WASHINGTON, D.C. 20549
Date of event requiring
this shell company report. . . . . . . . . . . . . .
(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 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.
Item 3. Key Information
|
A.
|
Selected
Financial Data
|
The following selected consolidated statements of income data
for the years ended December 31, 2018, 2019 and 2020 and the consolidated balance sheets data as of December 31, 2019 and 2020
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, 2016 and 2017 and the selected consolidated
balance sheets data as of December 31, 2016, 2017 and 2018 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.
In November 2017, we disposed of Fanhua Bocheng Insurance Brokerage
Co., Ltd., or Bocheng, which was 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 year ended 2016 as presented below
have been restated to conform to the current presentation.
|
|
For the Year Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands, except shares, per share and per ADS data)
|
|
Consolidated Statements of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
3,746,471
|
|
|
|
3,780,217
|
|
|
|
3,143,873
|
|
|
|
3,335,397
|
|
|
|
2,834,997
|
|
|
|
434,482
|
|
Life insurance business
|
|
|
990,541
|
|
|
|
2,424,444
|
|
|
|
2,870,776
|
|
|
|
3,193,625
|
|
|
|
2,703,584
|
|
|
|
414,342
|
|
P&C insurance business
|
|
|
2,755,930
|
|
|
|
1,355,773
|
|
|
|
273,097
|
|
|
|
141,772
|
|
|
|
131,413
|
|
|
|
20,140
|
|
Claims adjusting
|
|
|
336,413
|
|
|
|
308,256
|
|
|
|
327,390
|
|
|
|
370,606
|
|
|
|
433,148
|
|
|
|
66,383
|
|
Total net revenues
|
|
|
4,082,884
|
|
|
|
4,088,473
|
|
|
|
3,471,263
|
|
|
|
3,706,003
|
|
|
|
3,268,145
|
|
|
|
500,865
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
(2,906,791
|
)
|
|
|
(2,864,882
|
)
|
|
|
(2,151,856
|
)
|
|
|
(2,263,952
|
)
|
|
|
(1,953,744
|
)
|
|
|
(299,425
|
)
|
Life insurance business
|
|
|
(673,230
|
)
|
|
|
(1,636,340
|
)
|
|
|
(1,943,053
|
)
|
|
|
(2,166,126
|
)
|
|
|
(1,866,227
|
)
|
|
|
(286,012
|
)
|
P&C insurance business
|
|
|
(2,233,561
|
)
|
|
|
(1,228,542
|
)
|
|
|
(208,803
|
)
|
|
|
(97,826
|
)
|
|
|
(87,517
|
)
|
|
|
(13,413
|
)
|
Claims adjusting
|
|
|
(199,810
|
)
|
|
|
(194,525
|
)
|
|
|
(194,159
|
)
|
|
|
(219,496
|
)
|
|
|
(260,121
|
)
|
|
|
(39,865
|
)
|
Total operating costs
|
|
|
(3,106,601
|
)
|
|
|
(3,059,407
|
)
|
|
|
(2,346,015
|
)
|
|
|
(2,483,448
|
)
|
|
|
(2,213,865
|
)
|
|
|
(339,290
|
)
|
Selling expenses(1)
|
|
|
(502,802
|
)
|
|
|
(221,785
|
)
|
|
|
(231,075
|
)
|
|
|
(278,085
|
)
|
|
|
(288,460
|
)
|
|
|
(44,208
|
)
|
General and administrative expenses(1)
|
|
|
(387,362
|
)
|
|
|
(448,989
|
)
|
|
|
(481,947
|
)
|
|
|
(534,145
|
)
|
|
|
(463,634
|
)
|
|
|
(71,055
|
)
|
Total operating costs and expenses
|
|
|
(4,091,350
|
)
|
|
|
(3,815,337
|
)
|
|
|
(3,045,520
|
)
|
|
|
(3,236,640
|
)
|
|
|
(2,965,959
|
)
|
|
|
(454,553
|
)
|
Income (loss) from continuing operations
|
|
|
(8,466
|
)
|
|
|
273,136
|
|
|
|
425,743
|
|
|
|
469,363
|
|
|
|
302,186
|
|
|
|
46,312
|
|
Other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
115,275
|
|
|
|
191,784
|
|
|
|
195,456
|
|
|
|
79,070
|
|
|
|
34,789
|
|
|
|
5,332
|
|
Interest income
|
|
|
6,901
|
|
|
|
25,891
|
|
|
|
34,207
|
|
|
|
2,828
|
|
|
|
13,420
|
|
|
|
2,057
|
|
Others, net
|
|
|
10,341
|
|
|
|
14,284
|
|
|
|
11,807
|
|
|
|
9,664
|
|
|
|
11,907
|
|
|
|
1,825
|
|
Income from continuing operations before income taxes, share of income and impairment of affiliates, net and discontinued operations
|
|
|
124,051
|
|
|
|
505,095
|
|
|
|
667,213
|
|
|
|
560,925
|
|
|
|
362,302
|
|
|
|
55,526
|
|
Income tax expense
|
|
|
(27,249
|
)
|
|
|
(167,803
|
)
|
|
|
(224,586
|
)
|
|
|
(143,816
|
)
|
|
|
(83,387
|
)
|
|
|
(12,780
|
)
|
Share of income of affiliates
|
|
|
48,293
|
|
|
|
108,944
|
|
|
|
174,468
|
|
|
|
(224,555
|
)
|
|
|
(2,738
|
)
|
|
|
(420
|
)
|
Net income from continuing operations
|
|
|
145,095
|
|
|
|
446,236
|
|
|
|
617,095
|
|
|
|
192,554
|
|
|
|
276,177
|
|
|
|
42,326
|
|
Net income from discontinued operations, net of tax
|
|
|
22,543
|
|
|
|
5,480
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income
|
|
|
167,638
|
|
|
|
451,716
|
|
|
|
617,095
|
|
|
|
192,554
|
|
|
|
276,177
|
|
|
|
42,326
|
|
Less: Net income attributable to the noncontrolling interests
|
|
|
10,591
|
|
|
|
2,488
|
|
|
|
7,180
|
|
|
|
3,622
|
|
|
|
7,923
|
|
|
|
1,214
|
|
Net income attributable to the Company’s shareholders
|
|
|
157,047
|
|
|
|
449,228
|
|
|
|
609,915
|
|
|
|
188,932
|
|
|
|
268,254
|
|
|
|
41,112
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operation
|
|
|
0.12
|
|
|
|
0.36
|
|
|
|
0.49
|
|
|
|
0.17
|
|
|
|
0.25
|
|
|
|
0.04
|
|
Net income from discontinued operation
|
|
|
0.02
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Net income
|
|
|
0.14
|
|
|
|
0.36
|
|
|
|
0.49
|
|
|
|
0.17
|
|
|
|
0.25
|
|
|
|
0.04
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operation
|
|
|
0.11
|
|
|
|
0.36
|
|
|
|
0.49
|
|
|
|
0.17
|
|
|
|
0.25
|
|
|
|
0.04
|
|
Net income from discontinued operation
|
|
|
0.02
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Net income
|
|
|
0.13
|
|
|
|
0.36
|
|
|
|
0.49
|
|
|
|
0.17
|
|
|
|
0.25
|
|
|
|
0.04
|
|
Net income per ADS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operation
|
|
|
2.32
|
|
|
|
7.20
|
|
|
|
9.84
|
|
|
|
3.46
|
|
|
|
5.00
|
|
|
|
0.77
|
|
Net income from discontinued operation
|
|
|
0.39
|
|
|
|
0.09
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Net income
|
|
|
2.71
|
|
|
|
7.29
|
|
|
|
9.84
|
|
|
|
3.46
|
|
|
|
5.00
|
|
|
|
0.77
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operation
|
|
|
2.23
|
|
|
|
7.20
|
|
|
|
9.83
|
|
|
|
3.46
|
|
|
|
4.99
|
|
|
|
0.77
|
|
Net income from discontinued operation
|
|
|
0.37
|
|
|
|
0.09
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
Net income
|
|
|
2.60
|
|
|
|
7.29
|
|
|
|
9.83
|
|
|
|
3.46
|
|
|
|
4.99
|
|
|
|
0.77
|
|
Shares used in calculating net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,160,592,325
|
|
|
|
1,231,698,725
|
|
|
|
1,239,264,464
|
|
|
|
1,092,601,338
|
|
|
|
1,073,891,784
|
|
|
|
1,073,891,784
|
|
Diluted
|
|
|
1,208,821,796
|
|
|
|
1,261,223,049
|
|
|
|
1,240,854,034
|
|
|
|
1,093,229,436
|
|
|
|
1,074,291,360
|
|
|
|
1,074,291,360
|
|
|
(1)
|
Including
share-based compensation expenses of RMB4.9 million, nil, nil, RMB0.4 million and negative
RMB0.4 million for the years ended December 31, 2016, 2017, 2018, 2019 and 2020, respectively.
|
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
236,952
|
|
|
|
363,746
|
|
|
|
772,823
|
|
|
|
169,653
|
|
|
|
245,428
|
|
|
|
37,613
|
|
Total current assets
|
|
|
3,694,564
|
|
|
|
4,132,527
|
|
|
|
3,061,107
|
|
|
|
2,681,751
|
|
|
|
2,311,780
|
|
|
|
354,296
|
|
Total assets
|
|
|
4,238,568
|
|
|
|
4,737,742
|
|
|
|
3,866,611
|
|
|
|
3,440,843
|
|
|
|
3,080,999
|
|
|
|
472,184
|
|
Total current liabilities
|
|
|
747,119
|
|
|
|
661,860
|
|
|
|
905,583
|
|
|
|
947,974
|
|
|
|
929,210
|
|
|
|
142,408
|
|
Total liabilities
|
|
|
834,474
|
|
|
|
749,349
|
|
|
|
1,119,885
|
|
|
|
1,396,375
|
|
|
|
1,126,335
|
|
|
|
172,618
|
|
Noncontrolling interests
|
|
|
117,242
|
|
|
|
111,342
|
|
|
|
113,543
|
|
|
|
113,182
|
|
|
|
121,105
|
|
|
|
18,560
|
|
Total equity
|
|
|
3,404,094
|
|
|
|
3,988,393
|
|
|
|
2,746,726
|
|
|
|
2,044,468
|
|
|
|
1,954,664
|
|
|
|
299,566
|
|
Total liabilities and shareholders’ equity
|
|
|
4,238,568
|
|
|
|
4,737,742
|
|
|
|
3,866,611
|
|
|
|
3,440,843
|
|
|
|
3,080,999
|
|
|
|
472,184
|
|
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 RMB6.5250 to US$1.00, the noon buying rate in effect as of December 31, 2020 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 23, 2021, the noon buying rate was RMB6.4945 to US$1.00.
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B.
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Capitalization
and Indebtedness
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Not Applicable.
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C.
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Reasons
for the Offer and Use of Proceeds
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Not Applicable.
Risks Related to Our Business and 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 all of our subsidiaries and branches operating insurance agency and claims adjusting businesses, 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 subsidiaries and branches operating insurance agency and claims adjusting businesses
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 relevant
subsidiaries and branches, 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 to be generated from that contract.
For the year ended
December 31, 2020, our top five insurance company partners were Huaxia Life Insurance Co., Ltd., or Huaxia, Aeon Life Insurance
Co., Ltd., or Aeon, Sinatay Life Insurance Co., Ltd., or Sinatay, Evergrande Life Insurance Co., Ltd., or Evergrande and Tian’an
Life Insurance Co., Ltd., or Tian’an by net revenues. Among these top five partners, each of Huaxia, Aeon, Sinatay and Evergrande
accounted for more than 10% of our total net revenues individually in 2020, with Huaxia accounting for 18.6%, Aeon accounting
for 17.1%, Sinatay accounting for 15.4% and Evergrande accounting for 10.4%, respectively.
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.
All of our sales
of life insurance products and a substantial portion of our sales of property and casualty insurance products are conducted through
our individual sales agents. 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.
As of December 31,
2020, we had 362,580 sales agents and 1,736 claim adjustors. Out of the 362,580 sales agents, 222,203 were performing agents,
who have sold at least one insurance policy in 2020. The number of performing agents who have sold at least one life insurance
policy in 2020 was 80,768. 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.
If our digitalization initiative
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
online platforms and digital toolkits. In 2012, we launched Baowang (www.baoxian.com), an online insurance distribution platform which
allows customers to search for and purchase a wide range of commoditized insurance products, including accident insurance, indemnity medical
insurance, travel insurance, homeowner insurance, and a limited number of internet-specific regular life insurance products from various
insurance carriers. In October 2012, we launched CNpad Auto, an application to enable our sales agents to help their clients place auto
insurance policies which was subsequently discontinued in 2020. In August 2014, we unveiled eHuzhu (www.ehuzhu.com), an online mutual
aid platform that provides risk-protection programs on a mutual commitment basis among program members. In August 2014, we also rolled
out Chetong.net (www.chetong.net), an online-to-offline platform that integrates claims services and auto service resources. In September
2017, we launched Lan Zhanggui, an internet-based all-in-one application which integrates the functions of several of our existing online
platforms and allows our agents to access and help their clients to place a wide variety of insurance products, including life and health
insurance, indemnity medical insurance, lifestyle insurance and auto insurance products from multiple insurance companies. In 2020, we
announced an initiative to empower our operation by utilizing digital technologies such as artificial intelligence and big data to gain
more customer insight, match sales leads with the most suitable sales agents and maximize their productivity and help customers find the
products that suit their different needs throughout different stages of their lifecycle. However, our digitalization efforts 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:
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the
effectiveness of our marketing campaigns to build brand recognition among consumers and
our ability to attract and retain customers;
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the
acceptance of third-party e-commerce platforms as an effective channel for underwriters
to distribute their insurance products;
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the
acceptance of Lan Zhanggui as effective tools by sales agents;
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public
concerns over security of e-commerce transactions and confidentiality of information;
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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; increased competition
from third party insurance technology companies
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further
improvement in our information technology system designed to facilitate smoother online
transactions; and
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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.
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Since online
insurance distribution has emerged only recently in China and is evolving rapidly, the Chinese Banking and Insurance Regulatory
Committee, or CBIRC may promulgate and implement new rules and regulations to govern this sector from time to time. On December
7, 2020, the Chinese Banking and Insurance Regulatory Committee, or the CBIRC, promulgated the Measures for the Supervision of
the Internet Insurance Business, or the Measures, which became effective on February 1, 2021 and replaces the Interim Measures
for the Regulation of Internet Insurance Business. The Measures provides clarity on the qualifications for entities to operate
online insurance business in China and sets higher requirements on entities which intend to engage in online insurance business.
For example, the Measures requires that both insurance institutions and their self-operated online platforms shall make ICP filing
and insurance institutions engaged in online insurance business shall have IT systems that are certified as Safety Level III Computer
Information Systems, or Safety Level III. We operate part of our online insurance distribution business through Baowang (www.baoxian.com),
which accounted for 3.4% of our total net revenues in 2020. Our wholly-owned subsidiary Fanhua Century Insurance Sales &
Service Co., Ltd., or Fanhua Century, which owns the domain name of www.baoxian.com, holds an ICP license. Baowang’s
system was certified as Safety Level III Computer Information System on December 24, 2020. As advised by our PRC counsel,
we have obtained the necessary approvals and licenses and our operations meet the qualification requirements of the Measures. If
we are unable to adapt to any new changes to regulation governing internet insurance business and remain fully compliant, the
business operation of Baowang could be suspended which may adversely impact our business results of operation.
There are uncertainties with regard to how the changing
laws, regulations and regulatory requirements would apply to our business. We cannot assure you that our operations will remain
fully compliant with the changes in and further development of regulations applicable to us or we will be able to obtain the necessary
approvals and licenses as required in a timely manner.
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.
We may not be successful in implementing our new strategic initiatives, which
may have an adverse impact on our business and financial results.
There is no assurance that we will be able to implement important strategic
initiatives in accordance with our expectations, which may result in an adverse impact on our business and financial results. In late
2020, we launched new strategic initiatives to upgrade our sales organization by developing high-caliber, productive and professional
insurance advisor teams in economically developed cities in China. We also intend to build an integrated digital platform utilizing artificial
intelligence, big data and cloud computing to optimize the use of data to provide the most appropriate products for existing and potential
customers and increase agent productivity. In addition, we intend to build an open platform to facilitate a closer cooperation with various
third parties who can monetize their existing customer resources and to strengthen our value proposition to the market. We expect these
new strategic initiatives to be new engines to drive our long-term growth. However, our management may lack required experience, knowledge,
insight, or human and capital resources to carry out the implementation of these new strategic initiatives. As such, we may not be able
to realize our expected growth, and our business and financial results will be adversely impacted.
All of our personnel engaging in insurance agency, or claims
adjusting activities are required under relevant PRC regulations to register with the CBIRC’s Insurance Intermediaries Regulatory
Information System. If our sales personnel fail to finish practice registration, our business may be materially and adversely
affected.
All of our personnel who engage in insurance agency and claims
adjusting activities are required under relevant PRC regulations to be registered with the CBIRC’s Insurance Intermediary
Regulatory Information System, or the IIRIS through by the insurance company or insurance intermediary company to which he or
she belongs. See “Item 4. Information on the Company — B. Business Overview — Regulation.” In addition,
under the relevant PRC regulations, such as the Provisions on the Supervision and Administration of Insurance Agents issued on
November 12, 2020 and Provisions on the Supervision of Insurance Claims Adjusting Firms issued by the CBIRC (formerly CIRC) in
February 2018, an insurance agency or claims adjusting firm that retains a personnel who has not been registered with the IIRIS
through the insurance agency or claims adjusting firm to engage in insurance intermediary activities may be subject to rectification
request, warning and fines up to RMB10,000 per intermediary by the CBIRC. If a substantial portion of our sales force were found
to have not been properly registered with the IIRIS, our business may be adversely affected. Moreover, we may be subject to fines
and other administrative proceedings for the failure by our sales agents or sales representatives to register with the CBIRC.
Such fines or administrative proceedings could adversely affect our business, financial condition and results of operations.
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 our business.
We operate in a highly regulated industry. The laws and regulations
applicable to us are evolving and may change rapidly, which could change the competitive environment of our industry significantly
and cause us to lose some or all of our competitive advantages. In recent years, the CBIRC and its predecessor has increasingly
tightened regulations and supervision of the Chinese insurance market. For example, on April 2, 2019, the CBIRC issued a Notice
to Rectify the Irregularities in the Insurance Intermediary Market in 2019 and subsequently on May 26, 2020, the CBIRC issued
similar guidelines requiring all insurance companies and insurance intermediaries to conduct self-check on various practices in
violation of relevant regulations. Although we believe we have not had any material violations to date, we could be required to
spend significant time and resources in complying with the requirement and the attention of our management team and key employees
could be diverted to these efforts, which may adversely affect our business operations.
On July 10, 2017, the CIRC, the predecessor of CBIRC, promulgated
the Interim Measures on Retrospective Management of Insurance Sales Behaviors, effective November 1, 2017 which required ancillary
insurance agencies to take video and audio-recording, or double-recording for the sales of all insurance products that they facilitate
and other insurance distribution channels to take double-recording for the sales of investment linked insurance products and for
the sale of life insurance products with a payment period of more than one year to the elderly of over 60 years old. On June 11,
2019, Jiangsu Branch of the CBIRC published the Notice on Deepening the Implementation of the Retrospective Management of Personal
Insurance Sales Behaviors or the Notice, requiring all insurance companies and insurance intermediary companies to start double-recording
process for all long-term personal insurance products in Jiangsu Province starting from October 1, 2019. Ningbo Branch of the
CBIRC implemented similar rule in Ningbo, Zhejiang Province starting from January 1, 2020. Similar rule was also implemented in
certain part of Shandong since mid 2020. As substantially all of the life and health insurance products we distribute are long-term
personal insurance products, our sales activities in these regions have been materially adversely impacted. If similar rules are
implemented nationwide, our compliance cost may be increased and our business and results of operations may be adversely affected.
On March 13, 2018, the CIRC and CBRC merged to form the CBIRC.
The CBIRC has extensive authority to supervise and regulate the insurance industry in China. In exercising its authority, the
CBIRC is 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 supervision 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 also it may sometimes be unclear how they apply to
our business. For example, the laws and regulations applicable to our online and mobile platforms may be unclear. 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, adversely affect
demand for our services, invalidate all or a portion of our customer contracts, require us to change or terminate some of our
businesses, require us to refund a portion of our services fees, or cause us to be disqualified from serving customers, and therefore
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 authority 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
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, the CIRC, the predecessor of CBIRC, issued notices
in September 2016 and May 2017 to further reinforce the regulation of life insurance products by requiring insurance companies
to revise or improve the design of a number of insurance products. For instance, insurance companies are required to (i) increase
the death benefit coverage for insurance products including individual term life insurance, individual endowment insurance and
individual whole life insurance products, and (ii) seek CIRC approval for universal insurance products with a guaranteed interest
rate of above 3%. CIRC also required that (i) whole life insurance, annuity insurance and care insurance products must not be
designed as short-to-medium term products, (ii) the first payment of survival insurance benefits for endowment products and annuity
products must only occur after five years since the policy has become effective, and the annual payment or partial payment must
not exceed 20% of the paid premiums, and (iii) insurance companies must not design universal insurance products or investment-linked
insurance products in the form of riders. These new requirements apply to a number of annuity products sold by us. As a result,
sales of annuity products dropped significantly in 2018.
Pursuant to a notice issued by the CBIRC in August 2019, insurance
companies must seek approval for annuity insurance products with the assumed valuation interest rate of above 3.5%. In November
2019, the CBIRC requested 13 insurance companies to terminate the sales of their annuity insurance products with 4.025% interest
rate by December 31, 2019. Several of our major insurance company partners have subsequently terminated their high-interest rate
annuity products. While the cessation of higher interest-rate annuity products boosted the sales of annuity products in December,
the sales of annuity products dropped substantially in 2020.
On November 5, 2020, China Insurance Industry Association and
China Medical Doctor Association jointly published Definition Framework 2020, announcing changes to the definition of critical
illnesses, or CI, which will be adopted after a transition period until January 31, 2021. After January 31, 2021, all critical
illness products based on the previous definition framework will not be sold in China. Major changes to the CI definition framework
include, among others, (i) settping the upper limit for insurance benefits for mild illness at no more than 30% of total insured
amount; (ii) expanding the types of illnesses covered from 25 types to 28 types of critical illnesses and three types of mild
illness; (iii) exclusion of cancer that is in situ from the scope of CI coverage; and (iv) categorizing thyroid cancer at different
stages into critical illness category and mild illness category. The expected cessation of the critical illness products under
the previous CI definition framework has resulted in strong growth in our sales of critical illness policies in January 2021 followed
by a drop afterwards. Any future change in regulatory requirements that make our products less attractive to consumers or disrupt
product supply, our business results of operations could fluctuated significantly and be adversely affected.
Our mutual-aid platform eHuzhu currently is not subject to any
license requirement or any other supervision by the CBIRC as the mutual aid plans offered on the platform are not technically
insurance. If the CBIRC determines to include mutual aid platform into its supervision in the future, our compliance cost could
be increased, and if we are unable to meet the qualification requirement to obtain proper license, the operation of eHuzhu could
be disrupted which could harm the interests of the members of eHuzhu and damage our reputation.
We may be unsuccessful in identifying and
acquiring suitable acquisition targets, 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.
Competition in our industry is intense and,
if we are unable to compete effectively with both existing and new market participants, 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 as more internet giants and other online insurance intermediaries enter the
market. 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, 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 traditional
or online 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,
both existing and newly emerging, 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. 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 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 and health 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. Our commission and fee rates
are set by insurance companies and are based on the premiums that the insurance companies charge or the amount recovered by 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 CBIRC.
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. Life insurance commission revenue is usually 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. However,
the general seasonality trend in 2020 has been affected by the outbreak of Coronavirus Disease 2019, or COVID-19 as it hit China
the hardest in the first quarter of 2020. Apart from the outbreak of epidemic, some other factors that cause the quarterly and
annual variations are not within our control. Specifically, regulatory changes to product design may result in cessation of products
from time to time and cause quarterly fluctuation in the results of our operations. In addition, 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 and their branches located in 31 provinces in China. These companies report their
financial 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:
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making
misrepresentations when marketing or selling insurance to customers;
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hindering
insurance applicants from making full and accurate mandatory disclosures or inducing
applicants to make misrepresentations;
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hiding
or falsifying material information in relation to insurance contracts;
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fabricating
or altering insurance contracts without authorization from relevant parties, selling
false policies, or providing false documents on behalf of the applicants;
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falsifying
insurance agency business or fraudulently returning insurance policies to obtain commissions;
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colluding
with applicants, insureds, or beneficiaries to obtain insurance benefits;
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engaging
in false claims; or
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otherwise
not complying with laws and regulations or our control policies or procedures.
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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. Therefore, salesperson or employee misconduct could 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 half
a year 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 control 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.
As required by Section 404 of the Sarbanes-Oxley Act and related
rules as promulgated by the SEC, our management assessed the effectiveness of the internal control over financial reporting as
of December 31, 2020 using criteria established in “Internal Control — Integrated Framework (2013)” issued by
the Committee of Sponsoring Organizations of the Treadway Commission and concluded that our internal control over financial reporting
was effective as of December 31, 2020. If we fail to achieve and maintain an effective internal control environment for our financial
reporting, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting
in accordance with the Sarbanes-Oxley Act of 2002, which could result in inaccuracies in our consolidated financial statements
and could also impair our ability to comply with applicable financial reporting requirements and make related regulatory filings
on a timely basis. As a result, our business, financial condition, results of operations and prospects, as well as the trading
price of our ADSs, may be materially and adversely affected. Moreover, if we are not able to conclude that we have effective internal
control 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 required to write down goodwill
and investment in affiliates, 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 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, 2020, goodwill represented RMB109.9 million (US$16.8 million),
or 5.6% of our total shareholders’ equity. Our management performs impairment assessment annually and we did not recognize
any impairment loss between 2016 and 2020. Under current accounting standards, if we determine that goodwill is impaired, we will
be required to write down the value of such assets and recognize corresponding impairment charges.
We account for our 18.5% of equity interests in CNFinance Holdings
Limited (“CNFinance”) using the equity method. We review our equity method investment periodically to determine whether
a decline in fair value to an amount below the carrying value is other-than temporary. As of December 31, 2020, the fair value
of the investment in CNFinance was below the carrying value although the investment in CNFinance generated positive equity income.
Based on management’s evaluation, it was concluded that the decline in fair value of our investment in CNFinance below its
carrying value is deemed to be other-than-temporary. Accordingly, a provision of an impairment of RMB23.0 million (US$3.5 million)
on investment in CNFinance was recognized in 2020. Any future write-down related to such goodwill and equity method investments
may adversely and materially affect our shareholders’ equity and financial results.
Preparing and forecasting our financial results requires us to make judgments
and estimates which may differ materially from actual results.
Given the evolving regulatory and competitive environment and the inherent
limitations in predicting the future, forecasts of our revenues, operating income, net income and other financial and operating data may
differ materially from actual results. Such discrepancies could cause a decline in the trading price of our stock. In addition, the preparation
of the consolidated financial statements in conformity with U.S. GAAP requires management 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. Our management base their
estimates on historical experience and various other factors which are believed to be reasonable under the circumstances, and 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 our consolidated financial statements included estimates of allowance for doubtful
receivables and estimates associated with equity-method investment impairment assessments. Actual results could differ from those estimates,
which could negatively affect our stock price.
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, branches and our main offices in Guangzhou, is critical to our business and our ability to
compete effectively. Our business activities could 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.
Though we have not experienced any material cybersecurity incidents
in the past, if our database were compromised by outside sources or 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 remedying the situation, defending
against these accusations and we may face potential liability. Any negative publicity, especially concerning breaches in our cybersecurity
systems, may adversely affect our public image and reputation. Though we take proactive measures to protect against these risks
and we believe that our efforts in this area are sufficient for our business, we cannot be certain that such measures will prove
effective against all cybersecurity risks. 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.
Our business is subject to insurance company
partner concentration risks arising from dependence on a single or limited number of insurance company partners.
We derive a significant portion of net revenues from distributing
insurance products supplied by our important insurance company partners. Among the top five of our insurance company partners,
each of Huaxia, Aeon, Sinatay and Evergrande contributed more than 10% of our total net revenues from continuing operations in
2020, with Huaxia accounting for 18.6% Aeon accounting for 17.1%, Sinatay accounting for 15.4% and Evergrande accounting for 10.4%.
Because of this concentration in the supply of the insurance
products we distribute, our business and operations would be negatively affected if we experience a partial or complete loss of
any of these insurance company partners. In addition, any significant adverse change in our relationship with any of these insurance
company partners could result in loss of revenue, increased costs and distribution delays that could harm our business and customer
relationships. In addition, this concentration can exacerbate our exposure to risks associated with the termination by key insurance
company partners of our agreements or any adverse change in the terms of such agreements, which could have an adverse impact on
our revenues and profitability.
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 a material 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 the use of the Internet to communicate benefits and related information to consumers and to facilitate
information exchange, transactions and training. We believe that our future success will depend on our ability to anticipate and
adapt to technological changes and to offer additional products and services that meet evolving standards on a timely and cost-effective
manner. We may not be able to successfully identify new product and service opportunities or develop and introduce these opportunities
in a timely and cost-effective manner. In addition, new products and services that our competitors develop or introduce may render
our products and services uncompetitive. As a result, if we are not able to respond or adapt to technological changes that may
affect our industry in the future, our business and results of operations could be materially and adversely affected.
We face risks related to health epidemics,
including the ongoing COVID-19 outbreak, 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 health epidemics, severe weather conditions or other catastrophes. In December 2019, COVID-19 was first detected in China and then
quickly in other countries. Since January 2020, the PRC government has taken various precautionary measures to contain the spread of the
COVID-19, including extending the Chinese New Year Holiday into February 2020, temporarily closing offices, restricting travel, and avoiding
public gatherings. The outbreak of the COVID-19 has caused material adverse impact on Chinese economy and China’s insurance industry,
disrupted our operations and adversely affected our business, financial condition and results of operations in 2020 as (i) the sales activities
of our sales agents have been largely hindered due to the difficulty to interact with prospective customers face-to-face as result of
the social distancing measures imposed in the first half of 2020; (ii) recruitment of agents slowed down due to the suspension of large-scale
offline agent recruitment seminars until May 2020 and increased competition for agents in the insurance industry amid the challenging
business environment; (iii) our plan to establish new branches in selected major cities were interrupted; and (iv) the epidemic has accelerated
the trend of the young generation turning to the internet for insurance information and purchase of more affordable indemnity medical
insurance products as an alternative to critical illness products.
The business operation of our non-consolidated affiliated investees has also been
adversely impacted by the COVID-19 outbreak which had affected the fair value of our investment in affiliates.
Although COVID-19 has been considered to be largely contained in China
and we have resumed normal business activities in the second half of 2020, the epidemic has had and could continue to have lingering adverse
impact on our business results as consumers’ confidence in purchasing regular large ticket-sized insurance policies has not yet
fully recovered. The extent to which the COVID-19 outbreak will continue to impact our results will depend on its future developments,
which are highly uncertain and cannot be predicted, including sporadic recurrence of local and imported COVID-19 cases from time to time
and the actions to contain the disease or treat its impact, among others. For example, there has been occasional outbreaks in several
cities in north China including Shijiazhuang, Hebei Province where we have significant market presence. Targeted restrictive measures
were temporarily put in place in those cities, which had temporarily adversely impacted our business in those regions in January 2021.
Even if the economic impact of COVID-19 gradually recedes, the pandemic will have a lingering, long-term effect on business activities
and consumption behavior. There is no assurance that we will be able to adjust our business operations to adapt to these changes and the
increasingly complex environment in which we operate.
In addition, our results of operations have been and could continue
to be adversely affected to the extent the COVID-19 pandemic or any other epidemic harms the Chinese economy in general.
Any occurrence of other adverse public health developments or
severe weather conditions may also 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.
We may be at risk of securities class action
litigation.
Historically, securities class action litigation has often
been brought against a company following periods of instability in the market price of its securities. If we face such litigation,
it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.
Recently, U.S. public companies that have substantially all
of their operations in China, have been the subject of intense scrutiny, criticism and negative publicity by some investors, financial
commentators and regulatory agencies. Much of the scrutiny, criticism and negative publicity has centered around financial and
accounting irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance policies
or a lack of adherence thereto and, in some cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity,
the publicly traded stocks of many U.S.-listed Chinese companies has sharply decreased in value and, in some cases, has become
virtually worthless. Some of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting
or subject to internal and external investigations into the allegations. We had been targeted by short selling reports in the
past and became subject to class action lawsuits which were subsequently dismissed or settled. Shortselling firms or others may
in the future publish additional short seller reports with respect to our business, officers, directors and shareholders, and
we may become subject to other unfavorable allegations, which might cause further fluctuations in the trading price of our ADSs.
Such volatility in our share price could subject us to increased risk of securities class action lawsuits or derivative actions.
Any future class action lawsuit against us, whether or not
successful, could harm our reputation and restrict our ability to raise capital. In addition, if a claim is successfully made
against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition
and results of operations. Even if such allegations are ultimately proven to be groundless, the allegations or the process of
dealing with them could severely impact our business operations and stockholder’s equity, and any investment in our ADSs
could be greatly reduced.
We may be subject, from time to time, to
adverse actions taken by other parties, including lawsuits and negative reports and regulatory proceedings, which may divert resources
and the time and attention of our management and may otherwise adversely affect us.
From time to time, we may become a party to litigations incidental
to the operation of our business, including class action lawsuits and disputes with other third parties. Litigation usually requires
a significant amount of management time and effort, which may adversely affect our business by diverting management’s focus
from the needs of our business and the development of strategic opportunities.
We cannot predict the outcome of these lawsuits. Regardless
of the outcome, these lawsuits, and any other litigation that may be brought against us or our current or former directors and
officers, could be time-consuming, result in significant expenses and divert the attention and resources of our management and
other key employees. An unfavorable outcome in any of these matters could also exceed coverage provided under applicable insurance
policies, which is limited. Any such unfavorable outcome could have a material effect on our business, financial condition, results
of operations and cash flows. Further, we could be required to pay damages or additional penalties or have other remedies imposed
against us, or our current or former directors or officers, which could harm our reputation, business, financial condition, results
of operations or cash flows.
In addition, the CBIRC may from time to time make inquiries
and conduct examinations concerning our compliance with PRC laws and regulations. These administrative proceedings have in the
past resulted in administrative sanctions, including fines, which have not been material to us. While we cannot predict the outcome
of any pending or future examination, we do not believe that any pending legal matter will have a material adverse effect on our
business, financial condition or results of operations. However, we cannot assure you that any future regulatory proceeding will
not have an adverse outcome, which could have a material adverse effect on our operating results or cash flows.
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 Meidiya Investment, Yihe
Investment, 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 June 29, 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, the predecessor of CBIRC, 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 1, 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 operate our online insurance distribution business through
Baoxian.com which was subject to foreign investment restrictions. Foreign investors are not allowed to own more than 50% of the
equity interests in a value-added telecommunications service provider (except for e-commerce, domestic multi-party communication,
storage and forwarding classes and call centers) under the Special Administrative Measures for Access of Foreign Investment (Negative
List) (2020 Edition), which was promulgated on June 23, 2020 and implemented on July 23, 2020. However, 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 (operating e-commerce) 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 Meidiya Investment and Yihe Investment, which became our wholly-owned subsidiaries
in 2015 and Xinbao Investment and Dianliang Information, which became our wholly-owned subsidiaries in 2016. As a result, we obtained
direct controlling or significant equity ownership in each of our insurance intermediary companies and our online platforms in
2016. See “Item 4. Information on the Company — C. Organizational Structure.”
If our online insurance business operated through Baoxian.com
is treated as value-added telecommunication service other than e-commerce business by relevant authorities, our direct ownership
of our online platforms may be in violation of any existing or future PRC laws or regulations, or if our online platforms fail
to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities, including the CBIRC (formerly
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.
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 amount of a foreign-invested enterprise’s registered capital represents shareholders’
equity investments over a defined period of time, and the foreign-invested enterprise’s total investment 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 HK300 million (US$38.7 million) in foreign debts as of March 31, 2021. 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 on June 9, 2016, SAFE promulgated Circular 16,
a notice on reforming and standardizing the administrative provisions on capital account foreign exchange settlement, which became
effective on June 9, 2016. The new notice states that domestic enterprises (including Chinese-funded enterprises and foreign-invested
enterprises, excluding financial institutions) 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 application of discretionary settlement has been specified by relevant policies (including capitals
in foreign currencies, external debts, funds repatriated from overseas listing, etc.). 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 16 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 China’s GDP growth dropped to 2.3% in 2020 due to the COVID-19 outbreak. 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 sometime 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, which was subsequently amended on February 24, 2017 and December 29, 2018, 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,
such as the Circular on Issues Regarding Tax-related Preferential Policies for Further Implementation of Western Development Strategy
jointly issued by the State Ministry of Finance, General Administration of Customs, China and State Administration for Taxation,
enterprises located in the western China regions that fall into the encouraged industries are entitled to 15% EIT preferential
tax treatment from January 1, 2011 to December 31, 2020. The preferential tax treatment is subsequently extended to December 31,
2030, according to the Announcement Concerning the Extension of the EIT Policies for Enterprises Located in the Western China
issued by the Ministry of Finance on April 28, 2020. The preferential tax rates enjoyed by some of our PRC subsidiaries incorporated
in such regions, will increase to the uniform 25% EIT rate after 2030. 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. However, 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 and was subsequently amended on January 30, 2008, May 27,
2010, April 1,2015 and July 19, 2019, dividends from our PRC subsidiaries paid to us through our Hong Kong wholly-owned subsidiary
CNinsure Holdings Ltd. are subject to a withholding tax at a rate of 5% since CNinsure Holdings Ltd. is treated as a Hong Kong
resident enterprise for taxation purpose. 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.
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, according to the PRC Company Law, 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. In addition, according to the Regulation
on the Supervision of Insurance Agents, our insurance agency subsidiaries are required to either procure professional liability
insurance with minimum compensation for each accident under the one-year professional liability insurance policy no less than
RMB1 million, and accumulative compensation under the one-year insurance policy no less than RMB10 million and the total core
business revenue of the professional insurance agency company in the previous year, or make a contribution to deposit which shall
represent 5% of its registered capital. These reserves are not distributable as cash dividends.
As of December 31, 2020, the total retained earnings of our
PRC subsidiaries available for dividend distributions were RMB1.1 billion (US$175.7 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. We may also face regulatory uncertainties that could restrict our ability to adopt additional equity compensation plans
for our directors and employees and other parties under PRC law.
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.
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. No. 7 Notice covers all forms of
equity compensation plans including employee stock ownership plans, employee stock option plans and other equity compensation
plans permitted by relevant laws and regulations. According to the No. 7 Notice, all participants of such plans who are PRC citizens
shall register with and obtain approvals from SAFE prior to their participation in the equity incentive plan of an overseas listed
company. Domestic individuals, which include any directors, supervisors, senior managerial personnel or other employees of a domestic
company who are PRC 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. 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, which will
depend on how the SAFE interprets, applies and enforces Circular 7. 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. With the development of the foreign exchange
market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce
further changes to the exchange rate system and we cannot assure you that the Renminbi will not appreciate or depreciate significantly
in value against the U.S. dollar in the future. 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.
Certain PRC regulations could also make it
more difficult for us to pursue growth through acquisitions.
Among other things, Provisions on the Mergers and Acquisitions
of Domestic Enterprises by Foreign Investor, or 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.
Risks Related to Our ADSs
The trading price of our ADSs may be volatile.
The trading price of our ADSs may be volatile and could fluctuate
widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and
fluctuation in the market prices or the underperformance or deteriorating financial results of other listed companies based in
China. The securities of some of these companies have experienced significant volatility since their initial public offerings,
including, in some cases, substantial price declines in the trading prices of their securities. The trading performances of other
Chinese companies’ securities after their offerings, may affect the attitudes of investors toward Chinese companies listed
in the United States, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance.
In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate
structure or matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies
in general, including us, regardless of whether we have conducted any inappropriate activities. [U.S. government’s recent
polices concerning Chinese companies listed in the U.S. may also cause great uncertainty in the listing status of companies like
us and result in fluctuation in the trading rice of our ADSs]. In addition, securities markets may from time to time experience
significant price and volume fluctuations that are not related to our operating performance, which may have a material and adverse
effect on the trading price of our ADSs.
In addition to the above factors, the price and trading volume
of our ADSs may be highly volatile due to multiple factors, including the following:
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changes
in the economic performance or market valuations of other insurance intermediaries;
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actual
or anticipated fluctuations in our quarterly results of operations and changes or revisions
of our expected 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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announcements
by us or our competitors of acquisitions, strategic relationships, joint ventures, capital
raisings or capital commitments;
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additions
to or departures of our senior management;
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fluctuations
of exchange rates between the RMB and the U.S. dollar or other foreign currencies;
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potential
litigation or administrative investigations;
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sales
or perceived potential sales of additional ordinary shares or ADSs; and
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general
economic or political conditions in China and abroad.
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Any of these factors may result in large and sudden changes
in the volume and trading price of our ADSs. In addition, the stock market has from time to time experienced significant price
and volume fluctuations that are unrelated to the operating performance of particular companies and industries.
The volatility resulting from any of the above factors may
affect the price at which you could sell the 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 or perceived potential sales of our ordinary shares,
ADSs or other equity securities in the public market 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, 2021, our executive officers and directors beneficially
owned approximately 27.0% 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.
Holders of our ADSs may have fewer rights
than holders of our ordinary shares and must act through the depositary to exercise those rights.
Holders of ADSs do not have the same rights as our registered
shareholders. The holders of our ADSs will not have any direct right to attend general meetings of our shareholders or to directly
cast any votes at such meetings. The holders of our ADSs will only be able to exercise the voting rights which are carried by
the underlying ordinary shares represented by their ADSs indirectly by giving voting instructions to the depositary in accordance
with the provisions of the deposit agreement (“unrestricted deposit agreement”), and the deposit agreement for restricted
securities (as defined below) (each also referred to as a “deposit agreement”, and together the “deposit agreements”).
Under the deposit agreements, the holders of our ADSs may vote only by giving voting instructions to the depositary. Upon receipt
of the voting instructions from the holders of our ADSs, the depositary will vote the underlying ordinary shares represented by
their ADSs in accordance with these instructions. The holders of our ADSs will not be able to directly exercise their right to
vote with respect to the underlying ordinary shares unless they withdraw such shares and become the registered holder of such
shares prior to the record date for the general meeting. Under our amended and restated memorandum and articles of association,
the minimum notice period required to be given by our company to our registered shareholders to convene a general meeting is fourteen
calendar days. When a general meeting is convened, the holders of our ADSs may not receive sufficient advance notice of the meeting
to permit the holders of our ADSs to withdraw the underlying ordinary shares represented by their ADSs and become the registered
holder of such shares to allow the holders of our ADSs to attend the general meeting and to cast their vote directly with respect
to any specific matter or resolution to be considered and voted upon at the general meeting. Furthermore, under our amended and
restated memorandum and articles of association, for the purposes of determining those shareholders who are entitled to attend
and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such
meeting, and such closure of our register of members or the setting of such a record date may prevent the holders of our ADSs
from withdrawing the underlying ordinary shares represented by their ADSs and becoming the registered holder of such shares prior
to the record date, so that they would not be able to attend the general meeting or to vote directly. If we ask for their instructions,
the depositary will notify the holders of our ADSs of the upcoming vote and will arrange to deliver our voting materials to them.
We cannot assure the holders of our ADSs that they will receive the voting materials in time to ensure that they can instruct
the depositary to vote the ordinary shares underlying their ADSs. In addition, the depositary and its agents are not responsible
for failing to carry out voting instructions or for their manner of carrying out the voting instructions of the holders of our
ADSs. This means that the holders of our ADSs may not be able to exercise their right to direct how the underlying ordinary shares
represented by their ADSs are voted and they may have no legal remedy if the underlying ordinary shares represented by their ADSs
are not voted as they requested. In addition, in their capacity as an ADS holder, the holders of our ADSs will not be able to
call a shareholders’ meeting. Furthermore, 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.
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.
Right of holders of our ADSs to participate
in any future rights offerings may be limited, which may cause dilution to their holdings.
We may from time to time distribute rights to our shareholders,
including rights to acquire our securities. However, we cannot make rights available to holders of our ADSs in the United States
unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from
the registration requirements is available. Under the deposit agreements, the depositary will not make rights available to holders
of our ADSs unless both the rights and the underlying securities to be distributed to ADS holders are either registered under
the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement
with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and
we may not be able to establish a necessary exemption 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.
Holders of our restricted ADSs may be subject
to limitations on transfer of their ADSs.
Restricted 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 restricted
ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems 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 agreements,
or for any other reason.
Certain judgments obtained against us by
our shareholders may not be enforceable.
We are an exempted company incorporated under the laws of the
Cayman Islands. We conduct our operations outside the United States and substantially all of our assets are located outside the
United States. In addition, substantially all of our directors and officers are nationals or residents of jurisdictions other
than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be
difficult or impossible for our shareholders to bring an action against us or against them in the United States in the event that
our shareholders believe that their rights have been infringed under the U.S. federal securities laws or otherwise. Even if our
shareholders are successful in bringing an action of this kind, the laws of the Cayman Islands, the PRC or other relevant jurisdiction
may render our shareholders unable to enforce a judgment against our assets or the assets of our directors and officers.
Since we are a Cayman Islands company, the
rights of our shareholders may be more limited than those of shareholders of a company organized in the United States.
Under the laws of some jurisdictions in the United States, majority
and controlling shareholders generally have certain fiduciary responsibilities to the minority shareholders. Shareholder action
must be taken in good faith, and actions by controlling shareholders which are obviously unreasonable may be declared null and
void. Cayman Island law protecting the interests of minority shareholders may not be as protective in all circumstances as the
law protecting minority shareholders in some U.S. jurisdictions. In addition, the circumstances in which a shareholder of a Cayman
Islands company may sue the company derivatively, and the procedures and defenses that may be available to the company, may result
in the rights of shareholders of a Cayman Islands company being more limited than those of shareholders of a company organized
in the United States.
Furthermore, our directors have the power to take certain actions
without shareholder approval which would require shareholder approval under the laws of most U.S. jurisdictions. The directors
of a Cayman Islands company, without shareholder approval, may implement a sale of any assets, property, part of the business,
or securities of the company. Our ability to create and issue new classes or series of shares without shareholder approval could
have the effect of delaying, deterring or preventing a change in control of our Company without any further action by our shareholders,
including a tender offer to purchase our ordinary shares at a premium over prevailing market prices.
The audit reports included in this annual
report have been prepared by our independent registered public accounting firm 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. In addition, various
legislative and regulatory developments related to U.S.-listed China-based companies due to lack of PCAOB inspection and other
developments may have a material adverse impact on our listing and trading in the U.S. and the trading prices of our ADSs.
Our independent registered public accounting firm that issues
the audit reports included in our annual reports filed with the U.S. SEC, as auditors 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.
Because we have substantial operations within the PRC
and the PCAOB is currently unable to conduct inspections of the work of our independent registered public accounting firm
as it relates to those operations without the approval of the Chinese authorities, our independent registered public accounting
firm is not currently inspected fully by the PCAOB. This lack of PCAOB inspections in the PRC prevents the PCAOB from regularly
evaluating our independent registered public accounting firm’s audits and its quality control procedures. As a result, investors
may be deprived of the benefits of PCAOB inspections. Inspections of other firms that the PCAOB has conducted outside the PRC
have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as
part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct full inspections of
auditors in the PRC makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s
audit procedures or quality control procedures as compared to auditors outside the PRC that are subject to PCAOB inspections.
Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.
On May 24, 2013, PCAOB announced that it had entered into a
Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission, or the CSRC, and the Ministry
of Finance which establishes a cooperative framework between the parties for the production and exchange of audit documents
relevant to investigations in the United States and China. On inspection, it appears that the PCAOB continues to be in discussions
with the Mainland China regulators to permit inspections of audit firms that are registered with PCAOB in relation to the audit
of Chinese companies that trade on U.S. exchanges. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting
continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with
significant operations in China. The joint statement reflects a heightened interest in this issue. On April 21, 2020, the
SEC and the PCAOB issued a joint statement reiterating the greater risks of insufficient disclosures from companies in many emerging
markets, including China, compared to those from U.S. domestic companies. In discussing the specific issues related to these risks,
the statement again highlighted the PCAOB’s inability to inspect audit work and practices of accounting firms in China with
respect to U.S. reporting companies. On June 4, 2020, the U.S. President issued a memorandum ordering the President’s
Working Group on Financial Markets, or the PWG, to submit a report to the President within 60 days of the memorandum that
includes recommendations for actions that can be taken by the executive branch and by the SEC or the PCAOB on Chinese companies
listed on U.S. stock exchanges and their audit firms. On August 6, 2020, the PWG released the report. In particular, with
respect to jurisdictions that do not grant the PCAOB sufficient access to fulfill its statutory mandate, or NCJs, the PWG recommended
that enhanced listing standards be applied to companies from NCJs for seeking initial listing and remaining listed on U.S. stock
exchanges. Under the enhanced listing standards, if the PCAOB does not have access to work papers of the principal audit firm
located in a NCJ for the audit of a U.S.-listed company as a result of governmental restrictions, the U.S.-listed company may
satisfy this standard by providing a co-audit from an audit firm with comparable resources and experience where the PCAOB determines
that it has sufficient access to the firm’s audit work papers and practices to inspect the co-audit. The report recommended
a transition period until January 1, 2022 before the new listing standards apply to companies already listed on U.S. stock
exchanges. Under the PWG recommendations, if we fail to meet the enhanced listing standards before January 1, 2022, we could
face de-listing from the Nasdaq Global Select Market, deregistration from the SEC and/or other risks, which may materially and
adversely affect, or effectively terminate, our ADS trading in the United States. There were recent media reports about the SEC’s
proposed rulemaking in this regard. It is uncertain whether the PWG recommendations will be adopted, in whole or in part, and
the impact of any new rule on us cannot be estimated at this time.
As part of a continued regulatory focus in the United States
on access to audit and other information currently protected by national law, in particular China’s, in June 2019,
a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress, which if passed, would require the SEC to
maintain a list of issuers for which the PCAOB is not able to inspect or investigate auditor reports issued by foreign public
accounting firms. The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE)
Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. stock exchanges
of issuers included on the SEC’s list for three consecutive years. On December 18, 2020, the “Holding Foreign
Companies Accountable Act”, or the Act, was signed by the then U.S. President into law. The Act requires foreign issuers
to establish that they are not owned or controlled by a foreign government and requires the SEC to prohibit foreign companies
from listing securities on U.S. securities exchanges or trading “over-the-counter” if a company retains a foreign
accounting firm that cannot be inspected by the PCAOB for three consecutive years, beginning in 2021. On March 24, 2021, the SEC
adopted interim final amendments to implement the requirements of the ACT, which require any identified registrant to submit documents
to the SEC establishing that the registrant is not owned or controlled by a foreign governmental entity, and will also require
disclosure in a foreign issuer’s annual report regarding the audit arrangements of, and governmental influence on, such
a registrant. The amendments will become effective on April 23, 2021. The enactment of Act, implementation of the amendments and
any additional rule making efforts to increase U.S. regulatory access to audit information in China could cause investor uncertainty
for affected SEC registrants, including us, the market price of our ADSs could be materially adversely affected, and we could
be delisted if we are unable to meet the PCAOB inspection requirement in time.
If the settlement reached between the SEC
and the Big Four PRC-based accounting firms (including the Chinese affiliate of our independent registered public accounting firm),
concerning the manner in which the SEC may seek access to audit working papers from audits in China of U.S.-listed companies,
is not or cannot be performed in a manner acceptable to authorities in China and the United States, we could be unable to timely
file future financial statements in compliance with the requirements of the Exchange Act.
In late 2012, the SEC commenced administrative proceedings
under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the mainland Chinese affiliates
of the “Big Four” accounting firms (including the mainland Chinese affiliate of 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 Chinese accounting 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 Chinese
accounting firms reached a settlement with the SEC whereby the proceedings were stayed. Under the settlement, the SEC accepted
that future requests by the SEC for the production of documents would normally be made to the CSRC. The Chinese accounting
firms would receive requests matching those under Section 106 of the Sarbanes-Oxley Act of 2002, and would be required to
abide by a detailed set of procedures with respect to such requests, which in substance would require them to facilitate production
via the CSRC. The CSRC for its part initiated a procedure whereby, under its supervision and subject to its approval, requested
classes of documents held by the accounting firms could be sanitized of problematic and sensitive content so as to render them
capable of being made available by the CSRC to US regulators.
Under the terms of the settlement, the underlying proceeding
against the four PRC-based accounting firms was deemed dismissed with prejudice at the end of four years starting from the settlement
date, which was on February 6, 2019. Despite the final ending of the proceedings, the presumption is that all parties will continue
to apply the same procedures: i.e. the SEC will continue to make its requests for the production of documents to the CSRC, and
the CSRC will normally process those requests applying the sanitization procedure. We cannot predict whether, in cases where
the CSRC does not authorize production of requested documents to the SEC, the SEC will further challenge the four PRC-based accounting
firms’ compliance with U.S. law. If additional challenges are imposed on the Chinese affiliates of the “big four”
accounting firms, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange
Act.
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 accounting firms may cause investor uncertainty regarding China-based, United States-listed
companies and the market price of our ADSs may be adversely affected.
If the Chinese affiliate of 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. Such a determination could ultimately lead
to the delisting of our ordinary shares from the NASDAQ 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 discourage a third party from acquiring us, which could limit our shareholders’ opportunity to sell
their shares, including ordinary shares represented by our ADSs, at a premium.
Our amended and restated memorandum and articles of association
contain provisions which have the potential to limit the ability of others to acquire control of our company or cause us to engage
in change-of-control transactions. These provisions 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
other rights, 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, at such time
and on such terms as they may think appropriate. In the event these preferred shares have better voting rights than our ordinary
shares, in the form of ADSs or otherwise, they 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.
As a foreign private issuer, we are exempt
from certain disclosure requirements under the Exchange Act, which may afford less protection to our shareholders than they would
enjoy if we were a domestic U.S. company.
As a foreign private issuer, we are exempt from, among other
things, the rules prescribing the furnishing and content of proxy statements under the Exchange Act. In addition, our executive
officers, directors and principal shareholders are exempt from the reporting and short-swing profit and recovery provisions contained
in Section 16 of the Exchange Act. We are also not required under the Exchange Act to file periodic reports and financial statements
with the SEC as frequently or as promptly as domestic U.S. companies with securities registered under the Exchange Act although
we have voluntarily filed and will continue to file period reports and financial statements. As a result, our shareholders may
be afforded less protection than they would under the Exchange Act rules applicable to domestic U.S. companies.
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 the majority of our officers reside outside
the United States
We are incorporated in the Cayman Islands, and conduct substantially
all of our operations in China through our subsidiaries in China. Most of our officers reside outside the United States and some
or all of the assets of those persons are located outside of the United States. The legal system in Cayman, the PRC or other relevant
jurisdictions may not afford our shareholders the same level of protection as the legal system in the United States would. For
instance, the Securities Laws of the PRC regulates only security issuances and trading outside of the PRC to the extent that such
issuance and trading disrupts domestic markets and negatively affects the interest of domestic investors in the PRC. As such,
investors in the United States may not be able to file a lawsuit under the Securities Law in the PRC. Even if you are successful
in bringing an action in the PRC, shareholder claims that are common in the United States, including class action suits securities
law and fraud claims, may be difficult or impossible to pursue as a matter of law or practicality in the PRC. As a result, it
may be difficult or impossible for you to bring an action against us or against these individuals in the Cayman Islands or in
China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are
successful in bringing an action of this kind outside the Cayman Islands or China, the laws of the Cayman Islands and of China
may render you unable to effect service of process upon, or to enforce a judgment against our assets or the assets of our directors
and officers.
The SEC, U.S. Department of Justice, or the DOJ, and other relevant
regulatory authorities in the United States play vital roles in enforcing laws and regulations that protect securities investors.
These U.S. authorities may face significant legal and other obstacles to obtaining information needed for investigations or litigation.
Further, these U.S. authorities may have substantial difficulties in bringing and enforcing actions against non-U.S. companies
and non-U.S. persons, including company directors and officers, which will further limit protections available to our shareholders.
According to the Securities Laws of the PRC, without the approval of securities regulator and other actors within the Chinese
government, no entity or individual in China may provide documents and information relating to securities business activities
to overseas regulators. In addition, local authorities in Cayman, the PRC or other relevant jurisdictions often are constrained
in their ability to assist U.S. authorities and overseas investors more generally. There are also legal or other obstacles to
seeking access to funds in a foreign country.
There is no statutory enforcement in the Cayman Islands of judgments
obtained in the United States, although a judgment obtained in the federal or state courts of the United States courts will be
recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying
dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment:
(a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a liability to pay a liquidated
sum for which the judgment has been given, (c) is final, (d) is not in respect of taxes, a fine, or a penalty, and (d) was not
obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the
Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil
liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to
give rise to obligations to make payments that are penal or punitive in nature. A Cayman Islands court may stay enforcement proceedings
if concurrent proceedings are being brought elsewhere. A judgment of a court of another jurisdiction may be reciprocally recognized
or enforced if the jurisdiction has a treaty with China or if judgments of the PRC courts have been recognized before in that
jurisdiction, subject to the satisfaction of other requirements. However, China does not have treaties providing for the reciprocal
enforcement of judgments of courts with Japan, the United Kingdom, the United States and most other Western countries.
Our corporate affairs are governed by our amended and restated
memorandum and articles of association and by the Companies Law (2020 Revision) (the “Company Law”) and the common
law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders
and the fiduciary responsibilities 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 responsibilities 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, the Cayman Islands
has a less developed body of securities laws as compared to the United States, and 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 investors may have more
difficulty in protecting their interests through actions against our management, directors or major shareholders than would shareholders
of a corporation incorporated in a jurisdiction in the United States.
We may be a passive foreign investment company
for United States federal income tax purposes, which could result in adverse United States federal income tax consequences to
United States Holders of our ADSs or ordinary shares.
We will be a passive foreign investment company, or PFIC. for
United States federal income tax purposes for any taxable year if, applying applicable look-through rules, either (1) at least
75% of our gross income for such year is passive income or (2) at least 50% of the value of our assets (generally 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. Based on the market price of our ADSs, the value of our assets, and the composition of our
income and assets, we do not believe that we were a PFIC for United States federal income tax purposes for our taxable year ended
December 31, 2020. However, we believe we were a PFIC for 2017 and prior years. In addition, we believe that it is likely that
one or more of our subsidiaries were also PFICs for such prior years. 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. If our market capitalization
declines, we may be or become a PFIC because our liquid assets and cash (which are for this purpose considered assets that produce
passive income) may then represent a greater percentage of our overall assets. In addition, the application of the PFIC rules
is subject to uncertainty in several respects, and we cannot assure you that the United States Internal Revenue Service, or the
IRS, will agree with any positions that we ultimately take. Accordingly, we cannot assure you that we will not be treated as a
PFIC for any taxable year or that the IRS will not take a contrary position to any determination we make.
If we are a PFIC for any taxable year (as we believe we were
for 2017 and prior years) during which a United States Holder (as defined in “Item 10. Additional Information — E.
Taxation — United States Federal Income Taxation”) holds our ADSs or ordinary shares, certain adverse United States
federal income tax consequences could apply to such United States Holder. See “Item 10. Additional Information — E.
Taxation — United States Federal Income Taxation — Passive Foreign Investment Company.”
Item 4. Information on the Company
A.
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History and Development of the Company
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History of Our Corporate Structure
We started our operation in 1999 through Guangzhou Nanyun Car
Rental Services Co., Ltd. and Guangdong Nanfeng Automobile Association Co., Ltd. In 2001, we formed China United Financial Services
Holdings Limited, or China United Financial Services, a British Virgin Islands company, as the offshore holding company of our
PRC subsidiaries. In June 2004, CISG Holdings Ltd., or CISG Holdings was incorporated in British Virgin Islands and became our
holding company through share exchanges with China United Financial Services.
In anticipation of our initial public offering, we incorporated
CNinsure Inc. in the Cayman Islands in April 2007. After a series of restructuring transactions, 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.
In October 2012, we obtained license approval from the then 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 FISSG, to serve as the onshore 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.
History of Our Business Operation
We began our insurance intermediary business in 1999 by distributing
auto insurance products and auto loans on an ancillary basis and expanded our product offerings to other property and casualty
insurance products in 2002. We commenced life insurance products 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 and five claims adjusting firms.
In October 2017, we sold Fanhua Times Sales & Service Co.,
Ltd., and all of its subsidiaries, including 18 P&C insurance agencies and one insurance brokerage firm, to a third party
and divested our insurance brokerage segment in November 2017.
In recent years, we have devoted significant efforts to developing
and managing our mobile and online platforms. In 2010, we started to build an online insurance distribution platform Baowang (www.baoxian.com).
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 October 2012, we launched CNpad application, a mobile sales support system, which was later divided
into CNpad Auto which focused on facilitating auto insurance transaction and Lan Zhanggui which served as an integrated one-stop sales
support system that facilitate transactions for a wider range of products including life insurance, auto insurance, accident and health
insurance with toolkits for training and agent management. CNpad Auto App was discontinued in the third quarter of 2020 after its core
functionalities were integrated into Lan Zhanggui. Chetong. Net, an online claims services resource aggregating platform, was launched
in 2014.
We have also made investments in complementary business areas,
such as consumer finance and wealth management since 2009. We currently own an 18.5% equity interest in CNFinance (NYSE: CNF),
a leading home equity loan service provider in China, and a 4.5% equity interest in Puyi Inc. (NASDAQ: PUYI), a leading third-party
wealth management service provider in China which beneficially owns 100% in Fanhua Puyi Fund Distribution Co., Ltd., or Fanhua
Puyi.
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. 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.”
Driven by our cutting-edge technologies and insurance industry
expertise, we are the leading independent insurance intermediary group in China. We connect millions of individual customers to
our 104 insurance company partners as of March 31, 2021. As an independent insurance agency, we possess unique advantages over
the exclusive distribution channels of insurance companies. We offer not only a broad range of insurance products underwritten
by multiple insurance companies to address the needs of increasingly sophisticated customers with diverse needs and preferences
but also quality services backed by our nationwide network.
We focus on offering long-term life and health insurance products
including critical illness, annuity, whole life, term life and endowment life insurance and distribute property and casualty insurance
products including individual accident insurance, homeowner insurance, liability insurance and travel insurance. We also provide
insurance claims adjusting services such as damage assessment and loss estimations.
With strategic focus on long-term life and health insurance
products and services, we were one of the first independent insurance agencies to enter China’s life insurance agency market.
We began distributing long-term life and health insurance products in 2006 and have become an industry leader after accumulating
valuable industry experience for over 10 years.
We have adopted an integrated offline-to-online (“O2O”)
operating model. We use our technology platforms to boost efficiency and improve user experience, and rely on our extensive offline
distribution and service network to facilitate sales of complex insurance products and offer reliable after-sales services.
We began building online platforms to sell insurance products as early
as 2010 and pioneered the adoption of digital technologies in China’s insurance agency industry. To meet demand for different insurance
products and services, we have established industry-leading online platforms including Lan Zhanggui, Baowang (www.baoxian.com), eHuzhu
(www.ehuzhu.com) and Chetong.net. Our technology platforms enable intelligent deal management to help customers find the products that
best match their needs and streamline and expedite transaction processes, while our offline distribution and service network provides
an effective channel for us to engage with and serve our clients. This O2O model significantly enhances our operational efficiency and
scalability.
We have an extensive independent insurance product distribution
network and comprehensive insurance service network in China. With 362,580 sales agents, 763 sales outlets which include our branches
and sub-branches in 23 provinces as of December 31, 2020, our distribution network was the largest among independent insurance
agencies in China. With 1,736 claims adjusters in 118 service outlets as of December 31, 2020, our claims adjustment service network
covered 31 provinces in China. Our extensive distribution and service network and sizable sales and service work force allow us
to engage and serve customers nationwide and serve as a substantial entry barrier to China’s insurance agency industry.
We operate in a fast-growing industry with abundant opportunities.
The separation of insurance underwriting and distribution is a significant trend in China’s insurance industry. Historically
dominated by in-house sales forces and exclusive agents, insurance distribution channels in China have gradually shifted towards
independent insurance agencies, as demand for insurance products and services has diversified in recent years. With strong brand
recognition, established relationships with major insurance companies, an extensive distribution and sales network and cutting-edge
technology, we intend to take advantage of the opportunities resulting from the growth and transformation of the insurance agency
industry in China to increase our market share by professionalizing our sales force, enhancing digital capabilities and opening
up our platform to more market participations.
Our Platforms
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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Lan
Zhanggui - an internet-based all-in-one platform which integrates our existing online
platforms and allows our agents to access and purchase a wide variety of insurance products,
including long term life and health insurance accident insurance, travel insurance, and
standard medical insurance products from multiple insurance companies, through one integrated
account on their mobile devices. The platform is available in mobile application and
WeChat official account versions. As of March 31, 2021, Lan Zhanggui had approximately
1.8 million registered users.
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Baowang
(www.baoxian.com) - an online insurance platform that allows customers to
directly compare and shop for hundreds of accident, standard short term health, travel
and homeowner insurance products from dozens of insurance companies online. The platform
is available in PC-based website, mobile application and WeChat official account versions.
As of March 31, 2021, Baowang had over 3.1 million registered members.
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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 provide mutual aid for cancer in three different
age groups and accidental death. The platform is accessible primarily through its WeChat
official account. When a member signs up for a program offered by eHuzhu, he or she agrees
to evenly contribute to and is entitled to receive payout from other program members
in case of any claims covered under such program. The amount of fund that each member
can claim is up to RMB500,000, with the maximum contribution from each member limited
to RMB3 for each valid claim. As of March 31, 2021, eHuzhu had attracted approximately
2.8 million paying members.
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As of March 31, 2021, we, through FISSG, operated one e-commerce
insurance platform and one online mutual aid platform, and controlled twelve 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. As
of March 31, 2021, we also owned (i) 18.5% of the equity interests in CNFinance Holdings Ltd. (NYSE:CNF), a leading home
equity loan service provider, (ii) 4.5% of the equity interests in Puyi Inc. (NASDAQ:PUYI), a leading third party wealth
management services provider focusing on mass affluent and emerging middle class population, and (iii) 14.9% of the equity interests
in Shenzhen Chetong Network Co., Ltd., an online insurance claims services provider.
Segment Information
As of December 31, 2020, we operated two segments: (1) the insurance
agency segment, which mainly consists of providing agency services for distributing life insurance products and P&C insurance
products on behalf of insurance companies, and (2) 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.
Insurance Agency Segment
Our insurance agency segment accounted for 90.0% and 86.7% of
our net revenues in 2019 and 2020, respectively. Revenue from this segment is derived from two broad categories of insurance products:
(i) property and casualty insurance products, and (ii) life and health insurance products, both primarily focused on meeting the
insurance needs of individuals.
Life and health Insurance Products
Our life and health insurance business accounted for 82.7% of
our net revenues in 2020. We expect the sale of life insurance products to be the major source of our revenue in the next several
years. The life and health 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 when
the insured is diagnosed with specified serious illnesses, and medical insurance products,
which provide 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
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
a 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 coverage 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 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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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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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 2020 were primarily
underwritten by Huaxia, Aeon, Sinatay, Evergrande and Tian’an.
Property and Casualty Insurance Products
Our property and casualty insurance business accounted for 4.0%
of our net revenues in 2020, primarily representing insurance products we distributed through Baowang. Our main property and casualty
insurance product in terms of net revenues contribution in 2020 is individual accident insurance and indemnity medical insurance
which we distribute through Baowang. We also offer lifestyle insurance such as travel insurance, homeowner insurance, and other
innovative products on Baowang. In addition, we has started to offer certain long term life and health insurance products specifically
designed for internet distribution channel since 2019. The major insurance products we offer or facilitate to individual customers
through Baowang can be further classified into the following categories:
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Individual
Accident Insurance. The individual accident insurance products we distribute generally
provide a guaranteed benefit during the coverage period, which is usually 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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Homeowner
Insurance. The homeowner insurance products we distribute primarily cover damages
to the insured house, along with furniture and household electrical appliance in the
house caused by a number of incidents such as fire, flood and explosion.
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Indemnity
medical insurance. The indemnity medical insurance products we facilitate typically
have a one-year term and provide conditional reimbursement for medical and surgical expenses
incurred for treating illnesses during the coverage period. These products typically
require only a single premium payment for each coverage period. Because most of these
medical insurance products we distribute are underwritten by property and casualty insurance
companies, we classify indemnity medical products as property and casualty insurance
products.
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We primarily partnered with Zhong An Online Property and Casualty
Insurance Company Limited Ping An Property and Casualty Insurance Company Limited, or Ping An, JD Alliance Property and Casualty
Insurance Company Limited, Taikang Online Property and Casualty Insurance Company Limited, and Ping’an Health Insurance
Company Limited for the distribution of property and casualty insurance products in 2020.
Claims Adjusting Segment
Total net revenues derived from our claims adjusting segment
accounted for 13.3% of our total net revenues in 2020. 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.
|
|
●
|
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.
|
|
●
|
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.
|
We primarily provided claims adjusting services to Ping An, Xianghu
Bang Health Technology (Beijing) Co., Ltd., China Pacific Property and Casualty Insurance Company Limited, Shanghai Nuanwa Technology
Co., Ltd., and China Life Property and Casualty Insurance Company Limited in 2020.
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, 2021, consisted of one insurance sales and service group, nines insurance agencies including two with national operating
licenses, and three claims adjusting firms, with 881 sales and service branches and outlets, 350,565 registered independent sales
agents and 1,829 in-house claims adjustors. Our distribution and service network consisted of 771 sales outlets in 23 provinces
and 113 claims services outlets in 31 provinces.
The following table sets forth additional information concerning
our distribution and service network as of March 31, 2021, broken down by provinces:
Province
|
|
Number of Sales and
Service Outlets
|
|
|
Number of Sales
Agents
|
|
|
Number of
In-house Adjustors
|
|
Shandong
|
|
|
165
|
|
|
|
88,911
|
|
|
|
52
|
|
Guangdong
|
|
|
77
|
|
|
|
30,073
|
|
|
|
361
|
|
Guangxi
|
|
|
24
|
|
|
|
28,383
|
|
|
|
35
|
|
Jiangsu
|
|
|
42
|
|
|
|
28,268
|
|
|
|
170
|
|
Hebei
|
|
|
89
|
|
|
|
25,213
|
|
|
|
26
|
|
Henan
|
|
|
32
|
|
|
|
19,998
|
|
|
|
48
|
|
Anhui
|
|
|
49
|
|
|
|
19,110
|
|
|
|
45
|
|
Sichuan
|
|
|
93
|
|
|
|
15,688
|
|
|
|
49
|
|
Inner Mongolia
|
|
|
17
|
|
|
|
14,401
|
|
|
|
15
|
|
Yunan
|
|
|
20
|
|
|
|
12,507
|
|
|
|
19
|
|
Chongqin
|
|
|
15
|
|
|
|
11,603
|
|
|
|
37
|
|
Liaoning
|
|
|
24
|
|
|
|
10,404
|
|
|
|
61
|
|
Zhejiang
|
|
|
50
|
|
|
|
10,230
|
|
|
|
166
|
|
Shaanxi
|
|
|
16
|
|
|
|
8,966
|
|
|
|
71
|
|
Hunan
|
|
|
68
|
|
|
|
6,758
|
|
|
|
41
|
|
Shanxi
|
|
|
9
|
|
|
|
5,652
|
|
|
|
21
|
|
Fujian
|
|
|
31
|
|
|
|
5,570
|
|
|
|
45
|
|
Hubei
|
|
|
21
|
|
|
|
3,134
|
|
|
|
93
|
|
Heilongjiang
|
|
|
2
|
|
|
|
1,685
|
|
|
|
4
|
|
Tianjin
|
|
|
10
|
|
|
|
1,452
|
|
|
|
30
|
|
Jiangxi
|
|
|
7
|
|
|
|
1,334
|
|
|
|
61
|
|
Beijing
|
|
|
4
|
|
|
|
1,205
|
|
|
|
130
|
|
Shanghai
|
|
|
8
|
|
|
|
19
|
|
|
|
93
|
|
Guizhou
|
|
|
3
|
|
|
|
—
|
|
|
|
59
|
|
Ningxia
|
|
|
1
|
|
|
|
—
|
|
|
|
44
|
|
Hainan
|
|
|
1
|
|
|
|
—
|
|
|
|
13
|
|
Qinghai
|
|
|
1
|
|
|
|
—
|
|
|
|
10
|
|
Jilin
|
|
|
2
|
|
|
|
—
|
|
|
|
21
|
|
Xinjiang
|
|
|
1
|
|
|
|
—
|
|
|
|
4
|
|
Gansu
|
|
|
1
|
|
|
|
—
|
|
|
|
4
|
|
Tibet
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
Total
|
|
|
884
|
|
|
|
350,565
|
|
|
|
1,829
|
|
We market and sell long-term personal lines of life and health
insurance products and property and casualty insurance products to customers through mainly independent sales agents, who are
not our employees. We also market and sell accident, short-term 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 life and health insurance products including critical
illness, annuity insurance, whole life insurance and term life insurance and endowment insurance primarily to individual customers
as well as property and casualty insurance products including individual accident insurance, homeowner insurance products, liability
insurance and travel insurance. Customers for the life and health insurance products we distribute are primarily individuals under
50 years of age. For the year ended December 31, 2020, no single individual customer who has purchased insurance products through
us accounted for more than 1% of our net revenues. Our customers for the claims adjusting services are primarily insurance companies
and online mutual-aid platforms.
As of December 31, 2020, we had accumulated approximately 12 million
individual customers, of which approximately 1.8 million have purchased at least one regular long term life and health insurance policy.
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, 2021, we had established business relationships
with 104 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. 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 all our subsidiaries located in different parts of China. For the distribution of insurance products, we had outstanding contracts
with 32 life insurance companies, four health and pension insurance companies and 23 property and casualty insurance companies,
which were all signed at the corporate headquarter level as of March 31, 2021. For the provision of claims adjusting services,
we also had outstanding contracts with 59 insurance companies, and 13 other institutions as of March 31, 2021.
Insurance Aggregator Site Partners
In October 2017, we shifted to a platform business model for
our 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 Auto as an auto insurance transaction portal which connects insurance distributors with our sales
agents and received technology service fees from distributors which provide auto insurance products on CNpad Auto based on the
volume of insurance premiums they transact through CNpad Auto. A technology service fee is typically much smaller than the commission
we previously received from insurance companies, though our costs are generally minimal. From 2018, we started partnering with
third party online auto insurance platforms, for the facilitation of auto insurance products, by introducing agent traffic to
these platforms. We stopped charging this technology service fee starting from the fourth quarter of 2019. CNPad Auto App was
discontinued in the third quarter of 2020 after its key functionalities were integrated into Lan Zhanggui.
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:
|
●
|
Professional
insurance intermediaries. The professional insurance intermediary sector in China
is highly fragmented, accounting for only 11.5% of the total insurance premiums generated
in China in the first nine months of 2020, according to statistics quoted by an officer
of the CBIRC at the 2020 Insurance China Insurance Innovation Development Conference.
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.
|
|
●
|
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 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.
|
|
●
|
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 also 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.
|
|
●
|
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.
|
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 medical-insurance, property insurance, auto insurance, marine and cargo
insurance, and personal injury and accident 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, 2021, we had 34 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:
|
●
|
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.
|
|
●
|
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.
|
|
●
|
Regulation
of market conduct by participants. The 1995 Insurance Law prohibited fraudulent and other
unlawful conduct by insurance companies, agencies and brokerages.
|
|
●
|
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.
|
|
●
|
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.
|
|
●
|
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.
|
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:
|
●
|
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.
|
|
●
|
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.
|
|
●
|
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.
|
|
●
|
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.
|
|
●
|
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.
|
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:
|
●
|
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.
|
|
●
|
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.
|
|
●
|
Expanding
the business scope of insurers and further relaxing restriction on the use of fund by
insurers.
|
|
●
|
Strengthening
supervision on solvency of insurers with stricter measures.
|
|
●
|
Tightening
regulations governing the administration of insurance intermediary companies, especially
those relating to behaviors of insurance agents.
|
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:
|
●
|
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.
|
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:
|
●
|
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.
|
|
●
|
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.
|
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:
|
●
|
promulgate
regulations applicable to the Chinese insurance industry;
|
|
●
|
investigate
insurance companies and insurance intermediaries;
|
|
●
|
establish
investment regulations;
|
|
●
|
approve
policy terms and premium rates for certain insurance products;
|
|
●
|
set
the standards for measuring the financial soundness of insurance companies and insurance
intermediaries;
|
|
●
|
require
insurance companies and insurance intermediaries to submit reports concerning their business
operations and condition of assets;
|
|
●
|
order
the suspension of all or part of an insurance company or an insurance intermediary’s
business;
|
|
●
|
approve
the establishment, change and dissolution of an insurance company, an insurance intermediary
or their branches;
|
|
●
|
review
and approve the appointment of senior managers of an insurance company, an insurance
intermediary or their branches; and
|
|
●
|
punish
insurance companies or intermediaries for improper behaviors or misconducts.
|
Regulation
of Insurance Agents
The principal regulation governing insurance agents is the Provisions
on the Supervision and Administration of Insurance Agents, or the PSAIA, issued by the CBIRC on November 12, 2020 and effective
on January 1, 2021, replacing the Provision on the Supervision and Administration of Professional Insurance Agencies issued by
the CIRC on September 25, 2009 and amended on April 7, 2013, the Measures on the Supervision and Administration of Insurance Salespersons
issued on January 6, 2013 and the Interim Measures on the Administration of Ancillary-Business Insurance Agency issued on August
4, 2000.
The term of “insurance agent” refers to an entity
or an individual entrusted by insurance companies to handle insurance business by and within the authorization of, and which collects
commissions from insurance companies, and includes a professional insurance agency, ancillary-business insurance agency and individual
insurance sales agent which refers to a captive insurance agent of an insurance company.
The practitioner of an insurance agency refers to an individual
engaged in the sales of insurance products or loss assessment and claims settlement services for a professional insurance agency
or ancillary-business insurance agency.
To engage in insurance agency business, a professional insurance
agency shall obtain an insurance agency business permit issued by the CBIRC, after obtaining a business license, and satisfy the
requirements prescribed by the PSAIA or other relevant regulations on shareholder and management qualification, capital contribution,
articles of association, corporate governance and internal control procedures with viable business model and sound business and
financial information system. An insurance agency may take any of the following forms: (i) a limited liability company; or (ii)
a joint stock limited company. The name of a professional insurance agency shall contain the words “insurance agency”.
The minimum registered capital for establishing a nationwide
professional insurance agency is RMB50 million and that for a regional professional insurance agency is RMB20 million. The registered
capital of a professional insurance agency must be paid-in monetary capital. To operate outside of its registration place, a nationwide
professional insurance agency shall set up local provincial branches first before setting up additional sub-branches and sales
offices.
Professional insurance agencies shall, within 5 days from the
date of occurrence of any of the following circumstances, report to the CBIRC through the supervision information system and make
public disclosure: (i) change of name, domicile or business address; (ii) change of shareholders, registered capital or the form
of organization; (iii) change of name or capital contribution of a shareholder; (iv) amendments to the articles of association;
(v) equity investment in, or establishment of offshore insurance institutions or non-operating institutions; (vi) division, merger,
dissolution, or termination of insurance agency business activities of branches; (vii) change of the principal person-in-charge
of a sub-branch; (viii) administrative punishment, civil punishment or pending investigation of suspected illegal crime; or (ix)
other reportable events prescribed by the insurance regulatory body under the State Council.
A professional insurance agency may engage in all or part of
the following businesses: (i) selling insurance products on behalf of insurance companies; (ii) collecting insurance premium on
behalf of insurance companies; (iii) insurance-related loss survey and claims settlement on behalf of insurance companies; or
(iv) other relevant businesses stipulated by the insurance regulatory body under the State Council. Insurance agents shall not
engage in insurance agency business beyond the business scope and business area of the insurance companies for which they act
as agents.
A professional insurance agency and its sales practitioners
and individual insurance agents are not allowed to sell non-insurance financial products, except for non-insurance financial products
approved by relevant financial regulatory authorities provided that all necessary qualification requirements are being met.
A professional insurance agency shall, within 20 days upon
obtaining business permits, procure professional liability insurance or make contributions to security deposit. Minimum compensation
for each accident under the one-year professional liability insurance policy shall be no less than RMB1 million, and accumulative
compensation under the one-year insurance policy shall be no less than RMB10 million and the total core business revenue of the
professional insurance agency company in the previous year. If a professional agency intends to pay deposit, the deposit shall
be paid at 5% of its registered capital and when it increases its registered capital, the amount of the deposit shall be increased
proportionately.
The senior managers of a professional insurance agency must
meet specific qualification requirements in education background and relevant industry working experience set forth in the PSAIA.
An insurance agent shall perform sales practicing register with
the CRIBC’s Insurance Intermediaries Regulatory Information System for its individual insurance agent or sales practitioner.
Each individual insurance agent or sales practitioner of an insurance agency can only be allowed to register with one institution.
Specific information disclosure requirements are also provided
in the PSAIA. For example, it is required that a professional insurance agency or its branches shall place its business license
and copies of permit in a prominent position in its domicile or business site. Insurance agents shall make full disclosure of
all relevant information of insurance products to policyholders and make clear representation of the clauses in the insurance
contract including liability, liability reduction or exemption, cancellation and other expense deductions, cash value, cooling-off
period and etc.
Regulation
of Insurance Brokerages
The principal regulation governing insurance brokerages is the
Provisions on the Supervision and Administration of Insurance Brokers, or the POSAIB, promulgated by the CIRC on February 1, 2018
and effective May 1, 2018, replacing the Provisions on the Supervision of Insurance Brokerages issued on September 25, 2009, as
amended on April 27, 2013, and the Measures on the Supervision and Administration of Insurance Brokers and Insurance Claims Adjustors
issued by the CIRC on January 6, 2013.
The term of “insurance broker” refers to an entity
which, representing the interests of insurance applicants, acts as an intermediary between insurance applicants and insurance
companies for entering into insurance contracts, and collects commissions for the provision of such brokering services. The term
of “insurance brokerage practitioner” refers to a person affiliated with an insurance broker who drafts insurance
application proposals or handle the insurance application formalities for insurance applicants or the insured or assists insurance
applicants or the insured in claiming compensation or who provides clients with disaster or loss prevention or risk assessment
or management consulting services or engages in reinsurance brokerage, among others.
To engage in insurance brokerage business within the territory
of the PRC, an insurance brokerage shall satisfy the requirements prescribed by the CIRC and obtain an insurance brokerage business
permit issued by the CIRC, after obtaining a business license. An insurance brokerage may take any of the following forms: (i)
a limited liability company; or (ii) a joint stock limited company.
The minimum registered capital of an insurance brokerage company
whose business area is not limited to the province in which it is registered is RMB50 million while the minimum registered capital
of an insurance brokerage company whose business area is limited to its place of registration is RMB10 million.
The name of an insurance broker shall include the words “insurance
brokerage.” An insurance brokerage must register the information of its affiliated insurance brokerage practitioners with
the IISIS. One person can only be registered with the IISIS through one insurance brokerage.
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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An insurance brokerage shall submit a written report to the
CIRC through the IISIS and make public disclosure within five days from the date of occurrence of any of the following matters:
(i) change of name, domicile or business premises; (ii) change of shareholders, registered capital or form of organization; (iii)
change of names of shareholders or capital contributions; (iv) amendment to the articles of association; (v) equity investment,
establishment of offshore insurance related entities or non-operational organizations; (vi) division, merger and dissolution or
termination of insurance brokering business activities of its branches; (vii) change of the primary person in charge of its branches
other than provincial branches; (viii) being a subject of administrative or criminal penalties, or under investigation for suspected
involvement in any violation of law or a crime; and (x) other reportable events prescribed by the CIRC.
Insurance brokerage and its practitioners are not allowed to
sell non-insurance financial products, except for those products approved by relevant financial regulatory institutions and the
insurance brokerage and its practitioners shall obtain relevant qualification in order to sell non-insurance related financial
products that meets regulatory requirements.
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 POSAIB.
Regulation
of Insurance Claims Adjusting Firms
The principal regulation governing insurance adjusting firms
is the Provisions on the Supervision and Administration of Insurance Claims Adjustors, or the POSAICA, issued by the CIRC on February
1, 2018 and effective on May 1, 2018, replacing the Provisions on the Supervision of Insurance Claims Adjusting Firms effective
on October 1, 2009, as amended on September 29, 2013 and 2015, and the Regulation of Insurance Brokers and Insurance Adjustors
effective on July 1, 2013.
According to the POSAICA, the term “insurance adjustment”
refers to the assessment, survey, authentication, loss estimation and relevant risk assessment of the insured subject matters
or the insurance incidents conducted by an appraisal firm and its professional appraisers upon the entrustment of the parties
concerned. The term of “insurance adjusting firm” refers to an entity and any of its branches which engages in the
aforementioned businesses.
The term “insurance adjustment practitioner” refers
to a person retained by an insurance claims adjusting firm to conduct the following activities on behalf of an entruster: i) inspecting,
appraising the value of and assessing the risks of the subject matter before and after it is insured; ii) surveying, inspecting,
estimating the loss of, adjusting and disposing of the residual value of the insured subject matter after loss has been incurred;
and iii) risk management consulting.
Insurance adjustment practitioners include claims adjustors and
assessment practitioners with claims adjustment knowledge and practical experience. A claims adjustor refers to an individual
who has passed the qualification examination for the insurance claims adjustors organized by the CIRC.
An insurance claims adjusting firm must meet the requirements
prescribed by the China Asset Appraisal Law and applicable regulations issued by the CIRC and must file its business records with
the CIRC and its local offices.
According to the regulation, an insurance adjusting firm should
take the form of a company or a partnership in accordance with applicable law and retains claims adjustment practitioners to engage
in insurance claims adjusting businesses. A claims adjusting firm in the form of a partnership must have at least two claims adjustors
and two third of its partners should be claims adjustors who have least three years’ working experience in claims adjustment
and have no record of administrative penalties in relations to claims adjustment activities in the past three years. A claims
adjusting firm in the form of a company must have at least eight claims adjustors and two shareholders among which at least two
third are claims adjustors who have least three years’ working experience in claims adjustment and have no record of administrative
penalties in relations to claims adjustment activities in the past three years.
The establishment of an insurance claims adjusting firm only
requires the application for a business license from and registration with the AIC, instead of both applying for business license
and obtaining approval by the CIRC as previously required.
A claims adjusting firm may include a nationwide claims adjusting
firm and regional claims adjusting firm. A nationwide claims adjusting firm can conduct business within the territory of the PRC
and can establish branches in provinces other than its place of registration while a regional one can only conduct business and
establish branches in the province where it is registered. A claims adjusting firm in the form of a company must file its business
record with the CIRC if it is a nationwide claims adjusting firm or file with the local offices of the CIRC in the region where
it is registered if it is a regional claims adjusting firm. A partnership firm must file its business record with the CIRC.
An insurance claims adjusting firm must meet certain requirements
in order to engage in claims adjustment business which include, among others, i) its shareholders or its partners must meet the
requirements mentioned above and its capital contribution must be self-owned, actual and lawful and must not be non-self-owned
capital in various forms such as bank loan; and ii) it must have adequate working capital to support its day-to-day operation
and risk undertaking in accordance with its business development plan. A nationwide entity must have at least RMB2 million working
capital while a regional one must have at least RMB1 million.
An insurance adjusting firm may engage in the following businesses:
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 and after
it is insured;
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surveying,
inspecting, estimating the loss of, adjusting and disposing of 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. 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, domicile or business premises; (ii) change of shareholders
or partners; (iii) change of registered capital or form of organization; (iv) change of names of shareholders or partners or capital
contributions; (v) amendment to the articles of association or the partnership agreement; (vi) equity investment, establishment
of offshore insurance related entities or non-operational organization; (vii) division, merger and dissolution or termination
of insurance claims adjustment business of its branches; (viii) change of chairman of its board of directors, executive directors
or senior management; (ix) being a subject of administrative or criminal penalties, or under investigation for suspected involvement
in a crime; and (x) other reportable events specified by the CIRC.
Personnel of an insurance adjusting firm or its branches engaged
in any of the insurance adjusting businesses described above must 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 POSAICA.
An insurance claims adjustment practitioner must join an insurance
claims adjusting firm in order to conduct insurance claims adjustment activities. The insurance claims adjusting firm to which
he or she belongs must register his or her information with the CIRC’s Insurance Intermediary Supervision Information System
or IISIS. One person can only conduct insurance adjustment activities for one insurance claims adjusting firm and can only be
registered with the IISIS through one insurance claims adjusting firm.
At least two insurance claims adjustment practitioners must be
appointed to undertake each case of insurance claims adjustment businesses and the claims adjustment report shall be signed by
at least two insurance claims adjustment practitioners engaged in the claims adjustment activities and chopped by the claims adjusting
firm to which he or she belongs.
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;
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business
premises and office equipment which are suitable for the development of the businesses;
and
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other
conditions stipulated by laws, administrative regulations and the CIRC.
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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 June and 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
three 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 Measures for the Supervision of the Internet Insurance Business, or the Measures, promulgated on December
7, 2020 and effective on February 1, 2021, replacing the Interim Measures for the Supervision of the Internet Insurance Business,
or the Interim Measures, issued on July 22, 2015 and effective on October 1, 2015.
According to the Measures, the term of “internet insurance
business” refers to the business of concluding insurance contracts and providing insurance services by insurance institutions
with internet technologies. Insurance institutions refer to insurance companies and insurance intermediaries which include insurance
agents (except individual insurance agents), insurance brokerage firms and insurance claims adjusting firms. Insurance agents
(except individual insurance agents) refer to professional insurance agencies, bancassurance-related ancillary insurance agencies
and internet companies that have obtained licenses for engaging in insurance agency business in accordance with applicable laws
and regulations. Non-insurance institutions are not allowed to conduct internet insurance business, including but not limited
to, providing insurance product consultancy services, providing insurance product comparison, price quotation and price comparison
services, designing insurance plans for the insureds and handling insurance application formalities on behalf of the insureds
and collecting premiums by proxy.
A self-operated internet platform refers to an internet platform
established by insurance institutions for conducting insurance business, by which insurance institutions can operate business
independently and have full access to the data on the platform. The internet insurance business of an insurance institution shall
be operated and managed by its headquarter with standardized and centralized business platform, business procedures and management
system.
To carry out internet insurance business, an insurance institution
shall meet the following requirements, among others: (i) making ICP filing in the case of operating a mobile application or website; (ii)
maintaining independent information management system and core business system to support its internet insurance business operation; (iii)
equipped with a comprehensive working mechanism for network security monitoring, information alert, emergency management, and cybersecurity
protection measures for border protection, intrusion detection, data protection and disaster recovery; (vi) equipped with certified Safety
Level-III Computer Information System for a self-operated online platform that can facilitate insurance sales and application and no lower
than Safety level-II Computer Information System for self-operated online platforms without insurance sales and application functions;
(v) having designated department and personnel for managing the internet insurance business; (vi) maintaining sound management system
and operating procedures; (vii) having a sound Internet insurance business management system and operating rules; (viii) when an insurance
company carries out Internet insurance sales, it shall comply with the relevant regulations of the CBIRC on solvency, supervision and
evaluation of consumer rights and interests protection, etc.; (ix) professional insurance intermediaries shall be national institutions,
and their business areas shall not be limited to the provinces (autonomous regions, municipalities directly under the Central Government,
cities separately listed on the State plan) where the head office’s business license is registered, and comply with the relevant
provisions of the CBIRC on the classified supervision of insurance professional intermediary institutions; (x) other conditions prescribed
by the Bancassurance Regulatory Commission.
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.
Insurance institutions engaging in internet insurance business shall establish official
website and set up internet insurance column for information disclosure.
The Measures also specifies requirements on disclosure of information
such as information regarding insurance products sold on the internet, the qualification of the insurance institutions operating
the internet insurance business, contact methods for local support and compliant provides guidelines for the operations of the
insurance institutions that engage in internet insurance business.
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 and regulations, such as the Circular 19 promulgated by SAFE in March, 2015. The Circular 19 is designed with the view
to further deepening the reform of the foreign exchange administration system, and better satisfying and facilitating the needs
of foreign-invested enterprises for business and fund operations. It states the management of the payment of the amount of foreign
exchanges settled shall be further standardized, and also the penalties of the foreign-invested enterprises and banks that violates
this notice in handling the settlement, use and other business of the foreign exchange capitals of foreign-invested enterprises.
The irregularities shall be investigated and punished by foreign exchange bureaus pursuant to the Regulations of the People’s
Republic of China on Foreign Exchange Administration and other relevant provisions.
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. 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 such as foreign exchange registration,
account opening, funds transfer and remittance, and entrust an overseas institution to handle issues such as 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
Before January 1, 2020, 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.
With the Foreign Investment Law becoming effective on January 1, 2020,
the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested
Enterprise Law, together with their implementation rules and ancillary regulations are no longer applicable. The Foreign Investment Law
and its implementation rule, named as Implementing Regulations of the Foreign Investment Law of the People’s Republic of China,
or the Implementing Regulations, does not specify the rules of dividend distribution of wholly foreign-owned companies, however, article
31 of the Foreign Investment Law states that the organizational form, organizational structure and their activities of a foreign-invested
enterprise shall be governed by the provisions of the PRC Company Law, PRC Partnership Enterprise Law and other relevant laws, article
46 of the Implementing Regulations states that after the organizational forms, organizational structures, etc. of existing Foreign-invested
Enterprises have been adjusted pursuant to the law, existing parties to Sino-foreign equity or cooperative joint ventures may continue
to handle relevant matters according to the method of equity or interest transfer, the method of income distribution, the method of surplus
assets distribution, etc. agreed in the relevant contracts. Therefore, relevant PRC laws such as PRC Company Law may apply to the dividend
distribution of Foreign-owned companies, and the methods of dividend distribution stated in the current articles of association of the
foreign-owned companies may still be applicable.
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 and was amended
on June 22, 2009. 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, which was subsequently amended on March
16, 2007, February 24, 2017 and December 29, 2018. 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, which
was subsequently amended on January 30, 2008, May 27, 2010, April 1, 2015 and July 19, 2019, dividends from our PRC subsidiaries
paid to us through our Hong Kong wholly-owned subsidiary CNinsure Holdings Ltd. are 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 July 2018, CNinsure Holdings Ltd. was determined by Hong Kong Taxation Bureau to be a
Hong Kong resident enterprise and completed the application and filing process for enjoying the tax treaty in PRC Taxation Bureau
therefore we have applied 5% withholding tax rate for the dividends paid by our PRC subsidiaries since then. 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.”
|
C.
|
Organizational
Structure
|
Corporate Structure
Historically, PRC laws and regulations restricted foreign investment
in and ownership of insurance intermediary companies and internet companies. 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. 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. The contractual arrangements were terminated
between January 2015 and May 2016.
In October 2015, we, through our wholly-owned subsidiary Meidiya
Investment Co., Ltd., or Meidya Investment, entered into act-in-concert agreements with 5 equity interest holders of Fanhua Insurance
Surveyors & Loss Adjustors Company Limited, or FHISLA and controls 69.0% of voting interests in aggregate. The act-in-concert
agreements were effective from October 26, 2015 and will remain effective for as long as FHISLA is in operation, until and only
when all contracting parties agree to cease the agreement. Per the act-in-concert agreements, all the disagreements will ultimately
be determined by Meidiya Investment, the shareholder of the highest shareholding amongst the act-in-concert group in FHISLA. Accordingly,
we control 69.0% of voting rights in aggregate, which exceeds the 2/3 of the voting requirement to pass all resolutions in shareholder
meetings of FHISLA.
We currently conduct our insurance agency and claims adjusting
business in China primarily through our wholly-owned subsidiary Fanhua Insurance Sales Service Group Company Limited, or FISSG,
and its subsidiaries. As of March 31, 2021, we, through FISSG, have a controlling equity ownership in two insurance sales services
companies with national operating licenses, 7 regional insurance agencies, and three insurance claims adjusting firms. We also
own 18.5%% equity interest of CNFinance, 4.5% equity interest of Puyi Inc. and 14.9% equity interest of one online claim adjusting
service company.
FISSG 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.
The following diagram illustrates our corporate structure, including
our principal subsidiaries, as of March 31, 2021:
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, 2021, see Exhibit 8.1 to this annual report.
For the insurance agency business, we have obtained direct controlling
voting rights in all of our insurance intermediary companies and our online operations and terminated all of the contractual arrangements.
For the claims adjusting business, we control 69.0% of voting interests of FHISLA in aggregate per the act-in-concert agreements, which
has exceeded the 2/3 of the voting requirement to pass all resolutions in shareholder meetings of FHISLA. In the opinion of Global Law
Office, our PRC legal counsel, both the direct and indirect controlling equity ownership structures of our subsidiaries in China have
complied with all existing PRC laws and regulations 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.
|
D.
|
Property, Plants and Equipment
|
Our headquarters are
located in Guangzhou, China, where we leased approximately 2,669 square meters of office space as of December 31, 2020. Office
space leased by our subsidiaries and consolidated affiliated entities, including certain space used and paid by sales teams, was
approximately 183,192 square meters as of December 31, 2020. In 2020, our total rental expenses were RMB106.6 million (US$16.3
million).
Item 4A. Unresolved Staff
Comments
None.
Item
5. Operating and Financial Review and Prospects
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. For discussion of 2018 items and year-over-year comparisons
between 2019 and 2018 that are not included in this annual report on Form 20-F, refer to “Item 5. – Operating and Financial
Review and Prospects” found in our Form 20-F for the year ended December 31, 2019, that was filed with the Securities and
Exchange Commission on April 29, 2020.
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:
|
●
|
business relationship with important insurance company partners;
|
|
●
|
total premium payments to Chinese insurance companies;
|
|
●
|
the extent to which insurance companies in the PRC outsource the
distribution of their products and claims adjusting functions;
|
|
●
|
premium rate levels and commission and fee rates;
|
|
●
|
the size and productivity of our sales force;
|
|
●
|
commission rates for individual sales agents;
|
|
●
|
product and service mix;
|
|
●
|
share-based compensation expenses;
|
|
●
|
Impact on our business and financial results due to the COVID-19
pandemic;
|
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, Aeon,
Sinatay and Evergrande accounted for more than 10% of our total net revenues from continuing operations individually in 2020, with
Huaxia accounting for 18.6%, Aeon accounting for 17.1%, Sinatay accounting for 15.4% and Evergrande accounting for 10.4%. 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 profit.
Total Premium Payments to Chinese
Insurance Companies
The Chinese insurance
industry has grown substantially in the past decade. Between 2010 and 2020, total insurance premiums increased from RMB1.5 trillion
to RMB4.5 trillion, representing a compound annual growth rate, or CAGR, of 12.0%, according to the CBIRC. Although the growth
has slowed down significantly in 2020 due to the impact from COVID-19, among others, we believe that certain macroeconomic and
demographic factors, such as increasing per capita GDP, and an aging population and people’s increasing awareness for insurance
protection, 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. 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.
However, in recent years, as a result of increased competition, consumers’ demand for more choices and regulatory focus on long
term protection-oriented life insurance products, more and more insurance companies gradually expanded their distribution channels
to include insurance intermediaries such as commercial banks, postal offices, professional insurance agencies and professional
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 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. 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 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 who are individual sales agents in our distribution and service network. 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 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.
The size of our sales force and its productivity, as measured by the average number of insurance products sold per performing sales agent
who refer to a sales agent who has sold at least one insurance policy, the average premium per product sold and the average premiums generated
per performing sales agent during any specified period, directly affect our revenue and results of operations. In recent years, as the
result of our efforts to streamline our sales force with more focus on better performing sales agents as well as the adverse impact of
the COVID-19 on the sales activities of our sales agents, the size of our sales force has decreased substantially which had adversely
affected our financial results. However, in late 2020, we have embarked on a series of strategic initiatives to professionalize our sales
force which we expect to bring positive results on the number of our performing agents and their productivity and as a result have positive
impact on our financial performance.
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 may lead to a significant increase in commission rates which could have
a negative impact on our results of operations.
Product and Service Mix
We began distributing
auto insurance products in 1999, expanded our product offerings to other property and casualty insurance products in 2002, and
started distributing long term individual life and health insurance products in 2006, primarily to individual customers. We further
broadened our service offering to cover insurance claims adjusting services in 2008. In 2010, we started to offer insurance brokerage
services for commercial line insurance to corporate clients and reinsurance brokerage services, which were subsequently disposed
of in November 2017.
Insurance Agency
Segment
Our largest segment
by revenue, the insurance agency segment, provides a broad range of life and health and property and casualty insurance products
to individual customers.
Most individual life
and health insurance policies we distribute require periodic payment of premiums, typically annually, during a pre-determined payment
period, generally ranging from 5 to 25 years. For each of such policy that we distribute, insurance companies will pay us a first-year
commission and fee based on a percentage of the first-year premiums, and subsequent commissions and fees based on smaller percentages
of the renewal premiums paid by the insured throughout the renewal term of the policy. Therefore, once we distribute a life and
health insurance policy with a periodic payment schedule, it can bring us a steady flow of commission and fee revenue throughout
the renewal term as long as the insured fulfills his or her premium payment commitment and continuously renews the policy.
Because of the recurring
nature of commissions derived from long term life and health insurance business, and the higher gross margin of our life insurance
business than that of our property and casualty insurance business, we intend to focus our efforts on distributing more long term
life and health insurance products, which we believe will have a positive impact on our revenue and gross margin in the long term.
The property and casualty
insurance policies we distribute primarily consist of individual accident insurance, indemnity medical insurance, travel insurance,
and homeowner insurance we distribute through Baoxian.com. Because the insurance products that we distribute through Baoxian.com
are mostly underwritten by property and casualty insurance companies, we classify them as property and casualty insurance products.
These property and casualty insurance policies we distribute are typically for a one-year term, with a single premium payable at
the beginning of the term. As a result, the insured has to purchase new policies through us every year. Accordingly, we receive
a single commission or fee for each property and casualty policy we distribute.
Claims Adjusting
Segment
The fees we receive for our claims adjusting services are calculated
based on the types of insurance products 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 services provided in connection with auto insurance,
individual accident insurance and health 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 a steady source of our net revenues.
The operating margin of our claims adjusting segment are generally lower than those of our insurance agency segment although its gross
margin is relatively higher. 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 2019 and 2020, we incurred share-based compensation
expenses of RMB0.4 million and negative RMB0.4 million, 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 issued an aggregate number of 136,874,658 ordinary shares which equaled 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. On June 14, 2018, we announced the 521 Plan, which enabled the Participants,
consisting of certain key employees and independent sales agent team leaders, to invest in the Company by purchasing a total of
280,000,000 ordinary shares of the Company, representing 14 million of the Company’s ADSs at the subscription price of US$27.38
per ADS. Accordingly, we recognized share-based compensation expenses in 2019. In the third quarter of 2020, we concluded that
the stock options related to the 521 Plan were not probable to be vested because the performance target was not probable to be
met. Accordingly, RMB0.4 million of cumulative cost recognized in prior periods was reversed. In December 2020, we canceled the
521 Plan without any replacement awards. Therefore, we do not expect share-based compensation expenses to be a significant component
of our operation expenses in the near future.
Seasonality
Our quarterly results
of operations are affected by seasonal variations caused by business mix, insurance companies’ business practices and consumer
demand. 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 of the coming year by preparing to launch 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. For property and casualty
insurance products that we distribute on Baoxian.com, there was no obvious seasonal fluctuation.
Impact on our business and
financial results due to the COVID-19 pandemic
In December 2019,
COVID-19 was first detected in China and then in other countries. The outbreak has caused wide-ranging economic disruption in China
cross various industries. As of March 31, 2021, the COVID-19 coronavirus outbreak in China has been under control and businesses
in China have gradually resumed normal business activities since May 2020.
For fiscal year 2020, our
business was negatively impacted due to the COVID-19 pandemic, particularly in the first half of 2020, primarily because (i) the sales
activities of our sales agents have been largely hindered due to the difficulty to interact with prospective customers face-to-face as
result of the social distancing measures imposed to contain the spread of the COVID-19 in the first half of 2020; (ii) recruitment of
agents slowed down due to the suspension of large-scale offline agent recruitment seminars until May 2020 and increased competition for
agents in the insurance industry amid the challenging business environment; (iii) our plan to establish new branches in selected major
cities were put on hold; and (iv) the epidemic has accelerated the trend of the young generation turning to the internet for insurance
information search and purchase of short-term medical insurance products.
As a result, our net
revenues decreased by 11.8% from RMB3.7 billion in 2019 to RMB3.3 billion.
In addition, the business
operation of our non-consolidated affiliated investees has also been adversely impacted by the COVID-19 outbreak which had affected
the fair value of our investment in affiliates.
Key Performance Indicators
As of December 31, 2019
and 2020, we operated two segments: (1) the insurance agency segment, which mainly consists of providing agency services for distributing
life insurance products and P&C insurance products on behalf of insurance companies, and (2) 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.
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
tax surcharges and value-added tax incurred. In 2019 and 2020, we generated net revenues of RMB3.7 billion and RMB3.3 billion (US$500.9
million), respectively. We derive net revenues from the following sources:
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●
|
Insurance agency segment: commissions paid by insurance companies
for the distribution of (i) life and health insurance products, and (ii) commoditized property and casualty products sold through
Baoxian.com, which accounted for 90.0% and RMB86.7% of our net revenues for 2019 and 2020, respectively;
|
|
●
|
Claims adjusting segment: commissions and fees primarily paid
by the insurance companies for the provision of claims adjusting services, which accounted for 10.0% and 13.3% of our net revenues
for 2019 and 2020, respectively;
|
The following table
sets forth our total net revenues earned from each of our reporting segments both in absolute amounts and as percentages of total
net revenues, for the periods indicated:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands except percentages)
|
|
Agency
|
|
|
3,335,397
|
|
|
|
90.0
|
|
|
|
2,834,997
|
|
|
|
434,482
|
|
|
|
86.7
|
|
Life insurance business
|
|
|
3,193,625
|
|
|
|
86.2
|
|
|
|
2,703,584
|
|
|
|
414,342
|
|
|
|
82.7
|
|
P&C insurance business
|
|
|
141,772
|
|
|
|
3.8
|
|
|
|
131,413
|
|
|
|
20,140
|
|
|
|
4.0
|
|
Claims adjusting
|
|
|
370,606
|
|
|
|
10.0
|
|
|
|
433,148
|
|
|
|
66,383
|
|
|
|
13.3
|
|
Total net revenues
|
|
|
3,706,003
|
|
|
|
100.0
|
|
|
|
3,268,145
|
|
|
|
500,865
|
|
|
|
100.0
|
|
Insurance agency segment
primarily covers distribution of life and health insurance products and property and casualty insurance products to individuals.
Net revenues from the insurance agency segment decreased from 2019 to 2020 in both absolute amount and as a percentage of our total
net revenues.
Net revenues generated
from distribution of long term life and health insurance products have become our primary source of revenue. We began distributing
individual life and health insurance products in 2006. Net revenues generated from distribution of life and health insurance products
decreased from 2019 to 2020, both in absolute amounts and as a percentage of our net revenues primarily due to the impact of COVID-19.
We expect our life insurance business to grow and bring in significant revenue that will continue to represent a high 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 and health insurance products as a result of the aging population and the Chinese consumers’
increasing awareness of the benefits of insurance.
Net revenues generated
from distribution of property and casualty insurance products decreased from 2019 to 2020 in absolute amounts of our net revenues,
primarily due to lower demand for travel and accident insurance products as travel activities were significantly adversely affected
by COVID-19 pandemic. We expect our net revenues to be derived from distribution of property and casualty insurance products to
remain stable in 2021.
We began providing claims
adjusting services in 2008. Net revenues from our claims adjusting segment increased from 2019 to 2020, reflecting our increased
efforts to expand individual medical and health insurance-related claims adjusting services. We expect that net revenues from claims
adjusting services as a percentage of our total net revenues will be stable 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 additional performance bonuses after
we achieve specified premium volume or policy renewal goals as agreed upon between the insurance companies and us.
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 products 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 auto insurance, individual accident insurance and health 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,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands except percentages)
|
|
Total net revenues
|
|
|
3,706,003
|
|
|
|
100.0
|
|
|
|
3,268,145
|
|
|
|
500,865
|
|
|
|
100.0
|
|
Operating costs
|
|
|
(2,483,448
|
)
|
|
|
(67.0
|
)
|
|
|
(2,213,865
|
)
|
|
|
(339,290
|
)
|
|
|
(67.7
|
)
|
Selling expenses
|
|
|
(278,085
|
)
|
|
|
(7.5
|
)
|
|
|
(288,460
|
)
|
|
|
(44,208
|
)
|
|
|
(8.8
|
)
|
General and administrative expenses
|
|
|
(475,107
|
)
|
|
|
(12.8
|
)
|
|
|
(463,634
|
)
|
|
|
(71,055
|
)
|
|
|
(14.2
|
)
|
Total operating costs and expenses
|
|
|
(3,236,640
|
)
|
|
|
(87.3
|
)
|
|
|
(2,965,959
|
)
|
|
|
(454,553
|
)
|
|
|
(90.7
|
)
|
Operating
Costs
We incur costs primarily
in connection with the distributions of insurance products and the provision of claims adjusting services. Our operating costs decreased
from 2019 to 2020, which was in line with the decrease in revenue during the same period. 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 mainly on
our in-house claims adjustors and non-affiliated claims adjustors through Chetong.net. Operating costs incurred as a percentage of net
revenues increased from 2019 to 2020, primarily due to the slower growth of our renewal life insurance business and the decrease in volume-based
commission from new life insurance business. We anticipate that our operating costs as a percentage of our total net revenues to remain
stable.
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 will establish new offices and enhance trainings as part of our efforts to establish a professional sales
force in major cities. 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 in 2020 remained stable as compared to 2019.
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 invest in digital capabilities and develop our online
insurance platforms.
Share-based compensation
expenses
As share options granted
under the 2012 Share Incentive Plan have all vested by 2016, there was no share-based compensation expenses incurred in 2017 and
2018. We recognized share-based compensation expenses of RMB0.4 million in 2019 as a result of the 521 Plan. The 521 Plan was initially
recognized as a liability award, pursuant to the original Loan Agreement related to the 521 Plan and accordingly, share-based compensation
expense related to the 521 Plan was variable based on the change of the fair value at the reporting date for each of the first,
second and third quarter of 2019. Pursuant to the Second Supplement to the Loan Agreement entered into in November 2019, the 521
Plan was modified which resulted in a change of the award’s classification from liability to equity. Accordingly, share-based compensation
expenses in connection with the 521 Plan were recognized on a straight-line basis over the remaining vesting period from 2020 to
2023. In the third quarter of 2020, we concluded that the stock options related to the 521 Plan were not probable to be vested
because the performance target was not probable to be met, and accordingly, RMB0.4 million of cumulative cost recognized in prior
periods was reversed. In December 2020, we canceled the 521 Plan without any replacement awards. For more information about our
share-based compensation expenses, please see Note (19)(b) 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.
On March 21, 2018, the
Hong Kong Legislative Council passed The Inland Revenue (Amendment) (No. 7) Bill 2017 (the “Bill”) which introduces
the two-tiered profits tax rates regime. The Bill was signed into law on March 28, 2018 and was gazetted on the following day.
Under the two-tiered profits tax rates regime, the first 2 million Hong Kong Dollar of profits of the qualifying group entity will
be taxed at 8.25%, and profits above HK$2 million will be taxed at 16.5%.
The provision for current
income taxes of the subsidiaries operating in Hong Kong has been calculated by applying the current rate of taxation of 8.25% for
the years ended December 31, 2019 and 2020. 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 and was subsequently amended on March 16, 2007, February 24, 2017 and December 29, 2018, 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 the relevant laws and regulations in the PRC, each of Ying Si Kang Information Technology (Shenzhen) Co., Ltd., or Ying Si Kang,
and Shenzhen Huazhong United Technology Co., Ltd., or Shenzhen Huazhong, both our wholly-owned subsidiaries, was recognized as
a software company 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 Ying Si Kang, year 2014 was the first profit-making year and accordingly it has made
a 12.5% tax provision for its profits for the year ended December 31, 2018. For Shenzhen Huazhong, 2017 was the first profit-making
year and accordingly it has made a 12.5% tax provision for its profits for the years ended December 31, 2019 and 2020.
Pursuant
to the Circular on Issues Regarding Tax-related Preferential Policies for Further Implementation of Western Development Strategy
jointly issued by the State Ministry of Finance, General Administration of Customs, China and State Administration for Taxation,
enterprises located in the western China regions that fall into the encouraged industries are entitled to 15% EIT preferential
tax treatment from January 1, 2011 to December 31, 2020. The preferential tax treatment is extended to December 31, 2030, pursuant
to the Announcement Concerning the Extension of the EIT Policies for Enterprises Located in the Western China issued by the Ministry
of Finance on April 28, 2020. In September 2018, our wholly-owned subsidiary, Fanhua Lianxin Insurance Sales Co., Ltd., which is
the holding vehicle of our life insurance operations, was relocated to Tianfu New Area, Sichuan province, PRC. Subsequently, Lianxin
will enjoy 15% EIT tax rate instead of unified 25% from September 1, 2018 to December 31, 2030. Tibet Zhuli Investment Co. Ltd.
(“Tibet Zhuli”), our wholly-owned subsidiary, was entitled to a preferential tax rate of 9% for the period from January
1, 2015 to December 31, 2017 and 15% for from 2018 to 2020, as it was established with approval in Tibet, PRC, before January 1,
2018.
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 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, 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
Starting from January
1, 2018, we accounted for revenue in accordance with ASC 606, “Revenue from Contracts with Customers.”
Our revenue from contracts
with insurance companies is derived principally from the provision of agency and claims adjusting services, and insurance companies
are defined as our customers under ASC 606. We disaggregate our revenue from different types of service contracts with customers
by principal service categories, as the we believe it best depicts the nature, amount, timing and uncertainty of revenue and
cash flows.
Insurance agency
services revenue
We derive agency revenue
serving as a sales agent to distribute various life insurance and P&C insurance products on behalf of the insurance companies
by which we are entitled to receive initial commission from the insurance companies based on the premium paid by the policyholders
for the related insurance policy sold. For life insurance agency, we are also entitled to renewal commissions when the policyholder
renews the policy within the renewal term of the original policy as such life insurance products are typically long-term products.
We have identified the promise
to sell insurance products on behalf of an insurance company as the performance obligation in our contracts with the insurance companies.
Our performance obligation to the insurance company is satisfied and revenue is recognized at a point in time when an insurance policy
becomes effective. Specifically for life insurance agency business, certain contracts include the promise to provide certain post-sales
administrative services to policyholders on behalf of the insurance company, such as responding to the policyholder inquiries, facilitating
the renewal process and/or gathering information from the policyholder to assist the insurance companies to update the contact information
of the policy holder, we have concluded such services are administrative in nature and immaterial, and none of these activities on their
own results in a transfer of a good or services to the insurance company in the context of the contract. Accordingly, no performance obligation
exists after a policy becomes effective.
Initial placement
of an insurance policy
We recognize agency revenue
related P&C insurance products (which is short term in nature and related premium are collected upfront) when an insurance policy
becomes effective. The commission to be earned is required to be partially refunded contingently on policy cancellations. Based on its
past experience, subsequent commission adjustments in connection with P&C insurance policy cancellations have been de minims to date,
and are recognized upon notification from the insurance carriers. Actual commission and fee adjustments in connection with the cancellation
of P&C insurance policies were 0.2%, 0.1% and 0.2% of the total commission and fee revenues during years ended December 31, 2018,
2019 and 2020, respectively.
For life insurance products,
there is generally a 10 to 15 days hesitation period after an initial placement of a life insurance policy, during which the policyholder
has a legal right to unconditionally cancel the effective policy regardless of the reasons. According to relevant terms of the insurance
agency contracts with customers, we reconcile information of polices sold which also includes polices that have been cancelled by policyholders
within the hesitation period, with the insurance companies on a monthly basis. Therefore, we estimate cancellation of polices that have
become effective but still within the hesitation period based on subsequent actual data at each reporting date. The cancellation of an
effective life insurance policy by the policyholder after the hesitation period does not require us to refund initial commission to insurance
companies, but rather impacts our estimate on future commission related to renewal(s) of the policy.
In addition, for life insurance
agency, we may receive a performance bonus from insurance companies as agreed and per contract provisions. Once we achieve a certain sales
volume based on respective agency agreements, the bonus will become due. Performance bonus represent a form of variable consideration
associated with certain sales volume, for which we earn commissions. We estimate the amount of consideration with a constraint applied
that will be received in the coming year such that a significant reversal of revenue is not probable, and includes performance bonus as
part of the transaction price. For the years ended December 31, 2018, 2019 and 2020, we recognized contingent performance bonus of RMB23.2
million, RMB58.1 million and RMB17.3 million, respectively.
Renewals of a life
insurance policy
For the long-term life insurance
products, in addition to the initial commission earned, we are also entitled to subsequent renewal commission and compensation, and renewal
performance bonus which represent variable considerations and are contingent on future renewals of initial policies or we achieve our
performance target.
When making estimates of
the amount of variable consideration to which we expect to be entitled, we use the expected value method and evaluates many factors, including
but not limited to, insurance companies mix, product mix, renewal term of various products, renewal premium rates and commission rates,
to determine the method(s) of measurement, relevant inputs and the underlying assumptions. We consider constraints as well as when determining
the amount which should be included in the transaction price, which we refer to as “estimated constrained values”.
The following describes
how we apply the expected value method and our key considerations and judgments under the expected value method:
|
●
|
Determining portfolio of contracts: We set up portfolios segregated
by renewal term of the underlying policies which we refer to as a “batch” under the expected value method, by splitting
all the long-term life insurance policies into batches of policies with renewal term of 5 years, 10 years, 15 years, 20 years and
30 years.
|
|
●
|
Accumulating historical data and experiences: We believe that
we don’t have sufficient historical data to be utilized to estimate variable consideration of our portfolio of contracts at a confidence
level that would not result in a significant reversal when we initially adopted ASC 606 and when we subsequently prepared the fiscal
year 2018, 2019 and 2020 financial statements. Instead, we determined to accumulate three
renewal years’ data for products sold starting in 2017 as the basis for the estimate, because the 2017 product mix is at a level
of distribution and scale that is representative and comparable for those policies sold in subsequent periods, and majority of
the renewal commissions are to be paid by the insurance companies within the first 5 years.
|
|
●
|
Estimating variability for each variable renewal consideration:
For each of the variable renewal commissions, there is only one underlying variability (i.e., the renewal rates for each of the
subsequent years of policy period which is contingent on policyholders’ renewal). Given the payment term for each of the renewal
commissions is different, we thus separately estimate the future renewal rates of batches of policies based on accumulated historical
renewal information.
|
|
●
|
Considering constraints on estimates: In estimating the variable consideration,
we originally evaluated the following factors that could increase the likelihood or magnitude of a reversal:
|
|
-
|
we have limited history of selling our current life insurance products and co-operating with
our current customers, such that our experience is of little predictive value in determining future renewal(s) of long-term life
insurance policies;
|
|
-
|
the occurrence of a renewal is outside our control and the estimate of renewal rates is complex
and requires significant judgement;
|
|
-
|
the estimate of variable consideration associated with policy renewals has a broad range of possible
consideration amounts; and
|
|
-
|
the contingency is not expected to be resolved for a long period of time
|
|
●
|
Ongoing reassessment of the estimated constrained values:
We continue to reassess the estimated constrained values at the end of each reporting period on a quarterly basis, including continue
to review and evaluate the reasonableness of the applied assumptions by comparing the original estimated constrained values with
the actual renewal commissions collected to monitor and determine whether any changes to the assumptions are needed.
|
For years ended December
31, 2018, 2019 and 2020, revenue related to the variable consideration is recorded when it is probable that a significant reversal in
the amount of cumulative revenue recognized will not occur, i.e., when a policyholder pays the renewal premium to the insurance company,
and the policy is renewed because we were not able to conclude a significant reversal to the estimated variable consideration not probable,
considering factors such as a) we have limited history of selling our current life insurance products with our current customers, such
that our past experience in outdated products is of little predictive value in renewal(s) rate estimate; b) the occurrence of a renewal
is outside of our control and the estimate of renewal premium rates is complex and requires significant assumptions; and c) the contingency
lasts across a long period of time.
Insurance claims
adjusting services revenue
For insurance claims
adjusting services, performance obligations are considered met and revenue is recognized when the services are rendered and completed,
at the time loss adjusting reports are confirmed being received 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.
Practical Expedients
and Exemptions
We generally expense
sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within
sales and marketing expenses in the consolidated statements of operations and comprehensive income, as the amortization period
is less than one year and we have elected the practical expedient included in ASC 606.
We have applied the
optional exemption provided by ASC 606 to not disclose the value of remaining performance obligations not yet satisfied as of period
end for contracts with original expected duration of one year or less.
Investment in Affiliates
We use the equity
method of accounting for investments in which we have the ability to exercise significant influence, but do not have a controlling
interest.
We continually review
our investment in equity investees to determine whether a decline in fair value to an amount below the carrying value is other-than
temporary. The primary factors we consider in our determination are the duration and severity of the decline in fair value; the
financial condition, operating performance and the prospects of the equity investee; and other company specific information such
as the stock price of the investee and its corresponding volatility, if publically traded, our intent and ability to hold the investment
until recovery, and changes in the macro-economic, competitive and operational environment of the investee. If the decline in fair
value is deemed to be other-than-temporary, the carrying value of the equity investee is written down to fair value.
The fair values of
the investments in equity investees are determined based on valuation techniques using the best information available, including
but not limited to such as quoted prices for the investments or similar investments in active markets, the investees’ current and
expected future performance, industry trend and projected revenue growth rates and profit margin, forecasted cash flows based on
discounted rates and terminal growth rates, etc.
Recent Accounting Pronouncements
For a summary of recently
issued accounting pronouncements not yet adopted that may potentially impact our financial position and results of operations, see Note
(2)(ab) to the consolidated financial statements of Fanhua Inc. pursuant to Item 18 of Part III of this annual report.
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.
We are currently operating
under two reporting operating segments: (1) insurance agency, and (2) claims adjusting.
|
|
For the Year Ended December 31,
|
|
|
|
2019
|
|
|
2019 to 2020 Percentage Change
|
|
|
2020
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands except percentages)
|
|
Consolidated Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
3,335,397
|
|
|
|
(15.0
|
)
|
|
|
2,834,997
|
|
|
|
434,482
|
|
Life insurance business
|
|
|
3,193,625
|
|
|
|
(15.3
|
)
|
|
|
2,703,584
|
|
|
|
414,342
|
|
P&C insurance business
|
|
|
141,772
|
|
|
|
(7.3
|
)
|
|
|
131,413
|
|
|
|
20,140
|
|
Claims adjusting
|
|
|
370,606
|
|
|
|
16.9
|
|
|
|
433,148
|
|
|
|
66,383
|
|
Total net revenues
|
|
|
3,706,003
|
|
|
|
(11.8
|
)
|
|
|
3,268,145
|
|
|
|
500,865
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
(2,263,952
|
)
|
|
|
(13.7
|
)
|
|
|
(1,953,744
|
)
|
|
|
(299,425
|
)
|
Life insurance business
|
|
|
(2,166,126
|
)
|
|
|
(13.8
|
)
|
|
|
(1,866,227
|
)
|
|
|
(286,012
|
)
|
P&C insurance business
|
|
|
(97,826
|
)
|
|
|
(10.5
|
)
|
|
|
(87,517
|
)
|
|
|
(13,413
|
)
|
Claims adjusting
|
|
|
(219,496
|
)
|
|
|
18.5
|
|
|
|
(260,121
|
)
|
|
|
(39,865
|
)
|
Total operating costs
|
|
|
(2,483,448
|
)
|
|
|
(10.9
|
)
|
|
|
(2,213,865
|
)
|
|
|
(339,290
|
)
|
Selling expenses
|
|
|
(278,085
|
)
|
|
|
3.7
|
|
|
|
(288,460
|
)
|
|
|
(44,208
|
)
|
General and administrative expenses
|
|
|
(475,107
|
)
|
|
|
(2.4
|
)
|
|
|
(463,634
|
)
|
|
|
(71,055
|
)
|
Total operating costs and expenses
|
|
|
(3,236,640
|
)
|
|
|
(8.4
|
)
|
|
|
(2,965,959
|
)
|
|
|
(454,553
|
)
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance agency
|
|
|
537,746
|
|
|
|
(34.2
|
)
|
|
|
353,778
|
|
|
|
54,218
|
|
Claims adjusting
|
|
|
9,132
|
|
|
|
85.1
|
|
|
|
16,907
|
|
|
|
2,591
|
|
Other
|
|
|
(77,515
|
)
|
|
|
(11.6
|
)
|
|
|
(68,499
|
)
|
|
|
(10,497
|
)
|
Income from operations
|
|
|
469,363
|
|
|
|
(35.6
|
)
|
|
|
302,186
|
|
|
|
46,312
|
|
Other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
79,070
|
|
|
|
(56.0
|
)
|
|
|
34,789
|
|
|
|
5,332
|
|
Interest income
|
|
|
2,828
|
|
|
|
374.5
|
|
|
|
13,420
|
|
|
|
2,057
|
|
Others, net
|
|
|
9,664
|
|
|
|
23.2
|
|
|
|
11,907
|
|
|
|
1,825
|
|
Income from operations before income taxes and share of income and impairment of affiliates, net
|
|
|
560,925
|
|
|
|
(35.4
|
)
|
|
|
362,302
|
|
|
|
55,526
|
|
Income tax expense
|
|
|
(143,816
|
)
|
|
|
(42.0
|
)
|
|
|
(83,387
|
)
|
|
|
(12,780
|
)
|
Share of income and impairment of affiliates, net
|
|
|
(224,555
|
)
|
|
|
(98.8
|
)
|
|
|
(2,738
|
)
|
|
|
(420
|
)
|
Net income
|
|
|
192,554
|
|
|
|
43.4
|
|
|
|
276,177
|
|
|
|
42,326
|
|
Less: Net income attributable to the noncontrolling interests
|
|
|
3,622
|
|
|
|
118.7
|
|
|
|
7,923
|
|
|
|
1,214
|
|
Net income attributable to the Company’s shareholders
|
|
|
188,932
|
|
|
|
42.0
|
|
|
|
268,254
|
|
|
|
41,112
|
|
Year ended December 31, 2020 Compared to Year Ended December
31, 2019
Net Revenues
Our total net revenues
decreased by 11.8% from RMB3,706.0 million in 2019 to RMB3,268.1 million (US$500.9 million) in 2020.
|
●
|
Net revenues from our insurance agency segment decreased by 15.0% from RMB3,335.4 million in 2019
to RMB2,835.0 million (US$434.5 million) in 2020. The decrease was primarily due to decline in life insurance business, from RMB3,193.6
million in 2019 to RMB2,703.6 million (US$414.3 million) in 2020, and a decrease in net revenues derived from P&C insurance
business.
|
The decrease in net revenues
generated from the life insurance agency business was mainly caused by a 22.9% year-over-year decline in first year premiums from
RMB3,136.6 million to RMB2,417.6 million primarily due to the adverse impact of COVID-19 pandemic, partially offsetting the year-over-year
growth of renewal commissions as a result of a 38.7% year-over-year growth in renewal premiums from RMB5,473.6 million to RMB7,594.3
million. Revenues generated from our life insurance business accounted for 82.7% of our total net revenues in 2020.
The decline of the property
and casualty insurance agency business was primarily due to (i) the decline of sales on Baowang (www.baoxian.com) mainly
resulting from the decline in the sales of accident insurance and travel insurance impacted by the COVID-19 offsetting the growth
of medical insurance products and (ii) the termination of platform fees received for the auto insurance business. Revenues for
the P&C insurance business were mainly derived from commissions generated from Baowang.
|
●
|
Net revenues from our claims adjusting segment increased by 16.9%
from RMB370.6 million in 2019 to RMB433.1 million (US$66.4 million) for 2020. The increase
was mainly due to the strong growth of our medical insurance-related claims adjusting business in 2020.
|
Operating Costs and Expenses
Operating costs and
expenses decreased by 8.4% from RMB3,236.6 million in 2019 to RMB2,966.0 million (US$454.6 million) for 2020.
Operating Costs.
Our operating costs decreased by 10.9% from RMB2,483.4 million in 2019 to RMB2,213.9 million (US$339.3 million) in 2020, primarily
because of an increase in operating cost in life insurance business.
|
●
|
Operating costs for our insurance agency segment decreased by 13.7% from RMB2,264.0 million in
2019 to RMB1,953.7 million (US$299.4 million) in 2020, primarily due to a decrease of 13.8% in costs for the life insurance agency
business from RMB2,166.1 million in 2019 to RMB1,866.2 million (US$286.0 million) in 2020, which was mainly due to decline in revenue
generated from our life business, and a decrease of 10.5% in costs for the property and casualty insurance agency business from
RMB97.8 million in 2019 to RMB87.5 million (US$13.4 million) in 2020, which is in line with the decrease in revenue generated from
the property and casualty insurance agency business.
|
|
●
|
Operating costs for our claims adjusting segment increased by 18.5% from RMB219.5 million in 2019
to RMB260.1 million (US$39.9 million) in 2020, primarily due to business expansion of medical insurance-related claims adjusting
service.
|
Selling Expenses.
Our selling expenses increased by 3.7% from RMB278.1 million in 2019 to RMB288.5 million (US$44.2 million) in 2020, primarily attributable
to increased sales events in our claim adjusting segment.
General and Administrative
Expenses. Our general and administrative expenses decreased by 2.4% from RMB475.1 million in 2019 to RMB463.6 million (US$71.1 million)
in 2020, primarily due to the decrease in contributions to employees' defined contribution plans because government waived the contribution
from the company in 2020 in view of the impact of COVID-19.
Income from Operations
As a result of the foregoing factors, income
from operations decreased by 35.6% from RMB469.4 million in 2019 to RMB302.2 million (US$46.3 million) in 2020.
|
●
|
Income from operations for our agency insurance segment decreased
by 34.2% from RMB537.7 million in 2019 to RMB353.8 million (US$54.2 million) in 2020, which
was primarily due to the decline of life insurance business because of the impact from COVID-19.
|
|
●
|
Income from operations for our claims adjusting segment increase by 85.1% from RMB9.1 million in
2019 to RMB16.9 million (US$2.6 million) in 2020, which was primarily due to growth in our medical insurance-related claims adjusting
business.
|
|
●
|
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 11.6% from RMB77.5 million in 2019 to RMB68.5 million (US$10.5 million) in 2020, primarily due to decrease in expenditures at the headquarters.
|
Other Income
Investment Income.
Investment income represents income received from short-term investments in collective trust products and interbank deposits.
Our investment income decreased by 56.0% from RMB79.1 million in 2019 to RMB34.8 million (US$5.3 million) in 2020. The decrease
in yields from short-term investments in financial products was mainly due to (i) change in composition of our short-term investment
portfolio, with increased allocation to wealth management products issued by banks which offer relatively lower yields as compared
to other financial products in the portfolio; (ii) a year-over-year decrease in yields from wealth management products issued by
banks.
Interest Income.
Our interest income increased by 374.5% from RMB2.8 million in 2019 to RMB13.4 million (US$2.1 million) in 2020, primarily
due to a loan to a third party with annual rate of 10%. The loan and related interest has been collected by end of 2020.
Income Tax Expense
Our income tax expense
decreased by 42.0% from RMB143.8 million in 2019 to RMB83.4 million (US$12.8 million) in 2020. The effective tax rate for 2020
was 23.0% compared with 25.6% in 2019. The decrease in effective tax rate was primarily due to (i) exemption from income tax for
investment income derived from certain fund product and (ii) decrease of dividend income tax provision as compared with 2019.
Share of Income and Impairment of Affiliates,
net
Our share of income
and impairment of affiliates was negative RMB2.7 million (US$0.4 million) for 2020, as compared to share of income and impairment
of affiliates of negative RMB224.6 million in 2019. The share of income and impairment of affiliates mainly represented share of
income from CNFinance in which we own 18.5% of the equity interest. The share of income and impairment from CNFinance included
a RMB23.0 million (US$3.5 million) impairment on investment in CNFinance as compared to the impairment loss of RMB322.7 million
for the corresponding period in 2019, to reflect a write-down to the fair value of the investment as measured by the closing market
price of CNFinance on December 31, 2020, offsetting the share of income of CNFinance of RMB21.2 million (US$3.2 million) from CNFinance
in 2020 as compared to share of income of RMB98.7 million in 2019.
Net Income Attributable to the Non-controlling
Interests
The
net income attributable to the non-controlling interests increased by 118.7% from RMB3.6 million in 2019 to RMB7.9 million (US$1.2
million) in 2020, primarily due to the increase in profits from our subsidiaries operating claims
adjusting business in which we currently own 44.7% equity interests.
Net Income Attributable to the Company’s
Shareholders
As a result of the
foregoing factors, our net income attributable to our shareholders increased by 42.0% from RMB188.9 million in 2019 to RMB268.3
million (US$41.1 million) for 2020.
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 RMB6.6235 per U.S. dollar in December
2020. The fluctuation of the exchange rate between the RMB and U.S. dollar and HK dollar resulted in foreign currency translation
gain of RMB9.6 million (US$1.5 million) in 2020, 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, 2020, we had RMB245.4 million (US$37.6
million) in cash and cash equivalents, and RMB1.3 billion (US$200.4 million) in short-term investments. Our cash and cash equivalents
consist of cash on hand and bank deposits and our short term investments consist of 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 dividend distribution, maintenance and developments of online platforms including
Lan Zhanggui, Baoxian.com, and eHuzhu, investment to digitalize our mid-office and back-office functions, 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 with the focus on developing
a more professional sales force in major cities and development of digital capabilities.
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,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Net cash generated from operating activities
|
|
|
178,324
|
|
|
|
402,300
|
|
|
|
61,654
|
|
Net cash generated from investing activities
|
|
|
11,959
|
|
|
|
325,336
|
|
|
|
49,861
|
|
Net cash used in from financing activities
|
|
|
(792,106
|
)
|
|
|
(638,811
|
)
|
|
|
(97,902
|
)
|
Net (decrease) increase in cash and cash equivalents and restricted cash
|
|
|
(601,823
|
)
|
|
|
88,825
|
|
|
|
13,613
|
|
Cash and cash equivalents and restricted cash at the beginning of the year
|
|
|
848,166
|
|
|
|
265,605
|
|
|
|
40,706
|
|
Cash and cash equivalents and restricted cash at the end of the year
|
|
|
265,605
|
|
|
|
350,098
|
|
|
|
53,655
|
|
Operating Activities
Net
cash generated from operating activities amounted to RMB402.3 million (US$61.7 million) for the year ended December 31, 2020, primarily
attributable to (i) a net income of RMB276.2 million (US$42.3 million), (ii) adjustments of depreciation expense of RMB17.6 million
(US$2.7 million), non-cash operating lease expense of RMB98.2 million (US$15.0 million), allowance for credit losses on financial
assets of RMB18.8 million (US$2.9 million), and investment income of RMB14.3 million (US$2.2 million), which
were non-cash items and, (iii) a decrease of accounts receivable of RMB90.6 million (US$13.9 million) which was in line with the
decrease in our commission income and an increase of Insurance premium payables RMB17.5 million (US$2.7 million) related to property
and casualty insurance business contributed by channel vendors of Baowang offset by (i) decrease of other payables and accrued
expenses of RMB32.2 million (US$4.9 million), (ii) decrease of income tax payable of RMB9.3 million (US$1.4 million), and (iii)
decrease of lease liability of RMB98.8 million (US$15.2 million).
Net cash generated
from operating activities amounted to RMB178.3 million for the year ended December 31, 2019, primarily attributable to (i) a net
income of RMB192.6 million, (ii) adjustments of depreciation expense of RMB16.3 million, non-cash operating lease expense of RMB69.5
million, investment income of RMB65.6 million and share of income and impairment of affiliates, net of RMB224.6 million representing
share of net income generated by CNFinance offset by an impairment of the investment in CNFinance, which were non-cash items and,
and (iii) an increase of accounts payable of RMB50.2 million offset by (i) an increase of accounts receivable of RMB180.2 million
contributed by our major customers, Huaxia and Sinatay, which in aggregate accounted for 39.9% of our revenue and 44.8% of account
receivable as of year end of 2019 as certain amount of sales bonus from Huaxia and Sinatary was settled quarterly and annually,
among which the receivable from Sinatay has been fully settled in March 2020, (ii) decrease of other payables and accrued expenses
of RMB25.5 million, (iii) decrease of income taxes payable of RMB50.0 million and (iv) decrease of lease liability of RMB76.6 million.
Investing Activities
Net cash generated
from investing activities for the year ended December 31, 2020 was RMB325.3 million (US$49.9 million), primarily attributable to
proceeds from disposal of short term investments of RMB8,287.9 million (US$1,270.2 million) that matured offset by cash used to
purchase short term investment products of RMB7,947.7 million (US$1,218.0 million) and purchase of property, plant and equipment
of RMB15.3 million (US$2.3 million).
Net cash generated
from investing activities for the year ended December 31, 2019 was RMB12.0 million, primarily attributable to proceeds from disposal
of short term investments of RMB7,523.3 million that matured offset by cash used to purchase short term investment products including
collective trust funds and inter-bank deposits of RMB7,498.7 million and purchase of property, plant and equipment of RMB19.7 million.
Financing Activities
Net cash used in financing
activities was RMB638.8 million (US$97.9 million) for the year ended December 31, 2020, attributable to dividend payments of totaling
RMB388.5 million (US$59.5 million), and refund of share rights deposit to 521 plan participants of RMB250.3 million (US$38.4 million).
Net cash used in financing
activities was RMB792.1 million for the year ended December 31, 2019, attributable to (i) cash used for share repurchase program
in 2019 of RMB484.0 million and (ii) dividend payments of totaling RMB435.1 million, partially offset by proceeds from employees
and agents’ share subscriptions of RMB111.3 million.
Capital Expenditures
We incurred capital
expenditures of RMB22.8 million, RMB19.7 million and RMB15.3 million (US$2.3 million) for the years ended December 31, 2018, 2019
and 2020, 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 sales outlets. We estimate that our capital expenditures
will increase substantially 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 digital 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, 2019 and 2020, 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 before the Foreign Investment Law becomes effective on January 1, 2020,
our wholly owned subsidiaries had to 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, 2020, our restricted
net asset was RMB1,455.6 million (US$223.1 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, 2020, we had aggregate undistributed earnings of approximately RMB1,146.3 million (US$175.7 million) that were
available for distribution. 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.
|
See “Item 4. Information
on the Company—B. Business Overview—Intellectual Property.”
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, 2020 to December 31, 2020 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, 2020, 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.
|
Tabular Disclosure of Contractual Obligations
|
The following table
sets forth our contractual obligations and commercial commitments as of December 31, 2020:
|
|
Payment Due by Period
|
|
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
|
|
(in thousands of RMB)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undiscounted minimum lease payment included in the measurement of operating lease liabilities
|
|
|
219,393
|
|
|
|
92,382
|
|
|
|
98,692
|
|
|
|
23,523
|
|
|
|
4,796
|
|
Total
|
|
|
219,393
|
|
|
|
92,382
|
|
|
|
98,692
|
|
|
|
23,523
|
|
|
|
4,796
|
|
Not included in the
table above are uncertain tax liabilities of RMB67.2 million (US$10.3 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, 2020.
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
|
|
51
|
|
Chief Executive Officer and Chairman of the Board of Directors
|
Peng Ge
|
|
49
|
|
Chief Financial Officer and Director
|
Yinan Hu
|
|
55
|
|
Director
|
Yunxiang Tang
|
|
75
|
|
Independent Director
|
Stephen Markscheid.
|
|
67
|
|
Independent Director
|
Allen Warren Lueth
|
|
52
|
|
Independent Director
|
Mengbo Yin
|
|
65
|
|
Independent Director
|
Mr. Chunlin Wang
has been our chairman of the board of directors since September 2017 and has been our chief executive officer since October
2011. He has been our director since 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 has been our director since December 2016. He is currently a member of the
board of directors of CNFinance, which is a public company listed in the U.S. 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. He is currently a member of the board of directors of
Puyi Inc., which is a public company listed in the U.S. 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 chairman of Still Waters Greent Technology, a United Kingdom
based renewable energy developer. He is a member of the board of directors of Jinko Solar, Inc. and Xiaobai Maimai Inc., which
are public companies listed in U.S. and ZZ Capital International Limited, a public company listed in Hong Kong. He is also a trustee
emeritus of Princeton-in-Asia, a nonprofit social service organization affiliated with Princeton University. He was a member of
the board of directors of a number of other listed companies, including TKK Symphony Acquisition Corporation (currently named Glory
Star New Media Group Holdings Limited), Ener-Core, Inc., China Ming Yang Wind Power Group and ChinaCast Education Corporation.
He acted as a director and interim chief executive officer and chief financial officer of Fellazo Inc. in 2020. From 2014 to 2017,
he was a partner of Wilton Partners, a Shanghai-based boutique investment bank. From 2007 to 2011, 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 with 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. Since February 2021, Mr. Lueth has served as CEO of Great Leap Brewery, a company engaged in the
brewing and selling of beer in the PRC through third-party sales and its restaurants. From September 2019 to February 2021 Mr.
Lueth served as a president and chief financial officer of International Institute of Education Group, a company mainly engaged
in language education in the PRC. From 2017 to 2019 and 2010 to 2017, Mr. Lueth served as a chief financial officer for Asia-Pacific
region and a vice president of finance for the PRC region for Cardinal Health, a Fortune 500 company engaged in the healthcare
industry, respectively. From 2005 to 2010, Mr. Lueth served as a vice president of finance and strategy for the PRC region for
Zuellig Pharma China, which was then acquired by Cardinal Health in 2010. 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.
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 RMB0.5 million, 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 2020, the aggregate
cash compensation, including reimbursement of expenses, to our executive officers which include executive directors was approximately
RMB2.4 million (US$0.4 million), and the aggregate cash compensation to our non-executive directors was approximately RMB2.7 million
(US$0.4 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, 2020, except for the options to purchase 400,000 ordinary shares granted to one of the independent directors, all of the 2012
Options had been exercised or forfeited.
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:
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options to purchase our ordinary shares;
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●
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restricted shares, which represent non-transferable ordinary shares,
that may be subject to forfeiture, restrictions on transferability and other restrictions; and
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●
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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.
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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, 2021,
options to purchase 400,000 ordinary shares were outstanding. The following table summarizes the outstanding options as
of March 31, 2020.
Name(1)
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|
Options Outstanding
|
|
|
Exercise Price (Per Ordinary Share)(US$)
|
|
|
Grant Date
|
|
Expiration Date
|
Mengbo Yin
|
|
|
400,000
|
|
|
|
0.001
|
|
|
March 12, 2012
|
|
March 12, 2022
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(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.
|
2014 Share Issuance to Employees
In November 2014,
we entered into share purchase agreements with companies established on behalf of our employees, or the 2014 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 was US$0.27 per ordinary share or US$5.40 per ADS, while
the purchase price for the additional 50,000,000 ordinary shares was 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. As of March 31, 2021, there were 92,646,780
ordinary shares outstanding held by the 2014 Employee Companies.
521 Plan
On June 14, 2018, we
obtained approval from our board of directors to implement the 521 Plan, which enabled eligible Participants to participate in
our growth by purchasing a total of 14 million of the Company’s ADSs at a price of US$27.38 per ADS. The Participants in
the 521 Plan include entrepreneurial team leaders, general managers of our provincial branches or subsidiaries, and key managerial
personnel, excluding senior management.
In order to facilitate
the purchase of the shares by the Participants, 90% of the total subscription cost of the shares under the 521 Plan was funded
by loans granted to the individual Participants by us, while the remaining 10% was contributed directly by the individual Participants.
The loans each bear interest at a rate of 8% per annum and is repayable by December 31, 2023 or upon the termination of employment
or agent agreement, whichever is earlier.
As the performance targets
were not met by the Participants, we entered into supplemental agreement with the Participants to cancel the 521 Plan in December 2020,
upon which all the relevant original contractual agreements that we entered into relating to the 521 Plan were terminated and lapsed.
Further, all subscribed shares have been returned and cancelled while the share right deposits contributed by the Participants were refunded
back to the Participants, with termination of the Participants’ obligation to repay us the non-recourse loan principal and interest.
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 2020, our board of directors met in person or passed resolutions by unanimous written consent eight times. In
addition, our independent directors held executive sessions without the presence of non-independent directors or members of management
twice during 2020. 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
four committees under the board of directors: the audit committee, the compensation committee, the corporate governance and nominating
committee and financial reporting and disclosure 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:
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selecting the independent auditors and pre-approving all auditing
and non-auditing services permitted to be performed by the independent auditors;
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reviewing with the independent auditors any audit problems or difficulties
and management’s response;
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reviewing and approving all proposed related-party transactions;
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discussing the annual audited financial statements with management
and the independent auditors;
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reviewing major issues as to the adequacy of our internal controls
and any special audit steps adopted in light of material control deficiencies;
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annually reviewing and reassessing the adequacy of our audit committee
charter;
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meeting separately and periodically with management, the independent
auditors and the internal auditor; and
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reporting regularly to the full board of directors.
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In 2020, our audit committee
held meetings or passed resolutions by unanimous written consent four 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:
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reviewing and recommending to the board with respect to the total
compensation package for our chief executive officer;
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approving and overseeing the total compensation package for our executives
other than the chief executive officer;
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reviewing and making recommendations to the board with respect to
the compensation of our directors; and
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reviewing periodically and approving any long-term incentive compensation
or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
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In 2020, 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:
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identifying and recommending to the board nominees for election or
re-election to the board, or for appointment to fill any vacancy;
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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;
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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;
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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
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monitoring compliance with our code of business conduct and ethics,
including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.
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In 2020, our corporate
governance and nominating committee held meetings or passed resolutions by unanimous written consent twice.
Financial Reporting
and Disclosure Committee. Our financial reporting and disclosure committee consists of Peng Ge (chairman), Allen Lueth, and two
of our non-executive employees including our financial controller and our internal legal counsel. The financial reporting and disclosure
committee assist our CEO and CFO (collectively, the “Senior Officers”) in fulfilling their responsibility to oversee the accuracy,
completeness and timeliness of our public reporting and disclosure. The financial reporting and disclosure committee is responsible for,
among other things:
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Review and, as necessary, help revise our controls and procedures
that are designed to ensure that: (i) information required to be disclosed by us to the SEC and other information that our company
publicly discloses is recorded, processed, summarized and reported accurately and on a timely basis; and (ii) information
is accumulated and communicated to management, including the Senior Officers, as appropriate to allow timely decisions regarding
such reporting and disclosure (collectively, the “Reporting and Disclosure Controls and Procedures”);
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Assist in documenting and monitoring the integrity and effectiveness
of our Reporting and Disclosure Controls and Procedures; and
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Review the Company’s: (i) periodic and current reports, proxy statements,
information statements, registration statements and any other information filed with or furnished to the SEC; (ii) press releases
containing financial information, earnings guidance, information about material acquisitions or dispositions or other information
material to the Company’s securityholders; (iii) correspondence broadly disseminated to securityholders; (iv) other relevant
communications or presentations (collectively, the “Reporting and Disclosure Statements”); and (v) unusual and complex
transactions, new accounting standard adoption and disclosure, new SEC reporting requirements.
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In 2020, our financial
reporting and disclosure committee held meetings by unanimous written consent four times.
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
and the board of directors resolves that his office be vacated, 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 3,863, 4,746
and 4,926 employees as of December 31, 2018, 2019 and 2020, 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, 2020:
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|
Number of Employees
|
|
|
% of Total
|
|
Management and administrative staff
|
|
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2,972
|
|
|
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60.3
|
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Financial and accounting staff
|
|
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183
|
|
|
|
3.7
|
|
Professional claims adjustors
|
|
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1,673
|
|
|
|
34.0
|
|
Information technology staff
|
|
|
98
|
|
|
|
2.0
|
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Total
|
|
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4,926
|
|
|
|
100.0
|
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As of December
31, 2018, 2019 and 2020, we had 807,858 and 670,104 and 362,580 registered sales representatives,
respectively. A majority 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. We primarily distribute life insurance policy with a
periodic premium payment schedule. For the sale of each of such life insurance policy, 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 companies for the
sale and renewal of that policy, generally 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. For the sale of each life
insurance policy with a single premium payment schedule or property and casualty insurance policy, 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 insurance companies for
the sale of that policy. For the sale of each auto insurance policy facilitated through Lan Zhanggui, the sales agent who has generated
the sale will be paid a single commission based on a percentage of the insurance premiums he or she generated by our third party
auto insurance aggregator site partners.
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 commission for insurance policies sold by agents
under his or her management. In selected major cities, we are currently experimenting establishing a sales force organized with a flatter
hierarchy, under which a life insurance sales agent will only receive commissions for the insurance policies he or she sells.
Our sales agents, in-house
sales representatives and claims adjustors are valuable to us 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, both offline and online. For new 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
and develop skills to build and manage their own sales teams. Online training courses are also available on Lan Zhangui, which
enable sales agents to attend the courses anytime anywhere.
The following table
sets forth information with respect to the beneficial ownership of our shares, as of March 31, 2021, by:
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each of our current directors and executive officers; and
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each person known to us to own beneficially more than 5% of our shares.
|
As of March 31, 2021,
there were 1,073,891,784 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.
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Ordinary
Shares Beneficially
Owned(1) (2)
|
|
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Number
|
|
|
%
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
Chunlin Wang(3)
|
|
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39,252,100
|
|
|
|
3.7
|
%
|
Peng Ge(4)
|
|
|
48,562,260
|
|
|
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4.5
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%
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Yinan Hu(5)
|
|
|
199,739,310
|
|
|
|
18.6
|
%
|
Stephen Markscheid
|
|
|
*
|
|
|
|
*
|
|
Allen Warren Lueth
|
|
|
*
|
|
|
|
*
|
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Mengbo Yin
|
|
|
*
|
|
|
|
*
|
|
All Directors and Executive Officers as a Group
|
|
|
289,973,670
|
|
|
|
27.0
|
%
|
|
|
|
|
|
|
|
|
|
Principal Shareholders:
|
|
|
|
|
|
|
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Sea Synergy Limited(6)
|
|
|
189,689,110
|
|
|
|
14.0
|
%
|
|
*
|
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 1,073,981,784
ordinary shares outstanding as of March 31, 2021, and the number of ordinary shares underlying options held by such person that
have vested.
|
(3)
|
Includes 39,252,100 ordinary shares held by Kingsford Resources Limited, or Kingsford Resources, which is 100% held by Better
Rise Investments. Better Rise is 100% held by a family trust, of which Mr. Wang 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 48,562,260 ordinary share held by Green Ease, which is 100% held by High Rank Investments Limited, or High Rank. High
Rank was 100% held by a family trust, of which Mr. Ge 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 directly held by Mr. Hu, and (ii) 189,698,110 ordinary shares of our
company directly held by Sea Synergy Limited, or Sea Synergy. Sea Synergy is 100% held by a family trust, of which Mr. Hu 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 Sea Synergy.
|
(6)
|
Includes 189,698,110 ordinary shares of the Company directly held by Sea Synergy. The registered address of Sea Synergy is P.O.
Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.
|
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, 2021, 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 61.8% 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.
Item
7. Major Shareholders and Related Party Transactions
Please refer to “Item
6. Directors, Senior Management and Employees — E. Share Ownership.”
|
B.
|
Related Party Transactions
|
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.”
|
C.
|
Interests of Experts and Counsel
|
Not applicable.
Item
8. Financial Information
|
A.
|
Consolidated Statements and Other Financial Information
|
See “Item 18.
Financial Statements.”
Legal and Regulatory Proceedings
“We
are currently not a party to any material litigation or 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. In addition, the CBIRC may make inquiries and conduct examinations concerning our compliance with PRC laws and regulations
from time to time. These administrative proceedings have resulted in administrative sanctions, including fines of RMB130,000 in
aggregate in 2020, which were not material to us. While we cannot predict the outcome of any pending or future examination, we
do not believe that any pending legal matter will have a material adverse effect on our business, financial condition or results
of operations. However, we cannot assure you that any future regulatory proceeding will not have an adverse outcome, which could
have a material adverse effect on our operating results or cash flows.
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 unless, immediately following the date on which it is to be paid, our company will be able to pay its debts as they fall
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$0.12 per ADS, payable on or around May 18, 2017 to shareholders of
record on May 8, 2017.
On September 18, 2017,
our board of directors modified the dividend policy to adopt a quarterly payment schedule in lieu of an annual dividend, with the
dividend payout ratio of no less than 50% of net operating income attributable to the Company’s shareholders instead of no less
than 30% under the annual dividend policy previously announced on April 20, 2017. The following table summarizes the quarterly
dividend payments since the announcement of the quarterly dividend policy.
Declaration Date
|
|
Quarterly Dividend (Per Ordinary Share)(US$)
|
|
|
Quarterly Dividend
(Per ADS)(US$)
|
|
|
Record Date
|
|
Payable Date
|
November 20, 2017
|
|
|
0.01
|
|
|
|
0.20
|
|
|
December 8, 2017
|
|
December 22, 2017
|
March 9, 2018
|
|
|
0.01
|
|
|
|
0.20
|
|
|
March 26, 2018
|
|
April 10, 2018
|
May 12, 2018
|
|
|
0.0125
|
|
|
|
0.25
|
|
|
June 4, 2018
|
|
June 11, 2018
|
August 18, 2018
|
|
|
0.0125
|
|
|
|
0.25
|
|
|
September 5, 2018
|
|
September 19, 2018
|
November 17, 2018
|
|
|
0.0125
|
|
|
|
0.25
|
|
|
December 5, 2018
|
|
December 20, 2018
|
March 18, 2019
|
|
|
0.0125
|
|
|
|
0.25
|
|
|
March 21, 2019
|
|
April 3, 2019
|
May 22, 2019
|
|
|
0.0150
|
|
|
|
0.30
|
|
|
June 6, 2019
|
|
June 20, 2019
|
August 20, 2019
|
|
|
0.0150
|
|
|
|
0.30
|
|
|
September 4, 2019
|
|
September 19, 2019
|
November 20, 2019
|
|
|
0.0150
|
|
|
|
0.30
|
|
|
December 5, 2019
|
|
December 19, 2019
|
March 18, 2020
|
|
|
0.0150
|
|
|
|
0.30
|
|
|
April 2, 2020
|
|
April 16, 2020
|
May 26, 2020
|
|
|
0.0125
|
|
|
|
0.25
|
|
|
June 10, 2020
|
|
June 24, 2020
|
August 24, 2020
|
|
|
0.0125
|
|
|
|
0.25
|
|
|
September 8, 2020
|
|
September 22, 2020
|
November 24, 2020
|
|
|
0.0125
|
|
|
|
0.25
|
|
|
December 9, 2020
|
|
December 23, 2020
|
March 22, 2021
|
|
|
0.0125
|
|
|
|
0.25
|
|
|
March 31, 2021
|
|
April 15, 2021
|
When we pay dividends,
we 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.
Item
9. The Offer and Listing
|
A.
|
Offer and Listing Details
|
Not applicable
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.
Item
10. Additional Information
Not applicable.
|
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 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 issued and
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 calendar 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 or may be approved in writing by all of the shareholders entitled to vote at 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 or may be passed as a unanimous written resolution. 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 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 prospective and retroactive change and is included here for information purposes only. This summary is not intended
to be, and should not be construed as, legal or tax advice, does not consider any investor’s particular circumstances, and
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, estate duty or gift
tax. 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 a party to a double tax treaty with
the United Kingdom but otherwise is not a party to any double tax treaties. 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, which was subsequently amended on March
16, 2007, February 24, 2017 and December 29, 2018, 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% or 5% 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% or 5% 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% or 5% PRC withholding tax.
Income Tax and Withholding Tax
The EIT Law, applies
a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises. The EIT Law imposes a withholding
tax of 10% on dividends distributed by a PRC foreign-invested enterprise to its immediate holding company outside of China, if
such immediate holding company is considered a “non-resident enterprise” without any establishment or place within
China or if the received dividends have no connection with the establishment or place of such immediate holding company within
China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for
a different withholding arrangement. Holding companies in Hong Kong, for example, are subject to a 5% withholding tax rate. The
Cayman Islands, where we are incorporated, does not have such a tax treaty with China. Thus, dividends paid to us by our subsidiaries
in China may be subject to the 10% withholding tax if we are considered a “non-resident enterprise” under the EIT Law.
Under the EIT Law and
its implementation rules, any interest or premium with respect to the notes and any gains realized on the transfer of the notes
by holders who are deemed under the EIT Law as non-resident enterprise may be subject to PRC enterprise income tax if such interest,
premium or gains are regarded as income derived from sources within the PRC. Under the EIT Law, a “non-resident enterprise”
means an enterprise established under the laws of a jurisdiction other than the PRC and whose actual administrative organization
is not in the PRC but has established offices or premises in the PRC, or which has not established any offices or premises in the
PRC but has obtained incomes derived from sources within the PRC.
The EIT Law provides
that enterprises established outside of China whose “de facto management bodies” are located in China are considered
“resident enterprises” and are therefore subject to PRC enterprise income tax at the rate of 25% with respect to their
income sourced from both within and outside of China. The Implementing Regulation defines the term “de facto management body”
as a management body that exercises substantial and overall control and management over the production and operations, personnel,
accounting and properties of an enterprise. Circular 82 provides certain specific criteria for determining whether the “de
facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. The Resident Enterprise
Administrative Measures provide clarification for resident status determination and competent tax authorities. However, Circular
82 and the Resident Enterprise Administrative Measures apply only to offshore enterprises controlled by PRC enterprises, not those
invested in or controlled by PRC individuals, like our company. Currently there are no further detailed rules or precedents applicable
to us regarding the procedures and specific criteria for determining “de facto management body” for the company of
our type. It is still unclear if the PRC tax authorities would determine that we should be classified as a PRC “resident
enterprise.”
Although we have not
been notified that we are treated as a PRC resident enterprise, we cannot assure you that we will not be treated as a “resident
enterprise” under the EIT Law, any aforesaid circulars or any amended regulations in the future. If we are treated as a PRC
resident enterprise for PRC enterprise income tax purposes, among other things, we would be subject to the PRC enterprise income
tax at the rate of 25% on our worldwide taxable income. Furthermore, if we are treated as a PRC resident enterprise, payments of
dividends and/or other expenses of similar nature by us may be regarded as derived from sources within the PRC and therefore we
may be obligated to withhold PRC income tax at 10% on payments of dividends on the ADSs or shares and/or interest or other expenses
of similar nature on the notes to non-PRC resident enterprise investors. In the case of non-PRC resident individual investors,
the tax may be withheld at a rate of 20%.
In addition, if we are
treated as a PRC resident enterprise, any gain realized on the transfer of the ADSs and/or ordinary shares by non-PRC resident
investors may be regarded as derived from sources within the PRC and accordingly may be subject to a 10% PRC income tax in the
case of non-PRC resident enterprises or 20% in the case of non-PRC resident individuals. The PRC tax on interest or gains may be
reduced or exempted under applicable tax treaties between the PRC and the ADS holder’s home country. For example, according
to an arrangement between the PRC and Hong Kong, for the avoidance of double taxation, ADS holders who are Hong Kong residents,
including both enterprise holders and individual holders, may be exempted from PRC income tax on capital gains derived from a sale
or exchange of the notes.
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 on Form 20-F, 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 on Form 20-F. 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:
|
●
|
banks and certain other 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 tax advisors regarding
the tax consequences of investing in 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 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;
|
|
●
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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;
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an estate, the income of which is subject to United States federal
income taxation regardless of its source; or
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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.
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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.
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 do not believe we were a passive foreign
investment company (“PFIC”) for United States federal income tax purposes for our taxable year ended December 31, 2020.
However, we believe we were a PFIC for 2017 and prior years. In addition, we believe that it is likely that one or more of our
subsidiaries were also PFICs for such prior years. The determination of 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 we will not be a PFIC for any taxable year or that the IRS will not
take a contrary position to any determination we make.
We will be a PFIC for
United States federal income tax purposes for any taxable year if, applying applicable look-through rules, either:
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at least 75% of our gross income for such year is passive income;
or
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at least 50% of the value of our assets (generally determined based
on a quarterly average) during such year is attributable to assets that produce or are held for the production of passive income.
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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, at least
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, because we exercise effective control over the operation of such entities and 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.
Changes in the composition
of our income and assets may cause us to be or become a PFIC. The determination of whether we will be a PFIC for any taxable year
may depend in part upon the value of our goodwill and other unbooked intangibles not reflected on our balance sheet (which may
depend upon the market price of our ADSs or ordinary shares from time to time, which may fluctuate significantly) and also may
be affected by how, and how quickly, we spend our liquid assets and the cash we generate from our operations and raise in any offering.
Among other matters, if our market capitalization declines, we may be or become a PFIC because our liquid assets and cash (which
are for this purpose considered assets that produce passive income) may then represent a greater percentage of our overall assets.
Further, while we believe our classification methodology and valuation approach is reasonable, it is possible that the IRS may
challenge our classification or valuation of our goodwill and other unbooked intangibles, which may result in our being or becoming
a PFIC for the current or one or more future taxable years.
If we are a PFIC for
any taxable year (as we believe we were for 2017 and prior years) during which you hold ADSs or ordinary shares, 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 cease
to be a PFIC (as we believe we did in 2018) 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, the 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 as we believe we ceased to be a PFIC in 2018.
If we are a PFIC for
any taxable year (as we believe we were for 2017 and prior years) during which you hold ADSs or ordinary shares, 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:
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the excess distribution or recognized gain will be allocated ratably
over your holding period for the ADSs or ordinary shares;
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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
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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.
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If we are a PFIC for
any taxable year (as we believe we were for 2017 and prior years) during which you hold our ADSs or ordinary shares and any of
our non-United States subsidiaries that are corporations (or other corporations in which we own equity interests) is also a PFIC,
you 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. You should consult
your 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 (as we believe we were for 2017 and prior years) during which you hold ADSs or ordinary shares, 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.
You are urged to consult your tax advisors regarding the availability of mark-to-market election, and whether making the election
would be advisable in your 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 (as we believe we were
for 2017 and prior years), 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 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 tax advisors regarding the impact of our ceasing to be a PFIC in 2018 on your investment in our
ADSs or 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 or other 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.
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,
are 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, 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, 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
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 or other non-United
States 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 ADSs or ordinary shares 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 US$50,000.
United States Holders
should consult their tax advisors regarding the application of the information reporting and backup withholding rules.
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F.
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Dividends and Paying Agents
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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.
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I.
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Subsidiary Information
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For a list of our subsidiaries
as of March 31, 2021, 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, 2020, 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 the cash and cash
equivalent denominated in U.S. dollars that we keep offshore for dividend payments. 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$10.7 million and HK dollar-denominated financial assets amounting to HK$3.8 million as of December
31, 2020. A 10% appreciation of the RMB against the U.S. dollar and HK dollar would have resulted in a decrease of RMB7.3 million
(US$1.1 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
Not applicable.
Not applicable.
Not applicable.
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D.
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American Depositary
Shares
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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
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Depositary
Actions
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Associated
Fees
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(a) Depositing or substituting the underlying shares
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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
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US$5.00 for each 100 ADSs (or portion thereof) evidenced by the new ADRs delivered
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(b) Receiving or distributing dividends
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Distribution of dividends
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US$0.02 or less per ADS
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(c) Selling or exercising rights
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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
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US$5.00 for each 100 ADSs (or portion thereof)
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(d) Withdrawing an underlying security
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Acceptance of ADRs surrendered for withdrawal of deposited securities
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US$5.00 for each 100 ADSs (or portion thereof) evidenced by the ADRs surrendered
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(e) Transferring, splitting or grouping receipts
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Transfers, combining or grouping of depositary receipts
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US$1.50 per ADS
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(f) General depositary services, particularly those charged on an annual basis.
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● 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
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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
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(g) Expenses of the depositary
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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
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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
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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, 2019 and 2020, the depositary reimbursed US$1.7 million and US$1.1 million, respectively.
For the years ended December 31, 2019 and 2020, 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 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.
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.
The accompanying notes are an integral part of
the consolidated financial statements.
The accompanying notes are an integral part of
the consolidated financial statements.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
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(1)
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Organization and Description
of Business
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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 agency services and insurance claims adjusting services in the
People’s Republic of China (the “PRC”).
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(2)
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Summary of Significant Accounting Policies
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(a)
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Basis of Presentation and Consolidation
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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 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 December 2020, the Group cancelled the 521 Plan
and as a result, the Group no longer consolidates any VIE as of December 31, 2020. See Note 9 for detail.
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 Group’s management, base their estimates on historical experience
and various other factors, believed to be reasonable under the circumstances, that 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 estimates of allowance for doubtful receivables and equity-method
investment impairment assessments. 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, which have original maturities of three months or less,
and are readily convertible to known amounts of cash and have insignificant risk of changes in value related to changes in interest rates.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
|
(c)
|
Cash and Cash Equivalents and Restricted Cash (Continued)
|
In its capacity as an insurance
agent, the Group collects premiums from certain insureds and remits the premiums to the appropriate insurance companies. Accordingly,
as reported in the consolidated balance sheets, “premiums” are receivables from the insureds of RMB4,646 and RMB25,290 as of
December 31, 2019 and 2020, 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 balance sheets. Also, restricted cash balance includes the entrustment deposit received from the members of eHuzhu, an online
mutual aid platform operated by the Group, which is to be used during the one-year operating cycle and is therefore classified as a current
asset. The balance for entrustment deposit was RMB75,364 and RMB58,691 as of December 31, 2019 and 2020, respectively. Further, restricted
cash balance includes guarantee deposit required by China Banking and Insurance Regulatory Commission (“CBIRC”) in order to
protect insurance premium appropriation by insurance agency which is restricted as to withdrawal for other than current operations. Thus,
the Group classified the balance for guarantee deposit as a non-current asset in 2020. The balance for guarantee was RMB15,942 and RMB20,689
as of December 31, 2019 and 2020, 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. Available-for-sale
investments are carried at fair values and the unrealized gains or losses from the changes in fair values are included in accumulated
other comprehensive income or loss. The Group benchmarks the values of its other investments against fair values of comparable investments
and reference to product valuation reports as of the balance sheet date, and categorizes all fair value measures of short term investments
as level 2 of the fair value hierarchy.
The Group evaluates each
individual investment periodically for impairment. For investments where the Group does not intend to sell, the Group evaluates
whether a decline in fair value is due to deterioration in credit risk. Credit-related impairment losses, not to exceed the amount
that fair value is less than the amortized cost basis, are recognized through an allowance for credit losses on the consolidated
balance sheet with corresponding adjustment in the consolidated statements of operations and comprehensive income. Subsequent
increases in fair value due to credit improvement are recognized through reversal of the credit loss and corresponding reduction in
the allowance for credit loss. Any decline in fair value that is non-credit related is recorded in accumulated other comprehensive
income as a component of shareholder’s equity. As of December 31, 2020, there were no investments held by the Group that had
been in continuous unrealized loss position.
The short term investments
balance were RMB1,612,351 and RMB1,307,865 as of December 31, 2019 and 2020, respectively. No impairment loss on short term investments
was identified for years ended December 31, 2018, 2019 and 2020, respectively.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
|
(e)
|
Accounts Receivable and Insurance Premium Receivables
|
Accounts receivable are recorded
at the amount that the Group expects to collect and do not bear interest. Accounts receivable represent fees receivable on agency and
claims adjusting services primarily from insurance companies. The Group’s accounts receivables include trade-related receivables
and contract assets (see Note 2(r)). Amounts collected on accounts receivable are included in net cash provided by operating activities
in the consolidated statements of cash flows.
The Group evaluates the
collectability of its trade receivables and contract assets based on a combination of factors. The Group generally does not require collateral
on trade receivables and contract assets as the majority of the Group’s customers are large, well-established insurance companies.
The Group estimates allowances for expected credit losses using relevant available information from internal and external sources, related
to past events, current conditions, and reasonable and supportable forecasts. Credit loss expenses are assessed quarterly and included
in general and administrative expense on the consolidated statements of income and comprehensive income.
Accounts receivable, net is
analyzed as follows:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
Accounts receivable
|
|
|
702,666
|
|
|
|
612,116
|
|
Allowance for doubtful accounts
|
|
|
(20,495
|
)
|
|
|
(29,000
|
)
|
Accounts receivable, net
|
|
|
682,171
|
|
|
|
583,116
|
|
The following table summarizes
the movement of the Group’s allowance for expected credit losses of accounts receivables:
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Balance at the beginning of the year
|
|
|
20,198
|
|
|
|
21,241
|
|
|
|
20,495
|
|
Cumulative-effect adjustment upon adoption of ASU 2016-13
|
|
|
—
|
|
|
|
—
|
|
|
|
7,436
|
|
Current period provision for expected credit losses
|
|
|
6,791
|
|
|
|
6,533
|
|
|
|
4,831
|
|
Write-offs
|
|
|
(5,748
|
)
|
|
|
(7,279
|
)
|
|
|
(3,762
|
)
|
Balance at the end of the year
|
|
|
21,241
|
|
|
|
20,495
|
|
|
|
29,000
|
|
Insurance premium receivables
consist of insurance premiums to be collected from the insureds on behalf of insurance company customers, 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)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
|
(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 expense recognized in the consolidated
statements of income and comprehensive income:
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Operating costs
|
|
|
232
|
|
|
|
216
|
|
|
|
199
|
|
Selling expenses
|
|
|
4,769
|
|
|
|
7,144
|
|
|
|
7,350
|
|
General and administrative expenses
|
|
|
5,832
|
|
|
|
8,920
|
|
|
|
10,109
|
|
Depreciation expense
|
|
|
10,833
|
|
|
|
16,280
|
|
|
|
17,658
|
|
|
(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, 2020.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
|
(g)
|
Goodwill and Other Intangible Assets (Continued)
|
Goodwill and amortization
of intangible assets (Continued)
Prior to January 1, 2020,
the Group performed a two-step quantitative impairment test to determine the amount, if any, of goodwill impaired. The quantitative impairment
test consists of a comparison of the fair value of each reporting unit with its carrying amount. If the carrying amount of each reporting
unit exceeds its fair value, an impairment loss equal to the difference between the implied fair value of the goodwill and the carrying
value of the goodwill will be recorded. Starting from January 1, 2020, the Group adopted ASU 2017-04, which simplifies the accounting
for goodwill impairment by eliminating Step two from the goodwill impairment test. The impairment test is performed as of year-end or
if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying
amount by comparing the fair value of a reporting unit with its carrying value. If the fair value of the reporting unit exceeds its carrying
amount, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying
value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however,
the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
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. Estimates of fair value are primarily determined by using discounted cash flows. Discounted
cash flows method is 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 2019 and 2020, management
compared the carrying value of each reporting unit, inclusive of assigned goodwill, to its respective fair value. 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, the management concluded that goodwill was not impaired as of
December 31, 2019 and 2020, respectively.
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.
The intangible assets, net
consisted of trade names with cost of RMB8,898 as of December 31, 2019 and 2020, respectively. The trade names have an estimated useful
life of 9.4 to 10 years and accumulated amortization of RMB8,576 and RMB8,854 as of December 31, 2019 and 2020, respectively. The residual
balance will be fully amortized as expenses in 2021. Aggregate amortization expenses for intangible assets were RMB15,946, RMB942 and
RMB281 for the years ended December 31, 2018, 2019 and 2020, respectively.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
|
(g)
|
Goodwill and Other Intangible Assets (Continued)
|
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, 2018, 2019 and 2020, the Group recognized no impairment losses on identifiable
intangible assets with determinable useful lives.
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, 2018, 2019 and 2020, the Group recognized no impairment losses on its indefinite-lived intangible assets.
|
(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 and prepaid expenses.
See Note 4 for details.
|
(i)
|
Investment in Affiliates
|
The Group uses the equity
method of accounting for investments in which the Group has the ability to exercise significant influence, but does not have a controlling
interest.
The Group continually reviews
its investment in equity investees to determine whether a decline in fair value to an amount below the carrying value is other-than temporary.
The primary factors the Group considers in its determination are the duration and severity of the decline in fair value; the financial
condition, operating performance and the prospects of the equity investee; and other company specific information such as the stock price
of the investee and its corresponding volatility, if publically traded, the Group’s intent and ability to hold the investment until
recovery, and changes in the macro-economic, competitive and operational environment of the investee. If the decline in fair value is
deemed to be other-than-temporary, the carrying value of the equity investee is written down to fair value.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
|
(j)
|
Long-term Equity Investments and Convertible Loan Receivable
|
Other non-current assets mainly
represent long-term equity investments accounted for under the measurement alternative method and the convertible loan receivable.
Equity securities without
readily determinable fair value
The Group has long-term investments
in equity security of certain privately held companies which the Group exerts no significant influence or a controlling interest. As a
result of adoption of “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities” (“ASU 2016-01”) in January 1, 2019, equity securities without readily determinable fair values that
do not qualify for the practical expedient in ASC 820, Fair Value Measurements and Disclosure to estimate fair value using the net asset
value per share (or its equivalent) of the investment, are measured and recorded using a measurement alternative that measures the securities
at cost less impairment, if any, plus or minus changes resulting from qualifying observable price changes.
At each reporting period,
the Group makes a qualitative assessment considering impairment indicators to separately evaluate whether each of its equity securities
without readily determinable fair is impaired. Impairment indicators that the Group considers include, but are not limited to a significant
deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee, factors such as negative
cash flows from operations and working capital deficiencies that raise significant concerns about the investee’s ability to continue
as a going concern, current economic and market conditions and other specific information.
The Group used the discounted
cash flow method to estimate the fair value of its equity securities without readily determinable fair value as of each reporting date
and recorded an impairment of nil, nil and RMB10,929 during the years ended December 31, 2018, 2019 and 2020, respectively, in the consolidated
statements of income and comprehensive income.
Convertible loan receivable
The Group has elected the
fair value option for the convertible loan receivable, which permits the irrevocable fair value option election on an instrument-by-instrument
basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.
The convertible loan receivable accounted for under the fair value option are carried at fair value with realized or unrealized gains
and losses recorded in the consolidated income statements.
On October 10, 2019, the Group
partially exercised the conversion option embedded in its convertible loan receivable from Beijing Cheche Technology Co. Ltd. and waived
the conversion right on the remaining balance. Upon conversion, the Group uses the relative carrying amount approach to record RMB10,929
as the initial cost of the equity investment converted in Cheche Cayman in other non-current assets, and RMB6,830 in other receivables,
net (see Note 4) for the unconvertible balance of RMB50,000 plus interest in the consolidated balance sheets. Thus, there was no such
assets included in the balance of other non-current assets as of December 31, 2019 and 2020, respectively.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
|
(k)
|
Impairment of Long-Lived Assets
|
Property, plant, and equipment
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.
Treasury shares represent
ordinary shares repurchased by the Group that are no longer outstanding and are held by the Group. The repurchased ordinary shares are
recorded whereby the total par value of shares acquired is recorded as treasury stock and the difference between the par value and the
amount of cash paid is recorded in additional paid-in capital. If additional paid-in capital is not available or is not sufficient, the
remaining amount is to reduce retained earnings. See Note 20 for details.
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 balance sheets 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 balance sheets as a liability.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
|
(o)
|
Share-based Compensation
|
All forms of share-based payments
to employees and nonemployees, including stock options and 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. 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 to 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
and nonemployees forfeit because a service condition or a performance condition is not satisfied.
Employee
share-based compensation
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, while no compensation cost
is recognized if the requisite service is not rendered.
Nonemployee
share-based compensation
The Group early adopted the
ASU 2019-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting”,
prospectively starting from 2019. Consistent with the accounting requirement for employee share-based compensation, nonemployee share-based
compensation within the scope of Topic 718 are measured at grant-date fair value of the equity instruments, which the Group is obligated
to issue when the service has been rendered and any other conditions necessary to earn the right to benefit from the instruments have
been satisfied.
Classification of award
Options or similar instruments
on shares shall be classified as liabilities instead of equity if either of the following conditions is met:
|
●
|
The underlying shares are classified as liabilities;
|
|
●
|
The Group can be required under
any circumstances to settle the option or similar instrument by transferring cash or other assets.
|
The Group measures a liability
award under a share-based payment arrangement based on the award’s fair value remeasured at each reporting date until the date of
settlement. The corresponding credit is recorded as a share-based liability. Compensation cost for each period until settlement shall
be based on the change (or a portion of the change, depending on the percentage of the requisite service that has been rendered at the
reporting date) in the fair value of the instrument for each reporting date.
The Group measures an equity
award based on the awards’ fair value on grant date and recognizes the compensation cost over the vesting periods, with the corresponding
credit recorded as additional paid-in capital.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
|
(o)
|
Share-based Compensation (Continued)
|
Modification of an Award
A change in any of the terms
or conditions of the awards is accounted for as a modification of the award. Incremental compensation cost is measured as the
excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified,
measured based on the fair value of the awards and other pertinent factors at the modification date. For vested awards, the
Group recognizes incremental compensation cost in the period the modification occurs. For unvested awards, the Group recognizes
over the remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized compensation
cost for the original award on the modification date. If the fair value of the modified award is lower than the fair value of
the original award immediately before modification, the minimum compensation cost the Group recognizes is the cost of the original award.
Cancellation of an Award
A cancellation of an award
that is not accompanied by the concurrent grant of (or offer to grant) a replacement award or other valuable consideration shall be accounted
for as a repurchase for no consideration. Accordingly, any previously unrecognized compensation cost shall be recognized immediately at
the cancellation date.
The Group recognized share-based
compensation expenses of nil and RMB393 for the years ended December 31, 2018 and 2019, respectively in the selling, general and administrative
expenses. In the third quarter of 2020, the Group concluded that the stock options related to the 521 Plan were not probable to be vested
because the performance target was not probable to be met. Accordingly, RMB393 of cumulative cost recognized in prior periods was reversed.
In December 2020, the Group canceled the 521 Plan without any replacement awards (see more details in Note 19(b)).
(p) Employee
Benefit Plans
As stipulated by the regulations
of the PRC, the Group’s subsidiaries 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.
On January 1, 2018, the Group
adopted ASC 606 “Revenue from Contracts with Customers” (“ASC 606”) and applied the modified retrospective method
to all contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented
under ASC 606, while prior period amounts were not adjusted and reported under the accounting standards in effect for the periods presented.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
|
(q)
|
Revenue Recognition (Continued)
|
The Group’s revenue
from contracts with insurance companies is derived principally from the provision of agency and claims adjusting services, and insurance
companies are defined as the Group’s customers under ASC 606. The Group disaggregates its revenue from different types of service
contracts with customers by principal service categories, as the Group believes it best depicts the nature, amount, timing and uncertainty
of its revenue and cash flows. See Note 22 for detailed disaggregated revenue information that is disclosed for each reportable segment.
The following is a description
of the accounting policy for the principal revenue streams of the Group.
Insurance
agency services revenue
The Group derives agency revenue
serving as a sales agent to distribute various life insurance and property and casualty (“P&C”) insurance products on
behalf of insurance companies by which the Group is entitled to receive initial commission from the insurance companies based on the premium
paid by the policyholders for the related insurance policy sold. For life insurance agency, the Group is also entitled to renewal commissions
when the policyholder renews the policy within the renewal term of the original policy as such life insurance products are typically long-term
products.
The Group has identified its
promise to sell insurance products on behalf of an insurance company as the performance obligation in its contracts with the insurance
companies. The Group’s performance obligation to the insurance company is satisfied and revenue is recognized at a point in time
when an insurance policy becomes effective. Specifically for life insurance agency business, certain contracts include the promise to
provide certain post-sales administrative services to policyholders on behalf of the insurance company, such as responding to the
policyholder inquiries, facilitating the renewal process and/or gathering information from the policyholder to assist the insurance companies
to update the contact information of the policy holder, the Group has concluded such services are administrative in nature and immaterial,
and none of these activities on their own results in a transfer of a good or services to the insurance company in the context of the contract.
Accordingly, no performance obligation exists after a policy becomes effective.
Initial placement of an
insurance policy
The Group recognizes agency revenue related P&C insurance products
(which is short term in nature and related premium are collected upfront) when an insurance policy becomes effective. The commission to
be earned is required to be partially refunded contingently on policy cancellations. Based on its past experience, subsequent commission
adjustments in connection with P&C insurance policy cancellations have been de minims to date, and are recognized upon notification
from the insurance carriers. Actual commission and fee adjustments in connection with the cancellation of P&C insurance policies were
0.2%, 0.1% and 0.2% of the total commission and fee revenues during years ended December 31, 2018, 2019 and 2020, respectively.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
|
(q)
|
Revenue Recognition (Continued)
|
Insurance
agency services revenue (Continued)
Initial placement of an
insurance policy (Continued)
For life insurance products, there is generally a 10 to 15 days hesitation
period after an initial placement of a life insurance policy, during which the policyholder has a legal right to unconditionally cancel
the effective policy regardless of the reasons. According to relevant terms of the insurance agency contracts with customers, the Group
reconciles information of polices sold which also includes polices that have been cancelled by policyholders within the hesitation period,
with the insurance companies on a monthly basis. Therefore, the Group estimates cancellation of polices that have become effective but
still within the hesitation period based on subsequent actual data at each reporting date. The cancellation of an effective life insurance
policy by the policyholder after the hesitation period does not require the Group to refund initial commission to insurance companies,
but rather impacts the Group’s estimate on future commission related to renewal(s) of the policy.
In addition, for life insurance
agency, the Group may receive a performance bonus from insurance companies as agreed and per contract provisions. Once the Group achieves
a certain sales volume based on respective agency agreements, the bonus will become due. Performance bonus represent a form of variable
consideration associated with certain sales volume, for which the Group earns commissions. The Group estimates the amount of consideration
with a constraint applied that will be received in the coming year such that a significant reversal of revenue is not probable, and includes
performance bonus as part of the transaction price. For the years ended December 31, 2018, 2019 and 2020, the Group recognized contingent
performance bonus of RMB23,166, RMB58,124 and RMB17,265, respectively.
Renewals of a life insurance
policy
For the long-term
life insurance products, in addition to the initial commission earned, the Group is also entitled to subsequent renewal commission and
compensation, and renewal performance bonus which represent variable considerations and are contingent on future renewals of initial policies
or the Group achieves its performance target.
When making estimates of the
amount of variable consideration to which the Group expects to be entitled, the Group uses the expected value method and evaluates many
factors, including but not limited to, insurance companies mix, product mix, renewal term of various products, renewal premium rates and
commission rates, to determine the method(s) of measurement, relevant inputs and the underlying assumptions. The Group considers constraints
as well as when determining the amount which should be included in the transaction price.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
|
(q)
|
Revenue Recognition (Continued)
|
Renewals of a life insurance
policy (Continued)
For years ended December 31,
2018, 2019 and 2020, revenue related to the variable consideration is recorded when it is probable that a significant reversal in the
amount of cumulative revenue recognized will not occur, i.e., when a policyholder pays the renewal premium to the insurance company, and
the policy is renewed because the Group was not able to conclude a significant reversal to the estimated variable consideration not probable,
considering factors such as a) the Group has limited history of selling its current life insurance products with its current customers,
such that the Group’s past experience in outdated products is of little predictive value in renewal(s) rate estimate; b) the occurrence
of a renewal is outside the Group’s control and the estimate of renewal premium rates is complex and requires significant assumptions;
and c) the contingency lasts across a long period of time.
Insurance
claims adjusting services revenue
For insurance claims adjusting
services, performance obligations are considered met and revenue is recognized when the services are rendered and completed, at the time
loss adjusting reports are confirmed being received 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.
Contract balances
The Group’s contract
balances include accounts receivable and contract asset. The balances of accounts receivable as of December 31, 2019 and 2020 are all
derived from contracts with customers. See Note 2(e) for details.
The balances of contract asset
are RMB131,063 and RMB198,357 as of December 31, 2019 and December 31, 2020, respectively.
The Group has no advance from
customers in advance of revenue recognition, or contract liability and, therefore, none of revenue recognized in the current period that
was previously recognized as a contract liability.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
|
(q)
|
Revenue Recognition (Continued)
|
Practical Expedients and
Exemptions
The Group generally expenses
sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales
and marketing expenses in the consolidated statements of operations and comprehensive income, as the amortization period is less than
one year and the Group has elected the practical expedient included in ASC 606.
The Group has applied the
optional exemption provided by ASC 606 to not disclose the value of remaining performance obligations not yet satisfied as of period end
for contracts with original expected duration of one year or less.
Value-Added Tax and Surcharges
The Group presents revenue
net of tax surcharges and value-added taxes incurred. The tax surcharges amounted to RMB21,508, RMB21,916 and RMB20,610 for the years
ended December 31, 2018, 2019 and 2020, respectively.
Total value-added taxes paid
by the Group during the years ended December 31, 2018, 2019 and 2020 amounted to RMB179,317, RMB197,067 and RMB179,663 respectively.
|
(r)
|
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.
|
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, approximate their fair values due to the short-term nature of these
instruments.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
|
(r)
|
Fair Value of Financial Instruments (Continued)
|
Measured at fair value
on a recurring basis
As of December 31, 2019 and
2020, 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,
2019
|
|
|
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
|
|
|
1,612,351
|
|
|
|
—
|
|
|
|
1,612,351
|
|
|
|
—
|
|
|
|
|
|
|
Fair Value Measurements at
Reporting Date Using
|
|
Description
|
|
As of December 31,
2020
|
|
|
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
|
|
|
1,307,865
|
|
|
|
—
|
|
|
|
1,307,865
|
|
|
|
—
|
|
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 measured these investments at fair values and the unrealized gains or losses
from the changes in fair values are included in accumulated other comprehensive income or loss, at the balance sheet date. It is classified
as Level 2 of the fair value hierarchy since fair value measurement at reporting date is benchmarked against fair value of comparable
investments.
Measured at fair
value on a non-recurring basis
The Group measures certain
assets, including equity securities without readily determinable fair values, 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.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
|
(r)
|
Fair Value of Financial Instruments (Continued)
|
Measured
at fair value on a non-recurring basis (Continued)
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).
Investments in affiliates
(Note 7) are measured at fair value on a nonrecurring basis, and they are recorded at fair value only when there is other-than-temporary-impairment.
The fair value of investment in an affiliate that is publicly listed is determined based on the market value of its share (Level 1) on
the date such impairment is recorded.
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 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.
|
(t)
|
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 RMB220,895 and RMB172,359 of cash and cash equivalents and restricted cash denominated in RMB
as of December 31, 2019 and 2020, respectively.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
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 outside
of China and were calculated at the rate of US$1.00 = RMB6.5250, representing the noon buying rate in the City of New York for cable
transfers of RMB on December 31, 2020, the last business day in fiscal year 2020, 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.
As of December 31, 2020,
the Group operated two 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, and (2) 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. Details of operating segments are further described in Note 22. Operating segments are defined as components of an enterprise
for 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.
|
(w)
|
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.
The contingently issuable
shares /ADS related to the 521 Plan (see Note 19(b) for details), are subject to fulfillment of the performance conditions as stipulated
under the 521 Plan. Therefore, these shares are excluded from basic earnings per share until the shares are fully vested upon the achievement
of performance conditions under the 521 Plan by the Participants. In December 2020, the Group cancelled the 521 Plan.
Advertising costs are expensed
as incurred. Advertising costs amounted to RMB34,663, RMB44,387 and RMB37,389 for the years ended December 31, 2018, 2019 and 2020, respectively.
In February 2016, the FASB
issued ASU 2016-02, Leases (Topic 842). The Group adopted this new standard on January 1, 2019 and used the effective date as the
date of initial application on a modified retrospective basis. The Group elected to apply the transition requirements as the effective
date rather than at the beginning of the earliest comparative period presented with a cumulative effect adjustment to the opening balance
of retained earnings in the period of adoption, and prior periods were not restated. Upon adoption, the Group elected to use the package
of three practical expedients in transition under ASC 842, exempting the Group from reassessing the lease identification, lease classification
and initial direct costs associated with any expired or existing contracts as of the date of adoption. However, the Group determined not
to elect to adopt the hindsight practical expedient and therefore maintained the lease terms previously determined under ASC 840.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
The Group leases office space,
vehicles and certain equipment under operating leases for terms ranging from short term (under 12 months) to 10 years. The Group does
not have options to extend or terminate leases, as the renewal or termination of relevant lease is on negotiation basis. As a lessee,
the Group does not have any financing leases and none of the leases contain material residual value guarantees or material restrictive
covenants. The Group’s office space leases typically have initial lease terms of 2 to 10 years, and vehicles and equipment leases
typically have an initial term of 12 months or less. The Group’s office space leases include fixed rental payments. The lease payments
for the Group’s office space leases do not consist of variable lease payments that depend on an index or a rate.
The Group determines whether
a contract contains a lease at contract inception. A contract contains a lease if there is an identified asset and the Group has the right
to control the use of the identified asset. At the commencement of each lease, management determines its classification as an operating
or finance lease. For leases that qualify as operating leases, the Group recognizes a right-of-use (“ROU”) asset and a lease
liability based on the present value of the lease payments over the lease term in the consolidated balance sheets at commencement date.
As all of the leases do not have implicit rates available, the Group uses incremental borrowing rates based on the information available
at lease commencement date in determining the present value of future payments. The incremental borrowing rates are estimated to approximate
the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased assets are
located.
Upon adoption of ASU
2016-02 on January 1, 2019, the Group elected to use the remaining lease term as of January 1, 2019 in the estimation of the
applicable discount for rate for leases that were in place at adoption. For the initial measurement of the lease liabilities for
leases commencing after January 1, 2019, the Group uses the discount rate as of the commencing date of the lease, incorporating the
entire lease term. Current maturities and long-term portions of operating lease liabilities are classified as current operating
lease liability and non-current operating lease liability, respectively, in the consolidated balance sheets. As a result of the
adoption, the Group recognized approximately RMB181,576 of ROU assets recorded in right-of-use assets and a lease liability of
approximately RMB181,457 in operating lease liability in the consolidated balance sheets as of January 1, 2019. The adoption had no
material impact on the Group’s consolidated statements of income and consolidated statements of cash flows for the year ended
December 31, 2019.
The ROU asset is measured
at the amount of the lease liabilities with adjustments, if applicable, for lease prepayments made prior to or at lease commencement,
initial direct costs incurred and lease incentives. For office space leases beginning in 2019 and later, the Group identifies the lease
and non-lease components (e.g., common-area maintenance costs) and accounts for non-lease components separately from lease component.
The Group’s office space lease contracts have only one separate lease component and have no non-components (e.g., property tax or
insurance). Most of the office space lease contracts have no non-lease components. For the office space lease contracts include non-lease
components, the fixed lease payment is typically itemized in the office space lease contract for separate lease component and non-lease
component. Therefore, the Group does not allocate the consideration in the contract to the separate lease component and the non-lease
component.
Lease expense for minimum
lease payments is recognized on a straight-line basis over the lease term. The Group has made an accounting policy election to exempt
leases with an initial term of 12 months or less without a purchase option that is likely to be exercised from being recognized on the
balance sheet. Payments related to those leases continue to be recognized in the consolidated statement of income and comprehensive income
on a straight-line basis over the lease term.
In addition, the Group does
not have any related-party leases or sublease transactions.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
The Group elected to consistently
account for eligible current and future concessions resulting directly from COVID-19 by accounting for the concessions as if they were
made under the enforceable rights included in the original agreements. The rent concessions received in 2020 amounted to RMB832.
|
(z)
|
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, changes in fair value of short term investments and share of other
comprehensive income of the affiliates for the period.
|
(aa)
|
Recently Adopted Accounting Pronouncements
|
Financial Instruments –
Credit Losses (Topic 326) – In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial
Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This guidance requires financial assets
measured at amortized cost basis to be presented at the net amount expected to be collected. It also requires credit losses on available-for-sale
debt securities to be presented as an allowance, rather than reducing the carrying amount. ASU 2016-13 is effective for fiscal years beginning
after December 15, 2019, and for interim periods within those fiscal years. ASU 2016-13 adds to U.S. GAAP an impairment model (known as
the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses.
The Group adopted ASU 2016-13,
including applicable amendments in other ASUs issued subsequent to ASU 2016-13 on January 1, 2020 under a modified-retrospective basis
resulting in a cumulative-effect adjustment of RMB7,523 reduction to the opening retained earnings balance and the recognition of a RMB7,523
allowance for credit losses in the consolidated balance sheets as of January 1, 2020. Results for periods after January 1, 2020 are presented
under ASU 2016-13 while prior period amounts continue to be reported under the previous accounting standards.
The Group evaluates each individual
investment periodically for impairment. For investments where the Group does not intend to sell, the Company evaluates whether
a decline in fair value is due to deterioration in credit risk. Credit-related impairment losses, not to exceed the amount
that fair value is less than the amortized cost basis, are recognized through an allowance for credit losses on the consolidated
balance sheets with corresponding adjustment in the consolidated statements of operations and comprehensive income. Subsequent increases in
fair value due to credit improvement are recognized through reversal of the credit loss and corresponding reduction in the allowance for
credit loss. Any decline in fair value that is non-credit related is recorded in accumulated other comprehensive income as
a component of shareholder’s equity. As of December 31, 2020, there were no investments held by the Group that had been in
continuous unrealized loss position.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(2)
|
Summary of Significant Accounting Policies (Continued)
|
|
(aa)
|
Recently Adopted Accounting Pronouncements (Continued)
|
The impact from the adoption
of ASU 2016-13 is summarized as follows:
|
|
December 31,
2019
|
|
|
Transition
Adjustments
|
|
|
January 1,
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Accounts receivable
|
|
|
682,171
|
|
|
|
(7,436
|
)
|
|
|
674,735
|
|
Other receivable
|
|
|
61,570
|
|
|
|
(87
|
)
|
|
|
61,483
|
|
Total assets
|
|
|
3,440,843
|
|
|
|
(7,523
|
)
|
|
|
(3,433,320
|
)
|
Retained earnings
|
|
|
1,479,494
|
|
|
|
(7,523
|
)
|
|
|
1,471,971
|
|
Financial Instruments (Topic
820) – In 2018, the FASB issued ASU No. 2018-13, to change the disclosure requirements for fair value measurement with the objective
of improving the effectiveness of the notes to financial statements. This new guidance removed and modified certain disclosure requirements
under Topic 820. The Group adopted this guidance on January 1, 2020 with no material impact on the consolidated financial statements.
Intangible – Goodwill
and Other (Topic 350) – In 2017, the FASB issued ASU 2017-04 to simplify the subsequent measurement of goodwill by removing
the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment.
Instead, any goodwill impairment will equal the amount by which a reporting unit’s carrying value exceeds its fair value, not to
exceed the carrying amount of goodwill. In addition, the guidance eliminates the requirements for any reporting unit with a zero or negative
carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment
test. This standard is effective for annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019.
The Group adopted this guidance on January 1, 2020 with no material impact on the consolidated financial statements.
(ab) Recently
Issued Accounting Standards
New accounting standards not
yet adopted that could affect the Group’s consolidated financial statements in the future are summarized as follows:
In December 2019, the FASB
issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update simplify
the accounting for income taxes by removing exceptions related to the incremental approach for intra-period tax allocation, certain deferred
tax liabilities, and the general methodology for calculating income taxes in an interim period. The amendment also provides simplification
related to accounting for franchise (or similar) tax, evaluating the tax basis step up of goodwill, allocation of consolidated current
and deferred tax expense, reflection of the impact of enacted tax law or rate changes in annual effective tax rate calculations in the
interim period that includes enactment date, and other minor codification improvements. For public business entities, the amendments are
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments
is permitted, including adoption in any interim period for public business entities for periods in which financial statements have not
yet been issued. The Group will adopt this guidance in the first quarter of 2021 and is still evaluating, but does not expect the adoption
of this standard to have a material impact on its consolidated financial statements.
In October 2020, the FASB
issued ASU 2020-10, Codification Improvements – Disclosures to align with the SEC’s regulations. This ASU improves
consistency by amending the codification to include all disclosure guidance in the appropriate disclosure sections and clarifies application
of various provisions in the Codification by amending and adding new headings, cross referencing to other guidance, and refining or correcting
terminology. The Group is currently assessing the impact that ASU 2020-10 will have on the disclosures of its future consolidated financial
statements.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(3)
|
Acquisitions, disposals and reorganization
|
There was no acquisition or
disposal during 2020.
Disposal of subsidiaries
in 2019
|
a.
|
Disposal of Guangdong Fanhua Fangzhong Investment Management Co., Ltd.
|
In July 2019, the Group disposed
of Guangdong Fanhua Fangzhong Investment Management Co., Ltd. to its minority shareholder, for a total consideration of RMB61,372, which
has been offset against the Group’s other payables due to the disposed subsidiary as of December 31, 2019. As the sales consideration
equals to the net book value of the subsidiary at the time of disposal, no gain or loss on disposal of the subsidiary was recognized by
the Group. Guangdong Fanhua Fangzhong Investment Management Co., Ltd. is an investment holding company with no actual business operation
after year 2010.
|
b.
|
Disposal of Hubei Fanhua Insurance Agency Co., Ltd.
|
In November 2019, the Group
disposed of Hubei Fanhua Insurance Agency Co., Ltd. to three independent third party individuals, for a total consideration of RMB300,
which has been settled as of December 31, 2019. The Group recognized a loss of RMB58 on disposal of this subsidiary, which was determined
by the excess of the net book value of the subsidiary over the sales consideration at the time of disposal.
Disposal of subsidiaries
in 2018
|
c.
|
Disposal of InsCom service Limited and InsCom Holding Limited
|
In October 2018, the Group
disposed of InsCom service Limited, InsCom Holding Limited and their subsidiaries (collectively “InsCom”) to an independent
third party, for a total consideration of RMB11,214, which were settled as of December 31, 2018. No gain or loss on disposal of InsCom
was recognized by the Group, which was determined by the sales consideration equaling to the net book value of the subsidiaries at the
time of disposal. InsCom Service Limited, InsCom Holdings Limited and their subsidiaries are investment holding companies with no actual
business operation after the Group’s restructuring in 2016.
|
(4)
|
Other Receivables, net
|
Other receivables, net consist
of the following:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
Advances to staff (i)
|
|
|
9,578
|
|
|
|
14,142
|
|
Advances to entrepreneurial agents (ii)
|
|
|
3,523
|
|
|
|
1,290
|
|
Advances to a third party channel vendor (iii)
|
|
|
13,575
|
|
|
|
14,318
|
|
Rental deposits
|
|
|
14,333
|
|
|
|
14,824
|
|
Amount due from a third party (iv)
|
|
|
6,830
|
|
|
|
6,830
|
|
Amount due from payment platform
|
|
|
9,926
|
|
|
|
3,079
|
|
Other
|
|
|
3,805
|
|
|
|
2,685
|
|
Less: Allowance for current expected credit losses
|
|
|
—
|
|
|
|
(6,926
|
)
|
Other receivables, net
|
|
|
61,570
|
|
|
|
50,242
|
|
|
(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.
|
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(4)
|
Other Receivables, net (continued)
|
|
(iii)
|
This represented advances to a third-party channel vendor,
which are unsecured, interest-free and repayable on demand.
|
|
(iv)
|
This represented the amount receivable from Beijing Cheche
Technology Co., Ltd. (“Cheche”) as a result of conversion of loan receivable in October 2019. On October 27, 2020, the original
due date of the receivable, the Group entered into a supplemental agreement with Cheche to extend the maturity date of the loan receivable
to October 26, 2022.
|
|
(5)
|
Property, Plant and Equipment
|
Property, plant and equipment,
net, is comprised of the following:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
Building
|
|
|
12,317
|
|
|
|
12,317
|
|
Office equipment, furniture and fixtures
|
|
|
131,878
|
|
|
|
134,625
|
|
Motor vehicles
|
|
|
11,228
|
|
|
|
11,701
|
|
Leasehold improvements
|
|
|
24,386
|
|
|
|
29,110
|
|
Total
|
|
|
179,809
|
|
|
|
187,753
|
|
Less: Accumulated depreciation
|
|
|
(139,003
|
)
|
|
|
(150,975
|
)
|
Property, plant and equipment, net
|
|
|
40,806
|
|
|
|
36,778
|
|
No impairment for property,
plant and equipment was recorded for the years ended December 31, 2018, 2019 and 2020.
The gross amount of goodwill
and accumulated impairment losses by segment as of December 31, 2019 and 2020 are as follows:
|
|
Agency segment
|
|
|
Claims Adjusting segment
|
|
|
Total
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Gross as of December 31, 2019 and 2020
|
|
|
131,977
|
|
|
|
21,137
|
|
|
|
153,114
|
|
Accumulated impairment loss as of December 31, 2019 and 2020
|
|
|
(22,108
|
)
|
|
|
(21,137
|
)
|
|
|
(43,245
|
)
|
Net as of December 31, 2019
|
|
|
109,869
|
|
|
|
—
|
|
|
|
109,869
|
|
Net as of December 31, 2020
|
|
|
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, 2018, 2019 and 2020.
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, 2020, the Group’s investments accounted for under the equity method totaled RMB357,661 (as of December 31, 2019:
RMB363,414).
Investments as of December
31, 2019 and 2020 were as follows:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
CNFinance
|
|
|
352,540
|
|
|
|
347,769
|
|
Puyi.
|
|
|
10,670
|
|
|
|
9,586
|
|
Teamhead Automobile
|
|
|
204
|
|
|
|
306
|
|
Total
|
|
|
363,414
|
|
|
|
357,661
|
|
Investment
in CNFinance Holdings Limited (“CNFinance”)
The
Group holds 18.5% equity interest of CNFinance after CNFinance’s listing in New York Stock Exchange “NYSE” (symbol:
CNF) on November 7, 2018. CNFinance is a leading home equity loan service provider incorporated in the Cayman Islands and based in Guangzhou,
PRC. Investment in CNFinance is accounted for using the equity method as the Group has significant influence by the right to nominate
one board members out of seven.
As
of December 31, 2020, due to the continued decline in the share price of CNFinance, the Group recognized an other-than-temporary impairment
of RMB22,958 (as of December 31, 2019: RMB322,655) to reduce the carrying value of the investment to RMB347,769 to reflect the market
value of the shares held by the Group.
Investment
in Puyi Inc.
The Group holds 4.5%
equity interest of Puyi Inc. (“Puyi”) which was listed on NASDAQ (symbol: PUYI) on March 29, 2019. Puyi provides wealth
management, corporate finance and asset management services in China. The investment has been accounted for using the equity method
as the Group has obtained significant influence through the right to nominate one out of five board directors of Puyi. As of
December 31, 2020, the fair value of the Group’s equity interest of Puyi was RMB108,260, and no decline in market fair value
of shares held by the Group to an amount below the carrying value was identified.
Investment
in Teamhead Automobile
The Group holds 40% equity interest in Shanghai Teamhead Automobile
through one of the Group’s claim adjusting subsidiaries. The affiliate is a PRC registered company that provides insurance survey
and loss adjusting services.
During
the years ended December 31, 2018, 2019 and 2020, the Group recognized its share of income of affiliates in the amount of RMB174,468 and
RMB98,100 and RMB20,220 respectively. During the years ended December 31, 2018, 2019 and 2020, the Group recognized an impairment of nil,
RMB322,655 and RMB22,958 respectively on its investment in affiliates. During the years ended December 31, 2018, 2019 and 2020, the Group
recognized its share of other comprehensive loss of affiliates in the amount of RMB1,763, share of other comprehensive income of affiliates
in the amount of RMB452 and share of other comprehensive loss of affiliates in the amount of RMB3,016, respectively.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(7)
|
Investments in Affiliates (Continued)
|
The
summarized financial information of equity method investees is illustrated as below:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
Balance Sheets
|
|
|
|
|
|
|
Total assets
|
|
|
13,490,270
|
|
|
|
12,666,811
|
|
Total liabilities
|
|
|
9,510,013
|
|
|
|
8,571,667
|
|
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
Results of operation
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Income from operations
|
|
|
1,210,690
|
|
|
|
689,259
|
|
|
|
115,656
|
|
Net profit
|
|
|
907,724
|
|
|
|
520,539
|
|
|
|
89,820
|
|
The
Group’s lease payments for office space leases include fixed rental payments and do not consist of any variable lease payments that
depend on an index or a rate. As of December 31, 2019 and 2020, there was no leases that have not yet commenced.
The
following represents the aggregate ROU assets and related lease liabilities as of December 31, 2019 and 2020:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
Operating lease ROU assets
|
|
|
190,437
|
|
|
|
200,403
|
|
Current operating lease liability
|
|
|
79,986
|
|
|
|
86,233
|
|
Non-current operating lease liability
|
|
|
103,252
|
|
|
|
103,526
|
|
Total operating leased liabilities
|
|
|
183,238
|
|
|
|
189,759
|
|
The
weighted average lease term and weighted average discount rate as of December 31, 2019 and 2020 were as follows:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2020
|
|
Weighted average lease term:
|
|
|
|
|
|
|
Operating leases
|
|
|
2.99
|
|
|
|
2.74
|
|
Weighted average discount rate:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
4.78
|
%
|
|
|
4.60
|
%
|
The
components of lease expenses for the years ended December 31, 2019 and 2020 were as follows:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
Operating lease cost
|
|
|
77,406
|
|
|
|
92,385
|
|
Short term lease cost
|
|
|
15,148
|
|
|
|
14,219
|
|
Total
|
|
|
92,554
|
|
|
|
106,604
|
|
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
Supplemental
cash flow information related to leases for the years ended December 31, 2019 and 2020 were as follows:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
Operating cash flows for operating leases
|
|
|
74,265
|
|
|
|
92,348
|
|
Supplemental noncash information:
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations net of decrease in right-of-use assets for early determinations
|
|
|
78,344
|
|
|
|
108,178
|
|
Maturities
of lease liabilities at December 31, 2020:
|
|
Minimum Lease Payment
|
|
|
|
RMB
|
|
Year ending December 31:
|
|
|
|
2021
|
|
|
92,382
|
|
2022
|
|
|
62,187
|
|
2023
|
|
|
36,505
|
|
2024
|
|
|
16,107
|
|
2025
|
|
|
7,416
|
|
Thereafter
|
|
|
4,796
|
|
Total remaining undiscounted lease payments
|
|
|
219,393
|
|
Less: Interest
|
|
|
(29,634
|
)
|
Total present value of lease liabilities
|
|
|
189,759
|
|
Less: Current operating lease liability
|
|
|
(86,233
|
)
|
Non-current operating lease liability
|
|
|
103,526
|
|
|
(9)
|
Variable Interest Entities (“VIE”)
|
VIEs
related to the 521 Plan
On June 14, 2018, the Group
announced that its board of directors has approved a 521 Share Incentive Plan (the “521 plan”). The 521 Plan is designed to
incentivize the Group’s employees and independent sales agents (collectively the “Participants”). The 521 Plan provides
Participants an opportunity to benefit from appreciation of the Company’s ordinary shares by purchasing the Company’s ordinary
shares at a stated subscription price of US$27.38 per ADS, in exchange for employee and non-employee services, if service and performance
conditions are achieved. US$27.38 per ADS, is the weighted average of the closing prices of the repurchase and new share issuance transactions
listed below. 10% of the subscription price is paid by the Participant on or around the grant date, while the remaining 90% of the subscription
prices is financed through interest-bearing loans from the Group. The vesting of the awards is contingent on performance conditions being
met during the requisite service periods.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(9)
|
Variable Interest Entities (“VIE”) (Continued)
|
VIEs
related to the 521 Plan (Continued)
The 521 Plan established a
pool of 280 million ordinary shares (14 million ADS) available to benefit Participants. In establishing the ADS pool, the Group has:
|
●
|
through one of the 521 Plan Employee Companies,
purchased 7.5 million ADS from Master Trend Limited (“Master Trend”) at US$29 per ADS from June to October 2018 with consideration
amounted to RMB1,465,123. Master Trend is a company controlled by a principal shareholder, who is also one of the founders
of the Group. The Group funded 90% of the purchase price with the remaining 10% funded by Participants;
|
|
●
|
repurchased 1,423,774 ADS from the open market
from August to December 2018 at the average purchase price is US$25.52 per ADS, which have been transferred to Fanhua Employees Holdings
Limited on January 10, 2019;
|
|
●
|
issued 101,524,520 ordinary shares (5,076,226
ADSs) at US$25.52 per ADS in January 2019 to the 521 Plan Employee Companies.
|
As of December 31, 2019,
the Group had already transferred all the 280 million ordinary shares to the 521 Plan Employee Companies with an average price at US$27.38
per ADS. The 10% subscription price contributed by Participants amounted to RMB266,901 and is recorded as non-current refundable share
right deposits on the balance sheets.
Pursuant to the 521 Plan,
the Group set up three companies which are Fanhua Employees Holdings Limited, Step Tall Limited and Treasure Chariot Limited (collectively
the “521 Plan Employee Companies”) to hold the Group’s ordinary shares on behalf of the Participants of the 521 Plan.
Each of the 521 Plan Employee Companies is a legal entity formed in the British Virgin Islands with a sole shareholder appointed by the
Group. Each shareholder is either an employee, or a founder who is also a shareholder and director of the Group.
The following is a summary
of the contractual agreements that the Group entered into relating to the 521 Plan:
|
●
|
Loan Agreements and Entrusted Share Purchase
Agreements
|
The nature and structure of
the 521 Plan Employee Companies is that they are investment vehicle companies holding the Company’s shares on behalf of the Participants
for the purpose of the 521 Plan. Loan agreements and entrusted share purchase agreements were signed among the Group’s wholly-owned
subsidiary CISG Holdings Ltd., the 521 Plan Employee Companies and each of the Participants. To effect the 521 Plan, Participants agreed
to pay 10% of the subscription price and executed a loan agreement with the Group for a loan representing 90% of the subscription price
of the ordinary shares under the 521 Plan. Participants executed an entrusted share purchase agreement with one of the 521 Employee Companies
whereby the 521 Plan Employee Company will legally hold the ordinary shares on behalf of the Participants. As of December 31, 2018 and
2019, the loan agreements provide a total of US$184,815 and US$344,988, respectively, in loans to the VIEs and Participants of the 521
Plan with the sole purpose of providing funds necessary for the purchase of the Group’s ordinary shares under the 521 Plan. All
the ordinary shares are pledged as collateral to the Group for the loans and are not yet vested, the Participants cannot direct the sale
of the ordinary shares without the consent of the Group until the ordinary shares are fully vested in accordance with the 521 Plan’s
agreed target performance. The loan agreement and the entrusted share purchase agreement shall terminate after five year or upon termination
of agency relationship and employment relationship or the settlement of the loan, whichever comes first.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(9)
|
Variable Interest Entities (“VIE”) (Continued)
|
VIEs
related to the 521 Plan (Continued)
The sole director and sole
shareholder of each of the 521 Plan Employee Companies is either a significant shareholder and director, or an employee of the Group,
who have executed powers of attorney on behalf of the Group. Under the power of attorney, they will follow, without any conditions, the
Group’s instructions to manage all the activities of each of the 521 Plan Employee Companies. In addition, the Group can replace
the sole director and shareholder of each of the 521 Plan Employee Companies to another designated party at its discretion.
The ordinary shares are the
only significant assets held by the 521 Plan Employee Companies. Through the loan agreements, entrusted share purchase agreements and
letters of undertaking described above, the Group controls the decision-making rights of the 521 Plan Employee Companies with respect
to the shares held by the 521 Plan Employee Companies as collateral to the loans issued to the Participants during the vesting period.
Given the only substantial recourse to the loans issued by the Group are the ordinary shares, the Group has potential exposure to the
economics of the the 521 Plan Employee Companies resulting from the fluctuation in value of the ADS (principally decreases), which is
more than insignificant. Further, the Group will also participate in the variability and absorb the economic benefits of the 521 Plan
Employee Companies, through an increase in value of the shares held by the 521 Plan Employee Companies, if the performance conditions
are not met or partially met based on the profit distribution arrangements. Based on above, the Group is the primary beneficiary of the
521 Plan Employee Companies and consolidates them because it has the power to direct the activities that most significantly impact the
521 Plan Employee Companies’ economic performance, and the obligation to absorb losses of the 521 Plan Employee Companies that could
potentially be significant to them and the right to receive benefits from the 521 Plan Employee Companies that could potentially be significant
to the 521 Plan Employee Companies. Therefore, the Group has variable interests in the 521 Plan Employee Companies during the vesting
period.
Summarized below is the
information related to the VIE’s assets and liabilities reported in the Company’s consolidated balance sheets after
inter group elimination as of December 31, 2019 and 2020, respectively:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
Total assets
|
|
|
—
|
|
|
|
—
|
|
Total liabilities
|
|
|
266,901
|
|
|
|
—
|
|
The VIEs are related to
the 521 Plan as explained above, which did not have any operation or cash flows activities during 2019. In December 2020, upon the cancellation
of the 521 Plan, the Group refunded all share rights deposits back to the Participants which was presented as cash outflows from financing
activities.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(9)
|
Variable Interest Entities (“VIE”) (Continued)
|
VIEs
related to the 521 Plan (Continued)
Cancellation of the 521 Plan
As disclosed in Note 19(b),
the Group entered into supplemental agreements with all remaining Participants in December 2020 to cancel the 521 Plan upon which the
521 Plan Employee Companies returned all subscribed 280,000,000 ordinary shares to the Group, and as a condition, the Group refunded all
share rights deposits back to the Participants, and terminated the Participants’ obligation to repay the Group the non-recourse
loan principal and interest, and all the relevant original contractual agreements including the loan agreements, entrusted share purchase
agreements and letters of undertaking described above were agreed to be terminated and lapsed. As a result, the Group no longer has power
to direct the significant activities of the 521 Plan Employee Companies, and no longer bears potentially significant economic exposure
through its indirect interests to the 521 Plan Employee Companies, and stopped consolidating the 521 Plan Employee Companies upon the
cancellation of the 521 Plan.
|
(10)
|
Other Payables and Accrued Expenses
|
Components of other payables
and accrued expenses are as follows:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Business and other tax payables
|
|
|
72,998
|
|
|
|
69,002
|
|
Refundable deposits from employees and agents
|
|
|
23,478
|
|
|
|
21,672
|
|
Professional fees
|
|
|
13,958
|
|
|
|
7,117
|
|
Accrued expenses to third parties
|
|
|
22,610
|
|
|
|
23,169
|
|
Contributions from members of eHuzhu mutual aid program
|
|
|
76,765
|
|
|
|
58,460
|
|
Others
|
|
|
10,481
|
|
|
|
9,028
|
|
|
|
|
220,290
|
|
|
|
188,448
|
|
|
(11)
|
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.
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, 2018, 2019 and 2020, the Group contributed and accrued RMB74,179, RMB90,438 and RMB52,942, respectively.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
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.
On March 21, 2018, the Hong
Kong Legislative Council passed The Inland Revenue (Amendment) (No. 7) Bill 2017 (the “Bill”) which introduces the two-tiered
profits tax rates regime. The Bill was signed into law on March 28, 2018 and was gazetted on the following day. Under the two-tiered profits
tax rates regime, the first 2,000 Hong Kong Dollar (“HKD”) of profits of the qualifying group entity will be taxed at 8.25%,
and profits above HKD 2,000 will be taxed at 16.5%.
The provision for current
income taxes of the subsidiaries operating in Hong Kong has been calculated by applying the current rate of taxation of 8.25% for the
years ended December 31, 2018, 2019 and 2020.
Pursuant to the relevant
laws and regulations in the PRC, Ying Si Kang Information Technology (Shenzhen) Co., Ltd. (“Ying Si Kang”) and Shenzhen Huazhong
United Technology Co., Ltd. (“Shenzhen Huazhong”), subsidiaries of the Group, was regarded as a software company 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 Ying Si Kang, year 2014 was the first profit-making year and accordingly it has made a 12.5% tax provision for its profits
for the years ended December 31, 2016, 2017 and 2018. For Shenzhen Huazhong, year 2017 was the first profit-making year and accordingly
it has made a 12.5% tax provision for its profits for the years ended December 31, 2019 and 2020.
Pursuant to the Circular
on Issues Regarding Tax-related Preferential Policies for Further Implementation of Western Development Strategy jointly issued by the
State Ministry of Finance, General Administration of Customs, China and State Administration for Taxation, enterprises located in the
western China regions that fall into the encouraged industries are entitled to 15% EIT preferential tax treatment from January 1, 2011
to December 31, 2020 and this policies is further extended to December 31, 2030. In September 2018, Fanhua Lianxing Insurance Sales Co.,
Ltd. (“Lianxing”), the Group’s wholly-owned subsidiary, which is the holding entity of the Group’s life insurance
operations, were relocated to Tianfu New Area, Sichuan province. Lianxing was entitled to a preferential tax rate of 15% from September
1, 2018 to December 31, 2020 as it was classified as encouraged enterprises in the western region in an industry sector encouraged by
the PRC government. Tibet Zhuli Investment Co. Ltd. (“Tibet Zhuli”), the Group’s wholly-owned subsidiary, was entitled
to a preferential tax rate of 15% for the years ended December 31, 2018, 2019 and 2020, as it was established with approval in an economy
development zone in the PRC before January 1, 2018.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(12)
|
Income Taxes (Continued)
|
The Group’s subsidiaries
that are the PRC tax resident are required to withhold the PRC withholding tax of 10% on dividend payment to their non-PRC resident immediate
holding company, unless such dividend payment is qualified for the 5% reduced tax rate under the Arrangement between Mainland China and
Hong Kong for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the “PRC-HK
DTA”).
One of the Group’s
wholly owned subsidiaries, CNinsure Holdings Limited, was determined by Hong Kong Taxation Bureau to be a Hong Kong resident enterprise
since July 2018. The Hong Kong resident certificate was issued by the Hong Kong Inland Revenue Department and will be valid till the year
ending December 31, 2022. Accordingly, CNinsure Holdings Limited qualified as a Hong Kong resident and was entitled to enjoy a reduced
tax rate of 5% for the dividends paid by PRC subsidiaries for the years ended December 31, 2018, 2019 and 2020 under Bulletin [2018]
No. 9 (e.g. beneficial ownership, shareholding percentage and holding period).
The Group accounts for uncertain
income tax positions by prescribing a minimum recognition threshold in the financial statements. The Group’s liabilities for unrecognized
tax benefits were included in other tax liabilities. As of December 31, 2019 and 2020, the balance of unrecognized tax benefits are comprised
of amounts mainly arising from gain on disposal of subsidiaries and certain transfer pricing arrangements in prior years.
The movements of unrecognized
tax benefits are as follows:
|
|
RMB
|
|
Balance as of January 1, 2018
|
|
|
70,350
|
|
Change in unrecognized tax benefits
|
|
|
—
|
|
Increase in tax positions
|
|
|
—
|
|
Balance as of December 31, 2018
|
|
|
70,350
|
|
Change in unrecognized tax benefits
|
|
|
—
|
|
Increase in tax positions
|
|
|
—
|
|
Balance as of December 31, 2019
|
|
|
70,350
|
|
Change in unrecognized tax benefits
|
|
|
—
|
|
Decrease in tax positions
|
|
|
(3,131
|
)
|
Balance as of December 31, 2020
|
|
|
67,219
|
|
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. 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 Group 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. During
the current year, the Group reversed transfer pricing related uncertain tax position amounted to RMB3,131 when its statute of limitation
expired in 2020.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(12)
|
Income Taxes (Continued)
|
Income tax expenses are
comprised of the following:
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Current tax expense
|
|
|
243,330
|
|
|
|
139,549
|
|
|
|
67,609
|
|
Deferred tax (income) expense
|
|
|
(18,744
|
)
|
|
|
4,267
|
|
|
|
15,778
|
|
Income tax expense
|
|
|
224,586
|
|
|
|
143,816
|
|
|
|
83,387
|
|
The principal components
of the deferred income tax assets and liabilities are as follows:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Operating loss carryforward
|
|
|
40,498
|
|
|
|
40,666
|
|
Intangible assets, net
|
|
|
5,311
|
|
|
|
4,493
|
|
Less: valuation allowances
|
|
|
(38,482
|
)
|
|
|
(35,127
|
)
|
Total
|
|
|
7,327
|
|
|
|
10,032
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
PRC dividend withholding taxes
|
|
|
7,898
|
|
|
|
26,380
|
|
Total
|
|
|
7,898
|
|
|
|
26,380
|
|
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 RMB38,482 and RMB35,127 valuation allowance for the years ended December 31, 2019 and 2020,
respectively.
The Group had total operating
loss carry-forwards of RMB162,704 and RMB162,491 as of December 31, 2019 and 2020, respectively. As of December 31, 2020, all of the operating
loss carry-forwards will expire in the years from 2021 to 2025. During the years ended December 31, 2018, 2019 and 2020, RMB16,288, RMB6,060
and RMB5,321, 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)
|
(12)
|
Income Taxes (Continued)
|
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,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Income from continuing operations before income taxes, share of income of affiliates, net
|
|
|
667,213
|
|
|
|
560,925
|
|
|
|
362,302
|
|
PRC statutory tax rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Income tax at statutory tax rate
|
|
|
166,803
|
|
|
|
140,231
|
|
|
|
90,576
|
|
Expenses not deductible for tax purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
—Entertainment
|
|
|
1,358
|
|
|
|
2,516
|
|
|
|
2,428
|
|
—Other
|
|
|
1,079
|
|
|
|
730
|
|
|
|
202
|
|
Effect of tax holidays on concessionary rates granted to PRC subsidiaries
|
|
|
(8,307
|
)
|
|
|
(36,527
|
)
|
|
|
(18,114
|
)
|
Effect of different tax rates of subsidiaries operating in other jurisdictions
|
|
|
—
|
|
|
|
—
|
|
|
|
2,732
|
|
Change in valuation allowance
|
|
|
6,583
|
|
|
|
5,987
|
|
|
|
(3,355
|
)
|
Deferred income tax for dividend distribution
|
|
|
53,702
|
|
|
|
49,267
|
|
|
|
18,483
|
|
Effect of non-taxable income*
|
|
|
—
|
|
|
|
(13,422
|
)
|
|
|
(13,648
|
)
|
Other
|
|
|
3,368
|
|
|
|
(4,966
|
)
|
|
|
4,083
|
|
Income tax expense
|
|
|
224,586
|
|
|
|
143,816
|
|
|
|
83,387
|
|
|
*
|
The effect of non-taxable income represents an income
tax exemption according to the Notice (Cai Shui [2002] No. 128) promulgated by the State Administration of Taxation and Ministry of Finance
in China on dividend income derived from a purchased open-end securities investment fund product that the Group recorded as short term
investment.
|
Additional PRC income taxes
that would have been payable without the tax exemption amounted to approximately RMB8,307, RMB36,527 and RMB18,114 for the years ended
December 31, 2018, 2019 and 2020, respectively. Without such exemption, the Group’s basic net profit per share for the years ended
December 31, 2018, 2019 and 2020 would have been decreased by RMB0.01, RMB0.03 and RMB0.02, and diluted net profit per share for the years
ended December 31, 2018, 2019 and 2020 would have been decreased by RMB0.01, RMB0.03 and RMB0.02, respectively.
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%. The Group’s subsidiary, CNinsure Holdings Limited qualified as Hong Kong resident and was entitled to enjoy 5% reduced
tax rate under Bulletin [2019] No. 9 for the years ended December 31, 2018, 2019 and 2020, respectively.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(12)
|
Income Taxes (Continued)
|
Aggregate undistributed
earnings of the Group’s subsidiaries and VIEs in the PRC that are available for distribution to the Group of approximately RMB1,303,923
and RMB1,146,274 as of December 31, 2019 and 2020 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 RMB65,196 and RMB57,314, respectively.
During the years ended December
31, 2018,2019 and 2020, the Group has provided RMB53,702, RMB49,267 and RMB18,483, respectively, deferred income tax for the declared
dividend distribution based on a 5% 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.
In
December 2020, the Company cancelled 280,000,000 ordinary shares related to the 521 Plan since the 521 Plan was cancelled
in December 2020 (see more details in Note 19(b)).
On
January 10, 2019, the Company had granted an additional 6.5 million ADS (equivalent of 130,000,000 ordinary shares) at US$25.6 per ADS
(equivalent of US$1.28 per ordinary share) to the Participants, of which the 1,423,774 ADS was repurchased from open market during 2018 and
was held by the Company as treasury shares as of December 31, 2018. Pursuant to the Company’s 521 Plan, 280,000,000 ordinary shares
had been purchased by 521 Plan Employee Companies at the weighted average price of US$1.37 per ordinary share and 178,475,480 shares of
which were recorded as treasury shares as of December 31, 2018 and 2019.
During
2019, the Company has purchased and cancelled an aggregate of 2,511,191 ADSs (equivalent of 50,223,820 ordinary shares), representing
4.7% of the total shares outstanding as of December 31, 2019, at an average price of approximately US$28.2 per ADS for a total amount
of approximately RMB484,015 (US$69,525), under its share buyback program to repurchase up to US$200 million ADSs by December 31, 2019,
as previously announced by its board of directors in March 2019.
During
2019, the Company issued 640,000 new shares for the exercise of options, representing 0.1% of the total shares outstanding as of
December 31, 2019.
During
2018, the Company repurchased 1,423,774 ADS (equivalent of 28,475,480 ordinary shares) on the open market and 7.5 million ADS (equivalent
of 150,000,000 shares) from Master Trend Limited to execute the 521 Plan in 2018, for an accumulated cash consideration of RMB1,716,343,
representing 2.19% and 11.52% of the total shares outstanding as of December 31, 2018 respectively. Master Trend Limited is an investment
vehicle company beneficially owned by Mr. Qiuping Lai, co-founder and former president of the Group who retired from the Company
in March 2016.
During
2018, the Company issued 1,760,000 new shares for the exercise of options, representing 0.16% of the total shares outstanding as of December
31, 2018.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(14)
|
Net Income per Share
|
The computation of basic and
diluted net income per ordinary share is as follows:
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
617,095
|
|
|
|
192,554
|
|
|
|
276,177
|
|
Less: Net income attributable to the noncontrolling interests
|
|
|
7,180
|
|
|
|
3,622
|
|
|
|
7,923
|
|
Net income attributable to the Company’s shareholders
|
|
|
609,915
|
|
|
|
188,932
|
|
|
|
268,254
|
|
Weighted average number of ordinary shares outstanding
|
|
|
1,239,264,464
|
|
|
|
1,092,601,338
|
|
|
|
1,073,891,784
|
|
Basic net income per ordinary share
|
|
|
0.49
|
|
|
|
0.17
|
|
|
|
0.25
|
|
Basic net income per ADS
|
|
|
9.84
|
|
|
|
3.46
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
617,095
|
|
|
|
192,554
|
|
|
|
276,177
|
|
Less: Net income attributable to the noncontrolling interests
|
|
|
7,180
|
|
|
|
3,622
|
|
|
|
7,923
|
|
Net income attributable to the Company’s shareholders
|
|
|
609,915
|
|
|
|
188,932
|
|
|
|
268,254
|
|
Weighted average number of ordinary shares outstanding
|
|
|
1,239,264,464
|
|
|
|
1,092,601,338
|
|
|
|
1,073,891,784
|
|
Weighted average number of dilutive potential ordinary shares from share options
|
|
|
1,589,570
|
|
|
|
628,098
|
|
|
|
399,576
|
|
Total
|
|
|
1,240,854,034
|
|
|
|
1,093,229,436
|
|
|
|
1,074,291,360
|
|
Diluted net income per ordinary share
|
|
|
0.49
|
|
|
|
0.17
|
|
|
|
0.25
|
|
Diluted net income per ADS
|
|
|
9.83
|
|
|
|
3.46
|
|
|
|
4.99
|
|
The shares subscribed by
Participants under the 521 Plan is record as treasury shares and excluded from the computation of basic and diluted income per ordinary
share during the year ended December 31, 2018 and 2019. Further, the contingently issuable shares subject to the 521 Plan will be excluded
from basic income per ordinary share and diluted earnings per share until all the performance conditions have been satisfied.
In December 2020, the Group
cancelled the 521 Plan without any replacement awards, and as a result, the Participants returned the subscribed shares to the Group (see
more details in Note 19(b)). The returned shares were cancelled by the end of the year.
|
(15)
|
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, 2019 and 2020. 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.
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. The accumulated amounts contributed to the statutory reserves were RMB508,739 and RMB553,911 as of December 31, 2019
and 2020, respectively.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(16)
|
Related-party Balances and Transactions
|
The principal related-party
balances as of December 31, 2019 and 2020, and transactions for the years ended December 31, 2018, 2019 and 2020 are as follows:
(i) The Group advanced a
short-term loan with a principal amount of RMB50,000 to Shenzhen Baoying Factoring Co., Ltd. (“Shenzhen Baoying”) in August
2018, which was controlled by Puyi, the Group’s affiliate. The amounts is unsecured, bearing interest at 8.5% per annum and are
repayable after 6 months from the date of the agreement. The principal and interest of the loan have been received on November 2018. Interest
income from loan receivable from Shenzhen Baoying for 2018 is RMB989.
The Group invested in senior
units of structure fund issued by CNFinance with a principal amount of RMB138,000 and recognized investment income of RMB610 during the
year 2018. The principal and investment income have been received before July 2018.
In 2018 and 2019, one of
the Group’s subsidiaries purchased certain wealth management products offered by an online peer-to-peer (“P2P”) lending platform,
which is considered to be a related party as the legal representative of the company that operates the P2P platform is a relative to Mr.
Yinan Hu, the Group’s co-founder and director. The wealth management products purchased on the platform by the subsidiary bear interests
at 7.3% with terms of 90 days. Principal and interests are payable upon maturity of those products or on a quarterly basis. As of December
31, 2018, the value of the outstanding wealth management products recorded as short term investments in the consolidated balance sheets
was RMB15,000 and no investment income has been recognized before maturity. As of December 31, 2019, these wealth management products
were matured. The principal of RMB15,000 and interests of RMB360 recorded as investment income in the consolidated statements of income
have been received in 2019. There was no balance outstanding as of December 31, 2019 with regard to such products.
(ii) During 2018, the Group
has repurchased a total of 7.5 million of the Company’s outstanding ADS (equivalent of 150,000,000 ordinary shares) from Master
Trend at US$29.0 per ADS (equivalent to US$1.45 per ordinary share), representing the average closing price of the 30 trading days prior
to the Group’s Board approval on June 14, 2018. In form of loan to the 521 Plan’s participants, the Group had paid RMB1,318,611
as 90% of shares purchase consideration to Master Trend during 2018.
Master Trend is beneficially
owned by Mr. Qiuping Lai and Master Trend was then a related party because it was a principal owners of the Group at the time of the repurchase.
Master Trend still held 4.3% ordinary shares of the Group as of October 10, 2018, upon the Group’s completion of its repurchase
transactions of 7.5 million ADS.
|
(17)
|
Commitments and Contingencies
|
(i) See Note 8 for the Group’s
commitments for future minimum lease payments under operating leases.
(ii) As of December 31,
2020, there was no pending legal proceeding to which the Group is a party that will have a material effect on the Group’s business,
results of operations or cash flows.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(18)
|
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,
|
|
|
|
2018
|
|
|
% of sales
|
|
|
2019
|
|
|
% of sales
|
|
|
2020
|
|
|
% of sales
|
|
|
|
RMB
|
|
|
|
|
|
RMB
|
|
|
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huaxia Life Insurance Company Limited (“Huaxia”)
|
|
|
1,100,027
|
|
|
|
31.7
|
%
|
|
|
882,539
|
|
|
|
23.8
|
%
|
|
|
606,581
|
|
|
|
18.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aeon Life Insurance Co., Ltd. (“Aeon”).
|
|
|
453,120
|
|
|
|
13.1
|
%
|
|
|
677,707
|
|
|
|
18.3
|
%
|
|
|
560,341
|
|
|
|
17.1
|
%
|
Sinatay Life Insurance Co., Ltd. (“Sinatay”)
|
|
|
*
|
|
|
|
*
|
|
|
|
595,600
|
|
|
|
16.1
|
%
|
|
|
504,489
|
|
|
|
15.4
|
%
|
Evergrande Life Insurance Co., Ltd. (“Evergrande”)
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
339,567
|
|
|
|
10.4
|
%
|
Tianan Life Insurance Co., Ltd. (“Tianan”)
|
|
|
704,933
|
|
|
|
20.3
|
%
|
|
|
447,430
|
|
|
|
12.1
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
|
2,258,080
|
|
|
|
65.1
|
%
|
|
|
2,603,276
|
|
|
|
70.3
|
%
|
|
|
2,010,978
|
|
|
|
61.5
|
%
|
|
*
|
represented less than 10% of total net revenues as of the
year.
|
Details of the customers which
accounted for 10% or more of gross accounts receivable are as follows:
|
|
As of December 31,
|
|
|
|
2019
|
|
|
%
|
|
|
2020
|
|
|
%
|
|
|
|
RMB
|
|
|
|
|
|
RMB
|
|
|
|
|
Sinatay
|
|
|
100,872
|
|
|
|
14.4
|
%
|
|
|
126,820
|
|
|
|
20.7
|
%
|
Huaxia
|
|
|
213,851
|
|
|
|
30.4
|
%
|
|
|
108,232
|
|
|
|
17.7
|
%
|
Aeon
|
|
|
*
|
|
|
|
*
|
|
|
|
106,658
|
|
|
|
17.4
|
%
|
Evergrande
|
|
|
|
|
|
|
|
|
|
|
66,660
|
|
|
|
10.9
|
%
|
|
|
|
314,723
|
|
|
|
44.8
|
%
|
|
|
408,370
|
|
|
|
66.7
|
%
|
|
*
|
represented less than 10% of accounts receivable 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 and short investments with financial institutions with high-credit ratings and quality.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(19)
|
Share-based Compensation
|
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 in November 2014. The fair value of the options was determined by using the Black-Scholes option
pricing model.
For
the years ended December 31, 2019 and 2020, share-based compensation expenses of nil were recognized in connection with the 2012 Options
G, respectively.
For the year ended December
31, 2020, changes in the status of total outstanding options, were as follows:
|
|
Number of options
|
|
|
Weighted average remaining contractual life (years)
|
|
|
Weighted average exercise price in RMB
|
|
|
Aggregate Intrinsic Value RMB
|
|
Outstanding as of January 1, 2020
|
|
|
400,000
|
|
|
|
2.25
|
|
|
|
0.01
|
|
|
|
3,613
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Outstanding as of December 31, 2020
|
|
|
400,000
|
|
|
|
1.25
|
|
|
|
0.01
|
|
|
|
1,567
|
|
Exercisable as of December 31, 2020
|
|
|
400,000
|
|
|
|
1.25
|
|
|
|
0.01
|
|
|
|
1,567
|
|
As of December 31, 2020, all
of the above options were fully vested.
Total intrinsic value of options
exercised for the Company’s share option plans for the years ended December 31, 2018, 2019 and 2020 were RMB16,884, RMB5,703 and
nil, respectively.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(19)
|
Share-based Compensation (Continued)
|
In-substance non-recourse loans and option
grants
As disclosed in Note 9, the
521 Plan was designed to incentivize the Participants, 90% of the subscription price of the shares under the 521 Plan shall be settled
by the Group through in-substance nonrecourse loans with interest at a rate of 8% to the Participants. While the remaining 10% is contributed
by the Participants. The loan is repayable by the Participants upon the earlier of the expiry date of the 521 Plan, termination of employment
or the agency contract or within five years.
Given the consideration received
from the employee consists of an in-substance nonrecourse loans, the award is, accounted for as an option until the note is repaid. In
addition to the underlying shares which are collaterals to the loans, the Group also has legal recourse to the Participants’ personal
assets until the loans and interests are paid in full. However, the Group considers these loans to be in-substance nonrecourse loans due
to the uncertainty of the Group’s ability to recover sufficient assets from the Participants to justify the recourse nature of the
loan. In accordance of ASC 718, the rights and obligations embodied in a transfer of equity shares to Participants for loans that provides
no recourse, other than the shares, to other assets of the employee are substantially the same as those embodied in a grant of share options.
Accordingly, the 521 Plan is accounted for as grant of share options. The principal and interest are included as part of the exercise
price of the “option” (therefore, no interest income is recognized). Substantively, each share under the 521 Plan is an option
to purchase a fixed number of share at a strike price per ADS equal to the subscription price (i.e., the exercise price) of US$27.38 per
ADS increasing over time as interest accrues on the loan, offset by any dividends declared on the share. Further, because the shares sold
on a nonrecourse basis are accounted for as options, the note and the shares are not recorded. Rather, compensation cost is recognized
over any requisite service period, with an offsetting credit to additional paid-in capital (“APIC”). Periodic principal and
interest payments, if any, are treated as deposits.
Refundable share right deposits
are recorded as a liability until the note is paid off, at which time the deposit balance is transferred to APIC. Nonrefundable deposits
are immediately recorded as a credit to APIC as payments are received.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(19)
|
Share-based Compensation (Continued)
|
|
(b)
|
The 521 Plan (Continued)
|
Vesting conditions:
Vesting, Forfeiture, and Settlement Terms:
The Participants’
rights to ownership benefits of the shares are subject to the Participants’ achievement of service and performance vesting conditions.
Each award agreement contains a condition for service from January 1, 2019 through December 31, 2023 (which coincides with loan maturity
date) as well as individually determined performance conditions based on cumulative sales over the service period. Participants must achieve
both the service and performance conditions for their shares to fully vest at the end of the loan maturity date, otherwise the share appreciation
profits at the end of the vesting period, if any, after principals and accrued interests of the loans are fully repaid to the Group, will
be either fully retained or partially retained by the Group.
Under these vesting and
profit distribution arrangements, the Group can be required to settle the option or similar instrument by transferring cash, representing
a noncontingent cash settlement feature which requires the 521 awards to be liability classified.
Option modification
In November 2019, the Board
of Directors and Compensation Committee approved a modification of the settlement terms of the 521 Plan from cash settlement to net share
settlement of vested ADS options. Under the amended award agreement, the Group will settle the vested ADS option with shares of the Group
at a value equal to the excess of the settlement date fair value of the ADS over the loan principal plus interest. If the ADS depreciated
or have not appreciated sufficiently to repay the loan principal and interest, the outstanding loan balance (if any) shall be otherwise
negotiated and determined by the Group and the Participants. The modification result in a change of awards’ classification from
liability to equity. Other terms of the options grants remain unchanged.
The modified award was accounted
for as an equity award going forward from the date of modification with a fair value measured on the modification date on a straight-line
basis over the remaining requisite service period. The Group compared the fair value of the options granted immediately before the
modification to the fair value of the modified award and there is no change in the fair value at the modification date. Therefore, at
the modification date, the Group reclassified the amounts previously recorded as a share-based compensation liability as a component of
equity in the form of a credit to additional paid-in capital.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(19)
|
Share-based Compensation (Continued)
|
|
(b)
|
The 521 Plan (Continued)
|
Option modification (Continued)
At the modification date
on November 18, 2019, the Group used the Black-Scholes valuation model in determining the fair value of the options granted, which requires
the input of certain assumptions, including the expected life of the stock option, stock price volatility, dividend rate and risk-free
interest rate. The assumption used in determining the fair value of the options on the modification date were as follows:
Assumptions
|
|
November 18,
2019
|
|
|
|
|
|
Expected dividend yield (Note i)
|
|
|
3.00
|
%
|
Risk-free interest rate (Note ii)
|
|
|
1.61
|
%
|
Expected volatility (Note iii)
|
|
|
50.25
|
%
|
Expected life (Note iv)
|
|
|
4.12 years
|
|
Share price per ordinary share on valuation date
|
|
US$
|
26.64
|
|
|
(i)
|
Expected dividend yield:
|
The expected dividend yield was estimated
by the Group based on its historical dividend policy.
|
(ii)
|
Risk-free interest rate:
|
Risk-free interest
rate was estimated based on the 5-year US Government Bond yield as of the valuation date.
|
(iii)
|
Expected volatility:
|
The volatility of the underlying ordinary
shares was estimated based on the annualized standard deviation of the continuously compounded rate of return on the daily average adjusted
share price of the Group as of the Valuation Date.
The expected life was the contractual
life of the 521 plan.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(19)
|
Share-based Compensation (Continued)
|
|
(b)
|
The 521 Plan (Continued)
|
As of December 31, 2019,
the Group had reserved 280,000,000 ordinary shares available to be granted as share-based awards under the 521 Plan. The 521 Plan is generally
scheduled to be vested over five years. 150,000,000 ordinary shares were granted on December 31, 2018 and the rest has been granted on
January 10, 2019 subsequently.
On November 15, 2019, the
Board of Directors of the Group approved an exemption of the first-year performance condition for all Participants under the 521 Plan.
For the year ended December 31, 2019, the Group estimated the forfeiture rate for all Participants to be nil. Mainly due to the impact
of COVID-19 and the recent evolving dynamics of the insurance industry, the Group estimated that it is not probable that the Participants
can achieve the second-year performance condition by end of 2020.
In December 2020, the Group
entered into supplemental agreements with all remaing Participants to cancel the 521 Plan. In accordance with the supplemental agreements,
all the relevant original contractual agreements were terminated and lapsed and upon which, the 521 Plan Employee Companies returned a
total of 280,000,000 subscribed ordinary shares to the Group, and as a condition, the Group refunded all share rights deposits amounting
RMB250,312 (US$38,332) back to the Participants, and terminated the Participants’ obligation to repay the Group the non-recourse
loan principal and accumulated interest. By the end of 2020, the transaction was completed and the returned shares were all cancelled.
For the year ended December
31, 2020, changes in the status of total outstanding options under 521 Plan, was as follows:
|
|
Number of options
|
|
|
Weighted average exercise price in US$
|
|
|
Weighted average remaining contractual life
(Years)
|
|
|
Aggregate Intrinsic Value
RMB
|
|
Outstanding as of January 1, 2020
|
|
|
280,000,000
|
|
|
|
1.4
|
|
|
|
4.00
|
|
|
|
—
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancelled
|
|
|
(280,000,000
|
)
|
|
|
1.4
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding as of December 31, 2020
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
For the year ended December
31, 2019, the Group recognized RMB393 share-based compensation expense related to the 521 plan, while for the year ended December 31,
2020, the Group reversed RMB393 as the the stock options related to the 521 Plan were estimated to be improbable to vest. As of December
31, 2020, there was no unrecognized share-based compensation expense related to the 521 Plan.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
As
disclosed in Note 19(b), the Group cancelled the 521 Plan upon which all related subscribed shares presented as treasury stock in total
178,475,480 ordinary shares were returned to the Group, and cancelled in December 2020. As a result, the number of treasury shares as
of December 31, 2020 was nil.
During the year 2019, a
total of 50,223,820 ordinary shares (2,511,191 ADSs) have been repurchased from the open market under the Company’s share buyback
program at an average price of approximately US$28.2 per ADS and cancelled during the year.
During the year 2018, a
total of 178,475,480 ordinary shares, comprising 28,475,480 ordinary shares has been repurchased from the open market and 150,000,000
ordinary shares has been purchased from Master Trend, a related party of the Group at the time of the transaction. The Group accounts
for repurchased ordinary shares under the par value method and includes such treasury stock as a component of the shareholders’
equity.
|
(21)
|
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, 2019 and 2020, the Company had restricted net assets of RMB1,410,432 and RMB1,455,605, respectively, which were not eligible to be
distributed. These amounts were comprised of the registered capital of the Company’s PRC subsidiaries and the statutory reserves
disclosed in Note 15.
As of December 31, 2020, the
Group operated two segments: (1) the insurance agency segment, which mainly consists of providing agency services for distributing life
and P&C insurance products on behalf of insurance companies, and (2) 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. 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.
The following table shows
the Group’s operations by business segment for the years ended December 31, 2018, 2019 and 2020. Other includes revenue and expenses
that are not allocated to reportable segments and corporate related items.
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per
share data)
|
(22)
|
Segment Reporting (Continued)
|
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
3,143,873
|
|
|
|
3,335,397
|
|
|
|
2,834,997
|
|
|
|
434,482
|
|
Claims Adjusting
|
|
|
327,390
|
|
|
|
370,606
|
|
|
|
433,148
|
|
|
|
66,383
|
|
Total net revenues
|
|
|
3,471,263
|
|
|
|
3,706,003
|
|
|
|
3,268,145
|
|
|
|
500,865
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
(2,614,593
|
)
|
|
|
(2,797,651
|
)
|
|
|
(2,481,219
|
)
|
|
|
(380,264
|
)
|
Claims Adjusting
|
|
|
(316,899
|
)
|
|
|
(361,474
|
)
|
|
|
(416,241
|
)
|
|
|
(63,792
|
)
|
Other
|
|
|
(114,028
|
)
|
|
|
(77,515
|
)
|
|
|
(68,499
|
)
|
|
|
(10,497
|
)
|
Total operating costs and expenses
|
|
|
(3,045,520
|
)
|
|
|
(3,236,640
|
)
|
|
|
(2,965,959
|
)
|
|
|
(454,553
|
)
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
529,280
|
|
|
|
537,746
|
|
|
|
353,778
|
|
|
|
54,218
|
|
Claims Adjusting
|
|
|
10,491
|
|
|
|
9,132
|
|
|
|
16,907
|
|
|
|
2,591
|
|
Other
|
|
|
(114,028
|
)
|
|
|
(77,515
|
)
|
|
|
(68,499
|
)
|
|
|
(10,497
|
)
|
Income from operations
|
|
|
425,743
|
|
|
|
469,363
|
|
|
|
302,186
|
|
|
|
46,312
|
|
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Segment assets
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
1,133,121
|
|
|
|
1,254,778
|
|
|
|
192,303
|
|
Claims Adjusting
|
|
|
276,885
|
|
|
|
309,237
|
|
|
|
47,393
|
|
Other
|
|
|
2,030,837
|
|
|
|
1,516,984
|
|
|
|
232,488
|
|
Total assets
|
|
|
3,440,843
|
|
|
|
3,080,999
|
|
|
|
472,184
|
|
Substantially all of the Group’s
revenues for the three years ended December 31, 2018, 2019 and 2020 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.
On
March 22, 2021, the Group’s Board of Directors declared a quarterly dividend of US$0.0125 per ordinary share, or US$0.25 per ADS
for the fourth quarter of 2020. The dividend will be paid to shareholders of record on March 31, 2021.
On
March 22, 2021, the Group announced that its Board of Directors has approved the management’s proposal for annual dividend of US$0.6
per ADS, or US$0.03 per ordinary share for the year of 2021. The dividend will be paid on a quarterly basis, with US$0.15 per ADS, or
US$0.0075 per ordinary share, payable in each of the next four quarters.
FANHUA INC.
SCHEDULE 1—CONDENSED FINANCIAL INFORMATION
OF THE COMPANY
Balance Sheets
(In thousands, except for shares and per
share data)
|
|
As of December 31,
|
|
|
|
2019
|
|
|
2020
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
32,314
|
|
|
|
66,345
|
|
|
|
10,168
|
|
Short term investments
|
|
|
36,416
|
|
|
|
35,303
|
|
|
|
5,410
|
|
Other receivables and amounts due from subsidiaries and affiliates
|
|
|
1,378,556
|
|
|
|
651,533
|
|
|
|
99,853
|
|
Total current assets
|
|
|
1,447,286
|
|
|
|
753,181
|
|
|
|
115,431
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
2,855,907
|
|
|
|
3,111,767
|
|
|
|
476,899
|
|
Investment in an affiliate
|
|
|
10,670
|
|
|
|
9,586
|
|
|
|
1,469
|
|
Total assets
|
|
|
4,313,863
|
|
|
|
3,874,534
|
|
|
|
593,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other payables and accrued expenses
|
|
|
1,330,068
|
|
|
|
915,738
|
|
|
|
140,343
|
|
Amounts due to subsidiaries
|
|
|
785,608
|
|
|
|
1,125,237
|
|
|
|
172,450
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Refundable share rights deposits (Including refundable share rights deposits of the consolidated VIE of RMB266,901 and nil as of December 31, 2019 and 2020, respectively)
|
|
|
266,901
|
|
|
|
—
|
|
|
|
—
|
|
Total liabilities
|
|
|
2,382,577
|
|
|
|
2,040,975
|
|
|
|
312,793
|
|
Ordinary shares (Authorized shares:10,000,000,000 at US$0.001 each; issued 1,252,367,264 and 1,073,891,784 shares, of which 1,073,891,784 and 1,073,891,784 shares were outstanding as of December 31, 2019 and 2020, respectively)
|
|
|
9,235
|
|
|
|
8,089
|
|
|
|
1,240
|
|
Treasury stock
|
|
|
(1,146
|
)
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in capital
|
|
|
393
|
|
|
|
—
|
|
|
|
—
|
|
Retained earnings
|
|
|
1,988,233
|
|
|
|
1,860,465
|
|
|
|
285,129
|
|
Accumulated other comprehensive loss
|
|
|
(65,429
|
)
|
|
|
(34,995
|
)
|
|
|
(5,363
|
)
|
Total equity
|
|
|
1,931,286
|
|
|
|
1,833,559
|
|
|
|
281,006
|
|
Total liabilities and shareholders’ equity
|
|
|
4,313,863
|
|
|
|
3,874,534
|
|
|
|
593,799
|
|
FANHUA INC.
SCHEDULE
1—CONDENSED FINANCIAL INFORMATION OF THE COMPANY — (Continued)
Statements of Income and Comprehensive Income
(In thousands)
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
General and administrative expenses
|
|
|
(6,973
|
)
|
|
|
(6,480
|
)
|
|
|
(4,204
|
)
|
|
|
(644
|
)
|
Selling expenses
|
|
|
—
|
|
|
|
(281
|
)
|
|
|
281
|
|
|
|
43
|
|
Interest income
|
|
|
10,624
|
|
|
|
1,767
|
|
|
|
1,044
|
|
|
|
160
|
|
Equity in earnings of subsidiaries and an affiliate
|
|
|
606,264
|
|
|
|
193,926
|
|
|
|
271,133
|
|
|
|
41,553
|
|
Net Income attributable to the Company’s shareholders
|
|
|
609,915
|
|
|
|
188,932
|
|
|
|
268,254
|
|
|
|
41,112
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(10,194
|
)
|
|
|
10,178
|
|
|
|
9,639
|
|
|
|
1,477
|
|
Unrealized net gains on available-for-sale investments
|
|
|
—
|
|
|
|
17,231
|
|
|
|
23,811
|
|
|
|
3,649
|
|
Share of other comprehensive gain (loss) of affiliates
|
|
|
(1,763
|
)
|
|
|
452
|
|
|
|
(3,016
|
)
|
|
|
(462
|
)
|
Comprehensive income attributable to the Company’s shareholders
|
|
|
597,958
|
|
|
|
216,793
|
|
|
|
298,688
|
|
|
|
45,776
|
|
FANHUA INC.
SCHEDULE
1—CONDENSED FINANCIAL INFORMATION OF THE COMPANY — (Continued)
Statements of Cash
Flows
(In thousands)
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
609,915
|
|
|
|
188,932
|
|
|
|
268,254
|
|
|
|
41,112
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of subsidiaries and an affiliate
|
|
|
(606,264
|
)
|
|
|
(193,926
|
)
|
|
|
(271,133
|
)
|
|
|
(41,553
|
)
|
Compensation expenses associated with stock options
|
|
|
—
|
|
|
|
393
|
|
|
|
(393
|
)
|
|
|
(60
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
10,644
|
|
|
|
(4
|
)
|
|
|
26
|
|
|
|
4
|
|
Other payables
|
|
|
1,326,440
|
|
|
|
1,214
|
|
|
|
(7,707
|
)
|
|
|
(1,181
|
)
|
Net
cash (used in) from operating activities
|
|
|
1,340,735
|
|
|
|
(3,391
|
)
|
|
|
(10,953
|
)
|
|
|
(1,678
|
)
|
Cash flows (used in) generated from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of short-term investments
|
|
|
—
|
|
|
|
(178,371
|
)
|
|
|
(71,382
|
)
|
|
|
(10,940
|
)
|
Changes in investment in subsidiaries and an affiliate
|
|
|
81,129
|
|
|
|
(6,623
|
)
|
|
|
26,195
|
|
|
|
4,015
|
|
Advances to subsidiaries and affiliates
|
|
|
467,995
|
|
|
|
498,774
|
|
|
|
660,004
|
|
|
|
101,150
|
|
Proceeds from disposal of short-term investments
|
|
|
—
|
|
|
|
143,581
|
|
|
|
73,310
|
|
|
|
11,235
|
|
Net cash generated from investing activities
|
|
|
549,124
|
|
|
|
457,361
|
|
|
|
688,127
|
|
|
|
105,460
|
|
Cash flows generated from (used in ) financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds on exercise of stock options
|
|
|
3,286
|
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
Proceeds of employee and grantee subscriptions
|
|
|
211,054
|
|
|
|
111,304
|
|
|
|
—
|
|
|
|
—
|
|
Dividends paid
|
|
|
(326,725
|
)
|
|
|
(435,072
|
)
|
|
|
(388,499
|
)
|
|
|
(59,540
|
)
|
Repurchase of ordinary shares from open market
|
|
|
(251,220
|
)
|
|
|
(484,015
|
)
|
|
|
—
|
|
|
|
—
|
|
Repayment of subscription from the 521 Plan participants
|
|
|
—
|
|
|
|
—
|
|
|
|
(250,312
|
)
|
|
|
(38,362
|
)
|
Repurchase of ordinary shares from shareholder
|
|
|
(1,318,611
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net cash generated used in financing activities
|
|
|
(1,682,216
|
)
|
|
|
(807,779
|
)
|
|
|
(638,811
|
)
|
|
|
(97,902
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
207,643
|
|
|
|
(353,809
|
)
|
|
|
38,363
|
|
|
|
(5,880
|
)
|
Cash and cash equivalents and restricted cash at beginning of year
|
|
|
169,413
|
|
|
|
366,862
|
|
|
|
32,314
|
|
|
|
4,952
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(10,194
|
)
|
|
|
19,261
|
|
|
|
(4,332
|
)
|
|
|
(664
|
)
|
Cash and cash equivalents and restricted cash at end of year
|
|
|
366,862
|
|
|
|
32,314
|
|
|
|
66,345
|
|
|
|
10,168
|
|
FANHUA INC.
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
information as to the financial position, cash flows 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, 2020, RMB1,455,605 of the restricted capital and reserves are not available for distribution, and as such, the condensed
financial information of the Company has been presented for the years ended December 31, 2018, 2019 and 2020.
During
each of the three years in the period ended December 31, 2020, no dividend was paid by the Group’s subsidiaries to the Company in
2018, 2019 and 2020.
As
of December 31, 2020, there were no material contingencies, significant provisions of long-term obligations, and mandatory dividend or
redemption requirements of redeemable shares or guarantees of the Company except for those which have been separately disclosed in the
consolidated financial statements, if any.
Basis of preparation
The
condensed financial information of the Company has been prepared using the same accounting policies as set out in the accompanying consolidated
financial statements except that the equity method has been used to account for investments in its subsidiaries.
Certain
information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed
or omitted. The footnote disclosures contain supplemental information relating to the operations of the Company and, as such, these statements
should be read in conjunction with the notes to the consolidated financial statements of the Group as of December 31, 2019 and 2020 and
the years ended 2018, 2019 and 2020.
F-59
Expected life: The expected life was the contractual life of the 521 plan.
Expected volatility: The volatility of the underlying ordinary shares was estimated based on the annualized standard deviation of the continuously compounded rate of return on the daily average adjusted share price of the Group as of the Valuation Date.
Expected dividend yield: The expected dividend yield was estimated by the Group based on its historical dividend policy.
Risk-free interest rate: Risk-free interest rate was estimated based on the 5-year US Government Bond yield as of the valuation date.
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