|
449,228
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(27,895
|
)
|
|
|
17,231
|
|
|
|
(10,664
|
)
|
Exercise of share options
|
|
|
69,118,158
|
|
|
|
458
|
|
|
|
64,488
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64,946
|
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Private placement
|
|
|
66,000,000
|
|
|
|
455
|
|
|
|
200,632
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
201,087
|
|
Subscription receipt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22,187
|
|
|
|
22,187
|
|
Distribution of dividend
|
|
|
—
|
|
|
|
—
|
|
|
|
(137,216
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(137,216
|
)
|
Changes in fair value
of short term investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(632
|
)
|
|
|
—
|
|
|
|
(632
|
)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,263
|
|
|
|
—
|
|
|
|
1,263
|
|
Balance
as of December 31, 2017
|
|
|
1,300,191,084
|
|
|
|
9,571
|
|
|
|
2,429,559
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,779,746
|
|
|
|
(93,108
|
)
|
|
|
(248,717
|
)
|
|
|
3,877,051
|
|
Balance
as of December 31, 2017 in US$
|
|
|
—
|
|
|
|
1,471
|
|
|
|
373,416
|
|
|
|
—
|
|
|
|
—
|
|
|
|
273,543
|
|
|
|
(14,310
|
)
|
|
|
(38,227
|
)
|
|
|
595,893
|
|
SCHEDULE
1—CONDENSED FINANCIAL STATEMENTS OF THE COMPANY
— (Continued)
Statements
of Cash Flows
(
In thousands
)
|
|
Year Ended December 31,
|
|
|
2015
|
|
2016
|
|
2017
|
|
2017
|
|
|
RMB
|
|
RMB
|
|
RMB
|
|
US$
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
210,086
|
|
|
|
157,047
|
|
|
|
449,228
|
|
|
|
69,045
|
|
Adjustments to reconcile net income to net cash generated from (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries
|
|
|
(214,012
|
)
|
|
|
(158,714
|
)
|
|
|
(451,434
|
)
|
|
|
(69,384
|
)
|
Compensation expenses associated with stock options
|
|
|
17,653
|
|
|
|
4,937
|
|
|
|
—
|
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
(67,925
|
)
|
|
|
(9,290
|
)
|
|
|
(6,489
|
)
|
|
|
(997
|
)
|
Other payables
|
|
|
1,879
|
|
|
|
3,506
|
|
|
|
(5,693
|
)
|
|
|
(875
|
)
|
Net cash
used in operating activities
|
|
|
(52,319
|
)
|
|
|
(2,514
|
)
|
|
|
(14,388
|
)
|
|
|
(2,211
|
)
|
Cash flows (used in) generated from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in investment in subsidiaries
|
|
|
55,363
|
|
|
|
127,475
|
|
|
|
98,399
|
|
|
|
15,123
|
|
Advances to subsidiaries and affiliates
|
|
|
(8,797
|
)
|
|
|
(122,885
|
)
|
|
|
(38,609
|
)
|
|
|
(5,934
|
)
|
Decrease in advances to subsidiaries and affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
174,012
|
|
|
|
26,745
|
|
Net cash
generated from investing activities
|
|
|
46,566
|
|
|
|
4,590
|
|
|
|
233,802
|
|
|
|
35,934
|
|
Cash flows generated from (used in ) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds on exercise of stock options
|
|
|
1,518
|
|
|
|
1,144
|
|
|
|
64,946
|
|
|
|
9,982
|
|
Proceeds of employee subscriptions
|
|
|
—
|
|
|
|
—
|
|
|
|
22,187
|
|
|
|
3,410
|
|
Dividends paid
|
|
|
—
|
|
|
|
—
|
|
|
|
(137,216
|
)
|
|
|
(21,090
|
)
|
Repurchase ordinary shares
|
|
|
(6,276
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net cash
generated from (used in) financing activities
|
|
|
(4,758
|
)
|
|
|
1,144
|
|
|
|
(50,083
|
)
|
|
|
(7,698
|
)
|
Net (decrease) increase in cash and,
cash equivalents and restricted cash
|
|
|
(10,511
|
)
|
|
|
3,220
|
|
|
|
169,331
|
|
|
|
26,025
|
|
Cash and, cash equivalents and restricted cash at beginning of year
|
|
|
9,707
|
|
|
|
5,349
|
|
|
|
10,746
|
|
|
|
1,652
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
6,153
|
|
|
|
2,177
|
|
|
|
(10,664
|
)
|
|
|
(1,639
|
)
|
Cash
and, cash equivalents and restricted cash at end of year
|
|
|
5,349
|
|
|
|
10,746
|
|
|
|
169,413
|
|
|
|
26,038
|
|
Note to Schedule 1
(
In thousands, except for shares
)
Schedule 1 has been provided pursuant to
the requirements of Rule 12-04(a), 5-04(c) and 4-08(e)(3) of Regulation S-X, which require condensed financial statements as to
the financial position, changes in financial position and results of operations of a parent company as of the same dates and for
the same periods for which audited consolidated financial statements have been presented when the restricted net assets of the
consolidated and unconsolidated subsidiaries (including variable interest entities) together exceed 25 percent of consolidated
net assets as of the end of the most recently completed fiscal year. As of December 31, 2017, RMB2,245,077 of the restricted capital
and reserves are not available for distribution, and as such, the condensed financial statements of the Company have been presented
for the years ended December 31, 2015, 2016 and 2017.
F-55
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