UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2018.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report. . . . . . . . . . . . . .
Commission file number: 001-33768
FANHUA INC.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
27/F, Pearl River Tower
No. 15 West Zhujiang Road
Guangzhou, Guangdong 510623
People’s Republic of China
(Address of principal executive offices)
Peng Ge, Chief Financial Officer
Tel: +86 20 83883033
E-mail: gepeng@fanhuaholdings.com
Fax: +86 20 83883181
27/F, Pearl River Tower
No. 15 West Zhujiang Road
Guangzhou, Guangdong 510623
People’s Republic of China
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class
Ordinary shares, par value US$0.001 per share*
American depositary shares, each representing
20 ordinary shares
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
(The NASDAQ Global Select Market)
*Not for trading, but only in connection with the listing on The NASDAQ Global Select Market of American
depositary shares, each representing 20 ordinary shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
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.
1,273,475,604 ordinary shares, par value US$0.001 per share as of December 31, 2018
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
Yes No
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.
Yes
No
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.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
No
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):
Large accelerated filer
Non-accelerated filer
Accelerated filer
Emerging growth company
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:
U.S. GAAP
by the International Accounting Standards Board
International Financial Reporting Standards as issued Other
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.
Item 17
Item 18
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).
Yes
No
(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.
Yes
No
TABLE OF CONTENTS
INTRODUCTION ............................................................................................................... 1
PART I ................................................................................................................................. 1
Item 1.
Identity of Directors, Senior Management and Advisers ....................... 1
Item 2. Offer Statistics and Expected Timetable ................................................ 1
Item 3. Key Information ...................................................................................... 1
Item 4.
Information on the Company................................................................ 30
Item 4A. Unresolved Staff Comments.................................................................. 58
Item 5. Operating and Financial Review and Prospects ................................... 58
Item 6. Directors, Senior Management and Employees.................................... 85
Item 7. Major Shareholders and Related Party Transactions.......................... 96
Item 8. Financial Information ........................................................................... 98
Item 9. The Offer and Listing .......................................................................... 100
Item 10. Additional Information ....................................................................... 100
Item 11. Quantitative and Qualitative Disclosures about Market Risk ........... 111
Item 12. Description of Securities Other than Equity Securities...................... 112
PART II ........................................................................................................................... 113
Item 13. Defaults, Dividend Arrearages and Delinquencies ............................. 113
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds ............................................................................................... 113
Item 15. Controls and Procedures ..................................................................... 113
Item 16A. Audit Committee Financial Expert ................................................... 117
Item 16B. Code of Ethics .................................................................................... 117
Item 16C. Principal Accountant Fees and Services ........................................... 117
Item 16D. Exemptions from the Listing Standards for Audit Committees ....... 118
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers ............................................................................................. 94
Item 16F. Change in Registrant’s Certifying Accountant ................................... 94
Item 16G. Corporate Governance ...................................................................... 118
Item 16H. Mine Safety Disclosure ...................................................................... 119
PART III .......................................................................................................................... 119
Item 17. Financial Statements ........................................................................... 119
Item 18. Financial Statements ........................................................................... 119
Item 19. Exhibits ................................................................................................ 120
In this annual report, unless the context otherwise requires:
INTRODUCTION
“we,” “us,” “our company,” “our” or “Fanhua” refer to Fanhua Inc., formerly known as
CNinsure Inc., its subsidiaries and our consolidated affiliated entities, if applicable;
“China” or “PRC” refers to the People’s Republic of China, excluding, solely for the purpose
of this annual report, Taiwan, Hong Kong and Macau;
“provinces” of China refers to the 22 provinces, the four municipalities directly administered
by the central government (Beijing, Shanghai, Tianjin and Chongqing), the five autonomous
regions (Xinjiang, Tibet, Inner Mongolia, Ningxia and Guangxi);
“shares” or “ordinary shares” refers to our ordinary shares, par value US$0.001 per share;
“ADSs” refers to our American depositary shares, each of which represents 20 ordinary shares;
all references to “RMB” or “Renminbi” are to the legal currency of China, all references to
“US$” and “U.S. dollars” are to the legal currency of the United States and all references to
“HK$” and “HK dollars” are to the legal currency of the Hong Kong Special Administrative
Region; and
all discrepancies in any table between the amounts identified as total amounts and the sum of
the amounts listed therein are due to rounding.
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
In November 2017, we disposed of Fanhua Bocheng Insurance Brokerage Co., Ltd., or Bocheng,
which is the primary operating entity of our insurance brokerage segment. Accordingly, the insurance
brokerage segment was accounted as discontinued operations. Consolidated statements of operations for
the years ended 2014, 2015 and 2016 have been restated to conform to the current presentation.
The following selected consolidated statements of income data for the years ended December 31, 2016,
2017 and 2018 and the consolidated balance sheets data as of December 31, 2017 and 2018 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, 2014 and 2015 and the selected consolidated balance sheets data as of December 31, 2014, 2015 and
2016 have been derived from our consolidated financial statements, which are not included in this annual
report.
-1-
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.
-2-
2014
RMB
For the Year Ended December 31,
2015
2016
2017
2018
RMB
(in thousands, except shares, per share and per ADS data)
RMB
RMB
RMB
Consolidated Statements of Income Data
Net revenues:
Agency ...............................................................
Life insurance business ...................................
P&C insurance business .................................
Claims adjusting ................................................
1,624,410
197,208
1,427,202
292,981
2,155,264
319,916
1,835,348
303,846
3,746,471
990,541
2,755,930
336,413
3,780,217
2,424,444
1,355,773
308,256
3,143,873
2,870,776
273,097
327,390
Total net revenues ...........................................
1,917,391
2,459,110
4,082,884
4,088,473
3,471,263
US$
457,257
417,537
39,720
47,617
504,874
(in thousands, except shares, per share and per ADS data)
Operating costs and expenses:
Agency ...............................................................
Life insurance business ...................................
P&C insurance business .................................
Claims adjusting ................................................
(167,676)
(181,370)
(199,810)
(194,525)
(1,261,887)
(1,675,262)
(2,906,791)
(2,864,882)
(2,151,856)
(312,975)
(129,357)
(205,313)
(673,230)
(1,636,340)
(1,132,530)
(1,469,949)
(2,233,561)
(1,228,542)
(1,943,053)
(282,606)
(208,803)
(194,159)
(30,369)
(28,239)
Total operating costs .......................................
(1,429,564)
(1,856,632)
(3,106,601)
(3,059,407)
(2,346,015)
(341,214)
Selling expenses ................................................
General and administrative expenses(1) ............
(105,169)
(387,362)
(125,041)
(502,802)
(448,989)
(481,947)
(221,785)
(534,145)
Total operating costs and expenses ..................
(1,922,095))
(2,430,662)
(4,091,350)
(3,815,337)
Income (loss) from continuing operations ......
(4,704)
28,448
(8,466)
273,136
(231,075)
(468,430)
(33,608)
(68,130)
(3,045,520)
(442,952)
425,743
61,922
Other income, net:
Investment income ............................................
Interest income...................................................
Others, net ..........................................................
Income from continuing operations before
income taxes, share of income of affiliates and
discontinued operations .....................................
Income tax expense ..............................................
Share of income of affiliates ................................
Net income from continuing operations ..........
Net income from discontinued operations, net
of tax ......................................................................
44,240
82,216
2,030
123,782
(23,637)
30,649
130,794
65,624
57,206
20,964
115,275
6,901
10,341
191,784
25,891
14,284
195,456
34,207
11,807
28,428
4,975
1,717
172,242
124,051
505,095
667,213
97,042
(25,553)
(27,249)
(167,803)
(224,586)
(32,665)
26,924
173,613
48,293
145,095
108,944
446,236
174,468
617,095
25,375
89,752
35,286
41,868
22,543
5,480
—
—
Net income ...........................................................
166,080
215,481
167,638
451,716
617,095
89,752
Less: Net income attributable to the
noncontrolling interests ........................................
Net income attributable to the Company’s
shareholders.........................................................
Net income per share:
Basic: ..................................................................
Net income from continuing operation ............
Net income from discontinued operation .........
Net income ........................................................
Diluted: ...............................................................
Net income from continuing operation ............
Net income from discontinued operation .........
Net income ........................................................
Net income per ADS:
Basic: ..................................................................
Net income from continuing operation ............
Net income from discontinued operation .........
Net income ........................................................
4,320
5,395
10,591
2,488
7,180
1,044
161,760
210,086
157,047
449,228
609,915
88,708
0.13
0.03
0.16
0.13
0.03
0.16
2.60
0.62
3.22
0.14
0.04
0.18
0.14
0.03
0.17
2.92
0.73
3.65
-3-
0.12
0.02
0.14
0.11
0.02
0.13
2.32
0.39
2.71
0.36
0.00
0.36
0.36
0.00
0.36
7.20
0.09
7.29
0.49
0.00
0.49
0.49
0.00
0.49
9.84
0.00
9.84
0.07
0.00
0.07
0.07
0.00
0.07
1.43
0.00
1.43
2014
RMB
For the Year Ended December 31,
2015
2016
2017
2018
RMB
(in thousands, except shares, per share and per ADS data)
RMB
RMB
RMB
US$
(in thousands, except shares, per share and per ADS data)
Diluted: ...............................................................
Net income from continuing operation ............
Net income from discontinued operation
Net income ........................................................
Shares used in calculating net income per
share:
2.58
0.61
3.19
2.79
0.70
3.49
2.23
0.37
2.60
7.20
0.09
7.29
9.83
0.00
9.83
1.43
0.00
1.43
Basic ..............................................................
1,005,842,212
1,151,705,374
1,160,592,325
1,231,698,725
1,239,264,464
1,239,264,464
Diluted ...........................................................
1,012,591,387
1,203,323,521
1,208,821,796
1,261,223,049
1,240,854,034
1,240,854,034
(1)
Including share-based compensation expenses of RMB23.6 million, RMB17.7 million, RMB4.9 million, nil and nil for the years ended
December 31, 2014, 2015, 2016, 2017 and 2018, respectively.
As of December 31,
2014
RMB
2015
RMB
2016
RMB
2017
RMB
2018
RMB
US$
(in thousands)
2,099,468
3,301,726
3,748,486
335,440
414,226
123,508
3,334,260
3,748,486
1,115,172
3,513,061
4,014,428
488,448
580,859
116,139
3,433,569
4,014,428
236,952
3,694,564
4,238,568
747,119
834,474
117,242
3,404,094
4,238,568
363,746
4,132,527
4,737,742
661,860
749,349
111,342
3,988,393
4,737,742
772,823
3,061,107
3,866,611
905,583
1,119,885
113,543
2,746,726
3,866,611
112,403
445,221
562,377
131,713
162,882
16,514
399,495
562,377
Consolidated Balance Sheet Data:
Cash and cash equivalents ....................................
Total current assets................................................
Total assets ............................................................
Total current liabilities ..........................................
Total liabilities.......................................................
Noncontrolling interests........................................
Total equity ............................................................
Total liabilities and shareholders’ equity.............
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 RMB6.8755 to US$1.00, the noon buying rate in effect as of December 28,
2018 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 26, 2019, the noon buying rate was RMB6.7282 to US$1.00.
The following table sets forth information concerning exchange rates between the RMB and the U.S.
dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily
the exchange rates that we used in this annual report or will use in the preparation of our future periodic
reports or any other information to be provided to you.
-4-
Period
2014 ...........................................................
2015 ...........................................................
2016 ...........................................................
2017 ...........................................................
2018
October ..................................................
November ..............................................
December ...............................................
2019
January ..................................................
February.................................................
March ....................................................
April (through April 26)
Noon Buying Rate
(RMB per US$1.00)
Average(1)
Low
6.1704
6.2869
6.6549
6.7569
6.9191
6.9367
6.8837
6.7863
6.7369
6.7119
6.7143
6.2591
6.4896
6.9580
6.9575
6.9737
6.9558
6.9077
6.8708
6.7907
6.7381
6.7481
Period
End
6.2046
6.4778
6.9430
6.5063
6.9737
6.9558
6.8755
6.6958
6.6912
6.7112
6.7282
High
6.0402
6.1870
6.4480
6.4773
6.8680
6.8894
6.8343
6.6958
6.6822
6.6916
6.6870
Source: H.10 weekly statistical release of the Federal Reserve Bank of New York
(1) Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the
daily rates during the relevant period.
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
D. Risk Factors
Risks Related to Our Business and Our Industry
If and when our contracts with insurance companies are suspended or changed, our business and
operating results will be materially and adversely affected.
We primarily act as agents for insurance companies in distributing their products to retail customers.
We also provide claims adjusting services principally to insurance companies. Our relationships with the
insurance companies are governed by agreements between us and the insurance companies. We have
entered into strategic partnership agreements with most of our major insurance company partners for the
distribution of life, property and casualty insurance products and the provision of claims adjusting services
at the corporate headquarters level. While this approach allows us to obtain more favorable terms from
insurance companies by combining the sales volumes and service fees of our affiliated insurance agencies
and claims adjusting firms, it also means that the termination of a major contract could have a material
adverse effect on our business. Under the framework of the headquarter-to-headquarter agreements, our
affiliated insurance agencies and claims adjusting firms generally also enter into contracts at a local level
with the respective provincial, city and district branches of the insurance companies. Generally, each branch
of these insurance companies has independent authority to enter into contracts with our affiliated insurance
agencies and claims adjusting firms, and the termination of a contract with one branch has no significant
effect on our contracts with the other branches. See “Item 4. Information on the Company — B. Business
Overview — Insurance Company Partners.” These contracts establish, among other things, the scope of
our authority, the pricing of the insurance products we distribute and our fee rates. These contracts typically
have a term of one year and certain contracts can be terminated by the insurance companies with little
-5-
advance notice. Moreover, before or upon expiration of a contract, the insurance company that is a party to
that contract may agree to renew it only with changes in material terms, including the amount of
commissions and fees we receive, which could reduce our revenues from that contract.
For the year ended December 31, 2018, our top five insurance company partners were Huaxia Life
Insurance Co., Ltd., or Huaxia, Tian'an Life Insurance Co., Ltd., or Tian'an, Aeon Life Insurance Co., Ltd.,
or Aeon, Taiping Property and Casualty Company Limited, or Taiping, and Taikang Life Insurance Co.,
Ltd., or Taikang. Among these top five partners, each of Huaxia, Tian'an and Aeon accounted for more
than 10% of our total net revenues individually in 2018, with Huaxia accounting for 31.7%, Tian'an for
20.3% and Aeon for 13.1%.
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, who are not our employees. Some of
these sales agents are significantly more productive than others in generating sales. In recent years, some
entrepreneurial management staff or senior sales agents of major insurance companies in China have
chosen to leave their employers or principals and become independent agents. We refer to these individuals
as entrepreneurial agents. An entrepreneurial agent is usually able to assemble and lead a team of sales
agents. We have been actively recruiting and will continue to recruit entrepreneurial agents to join our
distribution and service network as our sales agents. Entrepreneurial agents have been instrumental to the
development of our life insurance business. In addition, we rely entirely on our in-house claims adjustors
to provide claims adjusting services. Because claims adjustment requires technical skills, the technical
competence of claims adjustors is essential to establishing and maintaining our brand image and
relationships with our customers. If we are unable to attract and retain the core group of highly productive
sales agents, particularly entrepreneurial agents, and qualified claims adjustors, our business could be
materially and adversely affected. Competition for sales personnel and claims adjustors from insurance
companies and other insurance intermediaries may also force us to increase the compensation of our sales
agents, in-house sales representatives and claims adjustors, which would increase operating costs and
reduce our profitability.
If our stock price is below certain levels after five years, the structure of our 521 plan may adversely
affect our business and results of operations.
On June 14, 2018, we obtained approval from our board of directors, or the Board, to implement a
plan, or 521 Plan, which enables eligible participants to invest in the Company by purchasing a total of 14
million of the Company’s ADSs at a price of US$27.38 per ADS. Eligible participants in the 521
Plan include certain entrepreneurial team leaders, general managers of our provincial branches or
subsidiaries, and key managerial personnel, excluding senior management, or the Participants. At least 10%
of the total subscription cost of the shares under the 521 Plan was contributed by the Participants and the
remaining portion was funded by loans granted to the Participants by the Company, which bear interest at
a rate of 8% per annum. Shares beneficially owned by the Participants under the 521 Plan are pledged to
the Company by the Participants to secure the payment of loans. These Participants must fulfill certain
performance goals within the five-year period from 2019 to 2023 in order to enjoy the full increase in the
value of the ADSs, and their ADSs will be subject to a five-year lock-up period.
Since we announced the 521 Plan on June 14, 2018, the price of our ADSs has dropped from US$36.8
to US$26.0 on April 26, 2019, largely affected by, among other things, uncertainty around the Sino-US
trade dispute and concerns about a softening macroeconomic environment in China and abroad. If our stock
price continues to fall or otherwise remains below the subscription cost of US$27.38 per ADS over the next
several years, it may dampen the morale of the Participants and thereby adversely affect our business and
results of operations. In addition, there is a risk that the Participants may default on the loans we provide
to them under the 521 Plan. Although the stocks held by the Participants under the 521 Plan and personal
assets, including salaries in the case of key employees and renewal commissions in the case of
-6-
entrepreneurial team leaders, are pledged to secure the payment of the loans, with a continued drop in stock
price, some Participants may choose not to repay the loans and interests at the end of the lock-up period or
upon termination of their employment or agent arrangement with us. The Company may have to collect the
loans by selling the pledged shares, and there is no guarantee that the proceeds from the sales of the shares
would be adequate to pay back the principal and interest due under the loan and therefore may cause losses
to the Company.
If our investments in our mobile and online platforms are not successful, our business and results of
operations may be materially and adversely affected.
We have devoted significant efforts to developing and managing our mobile and online platforms. On
January 1, 2012, we launched Baowang (www.baoxian.com), an online insurance platform which allows
customers to search for and purchase a wide range of commoditized insurance products, including short
term medical expense insurance, travel insurance, accident insurance, and homeowner insurance from
various insurance carriers. In October 2012, we launched CNpad Auto, the mobile workstation of our
proprietary sales support system, which enables sales agents to help their clients compare prices, policy
benefits and services from different insurance carriers’ auto insurance policies, and to apply for and
complete the purchase of the policy that best suits their clients’ needs anywhere and anytime. In August
2014, we unveiled eHuzhu (www.ehuzhu.com), an online non-profit mutual aid platform that provides low-
cost risk-protection programs on a mutual commitment basis among program members. In August 2014,
we also rolled out Chetong.net (www.chetong.net), an online-to-offline public service platform for the
insurance industry that integrates claims adjustment and auto service resources from around the country to
provide claims services such as damage assessment and loss estimations. In September 2017, we launched
Lan Zhanggui, an internet-based all-in-one platform which integrates several of our existing online
platforms and allows our agents to access and purchase a wide variety of insurance products, including life
insurance, auto insurance, accident insurance, travel insurance and standard health insurance products from
multiple insurance companies on their mobile devices. In the next few years, we intend to continue to
devote resources to maintaining the technology and content of our existing online and mobile initiatives.
However, our efforts to develop our mobile and online platforms may not be successful or yield the benefits
that we anticipate. In addition, our expansion may depend on a number of factors, many of which are
beyond our control, including but not limited to:
the effectiveness of our marketing campaigns to build brand recognition among consumers and our
ability to attract and retain customers;
the acceptance of third-party e-commerce platforms as an effective channel for underwriters to
distribute their insurance products;
the acceptance of CNpad Auto and Lan Zhanggui as effective tools for sales agents;
public concerns over security of e-commerce transactions and confidentiality of information;
increased competition from insurance companies which directly sell insurance products through
their own websites, call centers, portal websites which provide insurance product information and
links to insurance companies’ websites, and other professional insurance intermediary companies
which may launch independent websites in the future;
further improvement in our information technology system designed to facilitate smoother online
transactions; and
further development and changes in applicable rules and regulations which may increase our
operating costs and expenses, impede the execution of our business plan or change the competitive
landscape.
-7-
On July 22, 2015, the China Insurance Regulatory Commission, or CIRC, promulgated the Interim
Measures for the Supervision of Internet Insurance Business, or Interim Measures, which became effective
on November 1, 2015, and sets forth the qualifications and procedures for insurance intermediaries to
operate internet insurance businesses in China. As advised by our PRC counsel, we have obtained the
necessary approvals and licenses and our operations meet the qualification requirements of the Interim
Measures. Since online insurance distribution has emerged only recently in China and is evolving rapidly,
the Chinese Banking and Insurance Regulatory Committee , or CBIRC may promulgate and implement
new rules and regulations to govern this sector from time to time. The Interim Measures is aimed at
regulating the operations of internet insurance business, protecting the legitimate rights and interests of
insurance business. It provides that, in accordance with laws, regulations and relevant regulatory provisions,
the CIRC and its local offices conduct daily regulation and on-site inspection of the internet insurance
business activities of insurance institutions and third-party network platforms, in which case the insurance
institutions and third-party network platforms shall provide cooperation. We cannot assure you that our
operations will always be consistent with the changes and further development of regulations applicable to
us or we will be able to obtain necessary approvals and licenses as required on a timely basis.
Any failure to successfully identify the risks as part of our expansion into the online and mobile
insurance distribution business may have a material adverse impact on our growth, business prospects and
results of operations, which could lead to a decline in the price of our ADSs.
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 and obtain a Practice Certificate issued by the insurance company or insurance
intermediary to which he or she belongs. If these registration and certificate requirements are strictly
enforced in the future, 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, and obtain a “Practice Certificate” issued 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, we understand that the CBIRC requires that every
individual agent or claims adjustor carry the Practice Certificate and other credentials showing specified
information when conducting agency and claims adjusting activities. Under the relevant PRC regulations,
such as the Measures for the Supervision and Administration of Insurance Sales Personnel issued in January
2013 and Provisions on the Supervision of Insurance Claims Adjusting Firms issued by the CIRC in
February 2018, an insurance agency or claims adjusting firm that retains a personnel who has not obtained
its Practice Certificate to engage in insurance intermediary activities may be subject to warning and
imposed a fine ranging from RMB10,000 to RMB30,000 per intermediary by the CBIRC (formerly CIRC).
On March 12, 2019, the CBIRC issued a Notice for Professional Insurance Intermediaries to Conduct the
Verification of Sales Personnel’s Practice Registration, requiring all insurance intermediary institutions to
properly register the information of their newly recruited sales professionals with the IIRIS and complete
self-check and verification of the IIRIS registration of all existing sales professional affiliated with them,
by July 31, 2019. The self-check and verification will be focused on (i) eliminating dummy registration;
(ii) verifying affiliation; (iii) providing complete information for their affiliated sales personnel; and (iv)
enhancing maintenance. The CBRIC will also carry out on-site inspection on top five insurance
intermediaries in each region, after the completion of the self-check and verification by insurance
intermediaries. Certain of our subsidiaries have received fines for failure to register some of our sales
personnel’s information with the IIRIS, which have not been material to us. If the CBIRC were to strictly
enforce these regulations and the notice, and if a substantial portion of our sales force were found to have
not obtained practice certificates, our business may be adversely affected. Moreover, we may be subject to
fines and other administrative proceedings for the failure of our insurance professionals to register with the
CBIRC and obtain the necessary practice certificate. Such fines or administrative proceedings could
materially and adversely affect our business, financial condition and results of operations.
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Because our industry is highly regulated, any material changes in the regulatory environment could
change the competitive landscape of our industry or require us to change the way we do business. The
administration, interpretation and enforcement of the laws and regulations currently applicable to us
could change rapidly. If we fail to comply with applicable laws and regulations, we may be subject to
civil and criminal penalties or lose the ability to conduct business with our clients, which could materially
and adversely affect our business and results of operations.
We operate in a highly regulated industry. The laws and regulations applicable to us are evolving and
may change rapidly, which could change the competitive environment of our industry significantly and
cause us to lose some or all of our competitive advantages. For example, the PRC Insurance Law and
related regulations were amended in 2002, 2009, 2014 and 2015. The 2015 amendments involved a number
of significant changes to the regulatory regime, including eliminating the requirement for any insurance
agent, broker or claims adjusting practitioners to obtain a qualification certificate issued by the CIRC. The
elimination of the certificate requirement may result in an increase in competition for our business and in
misconduct by sales or service persons, in particularly sales misrepresentation. In addition, the general
increase misconduct in the industry could potentially harm the reputation of the industry and have an
adverse impact on our business.
In recent years, the CIRC and CBRIC have 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, 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 March 13, 2018, CIRC and CBRC were merged to form the CBIRC. The CBIRC has extensive
authority to supervise and regulate the insurance industry in China. In exercising its authority, the CIRC
and CBIRC are given wide discretion, and the administration, interpretation and enforcement of the laws
and regulations applicable to us involve uncertainties that could materially and adversely affect our
business and results of operations. The People’s Bank of China and other government agencies may
promulgate new rules governing online financial services. In July 2015, ten government agencies including
the People’s Bank of China, the Ministry of Finance and CIRC promulgated a guidance letter on how to
promote the healthy growth of internet financial services, which set forth the principles of supervising
based on the rule of law, appropriate level of regulation, proper categorization, cooperation among different
government agencies and promoting innovation. Not only may the laws and regulations applicable to us
change rapidly, but it is sometimes unclear how they apply to our business. For example, the laws and
regulations applicable to our online and mobile platforms may be unclear. Errors created by our products
or services may be determined or alleged to be in violation of the applicable laws and regulations. Any
failure of our products or services to comply with these laws and regulations could result in substantial civil
or criminal liability; could adversely affect demand for our services; could invalidate all or portions of
some of our customer contracts; could require us to change or terminate some portions of our business;
could require us to refund portions of our services fees; could cause us to be disqualified from serving
customers; and could have a material and adverse effect on our business.
Although we have not had any material violations to date, we cannot assure you that our operations
will always comply with the interpretation and enforcement of the laws and regulations implemented by
the CBIRC. Any determination by a provincial or national government agency that our activities or those
of our vendors or customers violate any of these laws could subject us to civil or criminal penalties, could
require us to change or terminate some portions of our operations or business, or could disqualify us from
providing services to insurance companies or other customers; and, thus could have an adverse effect on
our business.
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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 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 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. If there are similar regulatory requirements on
changing the design of products which could make our products less attractive to consumers or disrupt
product supply our business, results of operations could be adversely affected in the short term.
We may be unsuccessful in identifying and acquiring suitable acquisition candidates, which could
adversely affect our growth.
We may pursue acquisition of companies that can complement our existing business, diversify our
product offerings and improve our customers’ experience in the future. However, there is no assurance that
we can successfully identify suitable acquisition candidates. Even if we identify suitable candidates, we
may not be able to complete an acquisition on terms that are commercially acceptable to us. Our competitors
may be able to outbid us for these acquisition targets. If we are unable to complete acquisitions, our growth
strategy may be impeded and our earnings or revenue growth may be negatively affected.
Competition in our industry is intense and, if we are unable to compete effectively, we may lose customers
and our financial results may be negatively affected.
The insurance intermediary industry in China is highly competitive, and we expect competition to
persist and intensify. In insurance product distribution, we face competition from insurance companies that
use their in-house sales force, exclusive sales agents, telemarketing and internet channels to distribute their
products, and from business entities that distribute insurance products on an ancillary basis, such as
commercial banks, postal offices and automobile dealerships, as well as from other professional insurance
intermediaries. In our claims adjusting business, we primarily compete with other independent claims
adjusting firms. We compete for customers on the basis of product offerings, customer services and
reputation. Many of our competitors have greater financial and marketing resources than we do and may
be able to offer products and services that we do not currently offer and may not offer in the future. If we
are unable to compete effectively against those competitors, we may lose customers and our financial
results may be negatively affected.
Because the commission and fee revenue we earn on the sale of insurance products is based on
premiums, commission and fee rates set by insurance companies, any decrease in these premiums,
commission or fee rates may have an adverse effect on our results of operations.
We are engaged in the life insurance, property and casualty insurance and claims adjusting businesses
and derive revenues primarily from commissions and fees paid by the insurance companies whose policies
our customers purchase and to whom we provide claims adjusting services. The commission and fee rates
are set by insurance companies and are based on the premiums that the insurance companies charge or the
amount recovered from insurance companies. Commission and fee rates and premiums can change based
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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 (formerly
CIRC).
In October 2017 we started to implement a platform business model for auto insurance business. See
“Item 4. Business Overview — Insurance Aggregator Site Partners” for a more detailed description of the
platform business model. We derived a portion of the revenues from platform fees paid by businesses which
distribute auto insurance products through our CNpad-based insurance aggregating platform. The platform
fee rates are set at a certain percentage based on the insurance premiums transacted over CNpad. The fee
rates can change based on the prevailing economic, regulatory, taxation-related and competitive factors
that affect the third party aggregator sites which are not within our control.
Because we do not determine, and cannot predict, the timing or extent of premium or commission and
fee rate changes, we cannot predict the effect any of these changes may have on our operations. Any
decrease in premiums or commission and fee rates may significantly affect our profitability. In addition,
our budget for future acquisitions, capital expenditures and other expenditures may be disrupted by
unexpected decreases in revenues caused by decreases in premiums or commission and fee rates, thereby
adversely affecting our operations.
Quarterly and annual variations in our commission and fee revenue may unexpectedly impact our
results of operations.
Our commission and fee revenue is subject to both quarterly and annual fluctuations as a result of the
seasonality of our business, the timing of policy renewals and the net effect of new and lost business. During
any given year, our commission and fee revenue derived from distribution of property and casualty
insurance products is highest during the fourth quarter and is lowest during the first quarter. Life insurance
commission revenue is the highest in the first quarter and lowest in the fourth quarter of any given year as
much of the Jumpstart Sales activities of life insurance companies occurs in January and February during
which life insurance companies would increase their sales efforts by offering more incentives for insurance
agents and insurance intermediaries to increase sales, while the preparation for the Jumpstart Sales starts
in the fourth quarter of each year. The factors that cause the quarterly and annual variations are not within
our control. Specifically, consumer demand for insurance products can influence the timing of renewals,
new business and lost business, which generally includes policies that are not renewed, and cancellations.
As a result, you may not be able to rely on quarterly or annual comparisons of our operating results as an
indication of our future performance.
Our operating structure may make it difficult to respond quickly to operational or financial problems,
which could negatively affect our financial results.
We currently operate through our wholly-owned or majority-owned insurance agencies and claims
adjusting firms located in 31 provinces in China. These companies report their results to our corporate
headquarters monthly. If these companies delay either reporting results or informing corporate headquarters
of negative business developments such as losses of relationships with insurance companies, regulatory
inquiries or any other negative events, we may not be able to take action to remedy the situation in a timely
fashion. This in turn could have a negative effect on our financial results. In addition, if one of these
companies were to report inaccurate financial information, we might not learn of the inaccuracies on a
timely basis and be able to take corrective measures promptly, which could negatively affect our ability to
report our financial results.
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Our future success depends on the continuing efforts of our senior management team and other key
personnel, and our business may be harmed if we lose their services.
Our future success depends heavily upon the continuing services of the members of our senior
management team and other key personnel, in particular, Mr. Chunlin Wang, or Mr. Wang, our chairman
of the board of directors and chief executive officer, and Mr. Peng Ge, or, Mr. Ge, our chief financial officer.
If one or more of our senior executives or other key personnel, are unable or unwilling to continue in their
present positions, we may not be able to replace them easily, or at all. As such, our business may be
disrupted and our financial condition and results of operations may be materially and adversely affected.
Competition for senior management and key personnel in our industry is intense because of a number of
factors including the limited pool of qualified candidates. We may not be able to retain the services of our
senior executives or key personnel, or attract and retain high-quality senior executives or key personnel in
the future. As is customary in the PRC, we do not have insurance coverage for the loss of our senior
management team or other key personnel.
In addition, if any member of our senior management team or any of our other key personnel joins a
competitor or forms a competing company, we may lose customers, sensitive trade information, key
professionals and staff members. Each of our executive officers and key employees has entered into an
employment agreement with us which contains confidentiality and non-competition provisions. These
agreements generally have an initial term of three years, and are automatically extended for successive one-
year terms unless terminated earlier pursuant to the terms of the agreement. See “Item 6. Directors, Senior
Management and Employees — A. Directors and Senior Management — Employment Agreements” for a
more detailed description of the key terms of these employment agreements. If any disputes arise between
any of our senior executives or key personnel and us, we cannot assure you of the extent to which any of
these agreements may be enforced.
Salesperson and employee misconduct is difficult to detect and deter and could harm our reputation or
lead to regulatory sanctions or litigation costs.
Salesperson and employee misconduct could result in violations of law by us, regulatory sanctions,
litigation or serious reputational or financial harm. Misconduct could include:
making misrepresentations when marketing or selling insurance to customers;
hindering insurance applicants from making full and accurate mandatory disclosures or inducing
applicants to make misrepresentations;
hiding or falsifying material information in relation to insurance contracts;
fabricating or altering insurance contracts without authorization from relevant parties, selling
false policies, or providing false documents on behalf of the applicants;
falsifying insurance agency business or fraudulently returning insurance policies to obtain
commissions;
colluding with applicants, insureds, or beneficiaries to obtain insurance benefits;
engaging in false claims; or
otherwise not complying with laws and regulations or our control policies or procedures.
On April 24, 2015, the PRC Insurance Law was amended and consequently on December 3, 2015, the
CIRC amended the Provisions on the Supervision of Professional Insurance Agencies, the Provisions on
the Supervision of Insurance Brokerages and the Provisions on the Supervision of Insurance Claims
Adjusting Firms. These amendments have made a number of significant changes to the regulatory regime,
-12-
including eliminating the requirement for an insurance agent, broker or claims adjusting practitioner to
obtain a qualification certificate issued by the CIRC. The elimination of the certificate requirement may
result in an increase in misconduct by sales or service persons, in particularly sales misrepresentation. We
have internal policies and procedures to deter salesperson or employee misconduct. However, the measures
and precautions we take to prevent and detect these activities may not be effective in all cases. We cannot
assure you, therefore, that salesperson or employee misconduct will not lead to a material adverse effect
on our business, results of operations or financial condition. In addition, the general increase in misconduct
in the industry could potentially harm the reputation of the industry and have an adverse impact on our
business.
Our investments in certain financial products may not yield the benefits we anticipate or incur financial
loss, which could adversely affect our cash position.
In order to improve our return on capital, we may from time to time, upon board approval, invest
certain portion of our cash in financial products, such as trust products, with terms of one to two years.
These products may involve various risks, including default risks, interest risks, and other risks. We cannot
guarantee these investments will yield the returns we anticipate and we could suffer financial loss resulting
from the purchase of these financial products.
If we do not remedy the material weakness that we identified in our internal controls over financial
reporting, we may not be able to accurately report our financial results or prevent fraud.
We are subject to reporting obligations under U.S. securities laws. Pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002 and the related rules adopted by the Securities and Exchange Commission, or
the SEC, every public company is required to include a management report on the company’s internal
controls over financial reporting in its annual report, which contains management’s assessment of the
effectiveness of the company’s internal controls over financial reporting. In addition, an independent
registered public accounting firm must attest to and report on the effectiveness of the company’s internal
controls over financial reporting.
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, 2018 using criteria established in “Internal Control — Integrated Framework (2013)” issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Management is not permitted to
conclude that the Company’s internal control over financial reporting is effective if there are one or more
material weaknesses in the Company’s internal control over financing reporting. A material weakness is a
deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is
a reasonable possibility that a material misstatement of a company’s annual or interim consolidated
financial statements would not be prevented or detected on a timely basis. Based on our assessment and
those criteria, we have concluded that our internal controls over financial reporting were ineffective because
of the identification of a material weakness. Specifically, management review controls designed to address
risks associated with complex accounting matters that arise from significant non-routine transactions to
ensure that those transactions are properly accounted for in accordance with U.S. GAAP did not operate
effectively. As a result, errors in the accounting for the Fanhua 521 Development Plan were identified after
year end, but were corrected prior to the issuance of the consolidated financial statements. Management
has identified corrective actions for the weakness and intends to implement procedures to address such
weakness during the fiscal year 201.
See “Item 15. Controls and Procedures.” “Management’s Remediation Plans and Actions ” for
measures that we implement to address this material weakness and other control deficiencies in our internal
control over financial reporting might not fully address them, and we might not be able to conclude that
they have been fully remedied. Failure to correct the material weakness and other control deficiencies or
failure to discover and address any other control deficiencies 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,
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financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be
materially and adversely affected. Due to the material weakness in our internal control over financial
reporting as described above, our management concluded that our internal control over financial reporting
was not effective as of December 31, 2018. This could adversely affect the market price of our ADSs due
to a loss of investor confidence in the reliability of our reporting processes.
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 other intangible assets, our financial condition and results
may be materially and adversely affected.
When we acquire a business, the amount of the purchase price that is allocated to goodwill and other
intangible assets is determined by the excess of the fair value of purchase price and any controlling interest
over the net identifiable tangible assets acquired. As of December 31, 2018, goodwill represented
RMB109.9 million (US$16.0 million), or 4.0% of our total shareholders’ equity, and other net intangible
assets represented RMB1.3 million (US$ 0.2 million), or 0.05% of our total shareholders’ equity. Our
management performs impairment assessment annually and we did not recognize any impairment loss
between 2014 and 2018. Under current accounting standards, if we determine that goodwill or intangible
assets are impaired, we will be required to write down the value of such assets and recognize corresponding
impairment charges. As we implement our growth strategy through acquisitions, goodwill and intangible
assets may comprise an increasingly larger percentage of our shareholders’ equity. As such, any write-
down related to such goodwill and intangible assets may adversely and materially affect our shareholders’
equity and financial results.
Any significant failure in our information technology systems could have a material adverse effect on
our business and profitability.
Our business is highly dependent on the ability of our information technology systems to timely
process a large number of transactions across different markets and products at a time when transaction
processes have become increasingly complex and the volume of such transactions is growing rapidly. The
proper functioning of our financial control, accounting, customer database, customer service and other data
processing systems, together with the communication systems of our various subsidiaries and our main
offices in Guangzhou, is critical to our business and our ability to compete effectively. We cannot assure
you that our business activities would not be materially disrupted in the event of a partial or complete
failure of any of these primary information technology or communication systems, which could be caused
by, among other things, software malfunction, computer virus attacks or conversion errors due to system
upgrading. In addition, a prolonged failure of our information technology system could damage our
reputation and materially and adversely affect our future prospects and profitability.
We may face potential liability, loss of customers and damage to our reputation for any failure to protect
the confidential information of our customers.
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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.
If we are unable to respond in a timely and cost-effective manner to rapid technological change in the
insurance intermediary industry, it may result in an adverse effect.
The insurance industry is increasingly influenced by rapid technological change, frequent new product
and service introductions and evolving industry standards. For example, the insurance intermediary
industry has increased use of the internet to communicate benefits and related information to consumers
and to facilitate information exchange and transactions. We believe that our future success will depend on
our ability to continue to anticipate technological changes and to offer additional product and service
opportunities that meet evolving standards on a timely and cost-effective basis. There is a risk that we may
not successfully identify new product and service opportunities or develop and introduce these
opportunities in a timely and cost-effective manner. In addition, product and service opportunities that our
competitors develop or introduce may render our products and services uncompetitive. As a result, we can
give no assurances that technological changes that may affect our industry in the future will not have a
material adverse effect on our business and results of operations.
We face risks related to health epidemics, severe weather conditions and other catastrophes, which could
materially and adversely affect our business.
Our business could be materially and adversely affected by the outbreak of avian flu, severe acute
respiratory syndrome, or SARS, another health epidemic, severe weather conditions or other catastrophes.
In April 2009, influenza A (H1N1), a new strain of flu virus commonly referred to as “swine flu,” was first
discovered in North America and quickly spread to other parts of the world, including China. In January
and February 2008, a series of severe winter storms afflicted extensive damages and significantly disrupted
people’s lives in large portions of southern and central China. In May 2008, an earthquake measuring 8.0
on the Richter scale hit Sichuan Province in southwestern China, causing huge casualties and property
damages. In February 2013, H7N9 Avian influenza was first discovered in Shanghai, China and quickly
widened its geographical spread in China. Because our business operations rely heavily on the efforts of
individual sales agents, in-house sales representatives and claims adjustors, any prolonged recurrence of
avian flu or SARS, or the occurrence of other adverse public health developments such as influenza A
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(H1N1) and Zika Virus, severe weather conditions such as the massive snow storms in January and
February 2008 and other catastrophes such as the Sichuan earthquake may significantly disrupt our staffing
and otherwise reduce the activity level of our work force, thus causing a material and adverse effect on our
business operations.
We may be subject, from time to time, to various adverse actions taken by other parties, including various
lawsuits and negative reports, regulatory proceedings, each of which may require the time and attention
of our management and may otherwise adversely affect us.
From time to time, we are party to litigations incidental to the conduct of our ongoing business,
including class action lawsuits and disputes with other third parties. Litigations usually require a significant
amount of management time and efforts, which may adversely affect our business by diverting
management’s focus from the needs of our business and the development of future strategic opportunities.
In August 2018, a short-selling focused firm issued a short sell thesis report which we believe
contains false and misleading information about our strategy, business model and financials. Following the
issuance of this report, shareholder class action suits were filed against the Company in the United States
federal courts. We intend to vigorously defend ourselves against these actions, and will file any necessary
appeals should our initial defense be unsuccessful. We are currently unable to estimate the possible loss, if
any, associated with resolving these suits. Furthermore, in January 2019, another short-selling focused team
issued a short sell report against the Company, which caused the trading price of our ADSs to fluctuate
significantly. It is not unusual for companies that have experienced volatility in the trading price of their
shares to face securities class action suits or derivative actions.
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 (formerly CIRC) 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,
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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 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 operated online insurance distribution business through Baoxian.com which was subject to foreign
investment restriction. On June 19, 2015, the Ministry of Industry and Information Technology published
a Notice on Removing the Foreign Ownership Restriction in Online Data Processing and Transaction
Processing Business (Operating E-commerce), or the No. 196 Notice. Foreign ownership in online data
processing and transaction process business is allowed to increase to 100% as long as the foreign-invested
entities obtain necessary licenses to conduct the business. However, there remains uncertainty with regards
to the implementation of the No. 196 Notice and the administrative procedures with regards to the
application of the data processing and transaction process business licenses.
Following the changes in applicable foreign investment regulations, we commenced a restructuring of
our company in October 2011 and subsequently terminated all the contractual arrangements among our
PRC subsidiaries and consolidated entities such as 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 direct ownership of our online platforms is found to be in violation of any existing or future
PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant
PRC regulatory authorities, including the CBIRC (formerly CIRC), will have broad discretion in dealing
with such violations, including:
revoking the business and operating licenses of our PRC subsidiaries;
restricting or prohibiting any related-party transactions among our PRC subsidiaries;
imposing fines or other requirements with which we, our PRC subsidiaries may not be able to
comply;
requiring us, our PRC subsidiaries to restructure the relevant ownership structure or operations;
or
restricting or prohibiting us from providing additional funding for our business and operations in
China.
Any of these or similar actions could cause disruptions to our business, as well as reduce our revenues,
profitability and cash flows.
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PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay
or prevent us from making loans to our PRC subsidiaries or making additional capital contributions to
our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund
and expand our business.
We are an offshore holding company conducting our operations in China through PRC subsidiaries in
order to provide additional funding to our PRC subsidiaries, we may make loans to our PRC subsidiaries,
or we may make additional capital contributions to our PRC subsidiaries.
Any loans we make to any of our directly-held PRC subsidiaries (which are treated as foreign-invested
enterprises under PRC law), namely, Fanhua Zhonglian Enterprise Image Planning (Shenzhen) Co., Ltd.,
or Zhonglian Enterprise, and Fanhua Xinlian Information Technology Consulting (Shenzhen) Co., Ltd., or
Xinlian Information, cannot exceed statutory limits and must be registered with the State Administration
of Foreign Exchange, or the SAFE, or its local counterparts. Under applicable PRC law, the Chinese
regulators must approve the amount of a foreign-invested enterprise’s registered capital, which represents
shareholders’ equity investments over a defined period of time, and the foreign-invested enterprise’s total
investment, which represents the total of the company’s registered capital plus permitted loans. The
registered capital/total investment ratio cannot be lower than the minimum statutory requirement and the
excess of the total investment over the registered capital represents the maximum amount of borrowings
that a foreign-invested enterprise is permitted to have under PRC law. Our directly-held PRC subsidiaries
were allowed to incur a total of HK$300 million (US$43.6 million) in foreign debts as of March 31, 2019.
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.
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On August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-
invested company of its capital contribution in foreign currency into RMB. The notice requires that the
capital of a foreign-invested company settled in RMB converted from foreign currencies shall be used only
for purposes within the business scope as approved by the authorities in charge of foreign investment or by
other government authorities and as registered with the State Administration for Industry and Commerce
and, unless set forth in the business scope or in other regulations, may not be used for equity investments
within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the capital of a foreign-
invested company settled in RMB converted from foreign currencies. The use of such RMB capital may
not be changed without SAFE’s approval, and may not in any case be used to repay RMB loans if the
proceeds of such loans have not been used. Violations of Circular 142 will result in severe penalties,
including heavy fines. As a result, Circular 142 may significantly limit our ability to provide additional
funding to our PRC subsidiaries through our directly-held PRC subsidiaries in the PRC, which may
adversely affect our ability to expand our business.
However, on March 30, 2015, SAFE promulgated Circular 19, a notice on reforming the
administrative approach regarding the settlement of the foreign exchange capitals of foreign-invested
enterprises, which became effective on June 1, 2015. The new notice states that foreign-invested
enterprises shall be allowed to settle their foreign exchange capitals on a discretionary basis. The
discretionary settlement by a foreign-invested enterprise of its foreign exchange capital shall mean that the
foreign-invested enterprise may, according to its actual business needs, settle with a bank the portion of the
foreign exchange capital in its capital account for which the relevant foreign exchange bureau has
confirmed monetary contribution rights and interests (or for which the bank has registered the account-
crediting of monetary contribution). For the time being, foreign-invested enterprises are allowed to settle
100% of their foreign exchange capitals on a discretionary basis. The SAFE may adjust the foregoing
percentage as appropriate according to balance of payments situations. As a result, Circular 19 will relax
the limitation of our ability to provide additional funding to our PRC subsidiaries through our directly-held
PRC subsidiaries in the PRC.
Our variable interest entities or their respective shareholders and directors may fail to perform their
obligations under our contractual arrangements with them.
Pursuant to the 521 Plan, we set up three companies, or 521 Plan Employee Companies, which are
Fanhua Employees Holdings Limited, Step Tall Limited and Treasure Chariot Limited, to hold the shares
on behalf of the Participants. Each of the 521 Plan Employee Companies is a legal entity formed in the
British Virgin Islands with a sole shareholder appointed by the Company. Mr. Yinan Hu and two other
employees of the Company are the respective sole shareholder and director of the 521 Plan Employee
Companies. Our ordinary shares are the only significant assets held by the 521 Plan Employee Companies,
which serve as collateral to the loans issued by the Company to the Participants. Given the only substantial
recourse to the loans issued by the Company are the ordinary shares of the Company, changes (principally
decreases) in the value of the ordinary shares held by the 521 Plan Employee Companies will be indirectly
absorbed by the Company and we have potential exposure to the economics of the 521 Plan Employee
Companies. Therefore, we have variable interests in the 521 Plan Employee Companies. Since none of the
521 Plan Employee Companies' equity investors have the obligation to absorb the expected losses or the
right to receive the expected residual returns as (i) the depreciation of the ADS will be indirectly absorbed
by the Company as discussed above and (ii) and the appreciation of the ADS will be absorbed by the
Company or the Participants, as any residual proceeds from the sale of the ADS will revert to the Company
or the Participants and not the shareholders of the 521 Plan Employee Companies. Therefore, the 521 Plan
Employee Companies are deemed to be our consolidated variable interest entities, or VIEs.
Through loan agreements, entrusted share purchase agreements and letters of undertaking, we have
the right to the shares held by the 521 Plan Employee Companies, which collectively is 20.1% of our
outstanding shares, as collateral to the loans issued to the Participants, and we have potential exposure to
the economics of the VIEs resulting from the fluctuation in the value of the Company’s ADSs, which is
more than insignificant. Therefore, we are deemed the primary beneficiary of the 521 Plan Employee
Companies and consolidate them into our financial statements accordingly.
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If our VIEs or their shareholders and directors fail to perform their respective obligations under the
contractual arrangements, we may have to incur substantial costs and expend additional resources to
enforce such arrangements. We may also have to rely on legal remedies under various legal jurisdictions,
including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure
you will be effective under the relevant laws and regulations. For example, if the shareholders of our VIEs
act in bad faith toward us, we may have to take legal action to compel them to perform their contractual
obligations. In addition, if any third parties claim any interest in the equity interests of our VIEs, our ability
to exercise shareholders’ rights or foreclose the shares pledged under the loan agreements with the
Participants may be impaired. If these or other disputes between the shareholders and directors of our VIEs
and third parties were to impair our control over our VIEs, our ability to consolidate the financial results of
our VIEs would be affected, which would in turn materially and adversely affect our business, financial
condition and results of operations.
Risks Related to Doing Business in China
Adverse economic, political and legal developments in China could have a material adverse effect on
our business.
Substantially all of our business operations are conducted in China. Accordingly, our results of
operations, financial condition and prospects are subject to a significant degree to economic, political and
legal developments in China. China’s economy differs from the economies of most developed countries in
many respects, including with respect to the amount of government involvement, level of development,
growth rate, control of foreign exchange and allocation of resources. While the PRC economy has
experienced significant growth in the past 30 years or so, growth has been uneven across different regions
and among various economic sectors of China. Economic growth in China has been slowing in the past
few years and dropped to 6.6% for 2018, according to data released by the PRC government in January
2019. 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
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limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of
these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on
government policies and internal rules (some of which are not published on a timely basis or at all) that
may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules
until some time after the violation. In addition, any litigation in China may be protracted and result in
substantial costs and diversion of resources and management attention.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and
the remittance of currency out of China. Under existing PRC foreign exchange regulations, payments of
current account items, including profit distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from the SAFE by complying with
certain procedural requirements. However, approval from appropriate government authorities is required
where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such
as the repayment of loans denominated in foreign currencies. The PRC government may also at its
discretion restrict access in the future to foreign currencies for current account transactions. Under our
current corporate structure, the primary source of our income at the holding company level is dividend
payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the
ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to
us, or otherwise satisfy their foreign currency denominated obligations. If the foreign exchange control
system prevents us from obtaining sufficient foreign currency to satisfy our currency needs, we may not be
able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.
The PRC Enterprise Income Tax Law may increase the enterprise income tax rate applicable to some of
our PRC subsidiaries, which could have a material adverse effect on our result of operations.
According to the PRC Enterprise Income Tax Law, or the EIT Law, which became effective on
January 1, 2008, as further clarified by subsequent tax regulations implementing the EIT Law, foreign-
invested enterprises and domestic enterprises are subject to enterprise income tax, or EIT, at a uniform rate
of 25%, unless otherwise provided. Enterprises that were established and enjoyed preferential tax
treatments before March 16, 2007 will continue to enjoy such preferential tax treatments in the following
manners: (1) in the case of preferential tax rates, for a five-year transition period starting from January 1,
2008, during which the EIT rate of such enterprises will gradually increase to the uniform 25% EIT rate by
January 1, 2012; or (2) in the case of preferential tax exemption or reduction with a specified term, until
the expiration of such term. However, if such an enterprise has not enjoyed the preferential treatments yet
because of its failure to make a profit, its term for preferential treatments will be deemed to start from 2008.
As a result of the implementation of the EIT Law, certain preferential tax treatments enjoyed by some
of our subsidiaries expired on January 1, 2008. According to the EIT Law and related regulations, the
preferential tax rates enjoyed by some of our PRC subsidiaries incorporated in Shenzhen, a special
economic zone, will gradually increase to the uniform 25% EIT rate during the five year transition period.
An increase in the EIT rates for those entities pursuant to the EIT Law could result in an increase in our
effective tax rate, which could materially and adversely affect our results of operations.
Our global income or the dividends we receive from our PRC subsidiaries may be subject to PRC tax
under the EIT Law, which could have a material adverse effect on our results of operations.
Under the EIT Law, an enterprise established outside of the PRC with “de facto management bodies”
within the PRC is considered a resident enterprise and will be subject to the EIT at the rate of 25% on its
worldwide income. The Implementation Rules of the EIT Law, or the Implementation Rules, define the
term “de facto management bodies” as “establishments that carry out substantial and overall management
and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an
enterprise.” If we are deemed a resident enterprise, we may be subject to the EIT at 25% on our global
income, except that the dividends we receive from our PRC subsidiary will be exempt from the EIT. If we
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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, 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
CNinsurance 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, each of our PRC subsidiaries is required to set
aside at least 10% of its after-tax profits each year as reported in its PRC statutory financial statements, if
any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. In addition, each of
our PRC subsidiaries that are considered foreign-invested enterprises is required to further set aside a
portion of its after-tax profits as reported in its PRC statutory financial statements to fund the employee
welfare fund at the discretion of its board. These reserves are not distributable as cash dividends. As of
December 31, 2018, the total retained earnings of our PRC subsidiaries available for dividend distributions
were RMB1.4 billion (US$209.7 million). Furthermore, if our subsidiaries in China incur debt on their own
behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make
other payments to us. Any limitation on the ability of our subsidiaries to distribute dividends or other
payments to us could materially and adversely limit our ability to grow, make investments or acquisitions
that could be beneficial to our businesses, pay dividends, or otherwise fund and conduct our business.
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents
and employee stock options granted by overseas-listed companies may increase our administrative
burden, restrict our overseas and cross-border investment activity, or otherwise adversely affect us. If
our shareholders who are PRC residents, or our PRC employees who are granted or exercise stock
options, fail to make any required registrations or filings under such regulations, we may be unable to
distribute profits and may become subject to liability under PRC laws.
On October 21, 2005, the SAFE issued a Notice on Relevant Issues Concerning Foreign Exchange
Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special
Purpose Vehicles, generally known in China as SAFE Circular 75, requiring PRC residents to register with
the local SAFE branch before establishing or controlling any company outside of China, referred to in the
notice as an “offshore special purpose company,” for the purpose of raising capital backed by assets or
equities of PRC companies. PRC residents that are shareholders of offshore special purpose companies
established before November 1, 2005 were required to register with the local SAFE branch before March
31, 2006. On July 4, 2014, the SAFE issued the Notice on the Administration of Foreign Exchange Involved
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in Overseas Investment, Financing and Return on Investment Conducted by PRC Residents via Special-
Purpose Companies, or SAFE Circular 37, simultaneously repealing SAFE Circular 75. SAFE Circular 37
also requires PRC residents to register with relevant Foreign Exchange Bureau for foreign exchange
registration of overseas investment before making contribution to a special purpose company, or SPC, with
legitimate holdings of domestic or overseas assets or interests. See “Item 4. Information on the Company
— B. Business Overview — Regulation — Regulations on Foreign Exchange — Foreign Exchange
Registration of Offshore Investment by PRC Residents.”
We have requested our beneficial owners who to our knowledge are PRC residents to make the
necessary applications, filings and amendments as required under SAFE Circular 37 and other related rules.
We attempt to comply, and attempt to ensure that our beneficial owners who are subject to these rules
comply with the relevant requirements. However, we cannot assure you that all of our beneficial owners
who are PRC residents will comply with our request to make or obtain any applicable registrations or
comply with other requirements under SAFE Circular 37 or other related rules. The failure of these
beneficial owners to timely amend their SAFE registrations pursuant to SAFE Circular 37 or the failure of
future beneficial owners of our company who are PRC residents to comply with the registration procedures
set forth in SAFE Circular 37 may subject such beneficial owners to fines and legal sanctions and may also
limit our ability to contribute capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to
distribute dividends to our company or otherwise adversely affect our business.
On December 25, 2006, the People’s Bank of China, or the PBOC, promulgated the Measures for the
Administration of Individual Foreign Exchange, and on January 5, 2007, the SAFE further promulgated
implementation rules for those measures. We refer to these regulations collectively as the Individual
Foreign Exchange Rules. The Individual Foreign Exchange Rules became effective on February 1, 2007.
According to these regulations, PRC citizens who are granted shares or share options by a company listed
on an overseas stock market according to its employee share option or share incentive plan are required,
through the PRC subsidiary of such overseas listed company or any other qualified PRC agent, to register
with the SAFE and to complete certain other procedures related to the share option or other share incentive
plan. Foreign exchange income received from the sale of shares or dividends distributed by the overseas
listed company may be remitted into a foreign currency account of such PRC citizen or be exchanged into
Renminbi. Our PRC citizen employees who have been granted share options became subject to the
Individual Foreign Exchange Rules upon the listing of our ADSs on the Nasdaq stock exchange.
On February 15, 2012, SAFE promulgated the Notice of the State Administration of Foreign
Exchange on Issues Related to Foreign Exchange Administration in Domestic Individuals' Participation in
Equity Incentive Plans of Companies Listed Abroad, or the No. 7 Notice, which supersedes the Operation
Rules on Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock
Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule, in its entirety
and immediately became effective upon circulation. According to the No. 7 Notice, domestic individuals,
which include any directors, supervisors, senior managerial personnel or other employees of a domestic
company who are Chinese citizens (including citizens of Hong Kong, Macao and Taiwan) or foreign
individuals who consecutively reside in the territory of 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. See “Item 4. Information on the Company —
B. Business Overview — Regulation — Regulations on Foreign Exchange — SAFE Regulations on
Employee Share Options.”
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Fluctuation in the value of the RMB may have a material adverse effect on your investment.
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by,
among other things, changes in political and economic conditions. On July 21, 2005, the PRC government
changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy,
the PRC government allowed the RMB to appreciate by more than 20% against the U.S. dollar between
July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate
between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the PRC
government has allowed the RMB to appreciate slowly against the U.S. dollar again, though there have
been periods when the U.S. dollar has appreciated against the Renminbi as well. In April 2012, the trading
band was widened to 1%, and in March 2014 it was further widened to 2%, which allows the Renminbi to
fluctuate against the U.S. dollar by up to 2% above or below the central parity rate published by the PBOC.
In August 2015, the PBOC changed the way it calculates the mid-point price of Renminbi against U.S.
dollar, requiring the market-makers who submit for the PBOC’s reference rates to consider the previous
day’s closing spot rate, foreign-exchange demand and supply as well as changes in major currency rates.
This change, and other changes such as widening the trading band that may be implemented, may increase
volatility in the value of the Renminbi against foreign currencies. It is difficult to predict how market forces
or PRC or United States government policy may impact the exchange rate between the RMB and the U.S.
dollar in the future.
Our revenues and costs are mostly denominated in the RMB, and a significant portion of our financial
assets are also denominated in RMB. We rely on dividends and other fees paid to us by our subsidiaries in
China. Any significant appreciation or depreciation of the RMB against the U.S. dollar may affect our cash
flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs
in U.S. dollars. For example, a further appreciation of the RMB against the U.S. dollar would make any
new RMB-denominated investments or expenditures more costly to us, to the extent that we need to convert
U.S. dollars into RMB for such purposes. An appreciation of the RMB against the U.S. dollar would also
result in foreign currency translation losses for financial reporting purposes when we translate our U.S.
dollar denominated financial assets into the RMB, as the RMB is our reporting currency. Conversely, a
significant depreciation of the RMB against the U.S. dollar may significantly reduce the U.S. dollar
equivalent of our reported earnings, and may adversely affect the price of our ADSs.
The M&A Rule could also make it more difficult for us to pursue growth through acquisitions.
The M&A Rule also established additional procedures and requirements that could make merger and
acquisition activities by foreign investors more time-consuming and complex, including requirements in
some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction
in which a foreign investor takes control of a PRC domestic enterprise. To date, we have conducted our
acquisitions in China exclusively through subsidiaries that used to be our PRC consolidated affiliated
entities. In the future, we may grow our business in part by directly acquiring complementary businesses.
Complying with the requirements of the new regulations to complete such transactions could be time
consuming, and any required approval processes, including obtaining approval from the Ministry of
Commerce, may prevent us from completing such transactions on a timely basis, or at all, which could
affect our ability to expand our business or maintain our market share.
Risks Related to Our ADSs
The market price for our ADSs may be volatile.
The market price for our ADSs may be volatile and subject to wide fluctuations in response to factors
including the following:
actual or anticipated fluctuations in our quarterly operating results;
changes in financial estimates by securities research analysts;
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conditions in the Chinese insurance industry;
changes in the economic performance or market valuations of other insurance intermediaries;
announcements by us or our competitors of new products, acquisitions, strategic partnerships,
joint ventures or capital commitments;
addition or departure of key personnel;
fluctuations of exchange rates between the RMB and U.S. dollar or other foreign currencies;
potential litigation or administrative investigations;
sales of additional ADSs; and
general economic or political conditions in China and abroad.
In addition, the securities market has from time to time experienced significant price and volume
fluctuations that are not related to the operating performance of particular companies. These market
fluctuations may also materially and adversely affect the market price of our ADSs.
We may need additional capital, and the sale of additional ADSs or other equity securities could result
in additional dilution to our shareholders.
We believe that our current cash and cash equivalents and anticipated cash flow from operations will
be sufficient to meet our anticipated cash needs for the foreseeable future. We may, however, require
additional cash resources due to changed business conditions or other future developments, including any
investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash
requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of
additional equity securities could result in additional dilution to our shareholders. The incurrence of
indebtedness would result in increased debt service obligations and could result in operating and financing
covenants that would restrict our operations. We cannot assure you that financing will be available in
amounts or on terms acceptable to us, if at all.
Substantial future sales of our ordinary shares or ADSs, or the perception that these sales could occur,
could cause the price of our ADSs to decline.
Additional sales of our ADSs in the public market, or the perception that these sales could occur, could
cause the market price of our ADSs to decline. If any existing shareholder or shareholders sell a substantial
amount of ordinary shares in the form of ADSs, the market price of our ADSs could decline. In addition,
we may issue additional ordinary shares as considerations for future acquisitions. If we do so, your
ownership interests in our company would be diluted and this in turn could have an adverse effect on the
price of our ADSs.
Our corporate actions are substantially controlled by our officers, directors and principal shareholders.
As of March 31, 2019, our executive officers, directors and principal shareholders beneficially owned
approximately 35.2% 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. In addition, as of March 31, 2019, companies established to hold ordinary shares of the
Company on behalf of the Participants in the 521 Plan, or 521 Plan Employee Companies, collectively held
20.1% of our outstanding shares. Through loan agreements and entrusted share purchase agreement, as
these shares are pledged to the Company as collateral to secure the loans provided to the Participants, we
have the right to dispose of part or all of the shares held by the 521 Plan Employee Companies on behalf
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of the Participant if the Participant fails to repay the loan upon its maturity, the termination of his or her
employment or agent contract with the Company or its subsidiaries within five years, or if the Participant
failed to achieve his or her committed performance targets. The 521 Plan Employee Companies have either
established an employee committee or appointed employee representatives for the Participants, each with
the power to make voting and disposition decisions with respect to the shares. Although the committee or
employee representatives have promised to vote the shares they control in a manner that is in the best
interest of the Participants, we could exert substantial influence over the members of the employee
committee or the employee representatives, who are our employees, or they may not act in a manner that
protects the interests of other noncontrolling shareholders. This concentration of our share ownership also
may discourage, delay or prevent a change in control of our company, which could deprive our shareholders
of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce
the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders.
You may not have the same voting rights as the holders of our ordinary shares and may not receive
voting materials in time to be able to exercise your right to vote.
Except as described in this annual report and in the deposit agreement, holders of our ADSs will not
be able to exercise voting rights attaching to the shares evidenced by our ADSs on an individual basis.
Holders of ADSs may instruct the depositary to exercise the voting rights attaching to the shares represented
by the ADSs. If no instructions are received by the depositary on or before a date established by the
depositary, the depositary shall deem the holders to have instructed it to give a discretionary proxy to a
person designated by us to exercise their voting rights. You may not receive voting materials in time to
instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers,
dealers or other third parties, will not have the opportunity to exercise a right to vote.
You may not be able to participate in rights offerings and may experience dilution of your holdings as a
result.
We may from time to time distribute rights to our shareholders, including rights to acquire our
securities. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS
holders unless both the rights and the underlying securities to be distributed to ADS holders are either
registered under the Securities Act of 1933 or exempt from registration under the Securities Act with respect
to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such
rights or underlying securities or to endeavor to cause such a registration statement to be declared effective.
In addition, we may not be able to take advantage of any exemptions from registration under the Securities
Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may
experience dilution in their holdings as a result.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its
transfer books at any time or from time to time when it deems expedient in connection with the performance
of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs
generally when our books or the books of the depositary are closed, or at any time if we or the depositary
deem it advisable to do so because of any requirement of law or of any government or governmental body,
or under any provision of the deposit agreement, or for any other reason.
You may face difficulties in protecting your interests, and your ability to protect your rights through the
U.S. federal courts may be limited, because we are incorporated under Cayman Islands law, conduct
substantially all of our operations in China and most of our directors and officers reside outside the
United States. In addition, Cayman Islands securities laws provide significantly less protection to
investors as compared to U.S. laws.
We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China
through our subsidiaries in China. Most of our directors and officers reside outside the United States and
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some or all of the assets of those persons are located outside of the United States. As a result, it may be
difficult for you to effect service of process within the United States or elsewhere outside China upon these
persons. It may also be difficult for you to enforce in the courts of the Cayman Islands judgments obtained
in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our
officers and directors, most of whom are not residents in the United States and some or all of whose assets
are located outside of the United States. In addition, there is uncertainty as to whether the courts of the
Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or our officers
and directors predicated upon the civil liability provisions of the securities laws of the United States or any
state. Our PRC counsel has advised us that China does not have treaties with the United States or many
other countries providing for the reciprocal recognition and enforcement of judgment of courts. It is also
uncertain whether the Cayman Islands or PRC courts would entertain or be competent to hear original
actions brought in the Cayman Islands or the PRC against us or our officers and directors predicated upon
the securities laws of the United States or any state.
Our corporate affairs are governed by our amended and restated memorandum and articles of
association as amended and restated from time to time and by the Companies Law (2018 Revision)
(hereinafter, the "Cayman Companies Law") and common law of the Cayman Islands. The rights of
shareholders to take legal action against our directors, actions by non-controlling shareholders and the
fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the
common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from
comparatively limited judicial precedent in the Cayman Islands as well as from English common law,
which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our
shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly
established as they would be under statutes or judicial precedents in the United States. In particular, because
Cayman Islands law has no legislation specifically dedicated to the rights of investors in securities, and
thus no statutorily defined private causes of action specific to investors in securities such as those found
under the Securities Act or the Securities Exchange Act of 1934 in the United States, it provides
significantly less protection to investors. In addition, Cayman Islands companies may not have standing to
initiate a shareholder derivative action before the federal courts of the United States.
As a result of all of the above, our public shareholders may have more difficulty in protecting their
interests through actions against our management, directors or controlling shareholders than would
shareholders of a corporation incorporated in a jurisdiction in the United States.
The audit 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.
Our independent registered public accounting firm that issues the audit reports included in our annual
reports filed with the U.S. Securities and Exchange Commission, 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.
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
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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. However, it remains unclear what further actions the SEC and PCAOB
will take and its impact on Chinese companies listed in the U.S.
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.
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 US-listed companies,
is not or cannot be performed in a manner acceptable to authorities in China and the US, 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
sanitisation 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.
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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 NYSE or deregistration
from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs
in the United States.
Our articles of association contain anti-takeover provisions that could have a material adverse effect on
the rights of holders of our ordinary shares and ADSs.
Our articles of association contain provisions limiting the ability of others to acquire control of our
company or cause us to enter into change-of-control transactions. These provisions could have the effect
of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market
prices by discouraging third parties from seeking to obtain control of our company in a tender offer or
similar transaction. For example, our board of directors has the authority, without further action by our
shareholders, to issue preferred shares in one or more series and to fix their designations, powers,
preferences, privileges, and relative participating, optional or special rights and the qualifications,
limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption
and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary
shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to
delay or prevent a change in control of our company or make removal of management more difficult. If our
board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other
rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.
You may have to rely primarily on price appreciation of our ADSs for any return on your investment.
Our board of directors has discretion as to whether to distribute dividends, subject to applicable laws.
Although our board of directors has announced a policy to declare and pay dividends on a quarterly basis,
the amount and form of future dividends will depend on, among other things, our future results of operations
and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from
our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our
board of directors. Accordingly, the return on your investment in our ADSs will likely depend primarily
upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in
value or even maintain the price at which you purchased the ADSs. You may not realize a return on your
investment in our ADSs and you may even lose your entire investment in our ADSs.
We may be classified as a passive foreign investment company, which could result in adverse United
States federal income tax consequences to United States Holders of our ADSs or ordinary shares..
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 passive foreign investment company, or PFIC, for United
States federal income tax purposes for our taxable year ended December 31, 2018. 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. A non-United States corporation will be treated as a PFIC
for United States federal income tax purposes for any taxable year if, applying applicable look-through
rules, either (1) at least 75% of its gross income for such year is passive income or (2) at least 50% of the
value of its assets (determined based on an average of the quarterly values of the assets) during such year
is attributable to assets that produce passive income or are held for the production of passive income. We
must make a separate determination after the close of each taxable year as to whether we were a PFIC for
that year. Because the value of our assets for purposes of the PFIC test will generally be determined by
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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 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 the United States Internal Revenue Service, or IRS, will agree with any positions that we
ultimately take. 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.
If we are or were a PFIC for any taxable year 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 special and adverse tax rules could apply with respect to any “excess distribution”
received from us and any gain from a sale or other disposition of the ADSs or ordinary shares. See “Item
10. Additional Information — E. Taxation — United States Federal Income Taxation — Passive Foreign
Investment Company.”
Item 4. Information on the Company
A. History and Development of the Company
History of Our Corporate Structure
Our founders, Mr. Yinan Hu, or Mr. Hu and Mr. Qiuping Lai, or Mr. Lai, formed two PRC companies,
Guangzhou Nanyun Car Rental Services Co., Ltd. and Guangdong Nanfeng Automobile Association Co.,
Ltd., initially to provide automobile-related services, such as car rental and emergency services. In 1999,
we began distributing automobile insurance products and automobile loans on an ancillary basis. In 2001,
our founders transferred their interests in the two PRC companies to China United Financial Services
Holdings Limited (then known as China Automobile Association Holdings Limited), or China United
Financial Services, a British Virgin Islands company, as part of a series of transactions in which Cathay
Capital Group, a private equity group, made an investment in China United Financial Services by
subscribing for 40% of the equity interests.
In June 2004, as part of its corporate restructuring to facilitate international fundraising, China United
Financial Services incorporated CISG Holdings Ltd., or CISG Holdings, in the British Virgin Islands to be
the holding company for its insurance agency and brokerage businesses. China United Financial Services
transferred to CISG Holdings all of its rights and interests in four PRC insurance intermediary companies
it then controlled. In September 2004, Cathay Capital Group subscribed for approximately 27.8% of the
equity interests in CISG Holdings.
In December 2005, an entity affiliated with CDH Growth Capital Holdings Company Limited, or
CDH Growth Capital Holdings, a private equity firm, subscribed for approximately 26.4% of the equity
interests in CISG Holdings, through CDH China Holdings Management Company Limited. In January
2015, CDH Growth Capital Holdings agreed to sell all of its equity interests in our company to certain
members of our management.
In anticipation of our initial public offering, we incorporated CNinsure Inc. in the Cayman Islands in
April 2007. In July 2007, CNinsure Inc., on a 10,000-for-one basis, issued its ordinary shares to the then
existing shareholders of CISG Holdings in exchange for all of the outstanding shares of CISG Holdings.
After this restructuring transaction, CNinsure Inc. became the ultimate holding company of our group.
On October 31, 2007, we listed our ADSs on the Nasdaq Global Market under the symbol “CISG.”
We and certain selling shareholders of our company, completed the initial public offering of 13,526,773
ADSs, each representing 20 ordinary shares, on November 5, 2007.
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In October 2012, we obtained license approval from the CIRC to establish an insurance sales service
group company and renamed Shenzhen Nanfeng Investment, our wholly-owned subsidiary in the PRC, as
“Fanhua Insurance Sales Service Group Company Limited”, or Fanhua Group Company, to serve as the
holding company of our PRC operating entities.
On December 6, 2016, our shareholders approved the change of our company name from CNinsure
Inc. to Fanhua Inc. Our ticker symbol was changed to “FANH” subsequently.
History of Our Business Operation
We began our insurance intermediary business in 1999 by distributing automobile insurance products
and automobile loans on an ancillary basis and expanded our product offerings to other property and
casualty insurance products in 2002. We commenced life insurance distribution by acquiring three life
insurance agencies in 2006 and began to offer claims adjusting services by acquiring four claims adjusting
firms in 2008. In June 2010, we established an insurance brokerage business unit to expand our product
offerings from retail to commercial lines.
We have grown both organically and through acquisitions. Since 2002, we expanded our operations
nationwide by establishing 21 insurance agencies and two insurance brokerage firms and acquiring majority
interests in 21 insurance agencies (excluding Datong and its subsidiaries) and five claims adjusting firms.
In October 2017, as part of our transition towards the fee-based platform model, we sold Fanhua Times
Sales & Service Co., Ltd., and all of its subsidiaries, including 18 P&C insurance agencies and one
insurance brokerage firm, to Beijing Cheche Technology Co., Ltd. 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 acquired a majority equity interest in InsCom Holdings Limited, or InsCom
Holdings, to build an e-commerce insurance platform. In April 2014, we established Dianliang Information,
as the holding company for eHuzhu (www.ehuzhu.com), an online mutual aid platform that we launched
in July 2014. In October 2012, we launched CNpad application, a mobile sales support system, which was
later divided into CNpad Auto and Lan Zhanggui. Chetong. Net, an LBS technology-based 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 Holdings
Limited (NYSE:CNF), or CNFinance, 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. For
further information on the changes in our shareholdings in CNFinance and Fanhua Puyi, please see “Item
4. – Information on the Company – C. Organizational Structure – Recent Principal Changes in Corporate
Structure ”.
Our principal executive offices are located at 27/F, Pearl River Tower, No. 15 West Zhujiang Road,
Guangzhou, Guangdong 510623, People’s Republic of China. Our telephone number at this address is +86-
20-8388-6888. Our registered office is at the offices of Maples Corporate Services Limited, PO Box 309,
Ugland House, Grand Cayman, KY1-1104, Cayman Islands, or at such other place as our board of directors
may decide. Our agent for service of process in the United States is CT Corporation System, located at 111
Eighth Avenue, New York, New York 10011.
Capital Expenditure
Our capital expenditures have been used primarily to construct, upgrade and maintain our online
platforms. See “Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital
Resources.”
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B. Business Overview
We are a leading independent online-to-offline financial services provider in China. Through our
online platforms and offline sales and service network, we distribute to individual and institutional
customers in China a wide variety of property, casualty and life insurance products underwritten by
domestic and foreign insurance companies operating in China and provide insurance claims adjusting
services, such as damage assessments, surveys, authentications and loss estimations.
We distribute insurance products to customers primarily through our sales agents, and provide claims
adjustment services through our claims adjustors. With 860,550 sales agents and 1,213 claims adjustors
and 852 sales and service outlets as of March 31, 2019, our distribution and service network consisted of
709 sales outlets in 21 provinces and 143 services outlets in 31 provinces.
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:
CNpad Auto - internet-based auto insurance platform for our sales agents available in mobile
application and WeChat official account versions, through which they can access, compare and
purchase auto insurance products from multiple insurance companies on their mobile devices for
their clients. CNpad Auto had 568,367 activated accounts as of March 31, 2019.
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, 2019,
Baowang has over 2.3 million registered members.
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 life
insurance, auto insurance, accident insurance, travel insurance, and standard health 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, 2019, Lan Zhanggui has over 860,550 registered users.
eHuzhu (www.ehuzhu.com) - an online non-profit mutual aid platform that provides low-cost
alternative risk-protection programs on a mutual aid basis among program members. eHuzhu
primarily offers programs that cover mutual aid for cancer for three different age groups and
accidental death. 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 give donation to and is
entitled to receive donation 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 RMB300,000, with the
maximum contribution from each member limited to RMB3 for each valid claim. As of March 31,
2019, eHuzhu has attracted over 3.5 million registered members.
As of March 31, 2019, we, through Fanhua Group Company, had one e-commerce insurance platform
and one online mutual aid platform, and thirteen insurance intermediary companies in the PRC, of which
ten were insurance agencies including two with national operating licenses and three were insurance claims
adjusting firms. We also own (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.
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The professional insurance intermediary sector in China is still at its early stage of development. We
believe this offers substantial opportunities for further growth. The proliferation of internet access also
presents us with lots of opportunities to improve our operation efficiency and directly reach out to a much
broader customer base. We intend to take advantage of these opportunities to increase our market share by
aggressively expanding our sales force and offline distribution and service network, broadening our product
portfolio and developing our online platforms.
Segment Information
As of December 31, 2018, we 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.
Insurance Agency Segment
Our insurance agency segment accounted for 91.8%, 92.5% and 90.6% of our net revenues from
continuing operations in 2016, 2017 and 2018, respectively. Revenue from this segment is derived from
two broad categories of insurance products: (i) property and casualty insurance products, and (ii) life
insurance products, both primarily focused on meeting the insurance needs of individuals.
Life Insurance Products
Our life insurance business accounted for 82.7% of our net revenues from continuing operations in
2018. We expect the sale of life insurance products to be the major source of our revenue in the next several
years. The life insurance products we distribute can be broadly classified into the categories set forth below.
Due to constant product innovation by insurance companies, some of the insurance products we distribute
combine features of one or more of the categories listed below:
Individual Health Insurance. The individual health insurance products we distribute primarily
consist of critical illness insurance products, which provide guaranteed benefits for specified
serious illnesses and medical insurance, which provides conditional reimbursement for medical
expenses during the coverage period. In return, the insured makes periodic payment of premiums
over a pre-determined period.
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.
Individual Annuity. The individual annuity products we distribute generally provide annual
benefit payments after the insured attains a certain age, or for a fixed time period, and provide
lump sum payment at the end of the coverage period. In addition, the beneficiary designated in
the annuity contract will receive guaranteed benefits upon the death of the insured during the
coverage period. In return, the purchaser of the annuity products makes periodic payments of
premiums during a pre-determined accumulation period.
Individual Whole Life Insurance. The individual whole life insurance products we distribute
provide insurance for the insured person’s entire life in exchange for the periodic payment of
fixed premiums over a pre-determined period, generally ranging from five to 20 years, or until
the insured reaches a certain age. The face amount of the policy or, for some policies, the face
amount plus accumulated interest is paid upon the death of the insured.
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Individual Term Life Insurance. The individual term life insurance products we distribute provide
insurance coverage for the insured for a specified time period or until the attainment of a certain
age, in return for the periodic payment of fixed premiums over a pre-determined period, generally
ranging from five to 20 years. Term life insurance policies generally expire without value if the
insured survives the coverage period.
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.
The life insurance products we distributed in 2018 were primarily underwritten by Huaxia, Tian'an,
Aeon, Taikang, and ICBC AXA Life Insurance Co., Ltd, or ICBC AXA.
Property and Casualty Insurance Products
Our property and casualty insurance business accounted for 7.9% of our net revenues from continuing
operations in 2018. Our main property and casualty insurance product is accident insurance in terms of net
revenues. In addition, we also offer individual accident insurance, travel insurance, disability income
insurance, and other property and casualty products. The property and casualty insurance products we offer
to individual customers can be further classified into the following categories:
Automobile Insurance. Automobile insurance is the largest segment of property and casualty
insurance in the PRC in terms of gross written premiums. We distribute both standard automobile
insurance policies and supplemental policies, which we refer to as riders. The standard
automobile insurance policies we sell generally have a term of one year and cover damages
caused to the insured vehicle by collision and other traffic accidents, falling or flying objects, fire,
explosion and natural disasters. We also sell standard third-party liability insurance policies,
which cover bodily injury and property damage caused by an accident involving an insured
vehicle to a person not in the insured vehicle. The riders we distribute cover additional losses,
such as liability to passengers, losses arising from vehicle theft and robbery, broken glass and
vehicle body scratches.
Individual Accident Insurance. The individual accident insurance products we distribute
generally provide a guaranteed benefit during the coverage period, which usually is one year or
a shorter period, in the event of death or disability of the insured as a result of an accident, or a
reimbursement of medical expenses to the insured in connection with an accident. These products
typically require only a single premium payment for each coverage period. Because most of the
individual accident insurance products we distribute are underwritten by property and casualty
insurance companies, we classify individual accident insurance products as property and casualty
insurance products.
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.
Disability Income Insurance. The disability income insurance products we distribute generally
have a term of one year and provide supplementary income before the insured can get back to
their regular employment or for a specified period in the event of illness or disability. These
products typically require only a single premium payment for each coverage period. Because
most of the disability income insurance products we distribute are underwritten by property and
casualty insurance companies, we classify them as property and casualty insurance products.
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Homeowner Insurance. The homeowner insurance products we distribute primarily cover the
damage to the insured house, furniture and household electrical appliance caused by a number of
standard risks such as fire, flood and explosion.
We primarily partnered with Taiping Property and Casualty Insurance Company Limited, Zhong An
Online Property and Casualty Insurance Company Limited, Taikang Online Property and Casualty
Insurance Company Limited, Beijing Cheche Technology Co., Ltd., or Cheche, and Ping An Property and
Casualty Insurance Company Limited, or Ping An, for the distribution of property and casualty insurance
products in 2018.
Claims Adjusting Segment
Total net revenues derived from our claims adjusting segment accounted for 8.2%, 7.5% and 9.4% of
our total net revenue in 2016, 2017 and 2018, respectively. We offer the following insurance claims
adjusting services:
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.
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.
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, China Pacific Property and Casualty
Insurance Company Limited, or CPIC, Taiping, China Life Property and Casualty Insurance Company
Limited and Asia Pacific Property and Casualty Insurance Company Limited in 2018.
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.
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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, 2019, consisted of one
insurance sales and service group, ten insurance agencies including two with national operating licenses,
and three claims adjusting firms, with 852 sales and service branches and outlets, 860,550 registered
independent sales agents and 1,213 in-house claims adjustors. Our distribution and service network
consisted of 709 sales outlets in 21 provinces and 143 services outlets in 31 provinces.
The following table sets forth additional information concerning our distribution and service network
as of March 31, 2019, broken down by provinces:
Province
Shandong .........................
Guangdong ......................
Hebei ...............................
Sichuan ............................
Hunan ..............................
Jiangsu ............................
Anhui ..............................
Zhejiang ..........................
Guangxi ...........................
Henan ..............................
Shaanxi ...........................
Chongqing .......................
Liaoning ..........................
Inner Mongolia ................
Fujian ..............................
Hubei ..............................
Yunan ..............................
Tianjin .............................
Shanxi .............................
Jiangxi .............................
Beijing .............................
Shanghai ..........................
Guizhou ...........................
Ningxia ............................
Jilin .................................
Qinghai ............................
Hainan .............................
Gansu ..............................
Xinjiang...........................
Tibet ................................
Heilongjiang ...................
Total ..............................
Number of Sales
and Service Outlets
Number of Sales
Agents
Number of In-
house Adjustors
202,619
95,791
85,394
66,752
53,576
46,062
43,388
37,873
34,556
26,063
24,094
22,675
22,180
18,152
17,513
17,365
16,318
14,052
8,782
4,918
2,427
—
—
—
—
—
—
—
—
—
—
860,550
50
229
44
60
15
136
5
60
18
27
52
9
48
9
11
52
16
28
13
24
142
95
20
16
9
9
6
5
4
1
—
1,213
193
61
89
95
61
48
39
53
23
3
10
13
23
13
33
18
15
11
10
8
7
10
2
2
1
2
2
2
2
1
2
852
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We market and sell personal lines of life insurance products and property and casualty insurance
products to customers through mainly independent sales agents, who are not our employees, and our in-
house sales representatives to a lesser degree. We also market and sell accidental, health, travel and
homeowner
through our online platform Baowang
to customers
(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.
insurance products directly
Customers
We sell life insurance products including health insurance, endowment insurance, annuity insurance,
whole life insurance and term life insurance primarily to individual customers as well as personnel lines of
property and casualty insurance products including automobile insurance, individual accident insurance,
homeowner insurance products, liability insurance and travel insurance. Customers for the life insurance
products we distribute are primarily individuals under 50 years of age. For the year ended December 31,
2018, 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.
As of December 31, 2018, we had accumulated approximately 10.1 million individual customers and
1.8 million institutional customers.. By providing certain value-added services to these customers at no
additional charge, we seek to build a loyal customer base that generates referrals and cross-selling
opportunities.
Insurance Company Partners
As of March 31, 2019, we had established business relationships with 83 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 our various affiliated insurance agencies and brokerages located
in different parts of China. As of March 31, 2019, we had outstanding contracts with 28 life insurance
companies, two health insurance companies and 10 property and casualty insurance companies at the
corporate headquarters level for the distribution of insurance products. We also had outstanding contracts
with 58 insurance companies, and 5 insurance brokerage firms and 13 other institutions for the provision
of claims adjusting services as of March 31, 2019.
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 as a public auto insurance transaction platform which
connects insurance distributors with our sales agents and receives technology service fees from distributors
which provide auto insurance products on CNpad based on the volume of insurance premiums they transact
through CNpad. A technology service fee is typically much smaller than the commission we previously
received from insurance companies, though our costs are minimal. In 2018, we primarily partnered with
Cheche, an internet-based auto insurance distributor, for the distribution of auto insurance products, by
introducing agent traffic to Cheche while Cheche processes the transaction in the backoffice. In 2018, net
revenues derived from Cheche accounted for 6.8% of our total property and casualty insurance net revenues.
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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 12.7% of the total insurance premiums generated in
China in 2018, according to statistics released by the CBIRC at the 2019 Insurance Intermediary
Supervision and Administration Work 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 auto
insurance. We believe that we can compete effectively with insurance companies because we
focus only on distribution and offer our customers a broad range of insurance products
underwritten by multiple insurance companies.
Entities that offer insurance products online. In recent years, domestic insurance companies,
internet companies and professional insurance intermediaries have begun to engage in the internet
insurance business. However, each of their insurance e-commerce operations has its own
limitations. The insurance products offered on an insurance company’s website are usually
confined to those under its own brand. Most internet companies have limited experience in
insurance operation with limited or no offline sales and service support. Our better brand
recognition, larger sales scale and broader sales and service network differentiate us from other
professional insurance intermediaries. We believe that we can compete effectively with these
business entities because our online insurance platforms offer users access to a broad range of
insurance products underwritten by multiple insurance companies’ good after-sale services that
are backed by our nation-wide service network and better user experience.
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 property insurance, automobile insurance and
marine and cargo insurance and are able to leverage the business relationships we have developed with
insurance companies through the distribution of property and casualty insurance products.
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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, 2019, we had 30 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.
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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
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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;
-41-
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 Agencies
The principal regulation governing insurance agencies in China is the Provisions on the Supervision
and Administration of Professional Insurance Agencies, or the POSAPIA, promulgated by the CIRC on
September 25, 2009 and effective on October 1, 2009, which has been amended by (i) the Decision on
Revising the POSAPIA issued by the CIRC and effective on April 27, 2013, and (ii) the second amendment
to the POSAPIA issued by the CIRC and effective on October 19, 2015. According to the POSPIA, the
establishment of an insurance agency is subject to minimum registered capital requirement and other
requirements and to the approval of the CIRC. The term “insurance agency” refers to an entity that meets
the qualification requirements specified by the CIRC, has obtained the license to conduct an insurance
agency business with the approval of the CIRC, engages in the insurance business by and within the
authorization of, and which collects commissions from, insurance companies. An insurance agency may
take any of the following forms: (i) a limited liability company; or (ii) a joint stock limited company.
According to the CIRC’s Decision on Revising the Regulatory Provisions on Professional Insurance
Agencies, or the Insurance Agency Decision, promulgated on April 27, 2013, unless otherwise stipulated
by the CIRC, the minimum registered capital for establishing a new insurance agency is RMB50 million
instead of RMB2 million for a regional insurance agency and RMB10 million for a nationwide insurance
agency as previously required. An additional increase of registered capital is no longer required to establish
a branch or sales office. Pursuant to the Notice of the CIRC on Further Clarifying Certain Issues Relating
to the Access to the Professional Insurance Intermediary Market, a professional insurance agency that was
established prior to the promulgation of the Insurance Agency Decision and has a registered capital of no
more than RMB50 million may apply to establish branches only in the province in which it is registered.
A professional insurance agency company that was established prior to the promulgation of the Insurance
Agency Decision, has a registered capital of not more than RMB50 million and has already established
branches in provinces other than its place of registration may apply to establish additional branches in those
provinces. An insurance agency may engage in the following insurance agency businesses:
selling insurance products on behalf of the insurance companies;
collecting insurance premiums on behalf of the insurance companies;
conducting loss surveys and handling claims of insurance businesses on behalf of the insurer
principal; and
other business activities approved by the CIRC.
The name of an insurance agency must contain the words “insurance agency” or “insurance sales.”
The license of an insurance agency is valid for a period of three years. An insurance agency shall submit a
written report to the CIRC within five days from the date of occurrence of any of the following matters:(i)
change of name or a branch’s name;(ii) change of domicile or a branch's business premises;(iii) change of
names of sponsors or major shareholders;(iv) change of major shareholders;(v) change of registered
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capital;(vi) major changes to equity structure;(vii) amendment to the articles of association; (viii)
divestment of a branch; (ix) establishment of a branch; (x) spin-off of or merger with an insurance agency
or (xi) changes of organizational form. According to the Measures on the Supervision and Administration
of Insurance Brokers and Insurance Claims Adjustors issued by the CIRC in January 2013, personnel of an
insurance agency and its branches engaging in the sales of insurance products or relevant loss survey and
claim settlement shall comply with the conditions prescribed by the CIRC. The senior managers of an
insurance agency or its branches must meet specific qualification requirements set forth in the revised
Regulatory Provisions on Professional Insurance Agencies. The appointment of the senior managers of an
insurance agency or its branches is subject to review and approval of the CIRC.
Regulation of Insurance Brokerages
The principal regulation governing insurance brokerages is the Provisions on the Supervision 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 18, 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:
making insurance proposals, selecting insurance companies and handling the insurance
application procedures for the insurance applicants;
assisting the insured or the beneficiary to claim compensation;
reinsurance brokering business;
providing consulting services to clients with respect to disaster and damage prevention, risk
assessment and risk management; and
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
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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:
inspecting, appraising the value of and assessing the risks of the subject matter before and after
it is insured;
surveying, inspecting, estimating the loss of, adjusting and disposing of the insured subject matter
after loss has been incurred;
risk management consulting; and
other business activities approved by the CIRC.
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 PSICA.
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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 Ancillary-Business Insurance Agencies
The principal regulation governing ancillary-business insurance agencies is the Interim Measures on
the Administration of Ancillary-Business Insurance Agency issued by the CIRC on and effective as of
August 4, 2000. The term “ancillary-business insurance agencies” refer to entities that are engaged by
insurers to handle insurance business on behalf of insurers while concurrently engaging in another non-
insurance-related business. Ancillary-business
the qualifications
requirements set forth in this regulation. Upon reviewing and approving the qualifications of an entity
applying to become an ancillary-business insurance agency, the CIRC will issue a “License for Ancillary-
Business Insurance Agency,” which will be valid for three years. An ancillary-business insurance agency
may only undertake insurance business on behalf of one insurance company, and the scope of the
undertaken business is limited to the scope specified in the License for Ancillary- Business Insurance
Agency.
insurance agencies must meet
Regulation of Insurance Salespersons
The principal regulation governing individual insurance salespersons is the Measures on the
Supervision and Administration of Insurance Salespersons issued by the CIRC on January 6, 2013 and
effective on July 1, 2013, which replaced the Provisions on the Administration of Insurance Salespersons
promulgated on April 6, 2006 and effective on July 1, 2006. Under this regulation, the term “insurance
salesperson” refers to an individual who sells insurance products for an insurance company, including those
who are engaged by insurance companies or by insurance agencies. A person must be registered with the
CIRC’s Insurance Intermediaries Regulatory Information System and obtain a “Practice Certificate of
Insurance Salespersons” issued by the insurance company or insurance agency to which he or she belongs
in order to conduct insurance sales activities.
Pursuant to the 2015 Insurance Law and the amended POSPIA, a sales person is no longer required to
pass the qualification examination organized by the CIRC or insurance industry committees to obtain a
Qualification Certificate.
Regulation of Insurance 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;
no record of material violation by investors of applicable laws and regulations in the previous
three years;
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;
chairman (Executive director) and the senior management with qualifications stipulated by the
CIRC;
perfect governance structure, sound organization, effective risk management and internal control
management system; and
business premises and office equipment which are suitable for the development of the businesses.
The name of an insurance intermediary service group must contain the words “Group” or “Holding.”
Its principal business must be equity investment, management and provision of supporting services. An
insurance intermediary service group company shall, submit a written report to the CIRC and its local
counterparts at the place of registration within five working days after the date of occurrence of the
following: (i) changing its registered name or address; (ii) changing its registered capital; (iii) changing its
equity structure by more than 5% or shareholders holding more than 5% of shares; (iv) changing its articles
of association; (v) establishing, acquiring, merging or closing its subsidiary; (vi) engaging in related party
transactions between member companies; (vii) disincorporating; (viii) significantly changing its business
scope; or (ix) making a major strategic investment, suffering a significant investment loss or experiencing
other material events or emergencies that affect or may affect the business management, financial status or
risk control of the group. Senior managers of an insurance intermediary service group company must meet
specific qualification requirements and appointment of the senior managers of an insurance intermediary
service group company is subject to review and approval by the CIRC.
Content Related to Insurance Industry in the Legal Documents of China’s Accession to the WTO
According to the Circular of the CIRC on Distributing the Content Related to Insurance Industry in
the Legal Documents of China’s Accession to the World Trade Organization, or WTO, for the life insurance
sector, within three years of China’s accession to the WTO on December 11, 2001, geographical restrictions
were to be lifted, equity joint venture companies allowed to provide health insurance, group insurance, and
pension/annuity services to Chinese citizens and foreign citizens, and for there to be no other restrictions
except those on the proportion of foreign investment (no more than 50%) and establishment conditions.
For the non-life insurance sector, within three years of China’s accession, the geographical restrictions
were to be lifted and no restrictions allowed other than establishment conditions. For the insurance
brokerage sector, within five years of China’s accession, the establishment of wholly foreign-funded
subsidiary companies was to be allowed, and no restriction other than establishment conditions and
restrictions on business scope.
Content Related to Insurance Industry in the Closer Economic Partnership Arrangements
Under CEPA Supplement IV signed in July 2007 and CEPA Supplement VIII signed in December
2011, local insurance agencies in Hong Kong and Macao are allowed to set up wholly-owned insurance
agency companies and conduct insurance intermediary businesses in Guangdong Province (including
Shenzhen) on a pilot basis if they fulfill the following criteria:
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;
Within the years before application, there has been no serious misconduct or record of
disciplinary action; and
The applicant must have set up a representative office in mainland China for over one year
Regulations on Internet Insurance
The principal regulation governing the operation of internet insurance business is the Interim Measures
for the Supervision of the Internet Insurance Business, or Interim Measures, promulgated by the CIRC on
July 22, 2015 and effective on October 1, 2015. Under the Interim Measures, the term of “internet insurance
business” refers to the business of concluding insurance contracts and providing insurance services by
insurance institutions through self-operated internet platforms, third-party internet platforms or other
methods using the internet and mobile communication and other technologies. Insurance institutions
include insurance companies and professional insurance intermediary companies that are established and
registered in accordance with applicable laws and regulations and with the approval of the CIRC.
Professional insurance intermediaries refer to professional insurance agencies, insurance brokerage firms
and insurance claims adjusting firms that can operate in the areas not limited to the provinces where they
are registered. Third party internet platforms refer to internet platforms other than those self-operated by
insurance institutions which provide auxiliary services related to internet technology support to insurance
institutions for their internet insurance business activities. Any third party internet platform that intends to
directly engage in the internet insurance business such as underwriting of insurance policies, settlement of
claims, cancellation of insurance policies, handling customers’ complaints and providing other customer
services shall apply and obtain relevant qualifications from the CIRC before engaging in internet insurance
business.
Both self-operated internet platforms and third party internet platforms, through which insurance
institutions conduct internet insurance business, shall meet certain requirements such as obtaining ICP
licenses or making ICP filing and maintaining sound internet operation system and information security
system.
Insurance institutions shall carefully evaluate their own risk management and control capacity and
customer service capacity, and rationally determine and choose insurance products and the scope of sales
activities suitable for internet operations. The Interim Measures permit insurance companies to sell certain
type of products online in regions outside their registered business areas, which include: (i) personal
accident insurance, term life insurance and general whole life insurance; (ii) individual homeowner
insurance, liability insurance, credit insurance and guarantee insurance; (iii) property insurance business
for which the whole service process services from sales and underwriting of insurance policies to the
settlement of claims can be performed independently and completely through the internet; and (iv) other
insurance products specified by the CIRC. The Interim Measures also specifies requirements on disclosure
of information regarding insurance products sold on the internet and provides guidelines for the operations
of the insurance institutions that engage in internet insurance business.
Regulations on Online Financial Services
On July 18, 2015, ten PRC regulatory agencies, including the PBOC, the CIRC and the CBRC,
jointly issued the Guidelines on Promoting the Healthy Development of Internet Finance, or the Guidelines.
The Guidelines encourage insurance companies to leverage Internet technology to transform and upgrade
traditional financial services. The Guidelines also support financial institutions to build innovative
international platforms that could conduct internet insurance business.
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The Guidelines set out the basic principles for promoting the development and the administration
of the online insurance sector. The respective regulatory agencies will adopt new rules and regulations to
implement and enforce the principles set out in the Guidelines. As the implementing rules and regulations
of the Guidelines have not been published, there is uncertainty as to how the requirements in the Guidelines
will be interpreted and implemented.
Regulations on Foreign Exchange
Foreign Currency Exchange
Foreign exchange regulation in China is primarily governed by the following rules:
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
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange.
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
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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, or the Operating Rules. Stock Option Rule. On February
15, 2012, SAFE promulgated the No. 7 Notice, which supersedes the Stock Option Rule in its entirety and
immediately became effective upon circulation. According to the No. 7 Notice, domestic individuals, which
include any directors, supervisors, senior managerial personnel or other employees of a domestic company
who are Chinese citizens (including citizens of Hong Kong, Macao and Taiwan) or foreign individuals who
consecutively reside in the territory of PRC for one year, who participate in the same equity incentive plan
of an overseas listed company shall, through the domestic companies they serve, collectively entrust a
domestic agency to handle issues like foreign exchange registration, account opening, funds transfer and
remittance, and entrust an overseas institution to handle issues like exercise of options, purchasing and sale
of related stocks or equity, and funds transfer. Where a domestic agency needs to remit funds out of China
as required for individuals’ participation in an equity incentive plan, the domestic agency shall apply with
the local office of the SAFE for a foreign exchange payment quota on a yearly basis. A domestic agency
shall open a domestic special foreign exchange account in the bank. After repatriation of foreign currency
income earned by individuals from participation in an equity incentive plan, the domestic agency shall
request the bank to transfer the funds from its special foreign currency account to respective personal
foreign currency deposit accounts. In the case of any significant change to the equity incentive plan of a
company listed abroad (such as amendment to any major terms of the original plan, addition of a new plan,
or other changes to the original plan due to merger, acquisition or reorganization of the overseas listed
company or the domestic company or other major events), the domestic agency or the overseas trustee, the
domestic agency shall, within three months of the occurrence of such changes, go through procedures for
change of foreign exchange registration with the local office of the SAFE. The SAFE and its branches shall
supervise, administer and inspect foreign exchange operations related to individuals’ participation in equity
incentive plans of companies listed abroad, and may take regulatory measures and impose administrative
sanctions on individuals, domestic companies, domestic agencies and banks violating the provisions of the
No. 7 Notice.
We and our employees who have been granted applicable equity awards shall be subject to the No. 7
Notice. If we fail to comply with the No. 7 Notice, we and/or our employees who are subject to the No. 7
Notice may face sanctions imposed by foreign exchange authority or any other PRC government authorities.
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Regulations on Dividend Distribution
The principal regulations governing dividend distributions of wholly foreign-owned companies
include:
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
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.
Under these regulations, wholly foreign-owned companies in the PRC may pay dividends only out of
their accumulated profits as determined in accordance with PRC accounting standards. In addition, these
wholly foreign-owned companies are required to set aside at least 10% of their respective accumulated
profits each year, if any, to fund certain reserve funds, until the accumulative amount of such fund reaches
50% of its registered capital. These reserve funds are not distributable as cash dividends.
Regulation on Overseas Listing
On August 8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce, the State
Assets Supervision and Administration Commission, the State Administration for Taxation, the State
Administration for Industry and Commerce, the CSRC and the SAFE, jointly adopted the Provisions on
Foreign Investors' Merger with and Acquisition of Domestic Enterprises, or the Order No. 10 (2006) which
became effective on September 8, 2006. The Order No. 10 (2006) purports, among other things, to require
offshore SPVs, formed for overseas listing purposes and controlled by PRC companies or individuals, to
obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange. On
September 21, 2006, the CSRC published a notice on its official website specifying documents and
materials required to be submitted to it by SPVs seeking CSRC approval of their overseas listings.
At the time of our initial public offering in October 2007, while the application of the M&A Rule
remained unclear, our then PRC counsel at the time, Commerce & Finance Law Offices, had advised us
that, based on their understanding of the then PRC laws and regulations as well as the procedures announced
on September 21, 2006:
the CSRC had jurisdiction over our initial public offering;
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
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.
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.
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Based on the advice of our PRC counsel, we did not seek CSRC’s approval for our initial public offering.
Any requirement to obtain prior CSRC approval and a failure to obtain this approval, if required, could
have a material adverse effect on our business, operating results, reputation and trading price of our ADSs.
Regulations on Tax
PRC Enterprise Income Tax
The PRC EIT is calculated based on the taxable income determined under the PRC accounting
standards and regulations, as well as the EIT law. On March 16, 2007, the National People’s Congress of
China enacted the EIT Law, a new EIT law which became effective on January 1, 2008. On December 6,
2007, the State Council promulgated the Implementation Rules which also became effective on January 1,
2008. On December 26, 2007, the State Council issued the Notice on Implementation of Enterprise Income
Tax Transition Preferential Policy under the EIT Law, or the Transition Preferential Policy Circular, which
became effective simultaneously with the EIT Law. The EIT Law imposes a uniform EIT rate of 25% on
all domestic enterprises and foreign-invested enterprises unless they qualify under certain exceptions.
Under the EIT Law, as further clarified by the Implementation Rules, the Transition Preferential Policy
Circular and other related regulations, enterprises that were established and already enjoyed preferential
tax treatments before March 16, 2007 will continue to enjoy them in the following manners: (i) in the case
of preferential tax rates, for a five-year period starting from January 1, 2008, during which the tax rate will
gradually increase to 25%; or (ii) in the case of preferential tax exemption or reduction for a specified term,
until the expiration of such term. However, if such an enterprise has not enjoyed the preferential treatments
yet because of its failure to make a profit, its term for preferential treatment will be deemed to start from
2008. See “Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China —
The PRC Enterprise Income Tax Law may increase the enterprise income tax rate applicable to some of
our PRC subsidiaries which could have a material adverse effect on our result of operations.”
Under the New Income Tax law, enterprises are classified as either resident or non-resident. A resident
enterprise refers to one that is incorporated under the PRC law or under the law of a jurisdiction outside
the PRC with its "de facto management organization" located within the PRC. Non-resident enterprise
refers to one that is incorporated under the law of a jurisdiction outside the PRC with its "de facto
management organization" located also outside the PRC, but which has either set up institutions or
establishments in the PRC or has income originating from the PRC without setting up any institution or
establishment in the PRC. Under the New Enterprise Income Tax, Implementation Regulation, or the New
EIT Implementation Regulations, "de facto management organization" is defined as the organization of an
enterprise through which substantial and comprehensive management and control over the business,
operations, personnel, accounting and properties of the enterprise are exercised. Under the New Income
Tax Law and the New EIT Implementation Regulation, a resident enterprise’s global net income will be
subject to a 25% EIT rate. On April 22, 2009, the State Administration of Taxation, or the SAT, issued
SAT Circular 82, which provides certain specific criteria for determining whether the "de facto
management body" of a PRC-controlled enterprise that is incorporated offshore is located in China. In
addition, the SAT issued a bulletin on July 27, 2011 providing more guidance on the implementation of
Circular 82 and clarifies matters such as resident status determination. Due to the present uncertainties
resulting from the limited PRC tax guidance on this issue and because substantially all of our operations
and all of our senior management are located within China, we may be considered a PRC resident enterprise
for EIT purposes, in which case: (i) we would be subject to the PRC EIT at the rate of 25% on our worldwide
income; and (ii) dividends income received by us from our PRC subsidiaries, however, would be exempt
from the PRC withholding tax since such income is exempted under the EIT Law for a PRC resident
enterprise recipient. See “Item 3. Key Information — D.Risk Factors — Risks Related to Doing Business
in China — Our global income or the dividends we receive from our PRC subsidiaries may be subject to
PRC tax under the EIT Law, which could have a material adverse effect on our results of operations.”
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PRC Business Tax and VAT
Taxpayers providing taxable services in China are required to pay a business tax at a normal tax rate
of 5% of their revenues, unless otherwise provided. According to the Announcement on the VAT Reform
Pilot Program of the Transportation and Selected Modern Service Sectors issued by the State Tax Bureau
in July 2012, the transportation and some selected modern service sectors, including research and
development and technical services, information technology services, cultural creative services, logistics
support services, tangible personal property leasing services, and assurance and consulting service sectors,
should pay value-added tax instead of business tax based on a predetermined timetable (hereinafter referred
to as the “VAT Reform”), effective September 1, 2012 for entities in Beijing and November 1, 2012 for
entities in Guangdong. The VAT Reform expanded nation-wide from August 1, 2013.
In March 2016, during the fourth session of the 12th National People’s Congress, it was announced
that the VAT reform will be fully rolled out and extended to all industries including construction, real estate,
financial services and lifestyle services. Subsequently, the SAT and Ministry of Finance jointly issued a
Notice on Preparing for the Full Implementation of the VAT Reform (Cai Shui [2016] No. 36). Accordingly,
we started to pay value-added tax instead of business tax from May 1, 2016.
Dividend Withholding Tax
Under the PRC tax laws effective prior to January 1, 2008, dividends paid to foreign investors by
foreign-invested enterprises are exempt from PRC withholding tax. Pursuant to the EIT Law and the
Implementation Rules, dividends generated after January 1, 2008 and distributed to us by our PRC
subsidiaries through our BVI subsidiary are subject to a 10% withholding tax, provided that we are
determined by the relevant PRC tax authorities to be a “non-resident enterprise” under the EIT Law.
Pursuant to the Double Taxation Arrangement, which became effective on January 1, 2007, dividends from
our PRC subsidiaries paid to us through our Hong Kong wholly-owned subsidiary 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. Accordingly, from December 2005 to May 2016, we
conducted all or part of our business in China through contractual arrangements among our PRC
subsidiaries, then-existing consolidated affiliated entities and their shareholders. We relied on contractual
arrangements to control and receive economic benefits from our then-existing consolidated affiliated
entities, which became our wholly-owned subsidiaries in 2016.
In October 2011, we commenced a restructuring of our company. Through a series of equity transfers,
we had obtained direct controlling equity ownership in all of our insurance intermediary companies and
our online operations by May 2016. The contractual arrangements were terminated between January 2015
and May 2016.
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We currently conduct our business in China primarily through our wholly-owned subsidiary Fanhua
Insurance Sales Service Group Company Limited, or Fanhua Group Company, and its subsidiaries. As of
March 31, 2019, we, through Fanhua Group Company, have a controlling equity ownership in two
insurance sales services companies with national operating licenses, 8 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.
Fanhua Group Company and its direct and indirect subsidiaries hold the licenses and permits necessary
to conduct our insurance intermediary business and internet insurance distribution business in China.
Recent Principal Changes in Corporate Structure
Disposal of P&C Insurance Subsidiaries
In October 2017, we entered into a share purchase agreement with Cheche, which operates an online
auto insurance platform. Under this agreement, we disposed of the equity interests in 19 P&C insurance
intermediary subsidiaries to Cheche for a total consideration of approximately RMB225.4 million,
including approximately RMB95.4 million cash consideration and RMB130.0 million in the form of a
convertible loan receivable, which is convertible or collectible in three years and recognized as other non-
current assets. We evaluated the convertible loan receivable's settlement provisions and elected the fair
value option afforded in ASC 825, Financial Instruments, to value this instrument. Under such election, the
loan receivable is measured initially and subsequently at fair value, with any changes in the fair value of
the instrument being recorded in the consolidated financial statements as a change in fair value of derivative
instruments. We estimate the fair value of this instrument by first estimating the fair value of the straight
debt portion. We then estimate the fair value of the embedded conversion option based on financial
performance and growth rate of revenue of Cheche. The sum of these two valuations is the fair value of the
loan receivable included in other non-current assets. On October 31, 2017, we used the discounted cash
flow method to value the debt portion of the convertible loan receivable and determined the fair value to
be RMB22.0 million. Based on Cheche's current and expected financial performance, industry trend and
expected revenue and margin, management considered the conversion option to be deeply out of the money
and determined the fair value of the option to be immaterial. As a result, the carrying amount of the
convertible loan receivable was adjusted by RMB108.0 million. The total fair value of RMB22.0 million
was initially recognized and the balance remained the same and retained in other non-current assets as of
December 31, 2017 and 2018.
The convertible loan receivable also carries a 10% interest return per annum which could be satisfied
by cash or converted into equity interest in Cheche. When the convertible loan receivable expires, we have
the right to convert the loan into the equity interests of Cheche, or recover the principal and interests of the
convertible loan receivable according to the agreement. We recognized approximately RMB0.9 million
gain on disposal of these subsidiaries, which was determined by the excess of the cash consideration and
fair value of the convertible loan receivable over the net book value of the subsidiaries, which was
calculated to be approximately RMB116.5 million at the time of disposal. The net book value of the
subsidiaries at the time of disposal also included goodwill allocated to this disposal in the amount of
approximately RMB12.2 million.
Disposal of InsCom service Limited and InsCom Holding Limited
In October 2018, we disposed of InsCom service Limited, InsCom Holdings Limited and their
subsidiaries to an independent third party, for a total consideration of RMB11.2 million, which was settled
as of December 31, 2018. We recognized no gain or loss on disposal of these subsidiaries, 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 vehicle
companies with no actual business operation.
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Prior to May 23, 2016, Inscom Holdings Limited, through contractual arrangement amongst its
wholly-owned subsidiary Bao Si Kang Technology (Shenzhen) Co., Ltd., our consolidated entity Xinbao
Investment Management Co., Ltd., or Xinbao investment, and its then two individual shareholders,
controlled Xinbao’s wholly-owned subsidiary Shenzhen Baowang E-Commerce Co., Ltd., the operating
entity of Baoxian.com and CNpad.
As part of our restructuring, on May 23, 2016, Mr. Chunlin Wang and Mr. Yuan Tian, the then two
individual shareholders of Xinbao Investment who held the shares of Xinbao Investment on behalf of the
Company, transferred their respective equity interests in Xinbao Investment to Fanhua Times Insurance
Sales & Services Co., Ltd. which later transferred its equity interests in Xinbao Investment to Fanhua
Insurance Sales Service Group Company on September 20, 2017. As a result, Xinbao Investment became
our wholly-owned subsidiary and the contractual arrangement amongst Bao Si Kang, Xinbao Investment
and its individual shareholders were terminated. Inscom Holdings Limited ceased to be the beneficial owner
of Xinbao Investment.
Changes in Our Shareholdings in Fanhua Puyi
In November 2010, our wholly-owned subsidiary Fanhua Fanlian Investment Co., Ltd., or Fanlian,
invested RMB10.0 million in Fanhua Puyi Investment Management Co., Ltd., or Puyi Investment for 19.5%
equity interests in Puyi Investment. In March 2013, Puyi Investment was renamed as Fanhua Puyi Fund
Sales Co. Ltd., or Fanhua Puyi after obtaining a license to distribute fund products.
In November 2016, our equity interests in Fanhua Puyi were diluted from 19.5% to 15.4% as a result
of the injection of additional registered capital in Fanhua Puyi by Chengdu Puyi Bohui Information
Technology Co., Ltd., or Puyi Bohui which holds the remaining equity interests of Fanhua Puyi.
In 2018, in preparation of Puyi Inc.’s initial public offering (“IPO”), Fanhua Puyi and its affiliates
commenced a series of corporate restructurings which resulted in Puyi Inc. becoming the beneficiary owner
of Puyi Bohui. Accordingly, we also participated in Puyi Inc’s equity reorganization transactions in
September 2018, during which we exchange our 15.4% equity interests in Fanhua Puyi for 4,033,600
ordinary shares of Puyi Inc. issued to Fanhua Inc. After the transaction, we hold a 4.8% equity interest in
Puyi Inc. No gain or loss on above transactions was recognized by us as the fair value of Puyi’s shares
received is equivalent to the fair value of our original equity interests in Fanhua Puyi given up. Our equity
interests in Puyi Inc. was diluted to 4.5% after Puyi Inc.’s IPO on March 29, 2019.
Changes in Our Shareholdings in CNFinance
In October 2009, we acquired 20.6% equity interest in Sincere Fame International Limited, or Sincere
Fame, a leading home equity loan service provider in China.
In March 2018, in connection with the reorganization of Sincere Fame, the shareholders of Sincere
Fame transferred all of their equity interests in Sincere Fame in exchange for the ordinary shares of
CNFinance Holdings Limited, or CNFinance. As a result, CNFinance became the parent company of
Sincere Fame and we owned 20.6% equity interests in CNFinance. Our equity interests in CNFinance was
diluted to 18.5% after CNFinance’s initial public offering in November 2018. Investment in CNFinance is
accounted for using the equity method as we have significant influence by the right to nominate one board
member out of seven as the third largest shareholder of CNFinance.
Changes in our Shareholdings in Chetong Network
In July 2018, Fanhua Insurance Surveyors and Loss Adjustors, or FISLA, in which we own 44.67%,
injected an additional capital of RMB8.1 million in Shenzhen Chetong Technology Co., Ltd., or Chetong,
to increase its registered capital from RMB40 million to RMB48.1 million. As a result, FISLA’s equity
interests in Chetong increased from 19.9% to 33.4% and our equity interests in Chetong through FISLA
increased from 8.9% to 14.9%.
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Establishment of 521 Plan Employee Companies
On June 14, 2018, we announced that our board of directors approved the 521 Plan. Pursuant to the
521 Plan, we set up three companies, or 521 Plan Employee Companies, which are Fanhua Employees
Holdings Limited, Step Tall Limited and Treasure Chariot Limited, to hold the shares on behalf of the
Participants. Each of the 521 Plan Employee Companies is a legal entity formed in the British Virgin Islands
(“BVI”) with a sole shareholder appointed by the Company. Mr. Yinan Hu and two other employees of the
Company are the respective sole shareholder and director of the 521 Plan Employee Companies. The 521
Plan Employee Companies are deemed to be our consolidated VIEs.
The following diagram illustrates our corporate structure, including our principal subsidiaries, as of
March 31, 2019:
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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, 2019, see Exhibit 8.1 to this annual report.
We have obtained direct controlling equity ownership in all of our insurance intermediary companies
and our online operations and terminated all of the contractual arrangements. In the opinion of Global Law
Office, our PRC legal counsel, the ownership structures of our consolidated affiliated entities and our
subsidiaries in China have complied with all existing PRC laws and regulations 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, Plant and Equipment
Our headquarters are located in Guangzhou, China, where we leased approximately 2,657.6 square
meters of office space as of December 31, 2018. Our subsidiaries and consolidated affiliated entities leased
approximately 96,187.5 square meters of office space as of December 31, 2018. In 2018, our total rental
expenses were RMB62.1 million (US$9.1 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.
A. Operating Results
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;
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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; and
seasonality.
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, Tian'an and Aeon accounted for more than 10% of our
total net revenues from continuing operations individually in 2018, with Huaxia accounting for 31.7%,
Tian'an for 20.3% and Aeon for 13.1% in 2018. As a result, any significant changes to our business
relationship with the important insurance company partners could have a material impact on our revenue
and profits.
Total Premium Payments to Chinese Insurance Companies
The Chinese insurance industry has grown substantially in the past decade. Between 2008 and 2018,
total insurance premiums increased from RMB978.4 billion to RMB3.8 trillion, representing a compound
annual growth rate, or CAGR, of 13.1%, according to the CIRC. We believe that certain macroeconomic
and demographic factors, such as increasing per capita GDP and an aging population, have contributed to
and will continue to drive the growth of the Chinese insurance industry in the long term.
We derive our revenue primarily from commissions and fees paid by insurance companies, typically
calculated as a percentage of premiums paid by our customers to the insurance companies. Accordingly,
industry-wide premium growth will have a positive impact on us. 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, insurance agencies and
insurance brokerages. In addition, because of the increasingly high cost for establishing and maintaining
distribution networks of their own, more and more medium-size insurance companies have chosen to rely
primarily on insurance intermediaries to distribute their products while they focus on other aspects of their
business.
As insurance companies in the PRC become more accustomed to outsourcing the distribution of their
products to insurance intermediaries, they may allow insurance intermediaries to distribute a wider variety
of insurance products and may provide more monetary incentives to more productive and effective
insurance intermediaries. These and other similar measures designed to boost sales through insurance
intermediaries can have a positive impact on our financial condition and results of operations. Similarly, as
competition intensifies and the insurance market becomes more mature in China, we expect that more
insurance companies will choose to outsource claims adjusting functions to professional service providers
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such as our affiliated claims adjusting firms while they focus on the core aspects of their business, including
product development and asset and risk management.
Premium Rate Levels and Commission and Fee Rates
Because the commissions and fees we receive from insurance companies for the distribution of
insurance products or from third-party internet companies for using our auto insurance transaction system
are generally calculated as a percentage of premiums paid by our customers to the insurance companies,
our revenue and results of operations are affected by premium rate levels and commission and fee rates.
Premium rate levels and commission and fee rates can change based on the prevailing economic conditions,
competitive and regulatory landscape, and other factors that affect insurance companies and third-party
internet companies. These other factors include the ability of insurance companies to place new business,
underwriting and non-underwriting profits of insurance companies, consumer demand for insurance
products, the availability of comparable products from other insurance companies at a lower cost, and the
tax deductibility of commissions and fees. In general, we can negotiate for better rates as an incentive for
generating a larger volume of business.
Since China’s entry into the WTO in December 2001, competition among insurance companies has
intensified as a result of a significant increase in the number of insurance companies and the existing
insurance companies’ expansion into new geographic markets. This competition has led to a gradual
increase in the commission and fee rates offered to insurance intermediaries, and such increase has had a
positive impact on our results of operations.
The Size and Productivity of Our Sales Force
As a distributor of insurance products, we generate revenue primarily through our sales force, which
consists of individual sales agents in our distribution and service network and a relatively small number of
in-house sales representatives. The size of our sales force and its productivity, as measured by the average
number of insurance products sold per person with performance, the average premium per product sold and
the average premiums generated per person with performance during any specified period, directly affect
our revenue and results of operations. In recent years, some entrepreneurial management staffs or senior
sales agents of major insurance companies in China have chosen to leave their employers or principals and
become independent agents. We refer to these independent agents as “entrepreneurial agents.” An
entrepreneurial agent is usually able to assemble and lead a team of sales agents. We have been actively
recruiting and will continue to recruit entrepreneurial agents to join our distribution and service network as
our sales agents. Entrepreneurial agents have been instrumental to the development of our life insurance
business.
Commission Rates for Individual Sales Agents
A large component of our operating costs is commissions paid to our individual sales agents. In order
to retain sales agents, we must pay commissions at a level comparable to the commissions paid by our
competitors. Intensified competition for productive sales agents within the Chinese insurance industry and
rising salaries in China 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 automobile insurance products in 1999 and expanded our product offerings to
other property and casualty insurance products in 2002 and then to individual life insurance products in
2006, primarily to individual customers. We further broadened our service offering to cover insurance
claims adjusting services in 2008. We started to offer insurance brokerage services for commercial line
insurance to corporate clients and reinsurance brokerage services in 2010.
Insurance Agency Segment
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Our largest segment by revenue, the insurance agency segment, provides a broad range of property
and casualty and life insurance products to individual customers.
The property and casualty insurance policies we distribute are typically for one-year terms, with a
single premium payable at the beginning of the term. Accordingly, we receive a single commission or fee
for each property and casualty policy our customers purchase. In order for us to have recurring commission
and fee revenue from property and casualty insurance products, our customers have to renew their policies
or purchase new policies through us every year.
Since October 2017, we disposed of our P&C insurance agencies and have since then shifted to a
platform business model for auto insurance business. Under the platform business model, the fees we
receive from insurance distributors are calculated based on the volume of insurance premiums they transact
through CNpad, which are typically much smaller than the commissions we previously received from
insurance companies, though our costs are minimal.
Most individual life insurance policies we sell require periodic payment of premiums, typically
annually, during a pre-determined payment period, generally ranging from five to 25 years. For each such
policy that we sell, insurance companies will pay us a first-year commission and fee based on a percentage
of the first year’s gross premiums, and subsequent commissions and fees based on smaller percentages of
the renewal premiums paid by the insured throughout the payment period of the policy. Therefore, once
we sell a life insurance policy with a periodic payment schedule, it can bring us a steady flow of commission
and fee revenue throughout the payment period as long as the insured meets his or her premium payment
commitment.
Because insurance companies pay us first-year commissions and fees for most life insurance products
at rates higher than those for property and casualty insurance products, and gross margin of life insurance
business is higher than that of our property and casualty insurance business, we will make an effort to sell
more life insurance products, which will lead to a positive impact on our revenue and gross margin.
Claims Adjusting Segment
The fees we receive for our claims adjusting services are calculated based on the types of insurance
involved. For services provided in connection with property and casualty insurance (other than marine
cargo insurance and automobile insurance), our fees are calculated as a percentage of the recovered amount
from insurance companies plus travel expenses. For services provided in connection with marine cargo
insurance, our fees are charged primarily on an hourly basis and, in some cases, as a percentage of the
amount recovered from insurance companies. For automobile insurance, our fees are generally fixed and
the amounts collected are based on the types of services provided. In some cases, our fees are charged
based on the number of claims adjustors involved in providing the services. We pay our in-house claims
adjustors a base salary plus a commission calculated based on a small percentage of the service fees we
receive from insurance companies or the insured. The claims adjusting business has become and likely will
continue to be an important source of our net revenues. The gross margin and operating margin attributable
to the claims adjusting business are higher than those for both property and casualty insurance products
and life insurance products. We expect that revenues from our claims adjusting business as a percentage of
our total net revenues to remain stable over the next few years.
Share- based Compensation Expenses
Our historical results of operations have been affected by the share-based compensation expenses
incurred. In 2016, 2017 and 2018, we incurred share-based compensation expenses of RMB4.9 million, nil
and nil, respectively. See “Item 5. Operating and Financial Review and Prospects — A. Operating Results
— Key Performance Indicators — Operating Costs and Expenses — Share-based Compensation Expenses”
for a more detailed discussion of our historical share-based compensation expenses. In order to attract and
retain the best personnel for positions of substantial responsibility, provide additional incentive to
employees, directors and consultants and promote the success of our business, we adopted a share incentive
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plan in October 2007. Under our 2007 Share Incentive Plan, as amended and restated in December 2008,
we may issue an aggregate number of our ordinary shares, equal to 15% of our total number of shares
outstanding immediately after the closing of our initial public offering, to cover awards granted under the
plan. See “Item 6. Directors, Senior Management and Employees — B. Compensation — Share Incentives
— 2007 Share Incentive Plan.” All of the share-based compensation expenses related to the options granted
under the 2007 Share Incentive Plan have been amortized as of December 31, 2016.
Seasonality
Our quarterly results of operations are affected by seasonal variations caused by business mix,
insurance companies’ business practices and consumer demand. For property and casualty insurance
business, property and casualty insurance companies, under pressure to meet their annual sales targets,
would increase their sales efforts during the fourth quarter of a year by, for example, offering more
incentives for insurance intermediaries to increase sales. As a result, our commission and fee revenue
derived from property and casualty insurance products for the fourth quarter of a year has generally been
the highest among all four quarters. Business activities, including buying and selling insurance, usually
slow down during the Chinese New Year festivities, which occur during the first quarter of each year. As
a result, our commission and fee revenue derived from property and casualty insurance products for the
first quarter of a year has generally been the lowest among all four quarters. For life insurance business,
much of the Jumpstart sales activities of life insurance companies occur during the first quarter of a year
while business activities slow down in the fourth quarter of a year as life insurance companies focus on the
preparation for the Jumpstart sales season by launching new products, making marketing plans and
organizing training. During the Jumpstart sales season, life insurance companies will offer incentives that
are more attractive to insurance intermediaries and sales agents to boost sales. Accordingly, our
commission and fee revenue derived from life insurance business is generally the highest in the first quarter
of a year and the lowest in the fourth quarter of a year.
Key Performance Indicators
As of December 31, 2018, we 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.
Operating segments are defined as components of an enterprise about which separate financial
information is available and evaluated regularly by our chief operating decision maker in deciding how to
allocate resources and in assessing performance.
Net Revenues
Our revenues are net of PRC business tax. In 2016, 2017 and 2018, we generated net revenues of
RMB4.1 billion, RMB4.1 billion and RMB3.5 billion (US$504.9 million), respectively. We derive net
revenues from the following sources:
Insurance agency segment: commissions paid by insurance companies for the distribution of (i)
life insurance products, and (ii) commoditized property and casualty products sold through
Baoxian.com and (iii) technology service fee generated from CNpad for the transaction of
automobile insurance products, which accounted for 91.8%, 92.5% and 90.6% of our net revenues
for 2016, 2017 and 2018, respectively;
Claims adjusting segment: commissions and fees primarily paid by the insurance companies and,
to a lesser degree, by the insureds for the provision of claims adjusting services, which accounted
for 8.2% , 7.5% and 9.4% of our net revenues for 2016, 2017 and 2018, respectively;
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The following table sets forth our total net revenues earned from each of our reporting segments both
in absolute amounts and as percentages of total net revenues, for the periods indicated:
2016
RMB
%
Agency..................................................
Life insurance business ..................
P&C insurance business .................
3,746,471
990,541
2,755,930
Claims adjusting ............................................ 336,413
4,082,884
Total net revenues ................................
91.8
24.3
67.5
8.2
100.0
Year Ended December 31,
2017
RMB
%
RMB
(in thousands except percentages)
92.5
59.3
33.2
7.5
100.0
3,780,217
2,424,444
1,355,773
308,256
4,088,473
3,143,873
2,870,776
273,097
327,390
3,471,263
2018
US$
457,257
417,537
39,720
47,617
504,874
%
90.6
82.7
7.9
9.4
100.0
Insurance agency segment primarily offers life insurance products and property and casualty insurance
products to individuals. Net revenues from the insurance agency segment decreased from 2016 to 2018 in
both absolute amount and as a percentage of our total net revenues.
Net revenues from life insurance products have become our primary source of revenue. We began
distributing individual life insurance products in 2006. Net revenues from life insurance products increased
significantly from 2016 to 2018, both in absolute amounts and as a percentage of our net revenues. We
expect life insurance business to grow rapidly and bring in significant revenue that will represent a higher
percentage of our total net revenues in the next several years. We believe this growth will be driven by a
number of factors including stronger demand for traditional life insurance products as a result of the aging
population and the Chinese consumers’ increasing awareness of the benefits of insurance.
Commissions and fees generated from property and casualty insurance products decreased
significantly from 2016 to 2018, in absolute amounts, primarily due to i) the transition of our automobile
insurance business, from a commission-based business model to a platform service fee-based business
model in October 2017, under which the fee that we receive from third party internet companies that use
our CNpad platform to offer auto insurance products is based on a significantly lower percentage of
insurance premiums than commission fees that we received from insurance companies for the distribution
of auto insurance products, ii) the termination of business cooperation with certain channels and iii) the
suspension of business relationship with PICC P&C from March to November in 2017. Its share as a
percentage of our total net revenues also decreased from 67.5% in 2016 to 7.9% in 2018, primarily
reflecting the decrease of property and casualty insurance business and the significant growth of our life
insurance during the corresponding period. Due to the termination of business cooperation between
Baoxian.com and one of its major channel partners in June 2018, we expect our net revenues derived from
property and casualty insurance business will continue to decrease in 2019. However, as we retain all of
the fees that we receive from third party internet companies as our gross profit instead of retaining the
spread of commissions received from insurance companies and those paid out to sales agents, we expect
the impact of the new business model on the gross profit derived from our property and casualty insurance
business to be limited.
We began providing claims adjusting services in 2008. Net revenues from our claims adjusting
segment declined from 2016 to 2017, reflecting the suspension of business cooperation with PICC P&C
starting from March 2017 and were largely unchanged from 2017 to 2018. We expect that net revenues
from claims adjusting services will be stable as a percentage of our total net revenues in the next few years.
The commissions and fees we receive from the distribution of insurance products are based on a
percentage of the premiums paid by the insured. Commission and fee rates generally depend on the type of
insurance products, the particular insurance company and the region in which the insurance products are
sold. We typically receive payment of the commissions and fees from insurance companies for insurance
products on a monthly basis. Some of the fees are paid to us annually or semi-annually in the form of
performance bonuses after we achieve specified premium volume or policy renewal goals as agreed upon
between the insurance companies and us.
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The fees we receive from third party internet-based insurance sales companies are based on a
percentage of the premiums transacted over CNpad. We typically receive payment of such fees on a
monthly basis.
We are compensated primarily by insurance companies for our claims adjusting services. The fees we
receive for our claims adjusting services depend on the types of insurance involved. For services provided
in connection with marine cargo insurance, our fees are charged primarily on an hourly basis and, in some
cases, as a percentage of the amount recovered from insurance companies. For claims adjusting services
related to automobile insurance, our fees are generally fixed on a per claim basis, or in some cases, on a
per head basis. These fees are typically paid to us on a quarterly basis. For services provided in connection
with other property and casualty insurance, our fees are calculated as a percentage of the recovered amount
from insurance companies plus travel expenses. We typically receive payment for these fees on a semi-
annual or annual basis.
Operating Costs and Expenses
Our operating costs and expenses consist of costs incurred in connection with the distribution of
insurance products and the provision of claims adjusting services, selling expenses and general and
administrative expenses. The following table sets forth the components of our operating costs and expenses,
both in absolute amounts and as percentages of our net revenues, for the periods indicated.
2016
2017
RMB
%
RMB
%
RMB
2018
US$
%
Year Ended December 31,
(in thousands except percentages)
4,082,884
(3,106,601)
(502,802)
100.0
(76.1)
(12.3)
4,088,473
(3,059,407)
(221,785)
100.0
(74.8)
(5.4)
3,471,263
504,874
(2,346,015)
(231,075)
(341,214)
(33,608)
100.0
(67.6)
(6.7)
(481,947)
(11.8)
(534,145)
(13.1)
(468,430)
(68,130)
(13.5)
(4,091,350)
(100.2)
(3,815,337)
(93.3)
(3,045,520)
(442,952)
(87.8)
Total net revenues ..........................
Operating costs ................................
Selling expenses ...............................
General and administrative
expenses .......................................
Total operating costs and
expenses ..........................................
Operating Costs
We incur costs primarily in connection with the distributions of insurance products and claims
adjusting services Our operating costs decreased from 2016 to 2018, primarily due to the transition of our
automobile insurance business from a commission-based business model to a platform business model from
November, 2017, as well as the termination of business cooperation with certain channels and the
suspension of business relationship with PICC P&C for the distribution of property and casualty insurance
products from March 2017. 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 decreased from 2016 to 2017 and decreased further in 2018,
reflecting the transition of our automobile insurance business from a commission-based business model to
a platform fee-based business model and the strong growth of our life insurance business which has higher
margins than property and casualty insurance business. We anticipate that our costs will increase in absolute
amounts as we further grow our business.
Selling Expenses
Our selling expenses primarily consist of:
salaries and employment benefits for employees who work in back office below the provincial
management level;
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office rental, telecommunications and office supply expenses incurred in connection with sales
activities; and
advertising and marketing expenses.
We expect that our selling expenses will increase as we expand our distribution and service network
in both existing markets and new geographic regions. As we grow in size, we also intend to spend more on
marketing and advertising to enhance our brand recognition and promote our online platforms. Selling
expenses increased significantly as we implemented promotion schemes for P&C insurance business in
2016, and were stable in 2017 and 2018.
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
foreign exchange loss.
We expect that our general and administrative expenses will increase as we hire additional
administrative personnel, pay higher labor costs and incur additional costs in connection with the expansion
of our business, and our efforts to develop our e-commerce platform.
Share-based compensation expenses. Share-based compensation expenses constituted one of the
components of our general and administrative expenses in 2016. We incurred share-based compensation
with respect to certain managerial and administrative staff and a small number of sales agents in 2016. As
the share options have all been vested in 2016, there was no such expenses incurred in 2017 and 2018. The
following table sets forth our share-based compensation expenses, both in absolute amounts and as
percentages of our general and administrative expenses, for the periods indicated.
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(in thousands except percentages)
2016
RMB
%
Share-based compensation expenses .....
Others .......................................................
General and administrative expenses
4,937
477,010
481,947
1.0
99.0
100.0
For the Year Ended December 31,
2017
RMB
RMB
%
(in thousands except percentages)
2018
US$
—
534,145
534,145
—
100.0
100.0
—
468,430
468,430
—
68,130
68,130
%
—
100.0
100.0
Our share-based compensation expenses in 2016 were primarily attributable to the options granted in
March 2012. All of the share-based compensation expenses related to the options granted under the 2007
Share Incentive been amortized as of December 31, 2016. No share-based compensation expense was
recognized in 2017 and 2018.
Relating to our 521 Plan, we expect to commence to charge share-based compensation expenses in
2019. As the 521 Plan was initially recognized as a liability award, the unrecognized share base
compensation expense related to the 521 Plan is variable based on the change of the fair value at each
reporting date. As of December 31, 2018, there was RMB7.4 million in unrecognized share-based
compensation expense related to unvested share options granted to the 521 Plan’s participants. For more
information about our share-based compensation expenses, please see Note 19 to our audited consolidated
financial statements included in this annual report.
Taxation
We and each of our subsidiaries file separate income tax returns.
The Cayman Islands, the British Virgin Islands and Hong Kong
Under the current laws of the Cayman Islands and the British Virgin Islands, we and our subsidiaries
incorporated in the British Virgin Islands are not subject to income or capital gains taxes. In addition,
dividend payments are not subject to withholding tax in those jurisdictions.
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 16.5% for the years ended December 31, 2016 and 2017, and
8.25% for the years ended December 31, 2018. Payment of dividends is not subject to withholding tax in
Hong Kong.
PRC
EIT
According to the PRC Enterprise Income Tax Law, which became effective on January 1, 2008, as
further clarified by subsequent tax regulations implementing the EIT law, foreign invested enterprises and
domestic enterprises are subject to enterprise income tax, or EIT, at a uniform rate of 25%.
The provision for current income taxes of the subsidiaries operating in Hong Kong has been calculated
by applying the current rate of taxation of 16.5% for the years ended December 31, 2016 and 2017, and
8.25% for the years ended December 31, 2018.
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Pursuant to the relevant laws and regulations in the PRC, Ying Si Kang Information Technology
(Shenzhen) Co., Ltd., or Ying Si Kang, our wholly-owned subsidiary, 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.
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. In September 2018, our wholly-owned subsidiary, Fanhua
Lianxin Insurance Sales Co., Ltd., which is the holding vehicle of our life insurance operations, were
relocated to Tianfu New Area, Sichuan province. Subsequently, Lianxin will enjoy 15% EIT tax rate
instead of unified 25% from September 1, 2018 to December 31, 2020.
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
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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
On January 1, 2018, we 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. Our revenue from contracts with insurance companies
is derived principally from the provision of agency and claims adjusting services. According to
ASC 606, revenue is recognized at a point in time upon the effective date of the insurance policy,
as no performance obligation exists after the insurance policy was signed. If there are other services
within the contract, we estimate the stand-alone selling price for each separate performance
obligation, and the corresponding apportioned revenue is recognized over the period of time in
which the customer receives the service, and as the performance obligations are fulfilled and we
are entitled to that portion of revenue using the output method for the services. In situations where
multiple performance obligations exist within a contract, the use of estimates is required to allocate
the transaction price on a relative stand-alone selling price basis to each separate performance
obligation. We determine revenue recognition through the following steps:
Identification of the contract, or contracts, with a customer;
Identification of the performance obligation in the contract;
Determination of the transaction price, including the constraint on variable consideration;
Allocation of the transaction price to the performance obligation in the contracts; and
Recognition of revenue when (or as) the Group satisfies a performance obligation.
We disaggregates our revenue from different types of service contracts with customers by principal
service categories, as we believe it best depicts the nature, amount, timing and uncertainty of our revenue
and cash flows. The following is a description of the accounting policy for our principal revenue streams.
Insurance agency services revenue
For Insurance agency services, performance obligations are considered met and revenue is recognized
when the services are rendered and completed, at the time an insurance policy becomes effective, that is,
when the signed insurance policy is in place and the premium is collected from the insured. We have met
all the criteria of revenue recognition when the premiums are collected or the respective insurance
companies and not before, because collectability is not ensured until receipt of the premium. Accordingly,
we do not accrue any commission and fees prior to the receipt of the related premiums.
No allowance for cancellation has been recognized for agency as the management of our estimates,
based on our past experience that the cancellation of policies rarely occurs. Any subsequent commission
adjustments in connection with policy cancellations which have been deminims to date are recognized upon
notification from the insurance carriers. Actual commission and fee adjustments in connection with the
cancellation of policies were 0.2%, 0.2% and 0.1% of the total commission and fee revenues during years
ended December 31, 2016, 2017 and 2018, respectively.
For property insurance and life insurance agency, we may receive a performance bonus from insurance
companies as agreed and per contract provisions. Once an agency achieves its performance obligation,
typically a certain sales volume, the bonus will become due. The bonus amount is computed based on the
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insurance premium amount multiplied by an agreed-upon percentage. The contingent commissions are
recorded when a performance obligation is being achieved. Prior to the adoption of Topic 606, revenue
that was not fixed and determinable because a contingency existed was not recognized until the contingency
was resolved. Under Topic 606, we must estimate the amount of consideration that will be received in the
coming year such that a significant reversal of revenue is not probable. Performance bonus represent a form
of variable consideration associated with certain sales volume, for which our earn commissions. In
connection with Topic 606, contingent commissions are estimated with a constraint applied and accrued
relative to the recognition of the corresponding core commissions. For the year ended December 31, 2018,
the adoption of Topic 606 lead to recognition of contingent performance bonus by RMB23.2 million
(US$3.0 million). Also, such performance obligation did not exist in prior years' service contract with
insurance company.
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. Accordingly, the timing of revenue recognition is not materially impacted by the new
standard.
As of January 1, 2018, the adoption of Topic 606 was no impact on our consolidated financial position.
Practical Expedients and Exemptions
We 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
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.
Valuation of Convertible Loan Receivable
We use the income approach to value our convertible loan receivable. The income approach uses
valuation techniques to convert future cash flows or earnings to a single present amount (discounted). The
measurement is based on the value indicated by current market expectations about those future amounts.
In following these approaches, the types of factors that we may take into account in fair value pricing our
convertible loan receivable include, as relevant: the portfolio company’s ability to make payments, its
earnings and discounted cash flows, the markets in which the portfolio company does business, transaction
comparables, and enterprise values, among other factors.
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. We recognize 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, we recognize the compensation cost of each tranche as a separate
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award on a straight-line basis; if each tranche has performance conditions that are dependent of activities
that occur in the prior service periods, we recognize 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
We early adopted the Financial Accounting Standards Board’s Accounting Standard Update ("ASU")
No. 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-
Based Payment Accounting” prospectively starting from 2018. 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 we are 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.
Liability award
Options or similar instruments on shares shall be classified as liabilities if either of the following
conditions is met:
The underlying shares are classified as liabilities;
We can be required under any circumstances to settle the option or similar instrument by
transferring cash or other assets.
We measure 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. 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.
On June 14, 2018, we announced a 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 of the Company’s ordinary shares, representing 14 million of the Company’s ADSs at the
subscription price of US$27.38 per ADS.
As of January 24, 2019, 280,000,000 ordinary shares have been purchased by companies established
on behalf of the Participants, or 521 Plan Employee Companies, at the weighted average price of US$1.37
per ordinary share. Of the 280,000,000 ordinary shares, 150,000,000 ordinary shares were purchased from
Master Trend Limited, or Master Trend, on June 14, 2018, at US$29 per ADS (equivalent to US$1.45 per
ordinary share) which represents the average closing price of the 30 trading days prior to the date of Board
approval.. The remaining 130,000,000 ordinary shares were purchased from the Company at $1.28 per
ordinary shares.
In order to facilitate the purchase of shares by the Participants, 90% of the total subscription price of
the shares under the 521 Plan is funded by loans granted to individual Participants by the Company while
the remaining 10% is contributed by the Participants. The loans bear interest at a rate of 8% per annum and
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are repayable upon the earlier of the expiry date of the 521 Plan, termination of employment or agent
contract, or within five years
Because the Participants currently do not provide sufficient assets or other means (other than the shares
that they have pledged) to cover the full amount of their respective loans, the loans are considered to be
nonrecourse in nature. In accordance with ASC 718, the rights and obligations embodied in a transfer of
equity shares to the Participants for loans that provide no recourse to other assets of the employee (that is,
other than the shares) are substantially the same as those embodied in a grant of share options. Accordingly,
the 521 Plan is accounting for as a grant of share options. The principal and interest are included as part of
the exercise price of the “option” and therefore no interest income is recognized. The exercise price of the
grants increases over time as interest accrues. 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.
The Participants’ rights to the benefits of ownership 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 in order for the shares to fully vest,
otherwise the share appreciation profits at the end of the vesting period, if any, after principals and accrued
interests under the loans are fully repaid to us, will be either fully retained or partially retained by us.
Under these vesting and profit distribution arrangements, we may 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 classified as a liability.
As of December 31, 2018, we had reserved 280,000,000 ordinary shares available to be granted as
share-based awards under the 521 Plan. The shares under the 521 Plan are generally scheduled to vest over
five years. 150,000,000 ordinary shares were granted on December 31, 2018 and the rest were granted on
January 10, 2019. We estimate the forfeiture rate for both independent agents and employees will be nil in
2018.
For the years ended December 31, 2018, changes in the status of total outstanding options under 521
Plan, was as follows:
Outstanding as of January 1, 2018 ................
Granted .......................................................
Exercised.....................................................
Forfeited......................................................
Outstanding as of December 31, 2018 ..........
Weighted
average
exercise
price in USD
—
1.5
—
—
1.5
Weighted
average
remaining
contractual
life (Years)
—
5.00
—
—
5.00
Aggregate
Intrinsic
Value
RMB
—
—
—
Number of
options
—
150,000,000
—
—
150,000,000
No share-based compensation expense related to the 521 Plan was recognized for the year ended
December 31, 2018. As the 521 Plan was initially recognized as a liability award, the unrecognized share-
based compensation expense related to the 521 Plan varies based on the change of the fair value at each
reporting date. Compensation cost for each period until settlement will 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
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date) in the fair value of the instrument for each reporting period. As of December 31, 2018, there was
RMB7.3 million unrecognized share-based compensation expense related to unvested share options granted
to the 521 Plan’s Participants.
On January 10, 2019, we granted an additional 130,000,000 ordinary shares to the Participants. There
was RMB35.3 million unrecognized share-based compensation expense related to unvested share options
granted to the 521 Plan's participants as of January 10, 2019.
Share-based compensation expenses of RMB4, 937, nil and nil for the years ended December 31, 2016,
2017 and 2018, respectively, were included in the general and administrative expenses.
Variable Interest Entities ("VIE")
The 521 Plan
On June 14, 2018, we announced that our board of directors approved the 521 Plan. The 521 Plan is
designed to incentivize our key employees and independent sales agents. The 521 Plan provides the
Participants an opportunity to benefit from the appreciation of 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 Company.
The 521 Plan established a pool of 280 million ordinary shares, representing 14 million ADSs,
available to benefit Participants. In establishing the ADS pool, we have:
•
through a 521 Plan Employee Company, purchased 150,000,000 ordinary shares in the form of
either ADS or ordinary share from Master Trend, a company controlled by a principal shareholder who is
also one of our founders, in October 2018.
• repurchased 1,423,774 ADSs, representing 28,475,480 ordinary shares, from the open market
through December 31, 2018;
•
issued 101,524,520 new ordinary shares to the Participants in January 2019.
Pursuant to the 521 Plan, we set up three companies, or 521 Plan Employee Companies, which are
Fanhua Employees Holdings Limited, Step Tall Limited and Treasure Chariot Limited, to hold the shares
on behalf of the Participants. Each of the 521 Plan Employee Companies is a legal entity formed in the
British Virgin Islands with a sole shareholder appointed by the Company. Mr. Yinan Hu and two other
employees of the Company are the respective sole shareholder and director of the 521 Plan Employee
Companies. Our ordinary shares are the only significant assets held by the 521 Plan Employee Companies,
which serve as collateral to the loans issued by the Company to the Participants. Given the only substantial
recourse to the loans issued by the Company are the ordinary shares of the Company, changes (principally
decreases) in the value of the ordinary shares held by the 521 Plan Employee Companies will be indirectly
absorbed by the Company and we have potential exposure to the economics of the 521 Plan Employee
Companies. Therefore, we have variable interests in the 521 Plan Employee Companies. Since none of the
521 Plan Employee Companies' equity investors have the obligation to absorb the expected losses or the
right to receive the expected residual returns as (i) the depreciation of the ADS will be indirectly absorbed
by the Company as discussed above and (ii) and the appreciation of the ADS will be absorbed by the
Company or the Participants, as any residual proceeds from the sale of the ADS will revert to the Company
or the Participants and not the shareholders of the 521 Plan Employee Companies. Therefore, the 521 Plan
Employee Companies are deemed to be our VIEs.
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Through the loan agreements, entrusted share purchase agreements and letter of undertaking described
below, as the shares held by the 521 Plan Employee Companies are pledged to the Company as collateral
to the loans issued to the Participants, we have the power to direct the significant activities of the 521 Plan
Employee Companies, and we have potential exposure to the economics of the VIEs resulting from the
fluctuation in the value of the Company’s ADSs, which is more than insignificant. Therefore, we are
deemed the primary beneficiary of the 521 Plan Employee Companies and consolidate them accordingly.
The following is a summary of the contractual agreements that we have 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. On
various dates between July 2018 and January 2019, loan agreements and an entrusted share purchase
agreements were signed among CISG Holdings Ltd., our wholly-owned subsidiary, 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 Company for a loan of 90% of the subscription
price of the ordinary shares under the 521 Plan. Participants also each 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. The loan agreements provided a total of
RMB1.38 billion (US$191.8 million) in loans to the VIEs and Participants of the 521 Plan for the sole
purpose of funding purchases of the Company’s ordinary shares under the 521 Plan. All of the ordinary
shares purchased are pledged as collateral to the Company for the loans and the Participants cannot direct
the sale of the ordinary shares without the consent of the Company 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 will terminate after five years or upon the termination of agency or employment
relationship, or the settlement of the loan, whichever comes first.
•
Letters of Undertaking
Each of the sole directors and sole shareholders of the 521 Plan Employee Companies, each of whom
is either a significant shareholder and director or an employee of the Company, has executed a letter of
undertaking with the Company. Under the letter of under taking, each individual agrees to follow, without
any conditions, our instructions as to the management of all activities of each of the 521 Plan Employee
Companies, as well as any directions from us concerning transferring the shares or changing directors.
As all the contractual arrangements with the 521 Plan Employee Companies are subject to PRC law,
and, based on the advice of our PRC counsel, we believe that our contractual arrangements with the 521
Plan Employee Companies are in compliance with PRC law and are legally enforceable according to our
PRC counsel. However, uncertainties in the PRC legal system could limit our ability to enforce these
contractual arrangements. The interests of the shareholders of the 521 Plan Employee Companies may
diverge from that of our company, which may potentially increase the risk that they would seek to act
contrary to the contractual terms.
None of the 521 Plan Employee Companies conducted any material business activities during 2018.
However, the VIE’s collectively 20.1% of our outstanding shares. See “Item 3. Key Information — D. Risk
Factors — Risks Related to Our Corporate Structure — Our variable interest entities or their respective
shareholders and directors may fail to perform their obligations under our contractual arrangements with
them.
Recent Accounting Pronouncement
On February 25, 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases,”
which specifies the accounting for leases. For operating leases, ASU 2016-02 requires a lessee to recognize
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a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its
balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the
cost of the lease is allocated over the lease term, on a generally straight-line basis. In addition, this standard
requires both lessees and lessors to disclose certain key information about lease transactions. ASU 2016-
02 is effective for publicly-traded companies for annual reporting periods, and interim periods within those
years, beginning after December 15, 2018. Early adoption is permitted. Based on our preliminary
assessment, we expect to record a right-of-use asset of approximately RMB182 million and a lease liability
of approximately RMB181 million on the adoption date of January 1, 2019, primarily related to our leased
office space. We will use a modified retrospective approach under ASU 2018-11 and will not restate prior
periods. We expect to implement new accounting policies as well as to elect certain practical expedients
available to us under ASU 2016-02, including those related to leases with terms of less than 12 months.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, which is intended to improve financial reporting
by requiring timelier recording of credit losses on loans and other financial instruments held by financial
institutions and other organizations. The ASU requires the measurement of all expected credit losses for
financial assets held at the reporting date based on historical experience, current conditions, and reasonable
and supportable forecasts. Financial institutions and other organizations will now use forward-looking
information to better inform their credit loss estimates. Many of the loss estimation techniques applied
today will still be permitted, although the inputs to those techniques will change to reflect the full amount
of expected credit losses. Organizations will continue to use judgment to determine which loss estimation
method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors
and other financial statement users better understand significant estimates and judgments used in estimating
credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These
disclosures include qualitative and quantitative requirements that provide additional information about the
amounts recorded in the financial statements. In November 2018, this was further updated with the issuance
of ASU 2018-19, which excludes operating leases from the scope. In addition, the ASU amends the
accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit
deterioration. For public business entities that are U.S. SEC filers, the ASU is effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2019. We are in the process of
evaluating the impact of adoption of this guidance on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment. The update simplifies the subsequent measurement of
goodwill by eliminating Step 2 from the goodwill impairment test. The annual, or interim, goodwill
impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An
impairment charge should be recognized for the amount by which the carrying amount exceeds the
reporting unit’s fair value. The update also 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. An entity still has the option to perform the qualitative
assessment for a reporting unit to determine if the quantitative impairment test is necessary. The update
should be applied on a prospective basis. The nature of and reason for the change in accounting principle
should be disclosed upon transition. For public companies, the update is effective for any annual or interim
goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted
for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We
expects there is no material impact upon adoption of this guidance on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework –
Changes to the Disclosure Requirements for Fair Value Measurement, which modifies disclosure
requirements for fair value measurements. While some disclosures have been removed or modified, new
disclosures have been added. The guidance is effective for us no later than January 1, 2020. Early adoption
is permitted, where the Company is permitted to early adopt the portion of the guidance regarding the
removal or modification of the fair value measurement disclosures while waiting to adopt the requirement
regarding additional disclosures until the effective date. We expect there will be changes in respective
disclosure upon adoption of this guidance on our consolidated financial statements.
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Results of Operations
The following table sets forth our net revenues, operating costs and expenses and income from
operations by reportable segments for the periods indicated.
In 2016, our business was divided into three reporting operating segments: (1) insurance agency, (2)
insurance brokerage, and (3) claims adjusting. The insurance agency segment provides a broad range of
property and casualty and life insurance products to individual customers. As the result of the disposal of
our insurance brokerage business in November 2017, we operated two reporting operating segments: (1)
insurance agency, and (2) claims adjusting as of December 31, 2017. Accordingly, the insurance brokerage
segment was accounted as discontinued operations. Consolidated statements of operations for the years
ended 2016 have been revised to conform to the current presentation.
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(in thousands except percentages)
For the Year Ended December 31,
2016
RMB
2016 to 2017
Percentage
Change
%
2017
RMB
2017 to 2018
Percentage
Change
2018
%
RMB
US$
(in thousands except percentages)
3,746,471
990,541
2,755,930
336,413
4,082,884
(2,906,791)
(673,230)
(2,233,560)
(199,810)
(3,106,601)
(502,802)
(481,947)
(4,091,350)
79,467
29,609
(117,542)
(8,466)
115,275
6,901
10,341
124,051
(27,249)
48,293
145,095
22,543
167,638
10,591
(i)
0.9
144.8
(50.8)
(8.4)
0.1
(1.4)
143.1
(45.0)
(2.6)
(1.5)
(55.9)
10.8
(6.7)
367.8
(100.2)
(16.2)
*
66.4
275.2
38.1
307.2
515.8
125.6
207.5
(75.7)
169.5
(76.5)
(ii)
3,780,217
2,424,444
1,355,773
308,256
4,088,473
(2,864,882)
(1,636,340)
(1,228,542)
(194,525)
(3,059,407)
(221,785)
(534,145)
(3,815,337)
371,718
(65)
(98,517)
273,136
191,784
25,891
14,284
505,095
(167,803)
108,944
446,236
5,480
451,716
(iii)
(16.8)
18.4
(79.9)
6.2
(15.1)
(24.9)
18.7
(83.0)
(0.2)
(23.3)
(4.2)
(12.3)
(20.2)
42.4
*
15.7
55.9
1.9
32.1
(17.3)
32.1
33.8
60.1
38.3
*
36.6
(v)
(vi)
(iv)
3,143,873
457,257
2,870,776
417,537
273,097
327,390
39,720
47,617
3,471,263
504,874
(2,151,856)
(312,975)
(1,943,053)
(282,606)
(208,803)
(194,159)
(30,369)
(28,239)
(2,346,015)
(341,214)
(231,075)
(33,608)
(468,430)
(3,045,520)
(68,130)
(442,952)
529,280
10,491
76,981
1,526
(114,028)
(16,585)
425,743
61,922
195,456
34,207
11,807
28,428
4,975
1,717
667,213
97,042
(224,586)
174,468
617,095
(32,665)
25,375
89,752
—
—
617,095
89,752
2,488
188.6
7,180
1,044
157,047
186.1
449,228
35.8
609,915
88,708
Consolidated Statement of Income Data
Net revenues:
Agency ...............................................................
Life insurance business ...................................
P&C insurance business .................................
Claims adjusting ................................................
Total net revenues ..............................................
Operating costs and expenses:
Operating costs:
Agency ................................................................
Life insurance business ................................
P&C insurance business...............................
Claims adjusting ................................................
Total operating costs .......................................
Selling expenses ...............................................
General and administrative expenses ..............
Total operating costs and expenses ..................
Income (loss) from continuing
operations...................................................
Insurance agency ............................................
Claims adjusting.............................................
Other ...............................................................
Income(loss) from continuing operations .......
Other income, net:
Investment income ............................................
Interest income ..................................................
Others, net ..........................................................
Income from continuing operations before
income taxes and income of affiliates ...........
Income tax expense ..............................................
Share of income of affiliates ................................
Net income from continuing operations .
Net income from discontinued
operations, net of tax ..............................
Net income ...................................................
Less: Net income attributable to the
noncontrolling interests ............................
Net income attributable to the
Company’s shareholders ......................
*
Not meaningful for analysis because the percentage change is mathematically undeterminable or involves a change from income or benefit
to loss or expense, or vice versa.
Year ended December 31, 2018 Compared to Year Ended December 31, 2017
Net Revenues
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Our total net revenues decreased by 15.1% from RMB4,088.5 million in 2017 to RMB3,471.3 million
(US$504.9 million) in 2018.
Net revenues from our insurance agency segment decreased by 16.8% from RMB3,780.2 million
in 2017 to RMB3,143.9 million (US$457.3 million) in 2018. The decrease was primarily driven
by 79.9% (i) decrease in net revenues derived from the property and casualty insurance agency
business, from RMB1,355.8 million in 2017 to RMB273.1 million (US$39.7 million) in 2018,
offset by (ii) a 18.4% increase in net revenues derived from the life insurance agency business,
from RMB2,424.4 million in 2017 to RMB2,870.8 million (US$417.5 million) in 2018. The
increase in net revenues generated from the life insurance agency business was primarily due to
the growth in the number of sales agents, establishment of new branches in more regions, and
overall industry growth. The decline of the property and casualty insurance agency business was
primarily due to the transition of our P&C insurance business from a commission-based business
model towards a platform management fee-based business model.
Net revenues from our claims adjusting segment increased by 6.2% from RMB308.3 million in
2017 to RMB327.4 million (US$47.6 million) in 2018. The increase was mainly due to expansion
business to provide services to more insurance companies in 2018.
Operating Costs and Expenses
Operating costs and expenses decreased by 20.2% from RMB3,815.3 million in 2017 to RMB3,045.5
million (US$443.0 million) in 2018.
Operating Costs. Our operating costs decreased by 23.3% from RMB3,059.4 million in 2017 to
RMB2,346.0 million (US$341.2 million) in 2018, primarily because of a decrease in operating cost in P&C
insurance business.
Operating costs for our insurance agency segment decreased by 24.9% from RMB2,864.9 million
in 2017 to RMB2,151.9 million (US$313.0 million) in 2018, primarily driven by (i) a decrease of
83.0% in costs for the property and casualty insurance agency business which was mainly due to a
decrease in revenue, offset by (ii) an increase of 18.7% in costs for the life insurance agency
business, which is in line with the growth in net revenues from the life insurance agency business
offset.
Operating costs for our claims adjusting segment decreased by 0.2% from RMB194.5 million in
2017 to RMB194.2 million (US$28.2 million) in 2018.
Selling Expenses. Our selling expenses increased by 4.2% from RMB221.8 million in 2017 to
RMB231.1 million (US$33.6 million) in 2018, primarily attributable to new sales outlets.
General and Administrative Expenses. Our general and administrative expenses decreased by 12.3%
from RMB534.1 million in 2017 to RMB468.4 million (US$68.1 million) in 2018. The decreases were
primarily due to the disposal of P&C subsidiaries in Oct 2017, partially offset by the increase in payroll
and rental expenses.
Income(loss) from Operations
As a result of the foregoing factors, income from operations increased by 55.9% from RMB273.1
million in 2017 to RMB425.7 million (US$61.9 million) in 2018.
Income from operations for our agency insurance segment increased by 42.4% from RMB371.7
million in 2017 to RMB529.3 million (US$77.0 million) in 2018, which was primarily due to the
strong growth of renewal life insurance business contribution,, partially offset by the decline in the
property and casualty insurance agency business.
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Income from operations for our claims adjusting segment in 2018 was RMB10.5 million (US$1.5
million), compared with loss from operations of RMB0.7 million in 2017, which was primarily due
to growth of high margin business of non-automobile claim adjusting services.
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 increased by 15.7%
from RMB98.5 million in 2017 to RMB114.0 million (US$16.6 million) in 2018. The change was
primarily due to increase in payroll and rental expenses 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 slightly increased by 1.9% from
RMB191.8 million in 2017 to RMB195.5 million (US$28.4 million) in 2018.
Interest Income. Our interest income increased by 32.1% from RMB25.9 million in 2017 to RMB34.2
million (US$5.0 million) in 2018. The increase was primarily due to interest related to the settlement of
one year interest-bearing receivables in the third quarter of 2018.
Income Tax Expense
Our income tax expense increased by 33.8% from RMB167.8 million in in 2017 to RMB224.6 million
(US$32.7 million) in 2018. The effective tax rate for 2018 was 33.7% compared with 33.2% in 2017. The
increase in effective tax rate was primarily due to the withholding income tax provision related to dividend
payments since the third quarter of 2017.
Share of Income of Affiliates
Our share of income of affiliates increased by 60.1% from RMB108.9 million in 2017 to RMB174.5
million (US$25.4 million) in 2018, primarily due to the rapid growth of net income generated by
CNFinance , in which we own 18.5% equity interest.
Net Income Attributable to the Non-controlling Interests
Our net income attributable to the non-controlling interests increased by 188.6% from RMB2.5
million in 2017 to RMB7.2 million (US$1.0 million) in 2018, primarily due to the increased profits from
claims adjusting segments as we currently own 44.7% equity interests.
Net Income Attributable to the Company’s Shareholders
As a result of the foregoing, our net income attributable to our shareholders increased by 35.8% from
RMB449.2 million in 2017 to RMB609.9 million (US$88.7 million) in 2018.
Year ended December 31, 2017 Compared to Year Ended December 31, 2016
Net Revenues
Our total net revenues increased slightly by 0.1% from RMB4,082.9 million in 2016 to RMB4,088.5
million in 2017.
Net revenues from our insurance agency segment increased by 0.9% from RMB3,746.5 million in
2016 to RMB3,780.2 million in 2017. The increase was primarily driven by (i) a 144.8% increase
in net revenues derived from the life insurance agency business, from RMB990.5 million in 2016
to RMB2,424.4 million in 2017, offset by 50.8% decrease in net revenues derived from the property
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and casualty insurance agency business, from RMB2,755.9 million in 2016 to RMB1,355.8 million.
The increase in net revenues generated from the life insurance agency business was primarily due
to the growth in the number of sales agents, establishment of new branches in more regions, and
overall industry growth. The decline of the property and casualty insurance agency business was
primarily due to the i) suspension of business cooperation with PICC P&C starting from March 1,
2017, ii) our decision to cut low margin channel businesses starting from the second quarter of
2017 and (iii) the transition of our P&C insurance business from a commission-based business
model towards a platform management fee-based business model.
Net revenues from our claims adjusting segment decreased by 8.4% from RMB336.4 million in
2016 to RMB308.3 million in 2017. The increase was mainly due to expansion business to provide
services to more insurance companies in 2018..
Operating Costs and Expenses
Operating costs and expenses decreased by 6.7% from RMB4,091.4 million in 2016 to RMB3,815.3
million in 2017.
Operating Costs. Our operating costs decreased by 1.5% from RMB3,106.6 million in 2016 to
RMB3,059.4 million in 2017, primarily because of a decrease in operating cost in P&C insurance business.
Operating costs for our insurance agency segment decreased by 1.4% from RMB2,906.8 million
in 2016 to RMB2,864.9 million in 2017, primarily driven by (i) an increase of 143.1% in costs for
the life insurance agency business, which is in line with the growth in net revenues from the life
insurance agency business offset by (ii) a decrease of 45.0% in costs for the property and casualty
insurance agency business which was mainly due to a decrease in revenue.
Operating costs for our claims adjusting segment decreased by 2.6% from RMB199.8 million in
2016 to RMB194.5 million in 2017. The change was primarily in line with the decrease in net
revenues from claims adjusting business.
Selling Expenses. Our selling expenses decreased by 55.9% from RMB502.8 million in 2016 to
RMB221.8 million in 2017, primarily attributable to the significant decrease of marketing campaign
expenses, which mainly aimed at promoting sales and gaining market share of our P&C insurance during
2016.
General and Administrative Expenses. Our general and administrative expenses increased by 10.8%
from RMB481.9 million in 2016 to RMB534.1 million in 2017. The increases were primarily due to the
increase in payroll and rental expenses, partially offset by the decrease in share-based compensation and
depreciation expenses.
Income (loss) from Operations
As a result of the foregoing factors, income from operations for 2017 is RMB273.1 million,
compared with an operating loss of RMB8.5 million in 2016.
Income from operations for our agency insurance segment increased by 367.8% from RMB79.5
million in 2016 to RMB371.7 million in 2017, which was primarily due to the strong growth of
life insurance agency business, partially offset by the decline in the property and casualty insurance
agency business.
Income from operations for our claims adjusting segment in 2018 was RMB10.5 million (US$1.5
million), compared with loss from operations of RMB0.7 million in 2017, which was primarily due
to growth of high margin business of non-automobile claim adjusting services.
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Other loss from operations represented operating loss incurred by the headquarters which was not
allocated to each business segment. Operating loss incurred by the headquarters decreased by 16.2%
from RMB117.5 million in 2016 to RMB98.5 million in 2017. The change was primarily due to
our stringent cost control and increase in operating efficiency.
Other Income
Investment Income. Investment income represents income received from short term investments in
collective trust products and interbank deposits. Our investment income increased by 66.4% from
RMB115.3 million in 2016 to RMB191.8 million in 2017. The increase was primarily attributable to more
high return short term investment products in 2017.
Interest Income. Our interest income increased by 275.2% from RMB6.9 million in 2016 to RMB25.9
million in 2017. The increase was primarily due to interest related to amounts due from CNFinance and a
one-year interest bearing receivable from third party from third quarter of 2017.
Income Tax Expense
Our income tax expense increased by 515.8% from RMB27.2 million in 2016 to RMB167.8 million
in 2017. The effective tax rate for 2017 was 33.2% compared with 22.0% in 2016. The increase in effective
tax rate was primarily due to the withholding income tax provision related to dividend payments in2017.
Share of Income of Affiliates
Our share of income of affiliates increased by 125.6% from RMB48.3 million in 2016 to RMB108.9
million in 2017, primarily due to the rapid growth of net income generated by CNFinance, in which we
own 20.6% equity interest.
Net Income Attributable to the Non-controlling Interests
Our net income attributable to the non-controlling interests decreased by 76.5% from RMB10.6
million in 2016 to RMB2.5 million in 2017, primarily due to the decreased profits from claims adjusting
segments as we currently own 44.7% equity interests.
Net Income Attributable to the Company’s Shareholders
As a result of the foregoing, our net income attributable to our shareholders increased by 186.1% from
RMB157.0 million in 2016 to RMB449.2 million in 2017.
Inflation
Inflation in China has impacted our results of operations. According to the National Bureau of
Statistics of China, the consumer price index in China increased by 2.0%, 1.4%, 2.0%, 1.6% and 2.1% in
2014, 2015, 2016, 2017 and 2018, respectively. Our operating costs and expenses, such as sales agent and
employee compensation and office operating expenses, increased significantly partly as a result of inflation
in 2017 and 2018. Additionally, because a substantial portion of our assets consists of cash and cash
equivalents, high inflation significantly reduced the value and purchasing power of these assets. We are not
able to hedge our exposures to higher inflation in China. If high inflation persists in China in the future,
our operational results may continue to be significantly affected.
Foreign Currency
The exchange rate between U.S. dollar and RMB has declined from an average of RMB8.2264 per
U.S. dollar in July 2005 to RMB6.8837 per U.S. dollar in December 2018. The fluctuation of the exchange
rate between the RMB and U.S. dollar and HK dollar resulted in foreign currency translation loss of
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RMB10.2 million (US$1.5 million) in 2018, 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, 2018, we had RMB772.8 million (US$112.4 million) in cash and cash equivalents, and
RMB1,554.1 million (US$226.0 million) in short term investments. Our cash and cash equivalents consist
of cash on hand, bank deposits and short-term, highly liquid investments that are readily convertible to
known amounts of cash, and have insignificant risk of changes in value related to changes in interest rates.
Our principal uses of cash have been to fund dividend distribution and share buyback, maintenance and
developments of online platforms including Lan Zhanggui, CNpad Auto, Baoxian.com, and eHuzhu,
establishment of new branches and sales outlets, working capital requirements, automobiles and office
equipment purchases, office renovation and rental deposits.
We expect to require cash to fund our ongoing business needs, particularly the further expansion of
our distribution and service network, expansion into the financial services business and development of
online platforms.
We believe that our current cash and cash equivalents and anticipated cash flow from operations will
be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital
expenditures, for at least the next 12 months. We may, however, require additional cash due to changing
business conditions or other future developments, including any investments or acquisitions we may decide
to pursue. If our existing cash is insufficient to meet our requirements, we may seek to sell additional equity
securities, debt securities or borrow from lending institutions. Financing may be unavailable in the amounts
we need or on terms acceptable to us, if at all. The sale of additional equity securities, including convertible
debt securities, would dilute our earnings per share. The incurrence of debt would divert cash for working
capital and capital expenditures to service debt obligations and could result in operating and financial
covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable
to obtain additional equity or debt financing as required, our business operations and prospects may suffer.
The following table sets forth a summary of our cash flows for the periods indicated:
Year Ended December 31,
2016
RMB
87,846
(732,606)
(216,575)
2017
RMB
(in thousands)
RMB
2018
US$
152,127
(23,723)
47,558
523,827
1,567,585
(1,664,506)
76,187
227,996
(242,092)
(861,335)
175,962
426,906
62,091
1,132,851
273,979
439,033
63,855
273,979
439,033
848,166
123,361
Net cash generated from operating activities ....................
Net cash (used in) generated from investing activities ......
Net cash (used in) generated from financing activities ......
Net (decrease) increase in cash and cash equivalents and
restricted cash ..............................................................
Cash and cash equivalents and restricted cash at the
beginning of the year ..................................................
Cash and cash equivalents and restricted cash at the end of
the year ......................................................................
Operating Activities
Net cash generated from operating activities amounted to RMB523.8 million (US$76.2 million) for
the year ended December 31, 2018, primarily attributable to (i) a net income of RMB617.1 million
-81-
(US$89.8 million), (ii) adjustments of depreciation of RMB10.8 million (US$1.6 million), amortization of
acquired intangible assets of RMB15.9 million (US$2.3 million) and share of income of affiliates of
RMB174.5 million (US$25.4 million), which were non-cash items and increase primarily due to the rapid
growth of net income generated by CNFinance Inc., and (iii) an increase of accounts payable of RMB129.7
million (US$18.9 million) and other payable of RMB21.5 million (US$3.1 million) due to an increase in
operational cost and expenses that had been accrued but unsettled in the fourth quarter of 2018, partially
offset by RMB156.0 million (US$22.7 million) in investment adjustment income from collective trust
funds and inter-bank deposit.
Net cash generated from operating activities amounted to RMB152.1million for the year ended
December 31, 2017, primarily attributable to (i) a net income of RMB451.7 million, (ii) adjustments of
depreciation of RMB14.1 million, amortization of acquired intangible assets of RMB33.2 million and share
of income of affiliates of RMB108.9 million, which were non-cash items, and (iii) an increase of accounts
payable of RMB139.5 million and other payable of RMB22.9 million due to an increase in operational
cost and expenses that had been accrued but unsettled in the fourth quarter of 2017, partially offset by (i)
an increase of accounts receivable of RMB140.7 million as a result of sales growth, and (ii) RMB177.9
million in investment income from collective trust funds and inter-bank deposit.
Net cash generated from operating activities amounted to RMB87.8 million for the year ended
December 31, 2016, primarily attributable to (i) a net income of RMB167.6 million, (ii) adjustments of
depreciation of RMB13.5 million, amortization of acquired intangible assets of RMB20.2 million,
compensation expenses associated with stock options of RMB4.9 million and share of income of affiliates
of RMB48.3 million, which were non-cash items, and (iii) an increase of accounts payable of RMB127.0
million and other payable of RMB142.7 million due to an increase in the operational cost and expenses
that had accrued but unsettled in the fourth quarter of 2016, partially offset by (i) an increase of accounts
receivable of RMB271.3 million as a result of sales growth, and (ii) RMB80.6 million in investment
income from collective trust funds and inter-bank deposit.
Investing Activities
Net cash generated from investing activities for the year ended December 31, 2018 was RMB1,567.6
million (US$228.0 million), primarily attributable to (i) proceeds from short term investments of RMB12.5
billion (US$1.8 billion) that had matured, (ii) loan repayment from third party of RMB500.0 million
(US$72.7 million) and (iii) purchase of property, plant and equipment of RMB22.8 million (US$3.3 million)
partially offset by cash used to purchase financial products including collective trust funds and inter-bank
deposits of RMB11.4 billion (US$1.7 billion).
Net cash used in investing activities for the year ended December 31, 2017 was RMB23.7 million,
primarily attributable to (i) cash used to purchase financial products including collective trust funds and
inter-bank deposits of RMB11.1 billion, (ii) loan to third party of RMB500.0 million, partially offset by
proceeds from short term investments of RMB11.5 billion that had matured, (iii) purchase of property,
plant and equipment of RMB20.9 million, and (iv) disposal of subsidiaries of RMB20.6 million.
Net cash used in investing activities for the year ended December 31, 2016 was RMB732.6 million,
primarily attributable to (i) cash used to purchase financial products including collective trust funds and
inter-bank deposits of RMB9.5 billion, and (ii) cash used to purchase intangible assets of RMB60.0 million,
partially offset by (i) proceeds from short term investments of RMB8.8 billion that had matured and (ii)
proceeds from disposal of subsidiaries of RMB29.4 million.
Financing Activities
Net cash used in financing activities was RMB1,664.5 million (US$242.1 million) for the year ended
December 31, 2018 attributable to (i) cash used for the purchase of ordinary shares pursuant to the
Company’s 521 Plan and its share repurchase program in 2018 of RMB1.6 billion (US$228.3 million) and
(ii) dividend payments of totaling RMB331.7 million (US$48.2 million), partially offset by proceeds from
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employees and agents’ share subscription of RMB211.1 million (US$30.7 million) and proceeds related to
disposal of Fanhua Times Sales & Services Co., Ltd and its subsidiaries of RMB22.7 million (US$3.3
million).
Net cash generated from financing activities was RMB47.6 million for the year ended December 31,
2017 attributable to (i) proceeds of issuance of ordinary shares upon private placement of RMB201.1
million and proceeds of upon exercise of stock options RMB64.9 million partially offset by (i) dividend
payments of totaling RMB137.2 million and (ii) repayment of advances from the disposed subsidiary of
RMB103.4 million.
Net cash used in financing activities was RMB216.6 million for the year ended December 31, 2016,
attributable to payments totaling RMB213.5 million for acquisitions of noncontrolling interests in
subsidiaries, partially offset by proceeds of RMB1.1 million received upon exercise of stock options.
Capital Expenditures
We incurred capital expenditures of RMB11.9 million, RMB20.9 million and RMB22.8 million
(US$3.3 million) for the years ended December 31, 2016, 2017 and 2018, respectively. Our capital
expenditures have been used primarily to construct our IT infrastructure and online platforms, and to
purchase automobiles and office equipment for newly established insurance intermediary companies. We
estimate that our capital expenditures will increase moderately in the following two or three years as we
further expand our distribution and service network in China, and maintain and upgrade our IT
infrastructure and online platforms. We anticipate funding our future capital expenditures primarily with
net cash flows from financing and operating activities.
Borrowings
As of each of December 31, 2017 and 2018, we had no short-term or long-term bank borrowings.
Holding Company Structure
We are a holding company with no material operations of our own. We conduct our operations through
our subsidiaries in China. As a result, our ability to pay dividends and to finance any debt we may incur
depends upon dividends paid by our subsidiaries. If our subsidiaries incur debt on their own behalf in the
future, the instruments governing their debt may restrict their ability to pay dividends to us. Our wholly
owned subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as
determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our
subsidiaries in China is required to set aside at least 10% of its after-tax profits as reported in the PRC
statutory financial statements each year, if any, to fund a statutory reserve until such reserve reach 50% of
its registered capital, and to further set aside a portion of its after-tax profits to fund the employee welfare
fund at the discretion of its board. Although the statutory reserves can be used, among other ways, to
increase the registered capital and eliminate future losses in excess of retained earnings of the respective
companies, the reserve funds are not distributable as cash dividends except in the event of liquidation of
the companies. Furthermore, the EIT Law that took effect on January 1, 2008 has eliminated the exemption
of EIT on dividend derived by foreign investors from foreign-invested enterprises and imposes on foreign-
invested enterprises an obligation to withhold tax on dividend distributed by such foreign-invested
enterprises. As of December 31, 2018, our restricted net asset was RMB2.9 billion (US$415.1 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, 2018, we had aggregate undistributed earnings of approximately RMB1.4 billion
(US$209.7 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.
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C. Research and Development, Patents and Licenses, etc.
None.
D. Trend Information
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, 2018 to December 31, 2018 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, 2018, we did not have any off-balance sheet arrangements that had or were reasonably likely
to have a current or future effect on our financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
F. Contractual Obligations
The following table sets forth our contractual obligations and commercial commitments as of
December 31, 2018:
Payment Due by Period
Total
Less
than
1 year
1-3
years
(in thousands of RMB)
3-5
years
More
than 5
years
Operating lease obligations ...................................... 200,489
Total ................................................................... 200,489
71,812
71,812
91,752
91,752
29,619
29,619
7,306
7,306
Not included in the table above are uncertain tax liabilities of RMB70.4 million (US$10.2 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, 2018.
G. Safe Harbor
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
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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
Chunlin Wang ..................................... 49
Peng Ge ............................................... 47
Yinan Hu ............................................. 53
Yunxiang Tang .................................... 73
Stephen Markscheid. ........................... 65
Allen Warren Lueth ............................. 50
Mengbo Yin ........................................ 63
Position/Title
Chief Executive Officer and Chairman of the Board
of Directors
Chief Financial Officer and Director
Director
Independent Director
Independent Director
Independent Director
Independent Director
Mr. Chunlin Wang became our chairman of the board of directors in September 2017 and has been
our chief executive officer since October 2011. He has been our director since March 2016. From April
2011 to October 2011, he was our chief operating officer. From January 2007 to October 2011, he was vice
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president and head of the property and casualty insurance unit of our company. From 2003 to January 2007,
he served as assistant to our chairman. From 2002 to 2005, he served as the general manager of Guangdong
Nanfeng, one of our first affiliated insurance intermediaries in the PRC. From 1998 to 2002, Mr. Wang
served as a branch manager at Guangzhou Nanyun Car Rental Services Co., Ltd. and later Guangdong
Nanfeng Automobile Association Co., Ltd., our predecessors. Mr. Wang received his bachelor’s degree in
law from Central-Southern University of Politics and Law in China.
Mr. Peng Ge has been our chief financial officer since April 2008 and became our director in
December 2016. 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
currently a venture partner at DealGlobe, a Shanghai based investment bank. He is a member of the board
of directors and a member of the audit committee, compensation committee and/or nomination committee
of Jinko Solar, Inc., Ener-Core Inc., and Hexindai Inc., all of which are public companies listed in U.S and
ZZ Capital, a public company listed in Hong Kong. He is also a trustee of Princeton-in-Asia, a nonprofit
social service organization affiliated with Princeton University. From 2007 to 2015, he was the chief
executive officer of Synergenz BioScience, Inc., a genomics company based in Hong Kong. Prior to that,
Mr. Markscheid was the chief executive officer of HuaMei Capital Company, Inc., a Sino-U.S. investment
advisory firm from 2006 to 2007. From 1998 to 2006, Mr. Markscheid worked for GE Capital. During his
time with GE Capital, Steve led GE Capital's business development activities in China and Asia Pacific,
primarily acquisitions and direct investments. Prior to joining GE, Mr. Markscheid worked as case
leader for the Boston Consulting Group throughout Asia from 1994 to 1997. Prior to that, Mr. Markscheid
had been a commercial banker for ten years in London, Chicago, New York, Hong Kong and Beijing with
Chase Manhattan Bank and First National Bank of Chicago. Prior to that, he worked with the US-China
Business Council in Washington D.C. and Beijing. Mr. Markscheid received his bachelor’s degree in East
Asian studies from Princeton University, a master’s degree in international affairs and economics from the
School of Advanced International Studies at Johns Hopkins University, and an MBA degree from Columbia
University.
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Mr. Allen Lueth has been our independent director since August 2007. Mr. Lueth is currently a member
of the board of directors of Greatview Aseptic Packaging Company Limited, a company listed in Hong
Kong and Roots & Shoots, a private environmental charity organization. Since May 2017, Allen has been
the head of finance for Cardinal Health Asia-Pacific. From December 2010 to February 2018, he has been
the head of finance of Cardinal Health China. Prior to that, he was the vice president of finance and strategy
of Zuellig Pharma China, a private company focused on pharmaceutical distribution, and was its chief
financial officer from 2005 to November 2009, when the company was acquired by Cardinal Health. 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.
B. Compensation
In 2018, the aggregate cash compensation, including reimbursement of expenses, to our executive
officers was approximately RMB2.4 million (US$0.3 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.
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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 shs. 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, 2019, except for the options to purchase 1,040,000 ordinary shares granted to two 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;
restricted shares, which represent non-transferable ordinary shares, that may be subject to
forfeiture, restrictions on transferability and other restrictions; and
restricted share units, which represent the right to receive our ordinary shares at a specified date
in the future, which may be subject to forfeiture.
Awards may be designated in the form of ADSs instead of ordinary shares. If we designate an award
in the form of ADSs, the number of shares issuable under the 2007 Share Incentive Plan will be adjusted
to reflect the ratio of ADSs to ordinary shares.
Eligibility. We may grant awards to employees, directors and consultants of our company or any of
our related entities, which include our subsidiaries or any entities in which we hold a substantial ownership
interest. However, we may grant options that are intended to qualify as incentive share options, or ISOs,
only to our employees and employees of our majority-owned subsidiaries.
Plan Administration. The compensation committee of our board of directors, or a committee
designated by the compensation committee, will administer the 2007 Share Incentive Plan. However,
awards made to our independent directors must be approved by the entire board of directors. The
compensation committee or the full board of directors, as appropriate, will determine the individuals who
will receive grants, the types of awards to be granted and terms and conditions of each award grant,
including any vesting or forfeiture restrictions.
Award Agreement. Awards granted under our 2007 Share Incentive Plan will be evidenced by an
award agreement that will set forth the terms, conditions and limitations for each award. In addition, in the
case of options, the award agreement may also specify whether the option constitutes an ISO or a non-
qualifying share option.
Acceleration of Awards upon Corporate Transactions. The outstanding awards will accelerate upon
occurrence of a change-of-control corporate transaction where the successor entity does not assume our
outstanding awards under the 2007 Share Incentive Plan. In such event, each outstanding award will
become fully vested and immediately exercisable, and the transfer restrictions on the awards will be
released and any forfeiture provisions will terminate immediately before the date of the change-of-control
transaction. If the successor entity assumes our outstanding awards and later terminates the grantee’s
service without cause within 12 months of the change-of-control transaction, the outstanding awards will
automatically become fully vested and exercisable.
Exercise Price and Term of Awards. The exercise price per share subject to an option will be
determined by the plan administrator and set forth in the award agreement which may be a fixed or variable
price related to the fair market value of our ordinary shares; provided, however, that no options may be
granted to an individual subject to taxation in the United States at less than the fair market value on the
date of grant. To the extent not prohibited by applicable laws or any exchange rule, a downward adjustment
of the exercise prices of any outstanding options may be made in the absolute discretion of the plan
administrator and will be effective without the approval of our shareholders or the approval of the affected
participants. If we grant an ISO to an employee who, at the time of that grant, owns shares representing
more than 10% of the voting power of all classes of our share capital, the exercise price cannot be less than
110% of the fair market value of our ordinary shares on the date of that grant. The term of each award will
be stated in the award agreement. The term of an award shall not exceed 10 years from the date of the grant,
except that five years is maximum term of an ISO granted to an employee who holds more than 10% of the
voting power of our share capital.
Amendment and Termination. Our board of directors may at any time amend, suspend or terminate
the 2007 Share Incentive Plan. Amendments to the 2007 Share Incentive Plan are subject to shareholder
approval to the extent required by law, or stock exchange rules or regulations. Additionally, shareholder
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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, 2019, options to purchase 1,040,000 ordinary shares were outstanding. The following
table summarizes the outstanding options as of March 31, 2019.
Name(1)
Options
Outstanding
Exercise Price (Per
Ordinary
Share)( US$)
Grant Date
Expiration Date
Stephen Markscheid .............
Mengbo Yin .........................
640,000
400,000
0.001
0.001
March 12, 2012 March 12, 2022
March 12, 2012 March 12, 2022
(1) Upon cash exercise of all of the share options beneficially owned by Mr. Chunlin Wang, Mr. Peng
Ge and Mr. Yinan Hu in November, 2017, 4,050,000, 5,350,000 and 6,500,000 ordinary shares have
been issued to Kingsford Resources, Green Ease and Sea Synergy which were respectively 100%
beneficially owned by Mr. Wang, Mr. Ge and Mr. Hu.
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, 2019, there were 132,646,780 ordinary shares
outstanding held by the Employee Companies 2014.
521 Plan
On June 14, 2018, we obtained approval from our board of directors to implement a 521 Plan, which
enabled eligible Participants to participate in the growth of the Company 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 is funded by loans granted to the individual Participants by the Company,
while the remaining 10% is 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 comes first. The repayment of the loan and interests can be extended with
mutual agreements upon maturity of the loan. Shares beneficially owned by the Participants under the 521
Plan and certain of his or her personal assets are pledged to the Company to secure the repayment of the
loans by the Participants. The Participants are entitled to receive dividends, but during the lock-up period
any dividends distributed to them will be used to repay interest on the loan before their loans are repaid in
full.
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When it is time for the loan to be repaid, the 521 Plan Employee Company will sell the shares on
behalf of the Participant and use the proceeds from the sale to repay the principal and interest owed under
the loans from the Company. If the proceeds from the sale are insufficient to pay the amount owed, the
Participant remains obligated to pay the remaining amount due to the Company. If the proceeds from the
sale are more than sufficient to repay the amount owed, then any remaining amount will go to the
Participant, in part or in whole, based on whether the Participant obtained certain performance targets
detailed in the loan agreement, as follows:
If the Participant failed to meet the performance targets, or if the Participant ends his or her
employment or agent arrangement with the Company prior to the maturity date of the loan, which
is December 31, 2023, after repaying the principal and interest owed under the loans, any
remaining amount will be used to (i) repay the Participant’s capital contribution and (ii) pay the
Participant interest on his or her capital contribution at a rate of up to 8% per annum. Anything
remaining after this will be paid to the Company.
If the Participant partially meets the performance targets or is an employee of the Company, after
repaying the principal and interest owed under the loans, any remaining amount will be used to
(i) repay the Participant’s capital contribution, (ii) pay the Participant interest on his or her capital
contribution at a rate of up to 8% per annum, and (iii) pay the Participant 50% of the remaining
proceeds (after deducting (i) and (ii) and multiplying the amount by the percentage of the
performance target achieved). Anything remaining after this will be paid to the Company.
If the Participant met the performance target, after repaying the principal and interest owed under
the loans the Participant will keep all of the remaining proceeds.
Three stock holding vehicle companies, or 521 Plan Employee Companies, have been established to
hold the shares on behalf of the Participants, namely Fanhua Employee Holdings Limited, Treasury Chariot
Limited and Step Tall Limited, which hold 200,000,000 ordinary shares, 40,000,000 ordinary shares and
40,000,000 ordinary shares related to the 521 Plan, respectively. Mr. Yinan Hu, our co-founder and director
and two employees are the respective sole shareholder and director of each of the 521 Plan Employee
Companies. Fanhua Employee Holdings Limited, of which Mr. Hu is the sole shareholder and director, has
established an employee committee to make voting and disposition decisions with regards to the shares that
it holds while the other two 521 Plan Employee Companies have appointed their respective sole
shareholders and directors to exercise such right during the loan period. Each Participant enters into an
entrusted share purchase agreement with a 521 Plan Employee Company, pursuant to which each of the
521 Plan Employee Companies purchased the shares of the Company from either a principal shareholder
or from the Company and holds the shares on behalf of the Participant until the loan has been repaid.
C. Board Practices
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 2018, our board of directors
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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 2018. We have no specific policy with respect to director attendance at our
annual general meetings of shareholders.
Committees of the Board of Directors
We have established three committees under the board of directors: the audit committee, the
compensation committee and the corporate governance and nominating committee, and have adopted a
charter for each of the committees. Each committee’s members and functions are described below.
Audit Committee. Our audit committee consists of Allen Lueth (chairman), Stephen Markscheid and
Mengbo Yin, all of whom satisfy the “independence” requirements of Rule 5605 of the Nasdaq Listing
Rules and Rule 10A-3 under the Securities Exchange Act of 1934. The audit committee oversees our
accounting and financial reporting processes and the audits of the financial statements of our company. The
audit committee is responsible for, among other things:
selecting the independent auditors and pre-approving all auditing and non-auditing services
permitted to be performed by the independent auditors;
reviewing with the independent auditors any audit problems or difficulties and management’s
response;
reviewing and approving all proposed related-party transactions;
discussing the annual audited financial statements with management and the independent auditors;
reviewing major issues as to the adequacy of our internal controls and any special audit steps
adopted in light of material control deficiencies;
annually reviewing and reassessing the adequacy of our audit committee charter;
meeting separately and periodically with management, the independent auditors and the internal
auditor; and
reporting regularly to the full board of directors.
In 2018, 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:
reviewing and recommending to the board with respect to the total compensation package for our
chief executive officer;
approving and overseeing the total compensation package for our executives other than the chief
executive officer;
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reviewing and making recommendations to the board with respect to the compensation of our
directors; and
reviewing periodically and approving any long-term incentive compensation or equity plans,
programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
In 2018, our compensation committee held meetings or passed resolutions by unanimous written
consent twice times.
Corporate Governance and Nominating Committee. Our corporate governance and nominating
committee consists of Mengbo Yin(chairman), Allen Lueth and Stephen Markscheid, all of whom satisfy
the “independence” requirements of Rule 5605 of the Nasdaq Listing Rules. The corporate governance and
nominating committee assists our board of directors in identifying individuals qualified to become our
directors and in determining the composition of the board and its committees. The corporate governance
and nominating committee is responsible for, among other things:
identifying and recommending to the board nominees for election or re-election to the board, or
for appointment to fill any vacancy;
reviewing annually with the board the current composition of the board in light of the
characteristics of independence, skills, experience and availability of service to us;
identifying and recommending to the board the names of directors to serve as members of the
audit committee and the compensation committee, as well as the corporate governance and
nominating committee itself;
advising the board periodically with respect to significant developments in the law and practice
of corporate governance, as well as our compliance with applicable laws and regulations, and
making recommendations to the board on all matters of corporate governance and on any
corrective action to be taken; and
monitoring compliance with our code of business conduct and ethics, including reviewing the
adequacy and effectiveness of our procedures to ensure proper compliance.
In 2018, our corporate governance and nominating committee held meetings or passed resolutions by
unanimous written consent twice.
Duties of Directors
Under Cayman Islands law, our directors have a fiduciary duty to act honestly, in good faith and with
a view to our best interests. Our directors also have a duty to exercise the skill they actually possess and
such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In
fulfilling their duty of care to us, our directors must ensure compliance with our amended and restated
memorandum and articles of association as amended and restated from time to time. In certain limited
circumstances, it may be possible for our shareholders to bring a derivative action on behalf of our company
if a duty owed by our directors to our company is breached.
Terms of Directors and Executive Officers
All directors hold office until their successors have been duly elected and qualified. Outside of certain
specified circumstances, including resigning, becoming bankrupt or being of unsound mind or being absent
from board meetings without special leave of absence for six consecutive months 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
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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.”
D. Employees
Employees, Sales Agents and Training
We had 4,579, 3,344 and 3,863 employees as of December 31, 2016, 2017 and 2018, 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, 2018:
Management and administrative staff .....................................
Financial and accounting staff ...............................................
Professional claims adjustors ..................................................
Information technology staff ...................................................
Total ......................................................................................
Number of
Employees
% of Total
2,348
194
1,213
108
3,863
60.8
5.0
31.4
2.8
100.0
As of December 31, 2016, 2017 and 2018, we had 231,592, 506,231 and 807,858 registered sales
representatives, respectively. 99.9% of these sales representatives are independent sales agents who are not
our employees and are only compensated by commissions. We have contractual relationships with these
sales agents. 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 company
for the sale and renewal of that policy, up to the first five years of the premium payment period, and retain
all commissions and fees we continue to receive from insurance companies for the rest of the premium
payment period. For the sale of each life insurance policy with a single premium payment schedule or non-
auto insurance 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 the insurance
company for the sale of that policy. For the sale of each auto insurance policy through CNpad, 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 smaller commission for insurance policies sold by agents under his
or her management.
Our sales agents, in-house sales representatives and claims adjustors are our most valuable asset and
are instrumental in helping us build and maintain long-term relationships with our customers. Therefore,
we place a strong emphasis on training our sales force. We provide trainings to both new sales agents and
existing sales agents, on a monthly or quarterly basis, both offline and online, with a different emphasis.
For newly sales agents, we offer orientation courses that are designed to familiarize them with corporate
culture, insurance products, and sales skills. For the existing sales agents, we offer on-the-job training
courses that aim to enhance their sales skills and knowledge of different insurance products. Training
courses are also available on Lan Zhangui, which enable sales agents to attend the courses anytime
anywhere.
E. Share Ownership
The following table sets forth information with respect to the beneficial ownership of our shares, as
of March 31, 2019, by:
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, 2019, there were 1,392,391,084 ordinary shares outstanding, including 280,000,000
ordinary shares under the Company’s 521 plan which are subject to five-year lock-up period and will be
deducted from the total ordinary shares used for calculating earnings per share as these shares are treated
as treasury shares. Beneficial ownership is determined in accordance with the rules and regulations of the
SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of
that person, we include shares that the person has the right to acquire within 60 days, including through the
exercise of any option, warrant or other right or the conversion of any other security. These shares, however,
are not included in the computation of the percentage ownership of any other person.
Ordinary Shares Beneficially
Owned(1) (2)
Number
%
Directors and Executive Officers:
Chunlin Wang(3) ..............................................................................
39,252,100
Peng Ge(4) ........................................................................................
48,562,260
2.8%
3.5%
Yinan Hu(5) ......................................................................................
199,739,310
14.3%
Stephen Markscheid ........................................................................
Allen Warren Lueth .........................................................................
Mengbo Yin
*
*
*
*
*
*
All Directors and Executive Officers as a Group .............................. 290,373,670
20.8%
Principal Shareholders:
Sea Synergy Limited(6) .....................................................................
Fanhua Employees Holdings Limited(7)
189,689,110
200,000,000
13.6%
14.4%
* 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 1,392,391,084
ordinary shares outstanding as of March 31, 2019, 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.
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(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 our 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.
(7) Includes 200,000,000 ordinary shares of our company held by Fanhua Employees Holdings Limited
which holds the ordinary shares on behalf of the Participants of the Company’s 521 Plan. An Employee
Committee has been established for these Participants with respect to the voting and disposition of the
ordinary shares so held. The Employee Committee has the power to direct vote of the ordinary shares
held by Fanhua Employees Holdings Limited, in a manner that is in the best interest of the Participants
and for the disposition of such ordinary shares as directed by Participants. The registered address of
Fanhua Employees Holdings Limited is Vistra Corporate Services Centre, Wickhams Cay Ⅱ, Road
Town, Tortola, VG1110, British Virgin Islands, 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, 2019, J.P. Morgan Chase Bank, N.A., or J.P. Morgan, the depositary for our ADS program,
is our only record holder in the United States, holding approximately 48.1% 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
A. Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees E. Share Ownership.”
B. Related Party Transactions
Amounts Due from an Affiliate and its Subsidiaries
In August 2018, we advanced a short-term loan with a principal amount of RMB50.0 million to
Shenzhen Baoying Factoring Co., Ltd., or Shenzhen Baoying, which was controlled by Puyi Inc, our
affiliate. The amounts are unsecured, bearing interest at 8.5% per annum and are repayable after 6 months
from the date of the agreement. As of December 31, 2018, the principal and interest of the loan have been
received. Interest income from loan receivable from Shenzhen Baoying recognized in 2018 was RMB1.0
million (US$0.1million).
Shares Sold to Employee Companies and Subscription Receivables from Employee Companies in
2014
In November 2014, we entered into share purchase agreements with the 2014 Employee Companies,
for the issuance of up to 100,000,000 ordinary shares of our company at US$0.27 per ordinary share or
US$5.40 per ADS, and 50,000,000 ordinary shares at US$0.29 per ordinary share or US$5.80 per ADS.
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The sale of shares to the 2014 Employee Company was completed on December 17, 2014. In order to
facilitate the purchase of shares by our employees as described above, we have granted a loan to Employee
Companies, or 2014 Loan. The loan bore interest at a rate of 3.0% per annum and was repayable upon the
sale of the shares by employees, termination of employment or within two years, whichever comes first.
The interest rate was determined with reference to fair market prices and therefore no interest-related
compensation expense was recorded. The repayment of the loan was further extended to June 2018. As of
December 31, 2018, the 2014 Loan and the interests receivable have been fully repaid.
Purchase of Shares from a Principal Shareholder by Employee and Agent Stock Holding
Companies and Subscription Receivables from Employees and Sales Agents
Pursuant to the Company’s 521 Plan, as of January 24, 2019, 14 million ADSs had been purchased
by 521 Plan Employee Companies at the weighted average price of US$27.38 per ADS. The 521 Plan
Employee Companies have been established to hold the shares and conduct share administration on behalf
of the Participants. Of the 14 million ADSs, 7.5 million ADSs were purchased from Master Trend Limited
on June 14, 2018, at US$29.0 per ADS, which was the average closing price of the 30 trading days prior to
the approval by our Board on June 14, 2018. Master Trend Limited is an investment company controlled
by Mr. Qiuping Lai, co-founder and former president of the Company who has retired from the Company
in March 2016.
The remaining 6.5 million ADSs were purchased from the Company at $25.52 per ADS, which
consisted of 1,423,774 ADSs of treasury shares previously repurchased by the Company on the open market
under the 2018 Share Repurchase Program and new issuance of 101,524,520 ordinary shares (representing
5,076,226 ADSs) of the Company. The purchase and issuance prices were equivalent to the weighted
average of the closing prices of the share repurchases under the 2018 Share Repurchase Program.
In order to facilitate the purchase of shares by the Participants, we have granted a loan amounting to
RMB1.3 billion (US$191.8 million) to the Participants as of December 31, 2018. The loan bears 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 comes first. The repayment of the loan and interests can be extended with
mutual agreements upon maturity of the loan. Shares beneficially owned by the Participants under the 521
Development Plan and certain personal assets of the Participants including but not limited to salaries will
be pledged to the Company to secure the payment of loans by the Participants.
See “Item 6. Directors, Senior Management and Employees — A. Directors and Senior Management
— Share Incentives — 521 Plan” for additional information about the 521 Plan.
Purchase of Shares from a Principal Shareholder by Management
As part of the 521 Plan, on June 14, 2018, Mr. Chunlin Wang, chief executive officer and chairman
of the Board of Fanhua, and Mr. Peng Ge, chief financial officer of Fanhua, agreed to purchase 800,000
ADSs and 200,000 ADSs, respectively, from Master Trend Limited at US$29.0 per ADS. The transactions
were completed on October 10, 2018. The purchases were funded with their personal funds.
Revenues and Other Incomes from Affiliates
The Company charged affiliates interest income of RMB 8.7 million and nil for loans receivable for
the years ended December 31, 2017 and 2018, respectively. We invested in senior units of structure fund
issued by CNFinance and received investment income of RMB0.6 million (US$0.1 million) during the year
2018.
Investment in Financial Products Offered by A Related Party
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In 2018, one of 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 which operates the P2P platform is a relative to Mr. Yinan Hu, our co-founder and director. The
wealth management products purchased on the platform by the subsidiary bear interests at 7.3% with a
term of 90 days. As of December 31, 2018, the value of the outstanding wealth management products was
RMB15.0 million (US$2.2 million) and no investment income has been recognized before maturity.
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
On September 7, 2018, Miao Long, individually and on behalf of an alleged class of similarly situated
holders of our ADSs, filed a class action lawsuit in the United States District Court for the Southern District
of New York against us and two of our executive officers. The complaint alleges that we made false and
misleading statements regarding our business, operational and compliance policies. The complaint
principally alleges that we engaged in improper business practices including irregular accounting, which
were intended to benefit our insiders and overstated our financial assets and performance metrics. The
complaint asserts claims under Section 10(b) of the Security Exchange Act of 1934, or the Exchange Act,
and Rule 10b-5 thereunder and under Section 20(a) of the Exchange Act.
On January 2, 2019, the Court ordered a briefing schedule, providing that after the court’s entry of an
order appointing a lead plaintiff under the Private Securities Litigation Reform Act, the lead plaintiff must
either file a consolidated complaint or give notice of its intent not to do so (and therefore proceed on its
initial complaint) by February 20, 2019. Our response to the operative complaint was due by April 1, 2019;
the lead plaintiff’s opposition is due by May 1, 2019; and our reply is due by May 15, 2019.
In an order dated December 13, 2018, the Court appointed Miao Long as lead plaintiff and approved
the selection of Pomerantz LLP as lead counsel.
On February 20, 2019, the lead plaintiff filed an amended complaint. We, as the only defendant that
has been served so far, filed a motion to dismiss the amended compliant on April 1, 2019.
We believe we have meritorious defenses to the claims alleged and intend to defend against the lawsuit
vigorously. However, there can be no assurance that we will prevail in any such litigation and any adverse
outcome of this case could have a material adverse effect on our business or results of operations.
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Except as disclosed above, we are currently not a party to any other material litigation or other legal
proceeding that may have a material adverse impact on our business or operations. However, we are and
may continue to be subject to various claims and legal actions arising in the ordinary course of business. 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 in the range from RMB8,000 to RMB150,000 in 2018, in 2018, 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.
Dividend Policy
Our board of directors has discretion as to whether to distribute dividends, subject to certain
restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or
share premium account, and provided always that in no circumstances may a dividend be paid if this would
result in our company being unable to pay its debts due in the ordinary course of business. In addition, our
shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount
recommended by our directors. The timing, amount and form of dividends, if any, will depend on, among
other things, our future results of operations and cash flow, our capital requirements and surplus, the amount
of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions
and other factors deemed relevant by our board of directors.
On February 28, 2017, our board of directors approved a cash dividend policy, which provided for an
annual cash dividend to shareholders of no less than 30% of our net income attributable to shareholders in
the previous fiscal year. On April 20, 2017, our board of directors declared an annual cash dividend of
US$0.006 per ordinary share, or US$0.12 per ADS, payable on or around May 18, 2017 to shareholders of
record on May 8, 2017.
On September 18, 2017, our board of directors modified the dividend policy to adopt a quarterly
payment schedule in lieu of an annual dividend, with the dividend payout ratio of no less than 50% of net
income attributable to the Company's shareholders instead of no less than 30% under the annual dividend
policy previously announced on April 20, 2017. The following table summarizes the quarterly dividend
payments since the announcement of the quarterly dividend policy.
Declaration Date
November 20, 2017
March 9, 2018
May 12, 2018
August 18, 2018
November 17, 2018
March 18, 2019
Quarterly Dividend (Per
Ordinary Share)( US$)
Quarterly Dividend
(Per ADS)( US$)
0.01
0.01
0.0125
0.0125
0.0125
0.0125
0.20
0.20
0.25
0.25
0.25
0.25
Record Date
Payable Date
December 8, 2017
December 22, 2017
March 26, 2018
June 4, 2018
April 10, 2018
June 11, 2018
September 5, 2018
September 19, 2018
December 5, 2018
December 20, 2018
March 21, 2019
April 3, 2019
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.
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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.”
B. Significant Changes
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
B. Plan of Distribution
Not applicable.
C. Markets
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.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. Additional Information
A. Share Capital
Not applicable.
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B. Memorandum and Articles of Association
The following are summaries of material provisions of our amended and restated memorandum and
articles of association, as adopted by our shareholders by special resolution at the extraordinary general
meeting held on December 6, 2016, as well as the Cayman Companies Law insofar as they relate to the
material terms of our ordinary shares.
Registered Office and Objects
The registered office of our company is at the offices of Maples Corporate Services Limited, PO Box
309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands, or at such other place within the Cayman
Islands as our board of directors may decide. The objects for which our company is established are
unrestricted and we have full power and authority to carry out any object not prohibited by the Cayman
Companies Law or as the same may be revised from time to time, or any other law of the Cayman Islands.
Board of Directors
See “Item 6. Directors, Senior Management and Employees — C. Board Practices — Board of
Directors.”
Ordinary Shares
General. Our authorized share capital consists of 10,000,000,000 ordinary shares, with a par value of
US$0.001 each. All of our outstanding ordinary shares are fully paid and non-assessable. Certificates
representing the ordinary shares are issued in registered form. Our shareholders who are nonresidents of
the Cayman Islands may freely hold and vote their shares.
Dividend Rights. The holders of our ordinary shares are entitled to such dividends as may be declared
by our board of directors subject to the Companies Law.
Voting Rights. On a show of hands, each shareholder present in person or by proxy (or, for a
corporation or other non-natural person, present by its duly authorized representative or proxy) at general
meeting shall have one vote and on a poll, shall have one vote for each share registered in his name in the
register of members of our company. Voting at any meeting of shareholders is by show of hands unless a
poll is demanded. A poll may be demanded by the chairman of the meeting or by any one or more
shareholders together holding at least ten percent of our paid up voting share capital, present in person or
by proxy.
A quorum required for a meeting of shareholders consists of shareholders holding in aggregate not
less than one-third of our issued voting share capital present in person or by proxy or, if a corporation or
other non-natural person, by its duly authorized representative. We may, but are not obliged, to hold an
annual general meeting of shareholders. General meetings may be convened by our board of directors on
its own initiative or upon a request to the directors by shareholders holding in aggregate not less than one-
third of our voting share capital. Advance notice of at least 14 days is required for the convening of our
annual general meeting and other shareholders meetings.
An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple
majority of the votes attaching to the ordinary shares cast in a general meeting 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. 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.
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Transfer of Shares. Subject to the restrictions of our articles of association, as applicable, any of our
shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual
or common form or any other form approved by our board.
Liquidation. On a return of capital on winding up or otherwise (other than on conversion, redemption
or purchase of shares), assets available for distribution among the holders of ordinary shares may be
distributed among the holders of the ordinary shares as determined by the liquidator, subject to sanction of
an ordinary resolution of our company.
Calls on Shares and Forfeiture of Shares. Our board of directors may from time to time make calls
upon shareholders for any amounts unpaid on their shares in a notice served to such shareholders at least
14 days prior to the specified time of payment. The shares that have been called upon and remain unpaid
on the specified time are subject to forfeiture.
Redemption, Repurchase and Surrender of Shares. Subject to the provisions of the Companies Law
and our articles of association, we may issue shares on terms that they are subject to redemption, at our
option or at the option of the holders, on such terms and in such manner as our board of directors may
determine before the issue of such shares. We also may purchase our own shares, provided that our
shareholders have approved the manner of purchase by ordinary resolution or the manner of purchase is in
accordance with that specified in our articles of association. The manner of purchase specified in our
articles of association, which cover purchases of shares listed on an internationally recognized stock
exchange and shares not so listed, is in accordance with Section 37(2) of the Companies Law or any
modification or reenactment thereof for the time being in force. In addition, our company may accept the
surrender of any fully paid share for no consideration. Pursuant to the Cayman Companies Law, upon the
repurchase, redemption or surrender of shares, the board of directors can determine whether or not to cancel
those shares or hold them as treasury shares pending cancellation, transfer or sale. The company must
obtain authorization to hold such shares as treasury shares either in accordance with the procedures set out
in the company’s articles of association or (if there are none) by a board resolution before being repurchased,
redeemed or surrendered in accordance with the usual rules and articles.
Variations of Rights of Shares. All or any of the special rights attached to any class of shares may,
subject to the provisions of the Companies Law, be varied either with the written consent of the holders of
a majority of the issued shares of that class or with the sanction of a special resolution passed at a general
meeting of the holders of the shares of that class.
Inspection of Books and Records. Holders of our ordinary shares have no general right under Cayman
Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we
make our annual reports, which contain our audited financial statements, available to our shareholders. See
“Item 10. Additional Information — H. Documents on Display.”
C. Material Contracts
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.
D. Exchange Controls
See “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations on
Foreign Exchange.”
E. Taxation
The following summary of the material Cayman Islands, PRC and United States federal income tax
consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant
interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This
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summary does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary
shares, such as the tax consequences under state, local and other tax laws.
Cayman Islands Taxation
According to Maples and Calder (Hong Kong) LLP, our Cayman Islands counsel, the Cayman Islands
currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation
and there is no taxation in the nature of inheritance tax or estate duty. No Cayman Islands stamp duty will
be payable unless an instrument is executed in, or after execution brought within the jurisdiction of the
Cayman Islands, or produced before a court of the Cayman Islands. The Cayman Islands is not party to any
double tax treaties that are applicable to any payment made to or by our Company. There are no exchange
control regulations or currency restrictions in the Cayman Islands.
PRC Taxation
Under the former PRC Income Tax Law for Enterprises with Foreign Investment and Foreign
Enterprises, any dividends payable by foreign-invested enterprises to non-PRC investors were exempt from
any PRC withholding tax. In addition, any interest or dividends payable, or distributions made, by us to
holders or beneficial owners of our ADSs or ordinary shares would not have been subject to any PRC tax,
provided that such holders or beneficial owners, including individuals and enterprises, were not deemed to
be PRC residents under the PRC tax law and had not become subject to PRC tax.
Under the EIT Law, which took effect as of January 1, 2008, enterprises established under the laws of
non-PRC jurisdictions but whose “de facto management body” is located in China are considered “resident
enterprises” for PRC tax purposes. Under the implementation regulations issued by the State Council
relating to the new law, “de facto management bodies” are defined as the bodies that have material and
overall management control over the business, personnel, accounts and properties of an enterprise. On April
22, 2009, SAT, issued SAT Circular 82, which provides certain specific criteria for determining whether
the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in
China. In addition, the SAT issued a bulletin on July 27, 2011 providing more guidance on the
implementation of Circular 82 and clarifies matters such as resident status determination. Substantially all
of our management are currently based in China, and may remain in China in the future. If we were treated
as a “resident enterprise” for PRC tax purposes, we would be subject to PRC income tax on our worldwide
income at a uniform tax rate of 25%, but dividends received by us from our PRC subsidiaries may be
exempt from the income tax.
Under the new law and its implementation regulations, dividends paid to a non-PRC investor are
generally subject to a 10% 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.
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
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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, the “controlled foreign corporation rules” any United States federal non-income
tax laws, including the United States federal estate, gift and alternative minimum 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;
insurance companies;
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;
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persons required to accelerate the recognition of any item of gross income with respect to our
ADSs or ordinary shares as a result of such income being recognized on an applicable financial
statement; or
persons that hold, directly, indirectly or by attribution, ADSs, ordinary shares or other ownership
interests in us prior to our initial public offering.
If a partnership (including an entity or arrangement treated as a partnership for United States federal
income tax purposes) holds our ADSs or ordinary shares, the tax treatment of a partner in the partnership
generally will depend upon the status of the partner and the activities of the partnership. A partnership or a
partner in a partnership holding our ADSs or ordinary shares should consult its own tax advisors regarding
the tax consequences of investing 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 own tax advisors with respect to the application
of the United States federal income tax laws to their particular situations, as well as any tax
consequences arising under the federal estate or gift tax laws or the laws of any state, local or non-
United States taxing jurisdiction and under any applicable tax treaty.
For purposes of the discussion below, a “United States Holder” is a beneficial owner of our ADSs or
ordinary shares that is, for United States federal income tax purposes:
an individual who is a citizen or resident of the United States;
a corporation (or other entity treated as a corporation for United States federal income tax
purposes) created or organized in or under the laws of the United States, any state thereof or the
District of Columbia;
an estate, the income of which is subject to United States federal income taxation regardless of
its source; or
a trust, if (i) a court within the United States is able to exercise primary jurisdiction over its
administration and one or more United States persons have the authority to control all of its
substantial decisions or (ii) in the case of a trust that was treated as a domestic trust under the law
in effect before 1997, a valid election is in place under applicable Treasury regulations to treat
such trust as a domestic trust.
The discussion below assumes that the representations contained in the deposit agreement and any
related agreement are true and that the obligations in such agreements will be complied with in accordance
with their terms.
ADSs
If you own our ADSs, then you should be treated as the owner of the underlying ordinary shares
represented by those ADSs for United States federal income tax purposes. Accordingly, deposits or
withdrawals of ordinary shares for ADSs should not be subject to United States federal income tax.
The United States Treasury Department and the IRS have expressed concerns that United States
holders of American depositary shares may be claiming foreign tax credits in situations where an
intermediary in the chain of ownership between the holder of an American depositary share and the issuer
of the security underlying the American depositary share has taken actions that are inconsistent with the
ownership of the underlying security by the person claiming the credit. Such actions (for example, a pre-
release of an American depositary share by a depositary) also may be inconsistent with the claiming of the
reduced rate of tax applicable to certain dividends received by non-corporate United States holders of
American depositary shares, including individual United States holders. Accordingly, the availability of
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foreign tax credits or the reduced tax rate for dividends received by non-corporate United States Holders,
each discussed below, could be affected by actions taken by intermediaries in the chain of ownership
between the holder of an ADS and our company.
Passive Foreign Investment Company
Based on the market price of our ADSs, the value of our assets and the composition of our income
and assets, we do not believe we were not a passive foreign investment company (“PFIC”) for United States
federal income tax purposes for our taxable year ending December 31, 2018. 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. 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
treated as a PFIC for any taxable year or that the IRS will not take a contrary position
A non-United States corporation such as ourselves will be treated as a PFIC for United States federal
income tax purposes for any taxable year if, applying applicable look-through rules, either:
at least 75% of its gross income for such year is passive income; or
at least 50% of the value of its assets (determined based on a quarterly average) during such year
is attributable to assets that produce or are held for the production of passive income.
For this purpose, passive income generally includes dividends, interest, royalties and rents (other than
certain royalties and rents derived in the active conduct of a trade or business and not derived from a related
person). We will be treated as owning a proportionate share of the assets and earning a proportionate share
of the income of any other corporation in which we own, directly or indirectly, more than 25% by value of
the stock. Although the law in this regard is unclear, we treat our VIEs as being owned by us for United
States federal income tax purposes, not only because we exercise effective control over the operation of
such entities but also because we are entitled to substantially all of their economic benefits, and, as a result,
we consolidate their results of operations in our consolidated United States GAAP financial statements.
The composition of our income and assets will be affected by the market price of our ADSs and how,
and how quickly, we spend our liquid assets and the cash we generate from our operations and raise in any
offering. Among other matters, if our market capitalization declines, we may be 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.
If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares (as we believe
we were for 2017 and prior years), we will continue to be treated as a PFIC with respect to you for all
succeeding years during which you hold ADSs or ordinary shares, unless we cease to be a PFIC as 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, your ADSs or ordinary shares with respect to which such election was made will not be treated as
shares in a PFIC and, as a result, you will not be subject to the rules described below with respect to any
“excess distribution” you receive from us or any gain from an actual sale or other disposition of the ADSs
or ordinary shares. You are strongly urged to consult your tax advisors as to the possibility and
consequences of making a deemed sale election as we ceased to be a PFIC in 2018 and such an election
is available to you.
If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares (as we believe
we were for 2017 and prior years), then, unless you make a “mark-to-market” election (as discussed below),
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you generally will be subject to special and adverse tax rules with respect to any “excess distribution” that
you receive from us and any gain that you recognize from a sale or other disposition, including a pledge,
of the ADSs or ordinary shares. For this purpose, distributions that you receive in a taxable year that are
greater than 125% of the average annual distributions that you received during the shorter of the three
preceding taxable years or your holding period for the ADSs or ordinary shares will be treated as an excess
distribution. Under these rules:
the excess distribution or recognized gain will be allocated ratably over your holding period for
the ADSs or ordinary shares;
the amount of the excess distribution or recognized gain allocated to the taxable year of
distribution or gain, and to any taxable years in your holding period prior to the first taxable year
in which we were treated as a PFIC, will be treated as ordinary income; and
the amount of the excess distribution or recognized gain allocated to each other taxable year will
be subject to the highest tax rate in effect for individuals or corporations, as applicable, for each
such year and the resulting tax will be subject to the interest charge generally applicable to
underpayments of tax.
If we are a PFIC for any taxable year during which a United States Holder holds our ADSs or ordinary
shares (as we believe we were for 2017 and prior years) and any of our non-United States subsidiaries or
other corporate entities in which we own equity interests is also a PFIC, such United States Holder would
be treated as owning a proportionate amount (by value) of the shares of each such non-United States entity
classified as a PFIC (each such entity, a lower tier PFIC) for purposes of the application of these rules.
United States Holders should consult their tax advisors regarding the application of the PFIC rules to any
of our lower tier PFICs.
If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares (as we believe
we were for 2017 and prior years), then in lieu of being subject to the tax and interest-charge rules discussed
above, you may make an election to include gain on our ADSs or ordinary shares as ordinary income under
a mark-to-market method, provided that our ADSs or ordinary shares constitute “marketable stock” (as
defined below). If you make a mark-to-market election for our ADSs or ordinary shares, you will include
in gross income for each year that we are a PFIC an amount equal to the excess, if any, of the fair market
value of the ADSs or ordinary shares you hold as of the close of your taxable year over your adjusted basis
in such ADSs or ordinary shares. You will be allowed a deduction for the excess, if any, of the adjusted
basis of the ADSs or ordinary shares over their fair market value as of the close of the taxable year. However,
deductions will be allowable only to the extent of any net mark-to-market gains on the ADSs or ordinary
shares included in your income for prior taxable years. Amounts included in your income under a mark-to-
market election, as well as any gain from the actual sale or other disposition of the ADSs or ordinary shares,
will be treated as ordinary income. Ordinary loss treatment will apply to the deductible portion of any mark-
to-market loss on the ADSs or ordinary shares, as well as to any loss from the actual sale or other disposition
of the ADSs or ordinary shares, to the extent that the amount of such loss does not exceed the net mark-to-
market gains previously included for such ADSs or ordinary shares. Your basis in the ADSs or ordinary
shares will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market
election, any distributions we make would generally be subject to the tax rules discussed below under “—
Dividends and Other Distributions on the ADSs or Ordinary Shares,” except the lower capital gains rate
applicable to qualified dividend income generally would not apply.
The mark-to-market election is available only for “marketable stock.” Marketable stock is stock that
is regularly traded on a qualified exchange or other market, as defined in applicable Treasury Regulations.
Our ADSs, but not our ordinary shares, are listed on the Nasdaq Global Select Market, which is a qualified
exchange or other market for these purposes. Consequently, if the ADSs remain listed on the Nasdaq Global
Select Market and are regularly traded, and you are a holder of ADSs, we expect that the mark-to-market
election will be available to you, but no assurances are given in this regard.
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If you make a mark-to-market election, it will be effective for the taxable year for which the election
is made and all subsequent taxable years unless the ADSs are no longer regularly traded on a qualified
exchange or other market, or the IRS consents to the revocation of the election. In light of our belief that
we were a PFIC for 2017 and prior years, United States Holders are urged to consult their tax advisors
regarding the availability of mark-to-market election, and whether making the election would be advisable
in such United States Holder’s particular circumstances.
Because a mark-to-market election cannot be made for any lower tier PFICs that we may own, if we
were a PFIC for any taxable year, a United States Holder that makes the mark-to-market election may
continue to be subject to the tax and interest charges under the general PFIC rules with respect to such
United States Holder’s indirect interest in any investments held by us that are treated as an equity interest
in a PFIC for United States federal income tax purposes.
In certain circumstances, a United States shareholder in a PFIC may avoid the adverse tax and interest-
charge regime described above by making a “qualified electing fund” election to include in income its share
of the corporation’s income on a current basis. However, you may make a qualified electing fund election
with respect to your ADSs or ordinary shares only if we agree to furnish you annually with a PFIC annual
information statement as specified in the applicable Treasury Regulations. We do not intend to prepare or
provide the information that would enable you to make a qualified electing fund election.
A United States Holder that holds our ADSs or ordinary shares in any year in which we are classified
as a PFIC (as we believe we were for 2017 and prior years) will be required to file an annual report
containing such information as the United States Treasury Department may require. You are strongly
urged to consult your own tax advisor regarding the impact of our ceasing to be a PFIC for 2018 on
your investment in our ADSs and ordinary shares, as well as the application of the PFIC rules to
your investment in our ADSs or ordinary shares and the availability, application and consequences
of the elections discussed above.
Dividends and Other Distributions on the ADSs or Ordinary Shares
Subject to the passive foreign investment company rules discussed above, the gross amount of any
distribution that we make to you with respect to our ADSs or ordinary shares (including any amounts
withheld to reflect PRC withholding taxes) will be taxable as a dividend, to the extent paid out of our
current or accumulated earnings and profits, as determined under United States federal income tax
principles. Such income (including any withheld taxes) will be includable in your gross income on the day
actually or constructively received by you, if you own the ordinary shares, or by the depositary, if you own
ADSs. Because we do not intend to determine our earnings and profits on the basis of United States federal
income tax principles, any distribution paid will generally be reported as a “dividend” for United States
federal income tax purposes. Such dividends will not be eligible for the dividends-received deduction
allowed to qualifying corporations under the Code.
Dividends received by a non-corporate United States Holder may qualify for the lower rates of tax
applicable to “qualified dividend income,” if the dividends are paid by a “qualified foreign corporation”
and other conditions discussed below are met. A non-United States corporation is treated as a qualified
foreign corporation (i) with respect to dividends paid by that corporation on shares (or American depositary
shares backed by such shares) that are readily tradable on an established securities market in the United
States or (ii) if such non-United States corporation is eligible for the benefits of a qualifying income tax
treaty with the United States that includes an exchange of information program. However, a non-United
States corporation will not be treated as a qualified foreign corporation if it is a passive foreign investment
company in the taxable year in which the dividend is paid or the preceding taxable year. We believe that
we were a PFIC for our taxable years ended December 31, 2015, 2016 and 2017 and, as discussed above
under “E. Taxation — Passive Foreign Investment Company,” we believe that we were not a PFIC for our
taxable year ending December 31, 2018.
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Under a published IRS Notice, common or ordinary shares, or American depositary shares
representing such shares, are considered to be readily tradable on an established securities market in the
United States if they are listed on the Nasdaq Global Select Market, as are our ADSs (but not our ordinary
shares). Based on existing guidance, it is unclear whether the ordinary shares will be considered to be
readily tradable on an established securities market in the United States, because only the ADSs, and not
the underlying ordinary shares, will be listed on a securities market in the United States We believe, but
we cannot assure you, that dividends we pay, if any, on the ordinary shares that are represented by ADSs,
but not on the ordinary shares that are not so represented, will, subject to applicable limitations, including
ineligibility for reduced rates as a result of our being a PFIC, be eligible for the reduced rates of taxation.
In addition, if we are treated as a PRC resident enterprise under the PRC tax law (see “Item 10. Additional
Information — Taxation — PRC Taxation”), then we may be eligible for the benefits of the income tax
treaty between the United States and the PRC. If we are eligible for such benefits, then dividends that we
pay on our ordinary shares, regardless of whether such shares are represented by ADSs, would, subject to
applicable limitations, including ineligibility for reduced rates as a result of our being a PFIC, be eligible
for the reduced rates of taxation.
Even if dividends would be treated as paid by a qualified foreign corporation, a non-corporate United
States Holder will not be eligible for reduced rates of taxation if it does not hold our ADSs or ordinary
shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date or
if the United States Holder elects to treat the dividend income as "investment income" pursuant to Section
163(d)(4) of the Code. In addition, the rate reduction will not apply to dividends of a qualified foreign
corporation if the non-corporate United States Holder receiving the dividend is obligated to make related
payments with respect to positions in substantially similar or related property.
You should consult your own tax advisors regarding the availability of the lower tax rates applicable
to qualified dividend income for any dividends that we pay with respect to the ADSs or ordinary shares, as
well as the effect of any change in applicable law after the date of this annual report on Form 20-F.
Any PRC withholding taxes imposed on dividends paid to you with respect to the ADSs or ordinary
shares generally will be treated as foreign taxes eligible for credit against your United States federal income
tax liability, subject to the various limitations and disallowance rules that apply to foreign tax credits
generally. For purposes of calculating the foreign tax credit, dividends paid to you with respect to the ADSs
or ordinary shares will be treated as income from sources outside the United States and generally will
constitute passive category income. The rules relating to the determination of the foreign tax credit are
complex, and you should consult your tax advisors regarding the availability of a foreign tax credit in your
particular circumstances.
Disposition of the ADSs or Ordinary Shares
You will recognize gain or loss on a sale or exchange of the ADSs or ordinary shares in an amount
equal to the difference between the amount realized on the sale or exchange and your tax basis in the ADSs
or ordinary shares. Subject to the discussion under “E. Taxation — Passive Foreign Investment Company,”
above, such gain or loss generally will be capital gain or loss. Capital gains of a non-corporate United States
Holder, including an individual that has held the ADS or ordinary share for more than one year currently
are eligible for reduced tax rates. The deductibility of capital losses is subject to limitations.
Any gain or loss that you recognize on a disposition of the ADSs or ordinary shares generally will be
treated as United States-source income or loss for foreign tax credit limitation purposes. However, if we
are treated as a PRC resident enterprise for PRC tax purposes and PRC tax is imposed on gain from the
disposition of the ADSs or ordinary shares (see “Item 10. Additional Information — Taxation — PRC
Taxation”), then a United States Holder that is eligible for the benefits of the income tax treaty between the
United States and the PRC may elect to treat the gain as PRC-source income for foreign tax credit purposes.
If such an election is made, the gain so treated will be treated as a separate class or “basket” of income for
foreign tax credit purposes. You should consult your tax advisors regarding the proper treatment of gain
or loss, as well as the availability of a foreign tax credit, in your particular circumstances.
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Information Reporting and Backup Withholding
Information reporting to the IRS and backup withholding generally will apply to dividends in respect
of our ADSs or ordinary shares, and the proceeds from the sale or exchange of our ADSs or ordinary shares,
that are paid to you within the United States (and in certain cases, outside the United States), unless you
furnish a correct taxpayer identification number and make any other required certification, generally on
IRS Form W-9 or you otherwise establish an exemption from information reporting and backup
withholding. Backup withholding is not an additional tax. Amounts withheld as backup withholding
generally are allowed as a credit against your United States federal income tax liability, and you may be
entitled to obtain a refund of any excess amounts withheld under the backup withholding rules if you file
an appropriate claim for refund with the IRS and furnish any required information in a timely manner.
United States Holders who are individuals (and certain entities closely held by individuals) generally
will be required to report our name, address and such information relating to an interest in the ADSs or
ordinary shares as is necessary to identify the class or issue of which the ADSs or ordinary shares are a
part. These requirements are subject to exceptions, including an exception for ADSs or ordinary shares
held in accounts maintained by certain financial institutions and an exception applicable if the aggregate
value of all “specified foreign financial assets” (as defined in the Code) does not exceed $50,000.
United States Holders should consult their tax advisors regarding the application of the information
reporting and backup withholding rules.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
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.
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We intend to furnish J.P. Morgan, the depositary of our ADSs, with all notices of shareholders’
meeting and other reports and communications that are made generally available to our shareholders. The
depositary will make such notices, reports and communications available to holders of ADSs and, upon our
written request, will mail to all record holders of ADSs the information contained in any notice of a
shareholders’ meeting received by the depositary from us.
In accordance with Rule 5250(d) of the Nasdaq Listing Rules, we will post this annual report on Form
20-F on our website at http://ir.fanhuaholdings.com/sec.cfm. In addition, we will provide hard copies of
our annual report free of charge to shareholders and ADS holders upon request.
I. Subsidiary Information
For a list of our subsidiaries as of March 31, 2019, 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, 2018, 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$91.6
million and HK dollar-denominated financial assets amounting to HK$2.2 million as of December 31, 2018.
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A 10% appreciation of the RMB against the U.S. dollar and HK dollar would have resulted in a decrease
of RMB63.2 million (US$9.2 million) in the value of our U.S. dollar-denominated and HK dollar-
denominated financial assets. Conversely, if we decide to convert our RMB denominated cash amounts
into U.S. dollars amounts or other currencies amounts for the purpose of making payments for dividends
on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar or other
currencies against the RMB would have a negative effect on the U.S. dollar or other currencies amount
available to us.
Item 12. Description of Securities Other than Equity Securities
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Fees Payable by ADS Holders
We have appointed J.P. Morgan as our depositary. A copy of our Form of Deposit Agreement with
J.P. Morgan was filed with the SEC as an exhibit to our Form F-6 registration statement initially filed on
October 17, 2007 and amended on December 7, 2016 and November 28, 2017, or the Deposit Agreement.
Pursuant to the Deposit Agreement, holders of our ADSs may have to pay to J.P. Morgan, either directly
or indirectly, fees or charges up to the amounts set forth in the table below.
Category
Depositary Actions
Associated Fees
(a) Depositing or
substituting the
underlying
shares
(b) Receiving or
distributing
dividends
(c) Selling or
exercising
rights
(d) Withdrawing an
underlying
security
Each person to whom ADRs are issued against deposits of
shares, including deposits and issuances in respect of:
• Share distributions, stock split, rights, merger
• Exchange of securities or any other transaction or event or
other distribution affecting the ADSs or the Deposited
Securities
US$5.00 for each 100
ADSs (or portion thereof)
evidenced by the new
ADRs delivered
Distribution of dividends
US$0.02 or less per ADS
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
Acceptance of ADRs surrendered for withdrawal of deposited
securities
US$5.00 for each 100
ADSs (or portion thereof)
US$5.00 for each 100
ADSs (or portion thereof)
evidenced by the ADRs
surrendered
US$1.50 per ADS
(e) Transferring,
Transfers, combining or grouping of depositary receipts
splitting or
grouping
receipts
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(f) General
• Other services performed by the depositary in administering
depositary
services,
particularly
those charged
on an annual
basis.
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
(g) Expenses of the
depositary
Expenses incurred on behalf of Holders in connection with
• Compliance with foreign exchange control regulations or
any law or regulation relating to foreign investment
• The depositary's or
its custodian's compliance with
applicable law, rule or regulation
• Stock transfer or other taxes and other governmental charges
• Cable, telex, facsimile transmission/delivery
• Expenses of
the
conversion of foreign currency into U.S. dollars (which are
paid out of such foreign currency)
in connection with
the depositary
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
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
• Any other charge payable by depositary or its agents
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,
2017 and 2018, the depositary reimbursed US$0.2 million and US$1.7 million, respectively. For the years
ended December 31, 2017 and 2018, 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.
PART II
Item 13.
Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
A. – D. Material Modifications to the Rights of Security Holders
None.
E. Use of Proceeds
None.
Item 15. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, has
performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by Rule
13a-15(b) under the Exchange Act. Based upon this evaluation, our management, with the participation of
our chief executive officer and chief financial officer, has concluded that, as of the end of the period covered
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by this annual report, our disclosure controls and procedures were not effective, due to the material
weakness in our internal control over financial reporting described below.
Disclosure controls and procedures are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in by the SEC’s rules and forms, and that information required
to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosure.
Notwithstanding management’s assessment that our internal control over financial reporting was
ineffective as of December 31, 2018 due to the material weakness described below, we believe that the
consolidated financial statements included in this annual report on Form 20-F correctly present our
financial position, results of operations and cash flows for the fiscal years covered thereby in all material
respects.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such item is defined in Rules 13a-15(f) under the Exchange Act, for our company.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of consolidated financial statements in accordance
with U.S. GAAP and includes those policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s
assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of consolidated financial statements in accordance with generally accepted accounting principles, and that
a company’s receipts and expenditures are being made only in accordance with authorizations of a
company’s management and directors, and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a
material effect on the consolidated financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial
reporting objectives because of its inherent limitations. Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. Internal control over financial reporting also can be circumvented by
collusion or improper override. Because of such limitations, there is a risk that material misstatements may
not be prevented or detected on a timely basis by internal control over financial reporting. However, these
inherent limitations are known features of the financial reporting process, and it is possible to design into
the process safeguards to reduce, though not eliminate, this risk.
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, 2018 using criteria established in “Internal Control — Integrated Framework (2013)” issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Management is not permitted to
conclude that the Company’s internal control over financial reporting is effective if there are one or more
material weaknesses in the Company’s internal control over financing reporting. A material weakness is a
deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is
a reasonable possibility that a material misstatement of a company’s annual or interim consolidated
financial statements would not be prevented or detected on a timely basis. Based on our assessment and
those criteria, we have concluded that our internal controls over financial reporting were ineffective because
of the identification of a material weakness. Specifically, management review controls designed to address
risks associated with complex accounting matters that arise from significant non-routine transactions to
ensure that those transactions are properly accounted for in accordance with U.S. GAAP did not operate
effectively. As a result, errors in the accounting for the Fanhua 521 Plan were identified after year end, but
were corrected prior to the issuance of the consolidated financial statements. Management has identified
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corrective actions for the weakness and intends to implement procedures to address such weakness during
the fiscal year 2019.
Management’s Remediation Plans and Actions
To remediate the material weakness described above in “Management’s Annual Report on Internal
Control over Financial Reporting,” we plan to implement the plan and measures described below, and we
will continue to evaluate and make in the future implement additional measures.
We will carry out the following remediation measures:
● We plan to increase the level of relevant training in accounting and disclosure under the
requirements of U.S. GAAP to our financial reporting department personnel
● We will implement robust financial reporting and management reviews controls over future
complex accounting matters that arise from significant non-routine transactions during the
planning stage of these transaction, including the requirement for the reviewers to complete
deep dive research of the relevant subject matters related to these transactions, and consult with
competent external accounting specialists as needed
● Set up a Financial Reporting & Disclosure Committee with regular meetings of no less than
quarterly, which committee will be in charge of ensuring all operational, legal and financial
information are timely collected for the purpose of accounting analysis, and will also oversee
the effectiveness of management's reviews of the accounting analysis on significant non-
routine transactions
We believe that we are taking the steps necessary for remediation of the material weakness
identified above, and we will continue to monitor the effectiveness of these steps and to make any
changes that our management deems appropriate.
Report of the Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Fanhua Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Fanhua Inc., its subsidiaries and its
variable interest entities (the “Group”) as of December 31, 2018, based on criteria established in Internal
Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). In our opinion, because of the effect of the material weakness identified
below on the achievement of the objectives of the control criteria, the Group has not maintained effective
internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (“PCAOB”), the consolidated financial statements and related financial statement
schedule as of and for the year ended December 31, 2018, of the Group and our report dated April 30, 2019,
expressed an unqualified opinion and includes explanatory paragraphs relating to the translation of
Renminbi amounts into United States dollars amounts on those financial statements, and relating to the
financial statements of the Group's equity investment that were audited by other auditors.
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Basis for Opinion
The Group’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Group’s internal control over financial reporting based on our
audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the Group’s annual or
interim financial statements will not be prevented or detected on a timely basis. The following material
weakness has been identified and included in management’s assessment: Management review controls
designed to address risks associated with complex accounting matters that arise from significant non-
routine transactions to ensure that those transactions are properly accounted for in accordance with U.S.
GAAP did not operate effectively. This material weakness was considered in determining the nature, timing,
and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year
ended December 31, 2018, of the Group, and this report does not affect our report on such financial
statements.
/s/Deloitte Touche Tohmatsu
Hong Kong
April 30, 2019
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Changes in Internal Control over Financial Reporting
Management has evaluated, with the participation of our chief executive officer and chief financial
officer, whether any changes in our internal control over financial reporting that occurred during our last
fiscal year have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Based on the evaluation we conducted, management has concluded that no such changes occurred
during the period covered by this annual report on Form 20-F.
Item 16A. Audit Committee Financial Expert
Our board of directors has determined that Allen Lueth, an independent director (under the standards
set forth in Rule 5605 of the Nasdaq Listing Rules and Rule 10A-3 under the Exchange Act) and member
of our audit committee, is an audit committee financial expert.
Item 16B. Code of Ethics
Our board of directors adopted a code of business conduct and ethics that applies to our directors,
officers and employees. We have posted a copy of our code of business conduct and ethics on our investor
relations website at http://ir.fanhuaholdings.com/governance.cfm.
Item 16C. Principal Accountant Fees and Services
The following table sets forth the aggregate fees by categories specified below in connection with
certain professional services rendered by Deloitte Touche Tohmatsu, our independent registered public
accounting firm, for the periods indicated.
Audit fees(1) ................................................................................................................
Audit-related fees(2) ...................................................................................................
Tax fees(3) ...................................................................................................................
All other fees(4) ..........................................................................................................
For the Year Ended December 31,
2017
1,467.5
60.0
—
—
2018
(in thousands of US$)
1,656.0
120.0
—
—
(1) “Audit fees” meant the aggregate fees billed and expected to be billed in each of the fiscal years listed for professional services rendered by
our independent registered public accounting firm for the audit of our annual financial statements and review of quarterly financial statements
included in our reports on Form 6-K, services that are normally provided in connection with statutory and regulatory filings or engagements
for those fiscal years.
(2) “Audit-related fees” meant the aggregate fees billed in each of the fiscal years listed for assurance and related services by our in dependent
registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and are not
reported under “Audit fees.”
(3) “Tax fees” meant the aggregate fees billed in each of the fiscal years listed for professional services rendered by our independent registered
public accounting firm for tax compliance, tax advice, and tax planning.
(4) “All other fees” means the aggregate fees billed in each of the fiscal years listed for products and services provided by our principal accountant,
other than the services reported in the other categories.
The policy of our audit committee is to pre-approve all audit and non-audit services provided by our
independent registered public accounting firm, including audit services, audit-related services, tax services
and other services as described above, other than those for de minimis services which are approved by the
Audit Committee prior to the completion of the audit.
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Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Purchases of Equity Securities by the Issuer
On August 28, 2018, our board of directors approved a share repurchase program, pursuant to which
we were authorized to repurchase up to US$20 million of our ordinary shares represented by ADSs at a
price of no more than US$29.0 per ADS by September 30, 2018 (“2018 Share Repurchase Program”). On
August 29, 2018, our board of directors approved to expand the share repurchase program, pursuant to
which we were authorized to repurchase up to 6.5 million ADSs at a price of US$29.0 per ADS by
December 31, 2018. As of December 31, 2018, we had repurchased 1,423,774 ADSs, equivalent to
28,475,480 ordinary shares, for an aggregate price of approximately US$36.3 million on the open market,
under the 2018 Share Repurchase Program.
On March 11, 2019, our board of directors approved a share repurchase program, pursuant to which
we were authorized to repurchase up to US$200 million of our ordinary shares represented by ADSs by
December 31, 2019. (“2019 Share Repurchase Program”). As of April 26, 2019, we had repurchased
1,003,107 ADSs, equivalent to 20,060,340 ordinary shares, for an aggregate price of approximately
US$25.9 million on the open market, under the 2019 Share Repurchase Program.
Purchases of Equity Securities by Affiliated Purchases
On June 14, 2018, the Participants in our 521 plan agreed to purchase 7.5 million ADSs from
Master Trend Limited, in a privately negotiated transaction, at a price of US$29.0 per ADS, which
was the average closing price of the 30 trading days prior to the approval by the Board on June
14, 2018. The purchases were completed on October 10, 2018.
On January 20, 2019, the Participants purchased an additional of 6.5 million ADSs from the
Company at $25.52 per ADS, which consisted of 1,423,774 ADSs of treasury shares previously
repurchased by the Company on the open market under the 2018 Share Repurchase Program and
new issuance of 101,524,520 ordinary shares (representing 5,076,226 ADSs) of the Company.
The purchase and issuance prices were equivalent to the weighted average of the closing prices
of the share repurchases under the 2018 Share Repurchase Program.
On October 10, 2018, Mr. Chunlin Wang, chief executive officer and chairman of our board of
directors, and Mr. Peng Ge, our chief financial officer of Fanhua, completed the purchase of
800,000 ADSs and 200,000 ADSs, respectively, from Master Trend at US$29.0 per ADS, the
average closing price of the 30 trading days prior to the approval by the Board on June 14, 2018.
The purchases were funded with their personal funds.
Item 16F. Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
NASDAQ Stock Market Rule 5620(a) requires each issuer to hold an annual meeting of shareholders
no later than one year after the end of the issuer’s fiscal year-end. However, NASDAQ Stock Market Rule
5615(a)(3) permits foreign private issuers like us to follow “home country practice” in certain corporate
governance matters. Maples and Calder (Hong Kong) LLP, our Cayman Islands counsel, has provided a
letter to the NASDAQ Stock Market certifying that under Cayman Islands law, we are not required to hold
annual shareholder meetings every year. We followed home country practice with respect to annual
meetings and did not hold an annual meeting of shareholders from 2009 to 2015 and from 2017 to 2018.
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However, we held an extraordinary general meeting on December 6, 2016 and obtained requisite
shareholders' approval to change the Company name from “CNinsure Inc.” to “Fanhua Inc.”. We may hold
annual or extraordinary shareholder meetings in the future if there are significant issues that require
shareholders’ approvals.
We obtained approvals from the board of directors on November 27, 2014 and December 12, 2014 to
issue up to 150,000,000 ordinary shares of the Company (the “Shares”) to our employees, excluding
directors and officers. The purchase prices for the Shares are based on the average closing prices for the
then 20 trading days prior to the board approvals. See “Item 7. Major Shareholders and Related Party
Transactions — B. Related Party Transactions — Shares Sold to Employee Companies and Subscription
Receivables from Employee Companies.”
On August 29, 2018, we obtained approvals from the board of directors to resell 28,475,480 ordinary
shares, representing 1,423,774 ADS of treasury stocks and newly issue and sell 101,524,520 ordinary
shares representing 5,076,226 ADSs to participants in our 521 plan consisting of our key employees and
entrepreneurial team leaders, at $25.52 per ADS, or the weighted average of the closing prices of the share
repurchases under the 2018 Share Repurchase Program. The transactions were completed on January 24,
2019. Pursuant to the NASDAQ Stock Market Rule 5635(c), shareholder approval is required prior to the
issuance of securities when a stock option or purchase plan is to be established or materially amended or
other equity compensation arrangement made or materially amended, pursuant to which stock may be
acquired by officers, directors, employees, or consultants, except for a few situations stated thereunder.
Maples and Calder (Hong Kong) LLP, our Cayman Island counsel, has provided a letter to the NASDAQ
Stock Market certifying that under Cayman Islands law, we are not required to obtain shareholder approval
in respect of the issuance of securities in the circumstances set out in NASDAQ Stock Market Rule 5635(c).
We follow home country practice accordingly.
Other than the annual meeting and share purchase plan to employees practices described above, there
are no significant differences between our corporate governance practices and those followed by U.S.
domestic companies under NASDAQ Stock Market Rules.
Item 16H. Mine Safety Disclosure
Not applicable
PART III
Item 17. Financial Statements
We have elected to provide financial statements pursuant to Item 18.
Item 18. Financial Statements
The consolidated financial statements of Fanhua Inc., its subsidiaries and variable interest entities are
included at the end of this annual report.
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Item 19. Exhibits
Exhibit Number
Description of Document
1.1
1.2
1.3
2.1
2.2
2.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
Amended and Restated Memorandum and Articles of Association of the Registrant
(incorporated by reference to Exhibit 3.2 of our F-1 registration statement (File No. 333-
146605), as adopted by special resolution dated December 6, 2016, initially filed with the
Commission on October 10, 2007)
Amendments to the Articles of Association adopted by the shareholders of the Registrant
on December 18, 2008 (incorporated by reference to Exhibit 99.2 of our report on Form 6-
K furnished to the Commission on December 22, 2008)
Amendments to the Articles of Association adopted by the shareholders of the Registrant
on December 6, 2016 (incorporated by reference to Exhibit 1.3 of our annual report on
Form 20-F initially filed with the Commission on April 19, 2017)
Registrant’s Specimen American Depositary Receipt (included in Exhibit 2.3)
Registrant’s Specimen Certificate for Ordinary Shares (incorporated by reference to
Exhibit 4.2 of our F-1 registration statement (File No. 333-146605), as amended, initially
filed with the Commission on October 10, 2007)
Form of Deposit Agreement among the Registrant, the depositary and holder of the
American Depositary Receipts, as amended and restated (incorporated by reference to
Exhibit 99.(a) of our F-6 registration statement (File No. 333-146765), filed with the
Commission on November 28, 2017
2007 Share Incentive Plan (as amended and restated effective December 18, 2008)
(incorporated by reference to Exhibit 99.3 of our report on Form 6-K furnished to the
Commission on December 22, 2008)
Form of Indemnification Agreement with the Registrant’s directors and officers
(incorporated by reference to Exhibit 10.3 of our F-1 registration statement (File No. 333-
146605), as amended, initially filed with the Commission on October 10, 2007)
Form of Director Agreement with Independent Directors of the Registrant (incorporated
by reference to Exhibit 10.4 of our F-1 registration statement (File No. 333-146605), as
amended, initially filed with the Commission on October 10, 2007)
Form of Employment Agreement between the Registrant and an Executive Officer of the
Registrant (incorporated by reference to Exhibit 4.4 of our annual report on Form 20-F
filed with the Commission on May 15, 2009)
Share Purchase Agreement dated November 27, 2014, between Rosyedge Limited and
CNinsure Inc. (incorporated by reference to Exhibit 4.24 of our annual report on Form 20-
F filed with the Commission on April 24, 2015)
Share Purchase Agreement dated November 27, 2014, between Ojeda Limited and
CNinsure Inc. (incorporated by reference to Exhibit 4.25 of our annual report on Form 20-
F filed with the Commission on April 24, 2015)
Share Purchase Agreement dated December 12, 2014, between Colour Step Limited and
CNinsure Inc. (incorporated by reference to Exhibit 4.26 of our annual report on Form 20-
F filed with the Commission on April 24, 2015)
-120-
Exhibit Number
Description of Document
4.8
4.9
4.10
4.11*
4.12*
4.13*
4.14*
4.15*
4.16*
4.17*
4.18*
4.19*
4.20*
4.21*
Loan Agreement between the Company and Rosyedge Limited, Ojeda Limited and Colour
Step Limited dated December 17, 2015 regarding the Share Purchase Agreements in
November 27, 2014 and December 12, 2014. (incorporated by reference to Exhibit 4.27 of
our annual report on Form 20-F filed with the Commission on April 24, 2015)
Share Purchase Agreement dated September 30, 2017, amongst Beijing Cheche
Technology Co., Ltd., Fanhua Insurance Sales Services Group Company Limited and
Fanhua Times Insurance Sales & Services Co. Ltd. (incorporated by reference to Exhibit
4.9 of our annual report on Form 20-F filed with the Commission on April 20, 2018)
Share Purchase Agreement dated September 30, 2017, between Fanhua Times Insurance
Sales & Services Co. Ltd. and Fanhua Insurance Sales Services Group Company Limited.
(incorporated by reference to Exhibit 4.10 of our annual report on Form 20-F filed with the
Commission on April 20, 2018)
Share Purchase Agreement dated June 14, 2018, between Joy Magnificent Limited (later
renamed as Fanhua Employee Holdings Limited) and Master Trend Limited
Share Purchase Agreement dated January 20, 2019, between Fanhua Inc. and Fanhua
Employees Holding Limited
Share Purchase Agreement dated January 20, 2019, between Fanhua Inc. and Treasure
Chariot Limited
Share Purchase Agreement dated January 20, 2019, between Fanhua Inc. and Step Tall
Limited
English Translation of Form of Loan Agreement among various employees of the
Company, CISG Holdings Ltd., and Fanhua Employees Holdings Limited signed on
various dates from July 1, 2018 to January 10, 2019
English Translation of Form of Loan Agreement among various entrepreneurial agent team
leaders, CISG Holdings Ltd, and Fanhua Employees Holdings Limited, Treasure Chariot
Limited, or Step Tall Limited. signed on various dates from July 1, 2018 to January 10,
2019
English Translation of Form of Entrusted Share Purchase Agreement between various
employees of the Company and Fanhua Employees Holdings Limited signed on various
dates from July 12018 and January 10, 2019
English Translation of Form of Entrusted Share Purchase Agreement between various
entrepreneurial agent team leaders of the Company and Fanhua Employees Holdings
Limited, Treasure Chariot Limited, or Step Tall Limited signed on various dates from July
1, 2018 to January 10, 2019
English Translation of Form of Supplementary Loan Agreement, dated January 10, 2019,
between various entrepreneurial team leaders and Fanhua Employees Holdings Limited,
Treasure Chariot Limited, or Step Tall Limited
English Translation of Form of Supplementary Entrusted Share Purchase Agreement, dated
January 10, 2019, between various entrepreneurial team leaders and Fanhua Employees
Holdings Limited, Treasure Chariot Limited, or Step Tall Limited
English Translation of Form of Supplementary Loan Agreement, dated January 10, 2019,
between various employees of the Company and Fanhua Employees Holdings Limited
-121-
Exhibit Number
Description of Document
4.22*
4.23*
8.1*
11.1
12.1*
12.2*
13.1**
13.2**
15.1*
15.2*
15.3*
15.4*
15.5*
English Translation of Form of Supplementary Entrusted Share Purchase Agreement, dated
January 10, 2019, between various employees of the Company and Fanhua Employees
Holdings Limited
English Translation of Letter of Undertaking, dated December 12, 2018, issued by each
sole shareholder and director of 521 Plan Employee Companies
Subsidiaries and Affiliated Entities of the Registrant
Code of Business Conduct and Ethics of the Registrant (incorporated by reference to
Exhibit 99.1 of our F-1 registration statement (File No. 333-146605), as amended, initially
filed with the Commission on October 10, 2007)
CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Consent of Maples and Calder (Hong Kong) LLP
Consent of Global Law Office
Consent of Deloitte Touche Tohmatsu
Consent of KPMG Huazhen LLP, Independent Registered Public Accounting Firm of
CNFinance Holdings Limited.
Financial information from CNFinance Holdings Limited for the year ended December
31, 2018, prepared in accordance with U.S. Generally Accepted Accounting Principles:
(i)
(ii)
Consolidated Balance Sheets as of December 31, 2017 and 2018;
Consolidated Statements of Comprehensive Income for the Years Ended December
31, 2016, 2017 and 2018;
(iii) Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended
(i)
December 31, 2016, 2017 and 2018;
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016,
2017 and 2018; and
(iv) Notes to the Consolidated Financial Statements.
(incorporated by reference to the end of the annual report on Form 20-F of CNFinance
filed with the Commission on April 25, 2019)
101*
Financial information from Registrant for the year ended December 31, 2018 formatted
in eXtensible Business Reporting Language (XBRL):
(i)
(ii)
Consolidated Balance Sheets as of December 31, 2017 and 2018;
Consolidated Statements of Income and Comprehensive Income for the Years
Ended December 31, 2016, 2017 and 2018;
(iii) Consolidated Statements of Shareholder’s Equity for the Years Ended December
31, 2016, 2017 and 2018;
(iv) Consolidated Statements of Cash Flows for the Years Ended December 31, 2016,
2017 and 2018;
Notes to Consolidated Financial Statements; and
(v)
(vi) Schedule 1 — Condensed Financial Statements of Fanhua Inc.
-122-
Exhibit Number
Description of Document
*
Filed with this Annual Report on Form 20-F.
**
Furnished with this Annual Report on Form 20-F.
-123-
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing its annual report on
Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.
FANHUA INC.
By: /s/ Chunlin Wang
Name: Chunlin Wang
Title: Chief Executive Officer
Date: April 30, 2019
-124-
EXHIBIT 8.1
List of Subsidiaries and Affiliated Entities
(As of March 31, 2019)
Subsidiaries and Affiliated Entities(1)
1. CISG Holdings Ltd. (2)
2. Minkfair Insurance Management Limited (3)
3. CNinsure Holdings Ltd. (4)
4. Fanhua Zhonglian Enterprise Image Planning
(Shenzhen) Co., Ltd. (5)
5. Fanhua Xinlian Information Technology Consulting
(Shenzhen) Co., Ltd. (5)
6. Fanhua Insurance Sales Service Group Company
Limited (6)
7. Guangdong Meidiya Investment Co., Ltd. (7)
8. Litian Zhuoyue Software (Beijing) Co., Ltd. (7)
9. Beijing Fanlian Investment Co., Ltd. (8)
10. Guangzhou Zhongqi Enterprise Management
Consulting Co., Ltd. (9)
11. Tibet Zhuli Investment Co. Ltd.(9)
12. Fanjin Investment Co., Ltd. (9)
13. Ying Si Kang Information Technology (Shenzhen) Co.,
Ltd. (10)
14. Sichuan Yihe Investment Co., Ltd.(11)
15. Shenzhen Xinbao Investment Management Co., Ltd. (7)
16. Fanhua Century Insurance Co., Ltd. (12)
17. Shenzhen Baowang E-commerce Co., Ltd. (13)
18. Shenzhen Dianlian Information Technology Co., Ltd.
(14)
19. Shenzhen Qunabao Information Technology Co., Ltd.
(7)
20. Shenzhen Bangbang Auto Services Co., Ltd. (7)
21. Guangdong Fanhua Bluecross Health Management
Co., Ltd (15)
Insurance Agencies
Percentage
Attributable to
Our Company
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Place of
Incorporation
BVI
Hong Kong
BVI& Hong Kong
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
Subsidiaries and Affiliated Entities(1)
22. Fanhua Lianxing Insurance Sales Co., Ltd. (16)
23. Hubei Fanhua Insurance Agency Co., Ltd. (15)
24. Jiangsu Fanhua Lianchuang Insurance Agency Co.,
Ltd. (15)
25. Zhejiang Fanhua Tongchuang Insurance Agency Co.,
Ltd. (15)
26. Liaoning Fanhua Gena Insurance Agency Co., Ltd. (15)
27. Shanghai Fanhua Guosheng Insurance Agency Co.,
Ltd. (15)
28. Jiangxi Fanhua Insurance Agency Co., Ltd. (15)
29. Hunan Fanhua Insurance Agency Co., Ltd. (17)
30. Fujian Fanhua Xinheng Insurance Agency Co., Ltd. (18)
31. Fujian Fanhua Guoxin Insurance Agency Co., Ltd. (19)
Insurance Claims Adjusting Segment
32. Guangdong Fanhua Fangzhong Investment
Management Co., Ltd. (20)
33. Fanhua Insurance Surveyors & Loss Adjustors Co.,
Ltd. (21)
34. Shanghai Fanhua Teamhead Insurance Surveyors &
Loss Adjustors Co., Ltd. (22)
35. Shenzhen Fanhua Training Co., Ltd. (23)
36. Shenzhen Fanhua Software Technology Co., Ltd. (23)
37. Shenzhen Huazhong United Technology Co., Ltd. (24)
38. Guangzhou Suiyuan Insurance Surveyors & Loss
Adjustors Co., Ltd. (19)
39. Shenzhen Chetong Network Co., Ltd. (25)
Consolidated Variable Interest Entities
1. Fanhua Employee Holdings Limited
2. Step Tall Limited
3. Treasure Chariot Limited
Affiliated Entities
4. Puyi Inc.(26)
5. CNFinance Holdings Limited(27)
6. Shanghai Teamhead Automobile Surveyors Co., Ltd.
(28)
Percentage
Attributable to
Our Company
Place of
Incorporation
100%
100%
100%
100%
100%
100%
100%
55%
100%
100%
51%
44.7%
44.2%
44.7%
44.7%
44.7%
100%
14.9%
100%
100%
100%
4.5%
18.5%
17.7%
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
BVI
BVI
BVI
PRC
CI
PRC
(1) The official names of those companies registered in PRC are in Chinese. The English translation is for reference only.
(2)
100% of the equity interests in this company are held directly by Fanhua Inc.
(3)
100% of the equity interests in this company are held directly by CISG holdings Ltd.
(4)
100% of the equity interests in this company are held directly by Minkfair Insurance Management Limited.
(5)
100% of the equity interests in this company are held directly by CNinsure Holdings Ltd.
(6) We beneficially own 100% equity interests in this Company, of which 7.2%, 10.8% and 82% of the equity interests in this company
are held by Fanhua Zhonglian Enterprise Image Planning (Shenzhen) Co., Ltd., Fanhua Xinlian Information Technology Consulting
(Shenzhen) Co., Ltd and Tibet Zhuli Investment Co. Ltd., respectively.
(7)
100% of the equity interests in these companies are held directly by Fanhua Insurance Sales Service Group Company Limited.
(8)
100% of the equity interests in this company are held directly by Fanhua Xinlian Information Technology Consulting (Shenzhen) Co.,
Ltd.
(9)
100% of the equity interests in this company are held directly by Beijing Fanlian Investment Co., Ltd.
(10) 100% of the equity interests in this company are held directly by Litian Zhuoyue Software (Beijing) Co., Ltd.
(11) We beneficially own 100% equity interests in this company, of which 39.14%, 40.86% and 20% of the equity interests in this
company are held by Fanhua Zhonglian Enterprise Image Planning (Shenzhen) Co., Ltd., Fanhua Xinlian Information Technology
Consulting (Shenzhen) Co., Ltd. and Fanhua Insurance Sales Group Company Limited, respectively.
(12) 100% of the equity interests in this company are held directly by Shenzhen Xinbao Investment Management Co., Ltd.
(13) 100% of the equity interests in this company are held directly by Fanhua Century Insurance Sales & Service Co., Ltd.
(14) 100% of the equity interests in this company are held directly by Tibet Zhuli Investment Co., Ltd.
(15) 100% of the equity interests in each of these companies are held directly by Fanhua Lianxing Insurance Sales Co., Ltd.
(16) We beneficially owned 100% of the equity interests in this company, of which 99% of the equity interests in this company are held
directly by Fanhua Insurance Sales Service Group Company Limited., Ltd. and the remaining 1% by Fanhua Xinlian Information
Technology Consulting (Shenzhen) Co., Ltd.
(17) 55% of the equity interests in this company are held directly by Fanhua Lianxing Insurance Sales Co., Ltd.
(18) 55% of the equity interests in this company are held directly by Guangdong Meidiya Investment Co., Ltd. and the remaining 45% of
the equity interests is directly held by Sichuan Yihe Investment Co., Ltd. This company is in the process of cancelling its business
license upon completion of transferring its business operations to the Fujian branch of Fanhua Lianxing Insurance Sales Co., Ltd.
(19) 100% of the equity interests in these companies are held directly by Fanhua Insurance Sales Service Group Company Limited. Fujian
Fanhua Guoxin is in the process of cancelling its business license upon completion of transferring its business operations to the Fujian
branch of Fanhua Lianxing Insurance Sales Co., Ltd.
(20) 51% of the equity interests in this company are held directly by Guangdong Meidiya Investment Co., Ltd.
(21) 44.7% of the equity interests in the company are held directly by Guangdong Meidiya Investment Co., Ltd.
(22) 99% of the equity interests in this company are held directly by Fanhua Insurance Surveyors & Loss Adjustors Co., Ltd.
(23) 100% of the equity interests in each of these companies are held directly by Fanhua Insurance Surveyors & Loss Adjustors Co., Ltd.,
in which we beneficially own 44.7% of the equity interests.
(24) 100% of the equity interests in the company are held directly by Shenzhen Fanhua Software Technology Co., Ltd., in which we
beneficially own 44.7% of the equity interests.
(25) 33.39% of the equity interests in this company are held directly by Fanhua Insurance Surveyors & Loss Adjustors Co., Ltd., in which
we beneficially own 44.7% of the equity interests.
(26) We directly own 4.5% of the equity interests in this company.
(27) We directly own 18.5% of the equity interests in this company .
(28) 40% of the equity interests in this company are held directly by Shanghai Fanhua Teamhead Surveyors & Loss Adjustors Co., Ltd., in
which we beneficially own 44.2% of the equity interests.
Certification by the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 12.1
I, Chunlin Wang, certify that:
1.
I have reviewed this annual report on Form 20-F of Fanhua Inc. (the “Company”);
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the Company
as of, and for, the periods presented in this report;
4.
The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the Company,
including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that
occurred during the period covered by this annual report that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial reporting; and
5.
The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the Company’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the Company’s internal control over financial reporting.
Date: April 30, 2019
By: /s/ Chunlin Wang
Name: Chunlin Wang
Title: Chairman and Chief Executive Officer
Certification by the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 12.2
I, Peng Ge, certify that:
1.
I have reviewed this annual report on Form 20-F of Fanhua Inc. (the “Company”);
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the Company
as of, and for, the periods presented in this report;
4.
The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the Company,
including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that
occurred during the period covered by this annual report that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial reporting; and
5.
The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the Company’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the Company’s internal control over financial reporting.
Date: April 30, 2019
By: /s/Peng Ge
Name: Peng Ge
Title: Chief Financial Officer
Certification by the Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 13.1
In connection with the Annual Report of Fanhua Inc. (the “Company”) on Form 20-F for the year ended
December 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Chunlin Wang, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date: April 30, 2019
By: /s/ Chunlin Wang
Name: Chunlin Wang
Title: Chairman and Chief Executive Officer
Certification by the Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 13.2
In connection with the Annual Report of Fanhua Inc. (the “Company”) on Form 20-F for the year ended
December 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Peng Ge, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date: April 30, 2019
By: /s/ Peng Ge
Name: Peng Ge
Title: Chief Financial Officer
[Letterhead of Maples and Calder]
EXHIBIT 15.1
Our ref
Direct tel
Email
DKP/628018-000001/14574223v2
+852 3690 7523
devika.parchment@maplesandcalder.com
Fanhua Inc.
27/F, Pearl River Tower
No. 15 West Zhujiang Road
Guangzhou, Guangdong 510623
People’s Republic of China
30 April 2019
Dear Sirs
Re: Fanhua Inc. (the “Company”)
We consent to the reference to our firm under the headings "Cayman Islands Taxation" and "Corporate
Governance" in the Company’s Annual Report on Form 20-F for the year ended December 31, 2018, which will
be filed with the United States Securities and Exchange Commission in the month of April 2019.
Yours faithfully
Maples and Calder (Hong Kong) LLP
[Letterhead of Global Law Office]
EXHIBIT 15.2
April 30, 2019
To: Fanhua Inc.
27/F, Pearl River Tower
No. 15 West Zhujiang Road
Guangzhou, Guangdong 510623
People’s Republic of China
Dear Sirs,
We hereby consent to the reference to our firm under the headings “Risk Factors”, “Regulation” and
“Organizational Structure” in Fanhua Inc.’s Annual Report on Form 20-F for the year ended December 31, 2018,
which will be filed with the Securities and Exchange Commission in April 2019.
Yours faithfully,
/s/ Global Law Office
Global Law Office
EXHIBIT 15.3
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement (No. 333-151271) on Form S-8 of our
reports dated April 30, 2019, relating to (1) the consolidated financial statements of Fanhua Inc., its subsidiaries
and variable interest entities (the “Group”) (which report expresses an unqualified opinion and includes
explanatory paragraphs relating to the translation of Renminbi amounts into United States dollars amounts for the
convenience of the readers in the United States of America, and relating to the financial statements of Group's
equity investment that were audited by other auditors), (2) the financial statement schedule and (3) and the
effectiveness of the Group’s internal control over financial reporting (which report expresses an adverse opinion
on the effectiveness of the Group’s internal control over financial reporting because of a material weakness),
appearing in this Annual Report on Form 20-F of Fanhua Inc. for the year ended December 31, 2018.
/s/Deloitte Touche Tohmatsu
Hong Kong
April 30, 2019
Consent of Independent Registered Public Accounting Firm
Exhibit 15.4
The Board of Directors
Fanhua, Inc.
We consent to the incorporation by reference on Form 20-F of Fanhua, Inc. of our report dated April 25, 2019,
with respect to the consolidated balance sheets of CNFinance Holdings Limited as of December 31, 2018 and
2017, and the related consolidated statements of comprehensive income, changes in shareholders’ equity, and
cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes
(collectively, the consolidated financial statements), which report appears in the December 31, 2018 annual report
on Form 20-F of CNFinance Holdings Limited.
Our report dated April 25, 2019 contains an explanatory paragraph that states that CNFinance Holdings Limited
completed a reorganization through which it became the parent company of Sincere Fame International Limited
on March 27, 2018.
/s/ KPMG Huazhen LLP
Guangzhou, China
April 30, 2019
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FANHUA INC.
Page
Report of Independent Registered Public Accounting Firm ................................................................... F-2
Consolidated Statements of Financial Position as of December 31, 2017 and 2018 ................................ F-3
Consolidated Statements of Income and Comprehensive Income for the Years Ended December
31, 2016, 2017 and 2018.................................................................................................................... F-6
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2016, 2017
and 2018 ........................................................................................................................................... F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2017 and 2018 ........ F-9
Notes to the Consolidated Financial Statements .................................................................................. F-21
Schedule 1—Condensed Financial Statements of Fanhua Inc. ............................................................. F-57
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Fanhua Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Fanhua Inc. (the
“Company”), its subsidiaries and its variable interest entities (the “Group”) as of December 31, 2017 and 2018,
the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows,
for each of the three years in the period ended December 31, 2018, the related notes and schedule 1 (collectively
referred to as the “financial statements”). In our opinion, based on our audits and the report of the other auditor,
the financial statements present fairly, in all material respects, the financial position of the Group as of
December 31, 2017 and 2018, and the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United
States of America.
Our audits also comprehended the translation of Renminbi amounts into United States dollar amounts and,
in our opinion, such translation has been made in conformity with the basis stated in Note 2(w) to the
consolidated financial statements. Such United States dollar amounts are presented solely for the convenience of
readers in the United States of America.
We did not audit the financial statements of CNFinance Holdings Limited, or CNFinance, the Group’s
investment in which is accounted for by use of the equity method. The accompanying financial statements of the
Group include its equity investment in CNFinance of RMB405 million and RMB576 million as of December 31,
2017 and 2018, respectively, and its equity earnings in CNFinance of RMB49 million, RMB109 million, and
RMB171 million for the years ended December 31, 2016, 2017, and 2018, respectively. Those statements were
audited by other auditors whose report (which included an explanatory paragraph concerning completion of a
reorganization) has been furnished to us, and our opinion, insofar as it relates to the amounts included for
CNFinance, is based solely on the report of the other auditors.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (“PCAOB”), the Group’s internal control over financial reporting as of December 31,
2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated April 30, 2019, expressed an
adverse opinion on the Group’s internal control over financial reporting because of a material weakness.
Basis for Opinion
These financial statements are the responsibility of the Group’s management. Our responsibility is to
express an opinion on the Group’s financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the
risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of
the financial statements. We believe that our audits the report of the other auditors provide a reasonable basis for
our opinion.
/s/ Deloitte Touche Tohmatsu
Hong Kong
April 30, 2019
We have served as the Group’s auditor since 2007.
F-2
FANHUA INC.
Consolidated Statements of Financial Position
(In thousands, except for shares and per share data)
2017
RMB
As of December 31,
2018
RMB
2018
US$
ASSETS:
Current assets:
363,746
Cash and cash equivalents .............................................
75,287
Restricted cash ..............................................................
Short term investments (Note 2(d)) ................................ 2,498,730
Accounts receivable, net of allowance for
doubtful accounts of RMB20,198 and
RMB21,241 (US$3,089) as of
December 31, 2017 and 2018,
respectively (Note 2(e)) ..............................................
Insurance premium receivables ......................................
Other receivables, net (Note 4) ......................................
Other current assets .......................................................
Total current assets ..................................................... 4,132,527
515,194
4,325
631,381
43,864
Non-current assets:
Property, plant, and equipment, net (Note 5) ..................
Goodwill, net (Note 6) ...................................................
Intangible assets, net (Note 2(g))....................................
Deferred tax assets (Note 11) .........................................
Investments in affiliates (Note 7) ...................................
Other non-current assets (Note 2(j)) ...............................
26,075
109,869
17,210
2,091
404,783
45,187
605,215
Total non-current assets ..............................................
Total assets .................................................................. 4,737,742
772,823
75,343
1,554,060
508,474
5,267
86,150
58,990
3,061,107
37,934
109,869
1,264
9,320
587,517
59,600
805,504
3,866,611
112,403
10,958
226,029
73,955
766
12,530
8,580
445,221
5,517
15,980
184
1,356
85,451
8,668
117,156
562,377
LIABILITIES AND EQUITY:
Current liabilities:
Accounts payable ...........................................................
Insurance premium payables ...........................................
203,024
9,553
332,685
15,248
48,387
2,218
Other payables and accrued expenses
rights
refundable
(Including
deposits of the consolidated VIE of RMB
8,184 as of December 31, 2018) (Note 9) .....................
Accrued payroll ..............................................................
share
Income taxes payable .....................................................
Total current liabilities .................................................
241,894
77,424
129,965
661,860
254,824
97,637
205,189
905,583
37,063
14,201
29,844
131,713
The accompanying notes are an integral part of the consolidated financial statements.
F-3
FANHUA INC.
Consolidated Statements of Financial Position—(Continued)
(In thousands, except for shares and per share data)
Non-current liabilities:
Other tax liabilities (Note 11).........................................
Deferred tax liabilities (Note 11) ....................................
Refundable share rights deposits (Including refundable
share rights deposits of the consolidated VIE of
RMB 138,328 as of December 31, 2018) (Note 18 ) ...
Total non-current liabilities.........................................
Total liabilities .............................................................
Commitments and contingencies (Note 16)
Equity:
Ordinary shares (Authorized shares:10,000,000,000 at
US$0.001 each; issued and outstanding shares:
1,300,191,084 and 1,301,951,084 as of December
31, 2017 and 2018, respectively) (Note 12) .................
Treasury stock (Note 19) ...............................................
Additional paid-in capital ..............................................
Statutory reserves (Note 14)...........................................
Retained earnings ..........................................................
Accumulated other comprehensive loss ..........................
Subscription receivables (Note 2(m)) .............................
Total shareholders’ equity ...........................................
Noncontrolling interests ..............................................
Total equity ..................................................................
Total liabilities and shareholders' equity ....................
As of December 31,
2017
RMB
2018
RMB
2018
US$
70,350
17,139
—
87,489
749,349
70,350
5,624
138,328
214,302
1,119,885
10,232
818
20,119
31,169
162,882
9,571
—
2,429,559
311,038
1,468,708
(93,108)
(248,717)
3,877,051
111,342
3,988,393
4,737,742
9,583
(1,156)
437,176
480,881
1,799,989
(93,290)
—
2,633,183
113,543
2,746,726
3,866,611
1,394
(168)
63,584
69,941
261,798
(13,568)
—
382,981
16,514
399,495
562,377
The accompanying notes are an integral part of the consolidated financial statements.
F-4
FANHUA INC.
Consolidated Statements of Income and Comprehensive Income
(In thousands, except for shares and per share data)
Net revenues:
Agency ..........................................................
Life insurance business ................................
P&C insurance business ...............................
Claims adjusting .............................................
Total net revenues ........................................
Operating costs and expenses:
Agency ..........................................................
Life insurance business ................................
P&C insurance business ...............................
Claims adjusting .............................................
Total operating costs ....................................
Selling expenses .............................................
General and administrative expenses ...............
Total operating costs and expenses ..............
Income (loss) from operations ......................
Other income, net:
Investment income .........................................
Interest income ...............................................
Others, net ......................................................
Income from continuing operations before
income taxes, share of income of
affiliates and discontinued operations.......
Income tax expense ........................................
Share of income of affiliates ...........................
Net income from continuing operations...........
Net income from discontinued operations,
net of tax (Note 2(x) & Note 3)....................
Net income ....................................................
Less: net income attributable to the
noncontrolling interests ...............................
Net income attributable to the Company’s
shareholders ..............................................
Year Ended December 31,
2016
RMB
2017
RMB
2018
RMB
2018
US$
3,746,471
990,541
2,755,930
336,413
4,082,884
(2,906,791)
(673,230)
(2,233,561)
(199,810)
(3,106,601)
(502,802)
(481,947)
(4,091,350)
3,780,217
2,424,444
1,355,773
308,256
4,088,473
(2,864,882)
(1,636,340)
(1,228,542)
(194,525)
(3,059,407)
(221,785)
(534,145)
3,143,873
2,870,776
273,097
327,390
3,471,263
(2,151,856)
(1,943,053)
(208,803)
(194,159)
(2,346,015)
(231,075)
(468,430)
457,257
417,537
39,720
47,617
504,874
(312,975)
(282,606)
(30,369)
(28,239)
(341,214)
(33,608)
(68,130)
(3,815,337)
(3,045,520)
(442,952)
(8,466)
273,136
425,743
61,922
115,275
6,901
10,341
124,051
(27,249)
48,293
145,095
22,543
167,638
10,591
191,784
25,891
14,284
505,095
(167,803)
108,944
446,236
5,480
451,716
195,456
34,207
11,807
667,213
(224,586)
174,468
617,095
—
617,095
28,428
4,975
1,717
97,042
(32,665)
25,375
89,752
—
89,752
2,488
7,180
1,044
157,047
449,228
609,915
88,708
The accompanying notes are an integral part of the consolidated financial statements.
F-5
FANHUA INC.
Consolidated Statements of Income and Comprehensive Income - Continued
(In thousands, except for shares and per share data)
Year Ended December 31,
2016
RMB
2017
RMB
2018
RMB
2018
US$
Net income per share:
Basic:
Net income from continuing operations
Net income from discontinued operations
Net income
Diluted:
Net income from continuing operations
Net income from discontinued operations
Net income
Net income per American Depositary
Shares ("ADS"):
Basic:
Net income from continuing operations
Net income from discontinued operations
Net income
Diluted:
Net income from continuing operations
Net income from discontinued operations
Net income
Shares used in calculating net income per
share:
0.12
0.02
0.14
0.11
0.02
0.13
2.32
0.39
2.71
2.23
0.37
2.60
0.36
0.00
0.36
0.36
0.00
0.36
7.20
0.09
7.29
7.20
0.09
7.29
0.49
0.00
0.49
0.49
0.00
0.49
9.84
0.00
9.84
9.83
0.00
9.83
0.07
0.00
0.07
0.07
0.00
0.07
1.43
0.00
1.43
1.43
0.00
1.43
Basic:
Diluted
1,160,592,325
1,208,821,796
1,231,698,725
1,261,223,049
1,239,264,464
1,240,854,034
1,239,264,464
1,240,854,034
Net income
Other comprehensive income (loss), net of
tax:
167,638
451,716
617,095
89,752
Foreign currency translation adjustments
2,177
(10,664)
(10,194)
(1,483)
Changes in fair value of short term
investments
Share of other comprehensive gain (loss) of
affiliates
Total Comprehensive income
Less: Comprehensive income attributable to
the noncontrolling interests
Comprehensive income attributable to the
Company’s shareholders
632
(632)
—
(37,911)
132,536
1,263
441,683
(1,763)
605,138
—
(256)
88,013
10,591
2,488
7,180
1,044
121,945
439,195
597,958
86,969
The accompanying notes are an integral part of the consolidated financial statements.
F-6
FANHUA INC.
Consolidated Statements of Shareholders' Equity
(In thousands, except for shares and per share data)
Share Capital
Treasury Stock
Number of Share
Amounts
RMB
Number of
Share
Amounts
RMB
Statutory
Reserves
RMB
Accumulated
Other
Comprehensiv
e loss
RMB
Subscription
Receivables
RMB
Noncontrolling
Interests
RMB
Balance as of January 1, 2016 .............. 1,155,059,526
—
Net income .............................................
Foreign currency translation..................
—
2,597,400
Exercise of share options .......................
—
Share-based compensation ....................
Provision for statutory reserves .........
—
Acquisition of additional interests
in a subsidiary......................................
Disposal of subsidiaries .........................
Changes in fair value of short
term investments .................................
Share of other comprehensive loss
of affiliates ...........................................
Balance as of December 31,
2016 .....................................................
Net income .............................................
Foreign currency translation..................
Exercise of share options .......................
Provision for statutory reserves .........
Private placement ...................................
Subscription receipt ...............................
Distribution of dividend.........................
Disposal of subsidiaries .........................
Changes in fair value of short term
investments ..........................................
Share of other comprehensive gain
of affiliates ...........................................
Balance as of December 31, 2017 .......
Additional
Paid-in Capital
RMB
2,454,244
—
—
1,127
4,937
—
(174,779)
16,126
—
—
8,592
—
—
17
—
—
49
—
—
—
7,416,000
—
—
—
1,165,072,926
—
8,658
—
2,301,655
—
—
69,118,158
—
66,000,000
—
—
—
—
—
458
—
455
—
—
—
—
—
1,300,191,084
—
9,571
—
64,488
—
200,632
—
(137,216)
—
—
—
2,429,559
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Retained
Earnings
RMB
871,356
157,047
—
—
—
(9,909)
—
434
—
—
1,018,928
449,228
—
—
(30,658)
—
—
—
31,210
302,115
—
—
—
—
9,909
—
(434)
—
—
311,590
—
—
—
30,658
—
—
—
(31,210)
(50,048)
—
21,483
—
—
—
—
—
632
(37,911)
(65,844)
—
(27,895)
—
—
—
—
—
—
(268,829)
—
(19,306)
—
—
—
—
—
—
—
(288,135)
—
17,231
—
—
—
22,187
—
—
—
Total
RMB
3,433,569
167,638
2,177
1,144
4,937
—
(179,223)
11,131
632
(37,911)
3,404,094
451,716
(10,664)
64,946
—
201,087
22,187
(137,216)
(8,388)
116,139
10,591
—
—
—
—
(4,493)
(4,995)
—
—
117,242
2,488
—
—
—
—
—
—
(8,388)
—
—
(632)
—
(632)
—
311,038
—
1,468,708
1,263
(93,108)
—
(248,717)
—
111,342
1,263
3,988,393
The accompanying notes are an integral part of the consolidated financial statements.
F-7
FANHUA INC.
Consolidated Statements of Shareholders' Equity — (Continued)
(In thousands, except for shares and per share data)
Share Capital
Treasury Stock
Number of
Share
Amounts
RMB
Additional
Paid-in Capital
RMB
Number of
Share
Amounts
RMB
Statutory
Reserves
RMB
—
—
3,274
—
—
—
—
—
—
(1,464,163)
150,000,000
(960)
—
—
—
—
Retained
Earnings
RMB
609,915
—
—
—
Accumulated
Other
Comprehensive
loss
RMB
—
1,581
—
—
—
—
—
—
(1,763)
(93,290)
Subscription
Receivables
RMB
Noncontrolling
Interests
RMB
Total
RMB
—
7,180
617,095
(11,775)
—
—
—
(10,194)
3,286
—
—
(1,465,123)
—
—
260,492
—
—
—
—
(4,979)
(251,220)
—
260,492
(394,240)
—
—
—
—
(1,763)
113,543
2,746,726
16,514
399,495
(251,024)
—
—
(280,470)
28,475,480
—
—
—
(196)
—
—
—
—
169,843
—
—
—
(169,843)
—
(108,791)
—
—
—
—
—
437,176
178,475,480
(1,156)
480,881
1,799,989
63,584
178,475,480
(168)
69,941
261,798
(13,568)
Net income ..............................................
Foreign currency
—
translation .............................................
—
Exercise of share options ....................... 1,760,000
Repurchase of ordinary
shares from
shareholder (Note 12) ..........................
Repurchase of ordinary
shares from open market
(Note 19) ..............................................
Provision for statutory reserves .........
Subscription receipt ................................
Distribution of dividend .........................
Share of other
comprehensive gain of
affiliates ................................................
—
—
—
—
—
—
Balance as of December
31, 2018 ................................................
1,301,951,084
Balance as of December
31, 2018 in US$ .............................
1,301,951,084
—
—
12
—
—
—
—
—
—
9,583
1,394
The accompanying notes are an integral part of the consolidated financial statements.
F-8
FANHUA INC.
Consolidated Statements of Cash Flows
(In thousands)
OPERATING ACTIVITIES
Net income ........................................................
Adjustments to reconcile net income to net
cash generated from operating activities:
Depreciation ......................................................
Amortization of intangible assets ........................
Allowance for doubtful accounts ........................
Compensation expenses associated with stock
options ...........................................................
Loss (gain) on disposal of property, plant and
equipment .......................................................
Investment income .............................................
Gain on disposal of subsidiaries..........................
Share of income of affiliates ...............................
Deferred taxes .........................................................
Changes in operating assets and liabilities:
Accounts receivable ...........................................
Insurance premium receivables...........................
Other receivables ...............................................
Amounts due from related parties .......................
Other current assets ............................................
Other non-current assets .....................................
Accounts payable ...............................................
Insurance premium payables ..............................
Other payables and accrued expenses .................
Accrued payroll .................................................
Income taxes payable .........................................
Dividend received ..............................................
Other tax liabilities .............................................
Net cash generated from operating activities ..
Cash flows used in investing activities:
Purchase of short term investments .....................
Proceeds from disposal of short term
investments.....................................................
Purchase of property, plant and equipment..........
Purchase of intangible asset ................................
Proceeds from disposal of property and
equipment .......................................................
Disposal of subsidiaries, net of cash disposed
of RMB1,336，RMB94,677 and RMB 576
(US$84) in 2016, 2017 and 2018,
respectively ....................................................
Increase in other receivables ...............................
Decrease in other receivables .............................
Additions in investments in non-current assets ....
Increase in amounts due from related parties
Decrease in amounts due from related parties .....
Net cash (used in) generated from investing
activities ........................................................
2016
RMB
Year Ended December 31,
2017
RMB
2018
RMB
2018
US$
167,638
451,716
617,095
89,752
13,492
20,232
2,381
4,937
115
(80,599)
(3,082)
(48,293)
(14,736)
(271,275)
1,339
(6,395)
3,727
(15,074)
—
127,015
304
142,720
11,446
29,530
—
2,424
87,846
14,099
33,177
11,328
—
(104)
(177,862)
(2,009)
(108,944)
9,512
(140,712)
(4,603)
(207,162)
(8,714)
(5,962)
—
139,528
7,165
22,901
41,472
69,729
10,000
(2,428)
152,127
10,833
15,946
6,791
—
(133)
(156,047)
—
(174,468)
(18,744)
(70)
(942)
(7,272)
—
(15,126)
(6,291)
129,661
5,695
21,462
20,213
75,224
—
—
523,827
1,576
2,319
988
—
(19)
(22,696)
—
(25,375)
(2,726)
(10)
(137)
(1,058)
—
(2,200)
(915)
18,858
828
3,122
2,940
10,940
—
—
76,187
(9,515,500)
(11,055,424)
(11,380,198)
(1,655,181)
8,825,355
(11,885)
(60,000)
11,531,556
(20,899)
—
12,488,495
(22,765)
—
1,816,376
(3,311)
—
48
156
203
30
29,376
—
—
—
(20,564)
(500,000)
—
—
—
41,452
—
—
500,000
(18,150)
(50,000)
50,000
—
—
72,722
(2,640)
(7,272)
7,272
(732,606)
(23,723)
1,567,585
227,996
F-9
FANHUA INC.
Consolidated Statements of Cash Flows— (Continued)
(In thousands)
2016
RMB
Year Ended December 31,
2017
RMB
2018
RMB
2018
US$
Cash flows from financing activities:
Acquisition of additional interests in
subsidiaries .....................................................
(213,534)
Payment for deferred consideration of
acquisition of a subsidiary
Repayment of advances from a disposed
subsidiary
Proceeds of employee subscriptions
Proceeds of issuance of ordinary shares upon
private placement
Dividends paid
Dividend distributed to noncontrolling interest ...
Proceeds on exercise of stock options .................
Repurchase of ordinary shares from open
market .............................................................
Repurchase of ordinary shares from a
shareholder .....................................................
Proceed related to disposal of Fanhua Times
Sales & Services Co., Ltd and its
subsidiaries
Net cash (used in) generated from financing
activities ........................................................
Net (decrease) increase in cash and cash
equivalents, and restricted cash ....................
Cash and cash equivalents and restricted
—
—
(103,446)
22,187
201,087
(137,216)
—
64,946
—
—
—
—
—
—
211,054
—
(326,725)
(4,979)
3,286
—
—
—
30,697
—
(47,521)
(724)
478
(251,220)
(36,538)
(1,318,611)
(191,784)
22,689
3,300
(4,185)
—
—
—
—
—
1,144
—
—
—
(216,575)
47,558
(1,664,506)
(242,092)
(861,335)
175,962
426,906
62,091
cash at beginning of year ..............................
1,132,851
273,979
439,033
63,855
Effect of exchange rate changes on cash and
cash equivalents ..............................................
Cash and cash equivalents and restricted
cash at end of year ........................................
Reconciliation in amounts on the
consolidated Financial position:
Cash and cash equivalents at end of year,
excluding held for sale .......................................
Restricted cash at end of year, excluding
2,463
(10,908)
(17,773)
(2,585)
273,979
439,033
848,166
123,361
236,952
363,746
772,823
112,403
held for sale .............................................
31,996
75,287
75,343
10,958
Cash and cash equivalents at end of year,
held for sale ............................................
Restricted cash at end of year, held for
sale .................................................................
Total of cash and cash equivalents and
restricted cash at the end of the year ............
Supplemental disclosure of cash flow
information:
Income taxes paid ....................................
Supplemental disclosure of non-cash
operating activity:
3,290
1,741
—
—
—
—
—
—
273,979
439,033
848,166
123,361
4,133
103,155
109,863
15,979
F-10
FANHUA INC.
Consolidated Statements of Cash Flows— (Continued)
(In thousands)
Interest repayment ..................................
—
—
5,557
808
2016
RMB
Year Ended December 31,
2017
RMB
2018
RMB
2018
US$
Supplemental disclosure of non-cash
investing activities:
Acquisition of additional interest in
subsidiaries ..............................................
Disposal of subsidiaries ...........................
Other receivable and other non-current
asset related to disposal of entities ............
Supplemental disclosure of non-cash
financing activities:
Dividends offset against proceeds of
employee subscriptions (Note 2(m)) .........
Dividends paid ........................................
10% consideration related to repurchase
of ordinary shares from a shareholder
(Note 8) ...................................................
19,551
—
—
46,582
—
10,638
—
64,152
—
—
1,547
—
—
—
—
—
—
—
49,438
(62,536)
7,190
(9,095)
146,512
21,309
F-11
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(1)
Organization and Description of Business
Fanhua Inc. (the "Company") (formally known as "CNinsure Inc.") was incorporated in the Cayman
Islands on April 10, 2007 and listed on the Nasdaq on October 31, 2007. The Company, its subsidiaries and its
variable interest entities (the "VIEs") are collectively referred to as the "Group". The Group is principally engaged
in the provision of agency services and insurance claims adjusting services in the People’s Republic of China (the
"PRC").
(2)
Summary of Significant Accounting Policies
(a)
Basis of Presentation and Consolidation
The consolidated financial statements of the Group have been prepared in accordance with accounting
principles generally accepted in the United States of America ("US GAAP"). The consolidated financial statements
include the financial statements of the Company, all its 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. See note 8 for detail.
(b)
Use of Estimates
The preparation of the consolidated financial statements in conformity with US GAAP requires
management of the Group to make a number of estimates and assumptions relating to the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reported period. The Company's
management based their estimates on historical experience and various other factors believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Significant accounting estimates reflected in
the Group's consolidated financial statements included valuation of goodwill, allowance for doubtful receivables,
convertible loan receivables valuation assessment, equity-method investment impairment assessment and the
valuation of non-controlling interests of the subsidiaries at acquisition dates. Actual results could differ from those
estimates.
(c)
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash on hand, bank deposits and short-term, highly liquid
investments that are readily convertible to known amounts of cash, and have insignificant risk of changes in value
related to changes in interest rates.
In its capacity as an insurance agent, the Group collects premiums from certain insureds and remits the
premiums to the appropriate insurance companies. Accordingly, as reported in the consolidated statements of
financial position, "premiums" are receivables from the insureds of RMB9,553and RMB3,823 as of December 31,
2017 and 2018, respectively. Unremitted net insurance premiums are held in a fiduciary capacity until disbursed
by the Group. The Group invests these unremitted funds only in cash accounts held for a short term, and reports
such amounts as restricted cash in the consolidated statements of financial position. Also, restricted cash balance
includes guarantee deposits required by China Insurance Regulatory Commission ("CIRC") in order to protect
insurance premium appropriation by insurance agency and the entrustment deposit received from the members of
eHuzhu, an online mutual aid platform operated by the Group. The restricted cash balance were RMB65,734 and
RMB71,520 as of December 31, 2017 and 2018, respectively.
(d)
Short Term Investments
Short term investments are mainly available-for-sale investments in debt securities that do not have a
quoted market price in an active market. Except for short term investments on private funds, the majority of the
F-12
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
investments are measured at costs which approximate their fair values in the consolidated statements of financial
position. The Group benchmark the costs of other investments against fair values of comparable investments and
reference to product valuation reports as of the balance sheet date, and categorize all fair value measures of short
term investments as level 2 of the fair value hierarchy. Private funds are measured at fair value. No impairment
loss on short term investments was identified for each of the years ended December 31, 2016, 2017 and 2018.
The short term investments balance were RMB2,498,730 and RMB1,554,060 as of December 31, 2017
and 2018, respectively. The decline was primarily due to a decrease of cash reserve as a result of cash dividend
and share buyback executed in 2018 and loans related to the Company’s 521 development plan.
(e)
Accounts Receivable and Insurance Premium Receivables
Accounts receivable are recorded at the invoiced amount and do not bear interest. Accounts receivable
represent fees receivable on agency and claims adjusting services primarily from insurance companies. Amounts
collected on accounts receivable are included in net cash provided by operating activities in the consolidated
statements of cash flows. The allowance for doubtful accounts is the Group's best estimate of the amount of
probable credit losses in the Group's existing accounts receivable balance. The Group determines the allowance
based on historical write-off experience. The Group reviews its allowance for doubtful accounts regularly. Past
due balances over 90 days and over a specified amount are reviewed individually for collectability.
Accounts receivable, net is analyzed as follows:
Accounts receivable ....................................................................................
Allowance for doubtful accounts .................................................................
Accounts receivable, net..............................................................................
As of December 31,
2017
RMB
535,392
(20,198)
515,194
2018
RMB
529,715
(21,241)
508,474
The following table summarizes the movement of the Group's allowance for doubtful accounts for
accounts receivables:
Balance at the beginning of the year ..............................................................................
13,246
3,700
Provision for doubtful accounts .....................................................................................
(154)
Write-offs .....................................................................................................................
16,792
Balance at the end of the year ........................................................................................
16,792
14,052
(10,646)
20,198
20,198
6,791
(5,748)
21,241
2016
RMB
2017
RMB
2018
RMB
Insurance premium receivables consist of insurance premiums to be collected from the insured, and are
recorded at the invoiced amount and do not bear interest. Amounts collected on insurance premium receivables are
included in net cash provided by operating activities in the consolidated statements of cash flows.
F-13
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(f)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization are calculated using the
straight-line method over the following estimated useful lives, taking into account residual value:
Building .............................................................................
Office equipment, furniture and fixtures ..............................
Motor vehicles ....................................................................
Leasehold improvements ....................................................
Estimated useful
life (Years)
20-36
3-5
5-10
5
Estimated residual
value
0%
0%-3%
0%-3%
0%
The depreciation methods and estimated useful lives are reviewed regularly. The following table
summarizes the depreciation recognized in the consolidated statements of income and comprehensive income:
Operating costs .............................................................................................................. 185
1,590
Selling expenses ............................................................................................................
11,717
General and administrative expenses ..............................................................................
13,492
Depreciation for the year ...............................................................................................
43
2,775
11,281
14,099
232
4,769
5,832
10,833
2016
RMB
2017
RMB
2018
RMB
(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, 2018. The goodwill impairment review is a two-step process. Step
1 consists of a comparison of the fair value of a reporting unit with its carrying amount. An impairment loss may
be recognized if the review indicates that the carrying value of a reporting unit exceeds its fair value. Estimates of
fair value are primarily determined by using discounted cash flows. If the carrying amount of a reporting unit
exceeds its fair value, step 2 requires the fair value of the reporting unit to be allocated to the underlying assets and
liabilities of that reporting unit, resulting in an implied fair value of goodwill. If the carrying amount of the
goodwill of the reporting unit exceeds the implied fair value, an impairment charge is recorded equal to the excess
of the carrying amount over the implied fair value.
The impairment review is highly judgmental and involves the use of significant estimates and
assumptions. These estimates and assumptions have a significant impact on the amount of any impairment charge
recorded. Discounted cash flow methods are dependent upon assumptions of future sales trends, market conditions
and cash flows of each reporting unit over several years. Actual cash flows in the future may differ significantly
from those previously forecasted. Other significant assumptions include growth rates and the discount rate
applicable to future cash flows.
In 2017 and 2018, management compared the carrying value of each reporting unit, inclusive of assigned
goodwill, to its respective fair value which is the step one of the two-step impairment test. The fair value of all
reporting units was estimated by using the income approach. Based on this quantitative test, it was determined that
the fair value of each reporting unit tested exceeded its carrying amount and, therefore, step 2 of the two-step
goodwill impairment test was unnecessary. The management concluded that goodwill was not impaired as of
December 31, 2017 and 2018.
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
F-14
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
separate from goodwill if it satisfies either the “contractual-legal” or “separability” criterion. Intangible assets with
a finite economic life are carried at cost less accumulated amortization. Amortization for identifiable intangible
assets categorized as customer relationships are computed using the accelerated method, while amortization for
other identifiable intangible assets are computed using the straight-line method over the intangible assets'
economic lives. Intangible assets with indefinite economic lives are not amortized but carried at cost less any
subsequent accumulated impairment losses. If an intangible asset that is not being amortized is subsequently
determined to have a finite economic life, it will be tested for impairment and then amortized prospectively over
its estimated remaining economic life and accounted for in the same manner as other intangible assets that are
subject to amortization. Intangible assets with indefinite economic lives are tested for impairment annually or more
frequently if events or changes in circumstances indicate that they might be impaired.
Separately identifiable intangible assets consist of brand names, trade names, customer relationships, non-
compete agreements, agency agreement and licenses, and software and systems.
The intangible assets, net consisted of the following:
As of December 31, 2017
Useful life
(Years)
Cost
RMB
Accumulated
amortization
RMB
Accumulated
Impairment loss
RMB
Net carrying
values
RMB
Brand name ................................................
Trade name ..........................................................
Customer relationship .......................................
Non-compete agreement..............................
Agency agreement and
license ......................................................
Software and system .................................
Indefinite
9.4 to 10
4.6 to 9.8
3 to 6.25
4.6 to 9.8
2 to 10
16,404
8,898
48,306
50,925
14,535
65,680
204,748
—
(6,688)
(45,353)
(21,410)
(14,458)
(50,680)
(138,589)
(16,404)
—
(2,953)
(29,515)
(77)
—
(48,949)
—
2,210
—
—
—
15,000
17,210
As of December 31, 2018
Useful life
(Years)
Cost
RMB
Accumulated
amortization
RMB
Accumulated
Impairment loss
RMB
Net carrying
values
RMB
Brand name ................................................
Trade name ..........................................................
Customer relationship .......................................
Non-compete agreement..............................
Agency agreement and
license ......................................................
Software and system .................................
Indefinite
9.4 to 10
4.6 to 9.8
3 to 6.25
4.6 to 9.8
2 to 10
16,404
8,898
48,306
50,925
14,535
65,680
204,748
—
(7,634)
(45,353)
(21,410)
(14,458)
(65,680)
(154,535)
(16,404)
—
(2,953)
(29,515)
(77)
—
(48,949)
—
1,264
—
—
—
—
1,264
Aggregate amortization expenses for intangible assets were RMB20,232, RMB 33,177 and RMB15,946
for the years ended December 31, 2016, 2017 and 2018, respectively.
Impairment of intangible assets with definite lives
The Group evaluates the recoverability of identifiable intangible assets with determinable useful lives
whenever events or changes in circumstances indicate that these assets' carrying amounts may not be recoverable.
The Group measures the carrying amount of identifiable intangible assets with determinable useful lives against
the estimated undiscounted future cash flows associated with each asset. Impairment exists when the sum of the
expected future net cash flows is less than the carrying value of the asset being evaluated. Impairment loss is
calculated as the amount by which the carrying value of the asset exceeds its fair value. Fair value is estimated
based on various valuation techniques, including the discounted value of estimated future cash flows. The
evaluation of asset impairment requires the Group to make assumptions about future cash flows over the life of the
F-15
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed
and estimated amounts. During the years ended December 31, 2016, 2017 and 2018, 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, 2016, 2017 and 2018, the Group
recognized no impairment losses on its indefinite-lived intangible assets.
The estimated amortization expenses for the next five years are: RMB942 in 2019, RMB278 in 2020,
RMB44 in 2021, nil in 2022 and nil in 2023.
(h)
Other Receivables and Other Current Assets
Other receivables and other current assets mainly consist of loans and amounts due from third parties,
advances, deposits, interest receivables, value-added tax recoverable and prepaid expenses. See Note 4 for details.
(i)
Investment in Affiliates
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 recent
financing rounds. 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.
(j)
Other Non-current Assets
Other non-current assets mainly represent investments in equity security of certain private companies
which the Group exert no significant influence and the convertible loan receivable of Beijing Cheche Technology
Co., Ltd. ("Cheche"). See note 2(t) for details.
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, 2018, equity securities
without readily determinable fair values 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. Prior to January 1, 2018, these securities were accounted for using the cost method of accounting,
measured at cost less other-than temporary impairment. No other-than-temporary impairment charge was incurred
in the years ended December 31, 2016 and 2017. No qualifying observable price changes were noted in the year
ended December 31, 2018, and the adoption of ASU 2016-01 had no material impact on the Company’s
consolidated financial statements.
(k)
Impairment of Long-Lived Assets
Property, plant, and equipment, and purchased intangible assets with definite lives, subject to amortization,
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an
F-16
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If
the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the
amount by which the carrying value of the asset exceeds the fair value of the asset.
(l)
Insurance Premium Payables
Insurance premium payables are insurance premiums collected on behalf of insurance companies but not
yet remitted as of the balance sheet dates.
(m)
Subscription Receivables
The Group entered into share purchase agreements with companies established on behalf of its employees
(the "Employee Company") for the issuance of 100,000,000 ordinary shares at US$0.27 per ordinary share and
50,000,000 ordinary shares at US$0.29 per ordinary share in 2014. The issue prices are the average closing prices
for the 20 trading days prior to the board approval dates of such subscriptions. The sale of shares to the Employee
Company was completed on December 17, 2014.
In order to facilitate the purchase of shares by employees as described above, the Group has granted a
loan to the Employee Company. The loan bears interest at a rate of 3.0% per annum and is repayable upon the sale
of the shares by employees, termination of employment or within two years, whichever comes first. Please refer to
Note 12 for details. The interest rate was determined with reference to fair market prices and therefore no interest-
related compensation expense was recorded. Upon the expiry of the loan agreement on December 17, 2016, the
repayment maturity of the loan was further extended to June 2018 and the loan continues to bear interest at a rate
of 3.0% per annum.
According to FASB ASC 505-10-45, the loan is recorded as a separate line of deduction from equity in
the Group’s consolidated statements of financial position as of December 31, 2017 and 2018. Interest income
accruing from the loan is recognized as non-operating income. During the year 2018, the principal in the amount
of RMB260,492 and interests in the amount of RMB29,224 had been settled while RMB49,438 of principal and
RMB5,557 of interest were offset by the Company's dividend contributions. As of December 31, 2018, the
principal and interest of the loans have been collected.
(n)
Treasury shares
Treasury shares represent ordinary shares repurchased by the Group that are no longer outstanding and are
held by the Group. The repurchase of ordinary shares is accounted for under the cost method whereby the entire
cost of the acquired stock is recorded as treasury stocks. See Note 19(b) for details.
(o)
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized
for temporary differences between the tax basis of assets and liabilities and their reported amounts in the
consolidated financial statements, net operating loss carryforwards and credits by applying enacted statutory tax
rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Group presents an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the
statements of financial position as a reduction to a deferred tax asset for a net operating loss carryforward, a
similar tax loss, or a tax credit carryforward, except to the extent a net operating loss carryforward, a similar tax
loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable
jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the
tax law of the applicable jurisdiction does not require the Group to use, and the Group does not intend to use, the
deferred tax asset for such purpose, the unrecognized tax benefit is presented in the statements of financial position
as a liability.
F-17
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(p) 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 Financial Accounting Standards Board’s Accounting Standard Update
("ASU") No. 2018-07, “Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting” prospectively starting from 2018. 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.
Liability award
Options or similar instruments on shares shall be classified as liabilities 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. 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.
Share-based compensation expenses of RMB4,937, nil and nil for the years ended December 31, 2016,
2017 and 2018, respectively, were included in the general and administrative expenses.
(q)
Employee Benefit Plans
As stipulated by the regulations of the PRC, the Group’s subsidiaries and VIEs in the PRC participate in
various defined contribution plans organized by municipal and provincial governments for its employees. The
F-18
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
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.
(r)
Revenue Recognition
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.
The Group’s revenue from contracts with insurance companies is derived principally from the provision of
agency and claims adjusting services. According to ASC 606, revenue is recognized at a point in time upon the
effective date of the insurance policy, as no performance obligation exists after the insurance policy was signed. If
there are other services within the contract, the Company estimates the stand-alone selling price for each separate
performance obligation, and the corresponding apportioned revenue is recognized over the period of time in which
the customer receives the service, and as the performance obligations are fulfilled and the Company is entitled to
that portion of revenue using the output method for the services. In situations where multiple performance
obligations exist within a contract, the use of estimates is required to allocate the transaction price on a relative
stand-alone selling price basis to each separate performance obligation. The Group determines revenue recognition
through the following steps:
Identification of the contract, or contracts, with a customer;
Identification of the performance obligation in the contract;
Determination of the transaction price, including the constraint on variable consideration;
Allocation of the transaction price to the performance obligation in the contracts; and
Recognition of revenue when (or as) the Group satisfies a performance obligation.
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 21 for detail. The following is a description of the accounting policy for the principal
revenue streams of the Group.
Insurance agency services revenue
For Insurance agency services, performance obligations are considered met and revenue is recognized
when the services are rendered and completed, at the time an insurance policy becomes effective, that is, when the
signed insurance policy is in place and the premium is collected from the insured. The Group has met all the
criteria of revenue recognition when the premiums are collected by the Group or the respective insurance
companies and not before, because collectability is not ensured until receipt of the premium. Accordingly, the
Group does not accrue any commission and fees prior to the receipt of the related premiums.
No allowance for cancellation has been recognized for agency as the management of the Group estimates,
based on its past experience that the cancellation of policies rarely occurs. Any subsequent commission
adjustments in connection with policy cancellations which have been deminims to date are recognized upon
notification from the insurance carriers. Actual commission and fee adjustments in connection with the
cancellation of policies were 0.2%, 0.2% and 0.1% of the total commission and fee revenues during years ended
December 31, 2016, 2017 and 2018, respectively.
For property insurance and life insurance agency, the Group may receive a performance bonus from
insurance companies as agreed and per contract provisions. Once an agency achieves its performance obligation,
typically a certain sales volume, the bonus will become due. The bonus amount is computed based on the
insurance premium amount multiplied by an agreed-upon percentage. The contingent commissions are recorded
F-19
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
when a performance obligation is being achieved. Prior to the adoption of Topic 606, revenue that was not fixed
and determinable because a contingency existed was not recognized until the contingency was resolved. Under
Topic 606, the Company must estimate the amount of consideration that will be received in the coming year such
that a significant reversal of revenue is not probable. Performance bonus represent a form of variable consideration
associated with certain sales volume, for which the Group earn commissions. In connection with Topic 606,
contingent commissions are estimated with a constraint applied and accrued relative to the recognition of the
corresponding core commissions. For the year ended December 31, 2018, the adoption of Topic 606 lead to
recognition of contingent performance bonus by RMB23,166. Also, such performance obligation did not exist in
prior years' service contract with insurance company.
The following table illustrates the impact of adopting Topic 606 on the consolidated financial position as
of December 31, 2018:
Year Ended December 31, 2018
As reported
Assets
Accounts receivable, net......................................................................... ….
Liabilities
Other payables and accrued expenses ..........................................................
Income taxes payable ..................................................................................
Equity
Retained earnings ........................................................................................ 1,799,989
254,824
205,189
508,474
RMB
Balances
without
adoption of
Topic 606
RMB
485,308
253,434
200,834
1,782,568
Effect of Change
Higher/(Lower)
RMB
23,1661
1,390
4,355
17,421
The following table illustrates the impact of adopting Topic 606 on the consolidated statement of income
and comprehensive income for the year ended December 31, 2018:
Net revenues:
Life insurance business .......................................................................... ….
Income taxes expense:
Income taxes expense ..................................................................................
Net income:
Net income .................................................................................................
Insurance claims adjusting services revenue
Year Ended December 31, 2018
Balances
without
adoption of
Topic 606
RMB
2,849,000
Effect of
Change
Higher/(Lo
wer)
RMB
As reported
RMB
2,870,776
21,776
224,586
220,231
4,355
617,095
599,674
17,421
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. Accordingly, the timing of revenue recognition is not materially impacted by the new standard.
Contract balances
The Group’s contract balances include accounts receivable and advance from customers. The timing
between the recognition of revenue for effective insurance policy and the receipt of payment is not significant. The
estimated accounts receivable in relation to cancellation of insurance policies within hesitation period is a contract
F-20
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
asset included in accounts receivable. The balances of contract asset are RMB74,119 and RMB84,907 as of
January 1, 2018 and December 31, 2018, respectively. In 2018, the amount of contract assets reclassified to
receivables as a result of the right to the transaction consideration becoming unconditional was approximately
RMB74,119. The effect of change of adopting Topic 606 in the amount of RMB23,166 is included in the contract
balance of RMB84,907 as of December 31, 2018.
The Group did not recognize any impairment related to contract assets during the year ended December 31,
2018.
The Group’s advance from customers consists of cash received from customers in advance of revenue
recognition, which is a contract liability. The balances of contract liability are nil and nil as of January 1, 2018 and
December 31, 2018, respectively. None of revenue recognized in the current period that was previously recognized
as a contract liability. As of January 1, 2018, the adoption of Topic 606 was no impact on the Group's consolidated
financial position.
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, Business Tax and Surcharges
The Group presents revenue net of sales taxes incurred. The sales taxes amounted to RMB81,890,
RMB25,239 and RMB21,508 for the years ended December 31, 2016, 2017 and 2018, respectively. The State
Administration of Taxation and Ministry of Finance jointly issued a Notice on Preparing for the Full
Implementation of the VAT Reform (Cai Shui [2016] No. 36). Accordingly, the Group started to pay value-added
tax instead of business tax from May 1, 2016.
Total Value-added taxes paid by the Group during the years ended December 31, 2016, 2017 and 2018
amounted to RMB160,556, RMB157,607 and RMB179,317 respectively.
(s)
Marketing campaign expense
The Group records its marketing campaign expenses as selling expenses.
Marketing campaign expenses are incurred to increase the Group's market share and attract more agents in
certain selected regions where the Group strategically plans to capture higher market shares. These costs are not a
necessary expense to sell the insurance policy. Such expenses are temporary with the terms of regional programs
ranging from one to three months, cancellable at any time without further notice. Marketing campaign expenses
are only recognized when such campaigns are officially announced by the Group to the agents. The Group records
the marketing campaign expenses when the related services are provided. During the years ended December 31,
2016, 2017 and 2018, RMB299,885, Nil and Nil of marketing campaign expenses were included in the selling
expenses balance, respectively. The decrease was primarily due to promotional marketing expenses which were
paid to sales agents in 2016, while no promotional marketing plan of such nature was launched in the year of 2017
and 2018.
(t)
Fair Value of Financial Instruments
Fair value is considered to be the price that would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. When determining the fair
F-21
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
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
Level 2
Level 3
Applies to assets or liabilities for which there are quoted prices in active markets for identical assets or
liabilities.
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.
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.
Measured at fair value on a recurring basis
As of December 31, 2017 and 2018, 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
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
RMB
As of
December 31,
2017
RMB
Significant
Other
Observable
Inputs
(Level 2)
RMB
Significant
Unobservable
Inputs
(Level 3)
RMB
2,498,730
—
2,498,730
—
Fair Value Measurements at Reporting Date Using
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
RMB
As of
December 31,
2018
RMB
Significant
Other
Observable
Inputs
(Level 2)
RMB
Significant
Unobservable
Inputs
(Level 3)
RMB
1,554,060
—
1,554,060
—
Description
Short-term investments -
debt security
Description
Short-term investments -
debt security
The majority of debt security consists of investments in trust products and asset management plans that
normally pay a prospective fixed rate of return. These investments are recorded at fair values on a recurring basis.
The Group benchmarks the costs against fair values of comparable investments with similar measurement terms,
F-22
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
such as prevailing market yields, at the balance sheet date. It is classified as Level 2 of the fair value hierarchy
since fair value measurement at reporting date uses significant other observable inputs.
The Group disposed of the equity interests in Fanhua Times Sales & Service Co., Ltd., and its subsidiaries
that conducts mainly P&C insurance business (collectively, the “P&C Insurance Division”) to a third party in 2017,
namely Beijing Cheche Technology Co., Ltd. (“Cheche”), for a consideration included cash and a convertible loan
receivable. The Group evaluated the convertible receivable’s settlement provisions and elected the fair value
option afforded in ASC 825, Financial Instruments, to value this instrument. Under such election, the loan
receivable is measured initially and subsequently at fair value, with any changes in the fair value of the instrument
being recorded in the consolidated financial statements as a change in fair value of derivative instruments. The
Group estimates the fair value of this instrument by first estimating the fair value of the straight debt portion. The
Group then estimates the fair value of the embedded conversion option based on financial performance and growth
rate of revenue of Cheche. The sum of these two valuations is the fair value of the loan receivable included in
other non-current assets. On October 31, 2017, the date of disposal, the Group used the discounted cash flow
method to value the debt portion of the convertible debt and determined the fair value to be RMB22,000. Based on
Cheche’s current and expected financial performance, industry trend and expected revenue and margin,
management determined the fair value of the option to be approximately RMB4,500 as of December 31, 2018
according to the analysis under the Black-Scholes option pricing model. The details of the significant
assumptions of the valuations of the conversion option is included in note 3(b). The Group further considered the
fair value of the straight debt portion of this financial instrument at year ended December 31, 2018. The sum of
these two valuations is considered to be similar with the amount which was initially recognized and retained in
other non-current assets. The fair value of convertible debt was RMB22,000 as of December 31, 2017 and 2018,
and there has been no impairment recorded for the convertible loan receivable during 2018. The convertible debt is
classified as Level 3 of the fair value hierarchy since fair value measurement uses unobservable inputs.
Measured at fair value on a non-recurring basis
The Group measures certain assets, including the cost method investments, equity method investments and
intangible assets, at fair value on a nonrecurring basis when they are deemed to be impaired. The fair values of
these investments and intangible assets are determined based on valuation techniques using the best information
available, and may include management judgments, future performance projections, etc. An impairment charge to
these investments is recorded when the cost of the investment exceeds its fair value and this condition is
determined to be other-than-temporary. Impairment charge to the intangible assets is recorded when their carrying
amounts may not be recoverable.
On January 1, 2018, the Group adopted ASU 2016-01, "Financial Instruments-Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"), which requires that
equity investments, except for those accounted for under the equity method or those that result in consolidation of
the investee, be measured at fair value, with subsequent changes in fair value recognized in net income. However,
an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus
impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the
identical or a similar investment of the same issuer. ASU 2016-01 also impacts the presentation and disclosure
requirements for financial instruments.
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).
(u)
Foreign Currencies
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
F-23
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
income or loss in the consolidated statements of income and comprehensive income. The Group has chosen the
Renminbi ("RMB") as their reporting currency.
The functional currency of most of the Company’s subsidiaries and VIEs is RMB. Transactions in other
currencies are recorded in RMB at the rates of exchange prevailing when the transactions occur. Monetary assets
and liabilities denominated in other currencies are translated into RMB at rates of exchange in effect at the balance
sheet dates. Exchange gains and losses are recorded in the consolidated statements of income and comprehensive
income.
(v)
Foreign Currency Risk
The RMB is not a freely convertible currency. The State Administration for Foreign Exchange, under the
authority of the People's Bank of China, controls the conversion of RMB into foreign currencies. The value of
RMB is subject to changes in central government policies and international economic and political developments
that affect supply and demand in the China Foreign Exchange Trading System market of cash and cash equivalents
and restricted cash. The Group had aggregate amounts of RMB266,392 and RMB216,457 of cash and cash
equivalents and restricted cash denominated in RMB as of December 31, 2017 and 2018, respectively.
(w)
Translation into USD
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 in the United States and were calculated at the rate of
US$1.00 = RMB6.8755, representing the noon buying rate in the City of New York for cable transfers of RMB on
December 31, 2018, the last business day in fiscal year 2018, as set forth in H.10 statistical release of the Federal
Reserve Bank of New York. The translation is not intended to imply that the RMB amounts could have been, or
could be, converted, realized or settled into USD at such rate.
(x)
Discontinued Operations
Under ASC 205-20 "Presentation of Financial Statements - Discontinued Operation", when a component
of an entity, as defined in ASC 205, has been disposed of or is classified as held for sale, the results of its
operations, including the gain or loss on its disposal are classified as discontinued operations and the assets and
liabilities of such component are classified as assets and liabilities attributed to discontinued operations, provided
that the operations, assets and liabilities and cash flows of the component have been eliminated from the entity’s
consolidated operations and the entity will no longer have any significant continuing involvement in the operations
of the component.
In November 2017, the Group completed the sale of its brokerage business. The Group's results of
operations related to discontinued operations have been restated as discontinued operations on a retrospective basis
for all periods presented accordingly.
(y)
Segment Reporting
As of December 31, 2018, 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 21. 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.
(z)
Earnings per Share ("EPS") or ADS
Basic EPS is calculated by dividing the net income available to common shareholders by the weighted
average number of ordinary shares /ADS outstanding during the year. Diluted EPS is calculated by using the
F-24
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
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 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.
(aa)
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs amounted to RMB18,085, RMB35,741 and
RMB34,663, for the years ended December 31, 2016, 2017 and 2018, respectively.
(ab)
Operating Leases
Leases where substantially all the rewards and risks of ownership of assets remain with the leasing
company are accounted for as operating leases. Payments made under operating leases are charged to the
consolidated statements of income and comprehensive income over the lease period.
(ac)
Accumulated Other Comprehensive Income
The Group presents comprehensive income in the consolidated statements of income and comprehensive
income with net income in a continuous statement.
Accumulated other comprehensive income mainly represents foreign currency translation adjustments,
changes in fair value of short term investments and share of other comprehensive income of the affiliates for the
period.
F-25
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(ad) Recently Issued Accounting Standards
On February 25, 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases,” which
specifies the accounting for leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use
asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The
standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated
over the lease term, on a generally straight-line basis. In addition, this standard requires both lessees and lessors to
disclose certain key information about lease transactions. ASU 2016-02 is effective for publicly-traded companies
for annual reporting periods, and interim periods within those years, beginning after December 15, 2018. Early
adoption is permitted. Based on the Company's preliminary assessment, the Company expects to record a right-of-
use asset of approximately RMB181,576 and a lease liability of approximately RMB181,457 on the adoption date
of January 1, 2019, primarily related to the Company's leased office space. The Company will use a modified
retrospective approach under ASU 2018-11 and will not restate prior periods. The Group expects to implement
new accounting policies as well as to elect certain practical expedients available to us under ASU 2016-02,
including those related to leases with terms of less than 12 months.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, which is intended to improve financial reporting by
requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions
and other organizations. The ASU requires the measurement of all expected credit losses for financial assets held
at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.
Financial institutions and other organizations will now use forward-looking information to better inform their
credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the
inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will
continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The
ASU requires enhanced disclosures to help investors and other financial statement users better understand
significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting
standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that
provide additional information about the amounts recorded in the financial statements. In November 2018, this
was further updated with the issuance of ASU 2018-19, which excludes operating leases from the scope. In
addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased
financial assets with credit deterioration. For public business entities that are U.S. SEC filers, the ASU is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Group is in
the process of evaluating the impact of adoption of this guidance on the Group's consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment. The update simplifies the subsequent measurement of goodwill by
eliminating Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is
performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should
be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The update
also 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. An
entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative
impairment test is necessary. The update should be applied on a prospective basis. The nature of and reason for the
change in accounting principle should be disclosed upon transition. For public companies, the update is effective
for any annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early
adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1,
2017. The Group expects there is no material impact upon adoption of this guidance on the Group's consolidated
financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework –
Changes to the Disclosure Requirements for Fair Value Measurement, which modifies disclosure requirements for
fair value measurements. While some disclosures have been removed or modified, new disclosures have been
added. The guidance is effective for us no later than January 1, 2020. Early adoption is permitted, where the
F-26
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
Company is permitted to early adopt the portion of the guidance regarding the removal or modification of the fair
value measurement disclosures while waiting to adopt the requirement regarding additional disclosures until the
effective date. The Group expects there will be changes in relevant disclosures upon adoption of this guidance on
the Group's consolidated financial statements.
(3)
Acquisitions, disposals and reorganization
Disposal of subsidiaries in 2018
a. 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
was 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 and 2017.
Disposal of subsidiaries in 2017
a. Disposal of Beijing Ruisike Management Consulting Co., Ltd.
In January 2017, the Group disposed Beijing Ruisike Management Consulting Co., Ltd to a third party, for
a total cash consideration of RMB20,867, which was settled as of December 31, 2017. The Group recognized a
gain of RMB2,029 on disposal of this subsidiary, which was determined by the excess of the sales consideration
over the net book value of the subsidiary at the time of disposal.
b. Disposal of Fanhua Times Sales & Service Co., Ltd and its subsidiaries
In October 2017, the Group entered into a share transfer agreement with Cheche, which operates an online
auto insurance platform. Under this agreement, the Group disposed of the equity interests in P&C Insurance
Division, to Cheche for a total consideration of RMB225,398, including RMB95,398 cash consideration and
RMB130,000 in the value of a convertible loan receivable, which is convertible or collectible in three years and
recognized as other non-current assets. The Group evaluated the convertible loan receivable's settlement provisions
and elected the fair value option afforded in ASC 825, Financial Instruments, to value this instrument. Under such
election, the loan receivable is measured initially and subsequently at fair value, with any changes in the fair value
of the instrument being recorded in the consolidated financial statements as a change in fair value of derivative
instruments. The Group estimates the fair value of this instrument by first estimating the fair value of the straight
debt portion. The Group then estimates the fair value of the embedded conversion option based on the recent
development of Cheche. The sum of these two valuations is the fair value of the loan receivable included in other
non-current assets.On October 31, 2017, the Group used the discounted cash flow method to value the debt portion
of the convertible loan receivable and determined the fair value to be RMB 22,000, and based on Cheche's current
and expected financial performance, industry trend and expected revenue and margin, management considered the
conversion option to be deeply out of the money and determined the fair value of the option to be immaterial. As a
result, the carrying amount of the convertible loan receivable was adjusted by RMB108,000. The total fair value of
RMB 22,000 was initially recognized and the balance remained the same and retained in other non-current assets
as of December 31, 2017.
Based on Cheche’s current and expected financial performance, industry trend and expected revenue and
margin, management determined the fair value of the option to be approximately RMB4.5 million as of December
31, 2018 according to the analysis under the Black-Scholes option pricing model with detailed assumptions
disclosed as below. The Group further considered the fair value of the straight debt portion of this financial
instrument at year ended December 31, 2018. The sum of these two valuations is considered to be similar with the
amount which was initially recognized and retained in other non-current assets. The fair value of convertible debt
was RMB22,000 as of December 31, 2017 and 2018, and there has been no impairment recorded for the
convertible loan receivable during 2018.
F-27
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
The convertible loan receivable also carries a 10% interest return per annum which could be satisfied by
cash or converted equity interest in Cheche. The related interest income in 2017 is about RMB367. When the
convertible loan receivable expires, the Group has the right to convert to the equity interests of Cheche, or recover
the principal and interests of the convertible loan receivable according to the agreement. The Group recognized
RMB884 gain on disposal of these subsidiaries in 2017, which was determined by the excess of the cash
consideration and fair value of the convertible loan receivable over the net book value of the subsidiaries, which
was calculated to be RMB116,514 at the time of disposal. The net book value of the subsidiaries at the time of
disposal also included goodwill allocated to this disposal in the amount of RMB12,208.
The Company used the Black-Scholes valuation model in determining the fair value of embedded
conversion option, which requires the input of highly subjective assumptions, including the expected life of the
conversion option, stock price volatility, dividend rate and risk-free interest rate. The assumption used in
determining the fair value of the embedded conversion option on the December 31, 2018 were as follows:
Assumptions
Expected dividend yield (Note i)
Risk-free interest rate (Note ii)
Expected volatility (Note iii)
Expected life (Note iv)
Fair value per ordinary share on grant date
(i)
Expected dividend yield:
December 31,
2018
0.00 %
2.48 %
58.20 %
1.8 years
RMB0.04
The expected dividend yield was estimated by the Company based on Cheche’s historical dividend policy.
(ii)
Risk-free interest rate:
Risk-free interest rate was estimated based on the 2-year US Government Bond yield as of the valuation
date.
(iii)
Expected volatility:
As Cheche is a non-listed company, the Company adopted 58.20% volatility with reference to its
annualized standard deviation of the continuously compounded rate of return on the daily average adjusted
share price as of the Valuation Date.
(iv)
Expected life:
The expected life was the contractual life with Cheche’s agreement.
c. Disposal of Fanhua Bocheng Brokerage Limited ("Bocheng")
In November 2017, the Group disposed of Bocheng to a third party for a total consideration of
RMB46,582. And the consideration receivable was further offset by the other payables to Bocheng, see
supplemental disclosure of cash flow information for details. Prior to the disposal, the Group had a liability due to
Bocheng in the amount of RMB103,446, which was settled in December 2017. The Group recognized loss of
RMB904 on the disposal of this subsidiary, which was determined by the excess of the net book value of the
subsidiary at the time of disposal over the sales consideration. As a result of this disposal, brokerage's result of
operations should be reclassified to discontinued operations. Brokerage segment is no longer valid as of December
F-28
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
31, 2017. And accordingly, the segment note disclosure to the prior year consolidated financial statements have
been restated.
As described in Note 2(x), the activities of the brokerage business were segregated and reported as
discontinued operations in the consolidated statements of income and comprehensive income for all periods
presented.
The following table presents a reconciliation of the major classes of line items constituting pretax from
discontinued operations to after-tax profit reported in discontinued operations for the years ended December 31,
2016 and 2017:
Results of discontinued operations:
Total net revenues ..............................................
Total operating costs ..........................................
Selling expenses.................................................
General and administrative expenses ..................
Other income, net ...............................................
Loss on disposal of discontinued operations........
Income from discontinued operations before income taxes
Income taxes expense .........................................
Net income from discontinued operations, net of tax
Cash flow from discontinued operations:
Net cash generated from (used in) operating activities*
Net cash used in investing activities....................
Net cash generated from financing activities .......
Net cash increase (decrease) in cash and, cash equivalents, and
restricted cash .................................................
Cash and cash equivalents and restricted cash at beginning of year
Cash and cash equivalents, and restricted cash at the disposal date
Cash and cash equivalents and restricted cash at end of year
Year ended December 31,
2016
RMB
2017
RMB
617,738
(503,926)
(86,019)
(5,287)
1,141
—
23,647
(1,104)
22,543
172,993
(163,079)
(190)
(3,380)
40
(904)
5,480
—
5,480
Year ended December 31,
2016
RMB
2017
RMB
(1,616)
(12)
—
(1,628)
6,659
—
5,031
8,992
—
—
8,992
5,031
14,023
—
*Including adjustment for the loss on disposal of discontinued operations in the amount of RMB904 in 2017.
As of respective closing date of each of these disposals in 2017, the Group has completed the closing
procedures of all the above transactions and has effectively transferred its control of Bocheng to the respective
buyers.
F-29
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
Acquisition of additional interests in a subsidiary in 2016
On May 9, 2016, the Group entered into a share purchase agreement with the minority shareholders of
InsCom Holding Limited ("InsCom") to acquire the remaining 34.9% of the equity interests in InsCom and the
outstanding share options of InsCom for a total consideration of approximately RMB198,776 which consists of (i)
RMB179,223 in cash after netting off with the receivable of RMB1,836 in relation with the exercise of the InsCom
share options, and (ii) 7,416,000 ordinary shares of the Company. Upon completion of the acquisition in May 2016,
the Group's equity interests in InsCom increased from 65.1% to 100%.
The schedule below discloses the effects of changes in the Group’s ownership in subsidiaries on the
Group's equity:
Net income attributable to the Company's shareholders .....................................................
Decrease in Company's additional paid-in capital for acquisitions of additional equity
interests from noncontrolling interests .........................................................................
Changes from net income attributable to Company’s shareholders and transfers to
noncontrolling interests ...............................................................................................
Year ended December
31, 2016
RMB
157,047
(174,779)
(17,732)
Disposals of subsidiaries in 2016
During the year ended December 31, 2016, the Group disposed of three subsidiaries, including Shandong
Fanhua Mintai Insurance Agency Co., Ltd ("Shandong Mintai"), Guangdong Huajie Insurance Agency Co., Ltd
("Guangdong Huajie") and Dongguan Zhongxin Insurance Agency Co., Ltd ("Dongguan Zhongxin"), for a total
cash consideration of RMB30,712. The Group recognized RMB3,082 gain on disposal of subsidiaries, which was
determined by the excess of the sales consideration over the net book value of the subsidiaries at the time of
disposal.
As of December 31, 2016, the Group has completed the closing procedures of all the above transactions
and has effectively transferred its control of Shandong Mintai, Guangdong Huajie and Dongguan Zhongxin to the
respective buyers.
(4)
Other Receivables, net
Other receivables, net are analyzed as follows:
Advances to staff (i) ....................................................................................
Advances to entrepreneurial agents (ii) ........................................................
Rental deposits ............................................................................................
Interest receivables (iii) ...............................................................................
Loan to a third party (iv) .............................................................................
Amount due from a third party (v) ...............................................................
Amount due from payment platform ............................................................
Other(vi) .....................................................................................................
As of December 31,
2017
RMB
2018
RMB
14,599
1,308
7,709
23,038
513,180
42,152
591
28,804
631,381
10,036
1,362
12,580
18
—
19,463
7,082
35,609
86,150
(i) This represented advances to staff of the Group for daily business operations which are unsecured, interest-
free and repayable on demand.
F-30
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(ii) This represented advances to entrepreneurial agents who provide services to the Group. The advances are used
by agents to develop business. The advances were unsecured, interest-free and repayable on demand.
(iii) This represented accrued interest income on bank deposits and accrued interest on subscription receivables
(Note 2(m)).
(iv) This represented loan to Shenzhen Chuangjia Investment Partnership Limited ("Chuangjia") of RMB500,000
and corresponding interest receivable RMB13,180 as of December 31, 2017. The loan is secured by the 99%
equity share of Chengdu Puyi Bohui Information Technology Limited ("Puyi Bohui"), a major operating
subsidiary of Chuangjia, with interest rate 7.3% per annum. The loan matured in 2018 and the entire principal
and interests were fully settled in August 31, 2018.
(v) This represented the residual balance of uncollected cash consideration due from Cheche, which is related to
the disposal of P&C business. See Note 3 for details.
(vi) This represented other miscellaneous receivables, including advance for staff of the social insurance and
housing fund, prepaid rents, deposit to the garages for car repairing, prepayment for postage, etc.
The following table summarizes the movement of the Group's allowance for doubtful accounts for other
receivables:
Balance at the beginning of the year ..............................................................................
4,043
(1,319)
Write-offs .....................................................................................................................
2,724
Balance at the end of the year ........................................................................................
2,724
(2,724)
—
—
—
—
2016
RMB
2017
RMB
2018
RMB
(5)
Property, Plant and Equipment
Property, plant and equipment, net, is comprised of the following:
Building ......................................................................................................
Office equipment, furniture and fixtures ......................................................
Motor vehicles ............................................................................................
Leasehold improvements .............................................................................
Total ...........................................................................................................
Less: Accumulated depreciation ..................................................................
Property, plant and equipment, net...............................................................
As of December 31,
2017
RMB
12,317
119,478
10,443
6,192
148,430
(122,355)
26,075
2018
RMB
12,317
129,848
10,292
14,284
166,741
(128,807)
37,934
No impairment for property, plant and equipment was recorded for the years ended December 31, 2016,
2017 and 2018.
(6)
Goodwill
The gross amount of goodwill and accumulated impairment losses by segment as of December 31, 2017
and 2018 are as follows:
F-31
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
Agency
segment
RMB
Claims
Adjusting
segment
RMB
Gross as of January 1, 2017 ......................................................................... 922,494
Eliminated on disposal of subsidiaries in 2017 (Note 3) ............................... (790,517)
Gross as of December 31, 2017 and 2018 .................................................... 131,977
Accumulated impairment loss as of January 1, 2017 .................................... (800,417)
Eliminated on disposal of subsidiaries in 2017 (Note 3) ............................... 778,309
Accumulated impairment loss as of December 31, 2017
(22,108)
and 2018 ..................................................................................................
Net as of December 31, 2017....................................................................... 109,869
Net as of December 31, 2018....................................................................... 109,869
21,137
—
21,137
(21,137)
—
(21,137)
—
—
Total
RMB
943,631
(790,517)
153,114
(821,554)
778,309
(43,245)
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, 2016, 2017 and 2018.
F-32
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, 2018, the Group’s investments accounted for under the equity method totaled
RMB587,517 (as of December 31, 2017: RMB404,783), which mainly included the investment in CNFinance
Holdings Limited, (“CNFinance”, parent company of formerly known as Sincere Fame International Limited after
reorganization in March 2018), amounting to RMB576,048, the investment in Puyi Inc. (“Puyi”) amounting to
RMB11,350 and investment in Teamhead Automobile Surveyors Co., Ltd. (“Teamhead Automobile”) amounting
to RMB119. The increase primarily due to the rapid growth generated by CNfinance.
Investment in CNFinance
In March 2018, in connection with the reorganization of Sincere Fame International Limited (“Sincere
Fame”), the shareholders of Sincere Fame transferred all of their equity interests in Sincere Fame in exchange for
the ordinary shares of CNFinance. As a result, CNFinance became the parent company of Sincere Fame and the
Company owned 20.6% equity interests in CNFinance. The Company’s equity interest of CNFinance was diluted
from 20.6% to 18.5% 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 its third largest shareholder
of CNFinance. As of December 31, 2018, the market value of the Group’s investment in CNFinance was
approximately RMB479,605 based on its quoted closing price. The length of time that the fair value of investment
in CNFinance being below its carrying value is a short period since CNFinance was listed on November 7, 2018,
CNFinance’s current financial performance is positive, the Group intends and has the ability to retain its
investment in CNFinance for a period of time sufficient to allow for any anticipated recovery in market value.
Hence, the management considered the investment in CNFinance as at December 31, 2018 is considered as not
other than temporary and no impairment has been recognised during the year ended December 31, 2018.
Investment in Puyi
In November 2010, through the Group’s wholly-owned subsidiary Fanhua Fanlian Investment Co., Ltd., or
Fanlian, the Group invested RMB10,028 in Fanhua Puyi Investment Management Co., Ltd., or Puyi Investment
for 19.5% equity interests in Puyi Investment. In March 2013, Puyi Investment was renamed as Fanhua Puyi Fund
Sales Co. Ltd., or Puyi Sales after obtaining a license to distribute fund products.
In November 2016, equity interests in Puyi Sales were diluted from 19.5% to 15.4% as a result of the
injection of additional registered capital into Fanhua Puyi by Chengdu Puyi Bohui Information Technology Co.,
Ltd., or Puyi Bohui which holds the remaining equity interests of Puyi Sales.
The Group accounted the initial investment under the cost method before August 2018. In August of 2018,
Puyi Inc. or Puyi, an exempted company incorporated under the laws of the Cayman Islands, which is also the
ultimate holding company of Puyi Sales and Puyi Bohui, has started its process of an initial public offering (“IPO”)
in the U.S. capital market. For the IPO purpose, Puyi and its subsidiaries have conducted certain equity
reorganization transactions with the Group. As part of Puyi Inc’s reorganization, in September 2018, the Group
transferred its shares in Puyi Sales to Puyi Bohui with the carrying amount of RMB10,028 in exchange for
4,033,600 Ordinary Shares of Puyi (“Puyi’s shares”), representing 4.8% of Puyi’s equity interest. No gain or loss
on above transactions was recognized by the Group as management considered that the substance of this
transaction is an exchange of shares as part of Puyi Inc’s reorganization, and the fair value of Puyi’s share is
equivalent to the fair value of the Group’s original equity interests on Fanhua Puyi given up. Puyi was
subsequently listed on Nasdaq on March 29, 2019, and the Group’s equity was then diluted to 4.5% after its IPO.
Puyi provides wealth management, corporate finance and asset management services in China. Since September 5,
2018, investment in Puyi 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.
F-33
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
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 surveyor and loss
adjustors services.
During the years ended December 31, 2016, 2017 and 2018, the Group recognized its share of income of
affiliates in the amount of RMB48,293, RMB108,944 and RMB174,468 respectively. During the years ended
December 31, 2016, 2017 and 2018, the Group recognized its share of other comprehensive loss of affiliates in the
amount of RMB37,911, other comprehensive income of RMB1,263, and other comprehensive loss of RMB1,763,
and respectively.
Investments as of December 31, 2017 and 2018 were as follows:
As of December 31,
2017
RMB
160
—
404,623
404,783
2018
RMB
119
11,350
576,048
587,517
As of December 31,
2017
RMB
2018
RMB
1,745,693
16,460,862
13,022,143
3,355,068
4,413,558
15,216,534
16,338,523
1,306
Year Ended December 31,
2017
RMB
3,424,351
2,008,070
804,163
529,524
2016
RMB
1,347,800
899,946
287,975
235,366
2018
RMB
4,419,070
2,461,628
1,210,690
907,724
Teamhead Automobile ................................................................................
Puyi. ...........................................................................................................
CNFinance ..................................................................................................
Total ...........................................................................................................
The summarized financial information of equity method investees is illustrated as
below:
Statements of Financial Position
Current assets..............................................................................................
Non-current assets .......................................................................................
Current liabilities ........................................................................................
Non-current liabilities .................................................................................
Results of operation
Net revenues ........................................................................................... ....
Gross profit .................................................................................................
Income from operations...............................................................................
Net profit ....................................................................................................
(8)
Variable Interest Entities ("VIE")
(a) VIEs related to operations
PRC laws and regulations place certain restrictions on foreign investment in and ownership of insurance
agencies, brokerages and on-line business. Accordingly, the Group conducted some of its operations in China
through contractual arrangements among its PRC subsidiaries, two PRC affiliated entities and the equity
shareholders of these PRC affiliated entities, who are PRC nationals.
F-34
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
In recent years, some rules and regulations governing the insurance intermediary sector in China have
begun to encourage foreign investment. The Group commenced a restructuring which resulted in obtaining
controlling equity ownership in a majority of its affiliated insurance intermediary companies.
In May 2016, the Group completed its restructuring and all the individual shareholders had transferred
their respective equity interest in Shenzhen Dianliang Information Technology Co., Ltd and Shenzhen Xinbao
Investment Management Co., Ltd to subsidiaries of the Company. Thereafter, the Group conducts all of its
operations in China through its directly owned subsidiaries.
(b) 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.
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 5,076,226 new ADS at US$25.52 per ADS in January 2019;
The Group set the 521 Plan subscription price at US$27.38 per ADS, which is the weighted average of the
closing prices of the above mentioned repurchase and new share issuance transactions.
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 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 521 Plan Employee Companies were established by the Group to facilitate the adoption of its 521
Plan. The Group’s ordinary shares are the only significant assets held by the 521 Plan Employee Companies,
which serve as collaterals to the loans issued by the Group to the Participants. Given the only substantial recourse
to the loans issued by the Group are the ordinary shares, changes (principally decreases) in the value of the
ordinary shares held by the 521 Plan Employee Companies will be indirectly absorbed by the Group and the Group
has potential exposure to the economics of the 521 Plan Employee Companies. Therefore, the Group has variable
interests in the 521 Plan Employee Companies. Since none of the 521 Plan Employee Companies’ equity investors
have the obligation to absorb the expected losses or the right to receive the expected residual returns as (i) the
depreciation of the ADS will be indirectly absorbed by the Group and (ii) and the appreciation of the ADS will be
absorbed by the Group or the Participants, as any residual proceeds from the sale of the ADS will revert to Group
F-35
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
or the Participants and not the equity investor as described in the various vesting scenarios in Note 18(b).
Therefore, the 521 Plan Employee Companies are deemed to be VIEs of the Group.
Through the loan agreements, entrusted share purchase agreements and letters of undertaking described
below, 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, and the
Group has potential exposure to the economics of the VIEs resulting from the fluctuation in value of the ADS,
which is more than insignificant. The ordinary shares are the only significant assets held by the 521 Plan
Employee Companies. The ordinary shares held by 521 Plan Employee Companies serve as collateral to the loans
issued by the Group to the Participants. Given the only substantial recourse to the loans issued by the Group are
the ordinary shares, decreases in the value of the ordinary shares held by the 521 Plan Employee Companies will
be indirectly absorbed by the Group. 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.
The following is a summary of the contractual agreements that the Group entered into relating to the 521
Plan:
Loan, trust and shares pledge 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 our 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, the loan agreements
provide a total of RMB1,270,696 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.
Letter of Undertaking
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 it discretion.
As of December 31, 2018, the Group had already transferred 150,000,000 ordinary shares to one of the
521 Plan Employee Companies which were purchased from Master Trend with consideration of RMB1,465,124. at
the price of US$29 per ADS These shares were subscribed by Participants at the final price of US$27.38 per ADS,
but initially deposited at 10% contribution of US$29 per share. The 10% subscription price contributed by
Participants amounted to RMB8,184 and RMB138,328 as of December 31, 2018 and is recorded as current and
non-current refundable share right deposits on the statement of financial position, respectively. The RMB8,184
represents excess contribution received from Participants, which have been fully refunded in April, 2019.
F-36
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
Risks in relation to the 521 Plan’s VIE structure
The variable interest entities or their respective shareholders and directors may fail to perform their obligations
under our contractual arrangements with them.
The 521 Plan Employee Companies hold the shares on behalf of the Participants. 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. Mr. Yinan Hu, the Group’s director, and two other employees of the Group are the respective sole
shareholder and director of the 521 Plan Employee Companies. The Group’s ordinary shares are the only
significant assets held by the 521 Plan Employee Companies, which serve as collateral to the loans issued by the
Group to the Participants. Given the only substantial recourse to the loans issued by the Group are the ordinary
shares of the Group, changes (principally decreases) in the value of the ordinary shares held by the 521 Plan
Employee Companies will be indirectly absorbed by the Group and the Group has potential exposure to the
economics of the 521 Plan Employee Companies.
If the Group’s VIEs or their shareholders and directors fail to perform their respective obligations under
the contractual arrangements, the Group may have to incur substantial costs and expend additional resources to
enforce such arrangements. The Group may also have to rely on legal remedies under various legal jurisdictions,
including seeking specific performance or injunctive relief, and claiming damages, which the Group cannot assure
that it will be effective under the relevant laws and regulations. For example, if the shareholders of the Group’s
VIEs act in bad faith toward the Group, the Group may have to take legal action to compel them to perform their
contractual obligations. In addition, if any third parties claim any interest in the equity interests of the Group’s
VIEs, the Group’s ability to exercise shareholders’ rights or foreclose the shares pledged under the loan
agreements with the Participants may be impaired. If these or other disputes between the shareholders and
directors of the Group’s VIEs and third parties were to impair our control over the Group’s VIEs, its ability to
consolidate the financial results of the VIEs would be affected, which would in turn materially and adversely affect
the Group business, financial condition and results of operations.
Summarized below is the information related to the VIE’s assets and liabilities reported in the Company’s
consolidated financial position after inter group elimination as of December 31, 2017 and 2018, respectively:
2017
RMB
As of December 31,
2018
RMB
Total assets .................................................................................
Total liabilities ..............................................................................
—
—
—
146,512
Summarized below is the information related to the financial performance of the VIE's reported in the
Company’s consolidated statements of operations and comprehensive loss for the years ended December 31, 2016,
2017 and 2018, respectively:
Year Ended December 31,
2017
RMB
2016
RMB
2018
RMB
Net revenues .......................................................................................
Net loss ...............................................................................................
Net cash used in operating activities ....................................................
Net cash generated from investing activities ........................................
Net cash generated from financing activities ........................................
33,679
(4,598)
(11,536)
2,601
—
—
—
—
—
—
—
—
—
—
—
(1) Represents the results and cash flows of Shenzhen Dianliang Information Technology Co., Ltd and Shenzhen
Xinbao Investment Management Co., Ltd. before the restructuring as explained in note 8(a) above.
(2) During 2017, there was no VIE. During 2018, the VIEs are related to the 521 Plan as explained in note 8(b)
above, which did not have any operation or cash flows activities during 2018.
F-37
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
As of December 31, 2018, the Group had already transferred 150,000,000 ordinary shares to one of the 521
Plan Employee Companies which were purchased from Master Trend with consideration of RMB1,465,124 at the
price of US$29 per ADS These shares were subscribed by Participants at the final price of US$27.38 per ADS, but
initially deposited at 10% contribution of US$29 per share. The 10% subscription price contributed by Participants
amounted to RMB8,184 and RMB138,328 as of December 31, 2018 and is recorded as current and non-current
refundable share right deposits on the statement of financial position, respectively. The RMB8,184 represents
excess contribution received from Participants, which have been fully refunded in April, 2019.
(9)
Other Payables and Accrued Expenses
Components of other payables and accrued expenses are as follows:
As of December 31,
2017
RMB
2018
RMB
Business and other tax payables……………………………………………
Refundable deposits from employees and agents……………………………
Refundable share rights deposits (Note 18) ................................................
Professional fees ........................................................................................
Accrued expenses to third parties ................................................................
Payables for addition of office equipment, furniture and fixtures ..................
Contributions from members of eHuzhu mutual aid program .......................
Others ........................................................................................................
58,970
30,716
-
3,372
47,139
8,618
56,890
36,189
241,894
70,237
26,790
8,184
17,105
42,324
8,618
62,459
19,107
254,824
(10)
Employee Benefit Plans
Employees of the Group located in the PRC are covered by the retirement schemes defined by local
practice and regulations, which are essentially defined contribution plans.
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, 2016, 2017 and 2018, the Group contributed and accrued RMB57,090,
RMB66,370 and RMB74,179, respectively.
(11)
Income Taxes
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
million Hong Kong Dollar ("HKD") of profits of the qualifying group entity will be taxed at 8.25%, and profits
above HKD2 million will be taxed at 16.5%.
F-38
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
The provision for current income taxes of the subsidiaries operating in Hong Kong has been calculated by
applying the current rate of taxation of 16.5% for the years ended December 31, 2016 and 2017, and 8.25% for the
years ended December 31, 2018.
Pursuant to the relevant laws and regulations in the PRC, Ying Si Kang Information Technology
(Shenzhen) Co., Ltd. ("Ying Si Kang"), subsidiary 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.
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. In September 2018, Fanhua Lianxing Insurance Sales Co., Ltd. ("Lianxing"), the Group's
wholly-owned subsidiary, which is the holding vehicle of our 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.
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 in July 2018. The Hong Kong resident certificate
was valid for 3 years ended December 31, 2020, which was issued by the Hong Kong Inland Revenue Department.
CNinsure Holdings Limited enjoys a reduced tax rate under Bulletin [2018] No. 9 (e.g. beneficial ownership,
shareholding percentage and holding period) and qualified a Hong Kong resident certificate and was entitled to
enjoy 5% reduced tax rate for the dividends paid by PRC subsidiaries for the year ended December 31, 2018.
The Group accounts for uncertain income tax positions by prescribing a minimum recognition threshold in
the financial statements.
The movements of unrecognized tax benefits are as follows:
Balance as of January 1, 2016 ..............................................................................
Change in unrecognized tax benefits .....................................................................
Gross increase in tax positions ..............................................................................
Balance as of December 31, 2016 .........................................................................
Change in unrecognized tax benefits .....................................................................
Gross increase in tax positions ..............................................................................
Balance as of December 31, 2017 .........................................................................
Change in unrecognized tax benefits .....................................................................
Gross decrease in tax positions .............................................................................
Balance as of December 31, 2018 ...........................................................................
RMB
70,354
—
2,424
72,778
—
(2,428)
70,350
—
—
70,350
The uncertain tax positions are related to tax years that remain subject to examination by the relevant tax
authorities. Based on the outcome of any future examinations, or as a result of the expiration of statute of
limitations for specific jurisdictions, it is reasonably possible that the related unrecognized tax benefits for tax
positions taken regarding previously filed tax returns, might materially change from those recorded as liabilities
for uncertain tax positions in the Group’s consolidated financial statements as of December 31, 2017 and 2018. In
F-39
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
addition, the outcome of these examinations may impact the valuation of certain deferred tax assets (such as net
operating losses) in future periods. The Group’s policy is to recognize interest and penalties accrued on any
unrecognized tax benefits, if any, as a component of income tax expense. The Company does not anticipate any
significant increases or decreases to its liability for unrecognized tax benefit within the next twelve months.
According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if
the underpayment of income taxes is due to computational errors made by the taxpayer. The statute of limitations
will be extended to five years under special circumstances, which are not clearly defined, but an underpayment of
income tax liability exceeding RMB100 is specifically listed as a special circumstance. In the case of a transfer
pricing related adjustment, the statute of limitations is ten years. There is no statute of limitations in the case of tax
evasion.
F-40
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
Income tax expenses are comprised of the following:
Current tax expense ........................................................
Deferred tax (income) expense .......................................
Income tax expense ........................................................
2016
RMB
Year Ended December 31,
2017
RMB
2018
RMB
41,985
(14,736)
27,249
158,291
9,512
167,803
243,330
(18,744)
224,586
The principal components of the deferred income tax assets and liabilities are as follows:
Non-current deferred tax assets:
Operating loss carryforward .....................................................................
Intangible assets, net ................................................................................
Less: valuation allowances .......................................................................
Total ...........................................................................................................
Non-current deferred tax liabilities:
Intangible assets, net ...................................................................................
Dividend withholding taxes .........................................................................
Total ...........................................................................................................
As of December 31,
2017
RMB
2018
RMB
28,003
—
(25,912)
2,091
339
16,800
17,139
35,686
6,129
(32,495)
9,320
122
5,502
5,624
The Group considers positive and negative evidence to determine whether some portion or all of the
deferred tax assets will more likely than not be realized. This assessment considers, among other matters, the
nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory carry
forward periods, the Group’s experience with tax attributes expiring unused and tax planning alternatives.
Valuation allowances have been established for deferred tax assets based on a more-likely-than-not threshold. The
Group’s ability to realize deferred tax assets depends on its ability to generate sufficient taxable income within the
carry forward periods provided for in the tax law. The Group has provided RMB25,912 and RMB32,495 valuation
allowance for the years ended December 31, 2017 and 2018, respectively.
The Group had total operating loss carry-forwards of RMB112,011 and RMB142,745 as of December 31,
2017 and 2018, respectively. As of December 31, 2018, the operating loss carry-forwards of RMB14,199,
RMB12,571, RMB18,258, RMB41,710 and RMB56,007, are to expire during the years ending December 31, 2019,
2020, 2021, 2022 and 2023, respectively. During the years ended December 31, 2016, 2017 and 2018, RMB29,431,
RMB13,284 and RMB16,288, respectively, of tax loss carried forward has been expired and canceled.
F-41
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
Reconciliation between the provision for income taxes computed by applying the PRC enterprise income
rate of 25% to net income before income taxes and income of affiliates, and the actual provision for income taxes
is as follows:
Income from continuing operations before income
taxes, share of income of affiliates and discontinued
operations ...................................................................
PRC statutory tax rate ....................................................
Income tax at statutory tax rate .......................................
Expenses not deductible for tax purposes:
Entertainment ..........................................................
Effect of tax holidays on concessionary rates
granted to PRC subsidiaries ..................................
Other ......................................................................
Tax exemption and tax relief:
Change in valuation allowance .......................................
Uncertain tax provisions .................................................
Effect of utilization of deductible temporary difference
previously unrecognized .............................................
Deferred income tax for dividend distribution .................
Other .............................................................................
Income tax expense ........................................................
2016
RMB
Year Ended December 31,
2017
RMB
2018
RMB
124,051
25%
31,013
973
(2,750)
6,441
(1,332)
2,424
(12,872)
—
3,352
27,249
505,095
25%
126,274
1,411
(826)
19,689
578
(2,428)
—
16,800
6,305
167,803
667,213
25%
166,803
1,358
(8,307)
1,079
6,583
—
—
53,702
3,368
224,586
Additional PRC income taxes that would have been payable without the tax exemption amounted to
approximately RMB4,089, RMB826 and RMB8,307 for the years ended December 31, 2016, 2017 and 2018,
respectively. Without such exemption, the Group’s basic net profit per share for the years ended December 31,
2016, 2017 and 2018 would have been decreased by RMB 0.00, RMB0.00 and RMB0.01, and diluted net profit
per share for the years ended December 31, 2016, 2017 and 2018 would have been decreased by RMB 0.00,
RMB0.00 and RMB0.01.
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, enjoys a reduced tax rate under Bulletin [2018] No. 9
(e.g. beneficial ownership, shareholding percentage and holding period) and qualified as Hong Kong resident
certificate and entitled to enjoy 5% reduced tax rate for the year ended December 31, 2018.
Aggregate undistributed earnings of the Group’s subsidiaries and VIEs in the PRC that are available for
distribution to the Group of approximately RMB2,209,904 and RMB1,441,628 as of December 31, 2017 and 2018
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 RMB220,990 and RMB66,580, respectively.
As of December 31, 2018, the Group has provided RMB5,502 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.
F-42
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(12)
Capital Structure
As described in note 8, 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 has 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.
During 2017, the Company issued 69,118,158 new shares for the exercise of options, representing 5.32%
of the total shares outstanding as of December 31, 2017.
On April 6, 2017, the Company announced that it entered into a share purchase agreement with Fosun
Industrial Holdings Limited (“Fosun”), a wholly-owned subsidiary of Fosun International Limited (00656.HK) for
a private placement of 66,000,000 ordinary shares (equivalent to 3,300,000 ADS) of the Company, at purchase
price of US$0.44185 per ordinary share equivalent to US$8.837 per ADS), for a total investment of US$29,162.
The purchase price represents the average closing price of the past 20 trading days prior to the signing of the share
purchase agreement between Fosun and the Company on March 29, 2017. Fosun holds 5.08% of the total shares
outstanding as of December 31, 2017 and its purchased shares are subject to a contractual one-year lock-up.
During 2016, the Company issued 2,597,400 new shares for the exercise of options, representing 0.22%
of the total shares outstanding as of December 31, 2016.
During 2016, the Company issued 7,416,000 new shares for acquisition of additional interest in a
subsidiary, representing 0.64% of total shares outstanding as of December 31, 2016.
F-43
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(13)
Net Income per Share
The computation of basic and diluted net income per ordinary share is as follows:
Basic:
Net income from continuing operations ..........................
Net income from discontinued operations .......................
Net income ....................................................................
Less: Net income attributable to the noncontrolling
interests ......................................................................
Net income attributable to the Company’s shareholders ..
Weighted average number of ordinary shares
outstanding .................................................................
Basic net income from continuing operations per
ordinary share.............................................................
Basic net income from discontinued operations per
ordinary share.............................................................
Basic net income per ordinary share ...............................
Basic net income from continuing operations per ADS ...
Basic net income from discontinued operations per ADS
Basic net income per ADS .............................................
Diluted:
Net income from continuing operations ..........................
Net income from discontinued operations .......................
Net income ....................................................................
Less: Net income attributable to the noncontrolling
interests ......................................................................
Net income attributable to the Company’s shareholders ..
Weighted average number of ordinary shares
Year Ended December 31,
2017
RMB
2016
RMB
2018
RMB
145,095
22,543
167,638
10,591
157,047
446,236
5,480
451,716
2,488
449,228
617,095
—
617,095
7,180
609,915
1,160,592,325
1,231,698,725
1,239,264,464
0.12
0.02
0.14
2.32
0.39
2.71
145,095
22,543
167,638
10,591
157,047
0.36
0.00
0.36
7.20
0.09
7.29
446,236
5,480
451,716
2,488
449,228
0.49
0.00
0.49
9.84
0.00
9.84
617,095
—
617,095
7,180
609,915
outstanding .................................................................
1,160,592,325
1,231,698,725
1,239,264,464
Weighted average number of dilutive potential ordinary
shares from share options ...........................................
Total..............................................................................
Diluted net income from continuing operations per
ordinary share.............................................................
Diluted net income from discontinued operations per
ordinary share.............................................................
Diluted net income per ordinary share ............................
Diluted net income from continuing operations per ADS
Diluted net income from discontinued operations per
ADS ...........................................................................
Diluted net income per ADS ..........................................
48,229,471
1,208,821,796
29,524,324
1,261,223,049
1,589,570
1,240,854,034
0.11
0.02
0.13
2.23
0.37
2.60
0.36
0.00
0.36
7.20
0.09
7.29
0.49
0.00
0.49
9.83
0.00
9.83
The shares subscribed by Participants under the 521 Plan is excluded from the computation of basic and
diluted income per ordinary share during the year ended December 31, 2018. Further, the contingently issuable
shares subject to the 521 Plan will be excluded from basic income per ordinary share until the sale occurs and
excluded from diluted earnings per share until the conditions obligating the sale has been satisfied.
(14)
Distribution of Profits
As stipulated by the relevant PRC laws and regulations applicable to China’s foreign investment enterprise,
the Group’s subsidiaries and VIEs in the PRC are required to maintain non-distributable reserves which include a
statutory surplus reserve as of December 31, 2017 and 2018. Appropriations to the statutory surplus reserve are
F-44
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
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. There are no appropriations to
reserves by the
Company other than the Group’s subsidiaries and VIEs in the PRC during the periods presented. The accumulated
amounts contributed to the statutory reserves were RMB311,038 and RMB480,881 as of December 31, 2017 and
2018, respectively.
(15)
Related Party Balances and Transactions
The principal related party balances as of December 31, 2017 and 2018, and transactions for the years
ended December 31, 2016, 2017 and 2018 are as follows:
a)
Amounts due from related parties:
Subscription receivables (Note 2(m))……………………..…...
As of December 31,
2017
RMB
248,717
2018
RMB
—
b)
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 charged CNFinance interest income of nil, RMB8,714, and nil for loans receivable
for the years ended December 31, 2016, 2017, and 2018, respectively. The Group invested in
senior units of structure fund issued by CNFinance and received investment income of RMB610
during the year 2018.
In 2018, 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 which 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 was RMB15,000 and no investment income has been
recognized before maturity.
c)
During 2018, a total of 7.5 million ADS (equivalent of 150,000,000 ordinary shares) has been
purchased from Master Trend at USD29 per ADS (equivalent to USD1.45 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. The
remaining 10% in the amount of RMB146,512 was paid by the 521 Plan’s Participants directly to
Master Trend, representing a non-cash transaction in 2018.
Master Trend is beneficially owned by Mr. Qiuping Lai and Master Trend is a related party
because it is a principal owners of the Group at the time of the repurchase. Master Trend still hold
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.
F-45
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(16)
Commitments and Contingencies
(i) The Group has several non-cancelable operating leases, primarily for office premises.
Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease
terms in excess of one year) and future minimum operating lease payments as of December 31, 2018 are:
Minimum Lease
Payment
RMB
Year ending December 31:
2019.........................................................................................................................
2020.........................................................................................................................
2021.........................................................................................................................
2022.........................................................................................................................
2023.........................................................................................................................
Thereafter ................................................................................................................
Total ...............................................................................................................................
71,812
57,253
34,499
19,048
10,571
7,306
200,489
(ii) Rental expenses incurred under operating leases for the years ended December 31, 2016, 2017 and
2018 amounted to RMB40,394, RMB50,837 and RMB62,840, respectively.
(iii) These administrative proceedings have resulted in administrative sanctions, including fines in the
range from RMB8 to RMB150 in 2018, which have not been material to the Group. Fines incurred under General
and administrative expenses for the years ended December 31, 2017 and 2018 amounted to RMB77 and RMB652,
respectively.
(iv) On September 7, 2018, Miao Long, individually and on behalf of an alleged class of similarly situated
holders of the Group's ADSs, filed a class action lawsuit in the United States District Court for the Southern
District of New York against the Group and two of their executive officers. The complaint alleges that the Group
made false and misleading statements regarding the Group's business, operational and compliance policies. The
complaint principally alleges that they engaged in improper business practices including irregular accounting,
which were intended to benefit the Group's insiders and overstated their financial assets and performance metrics.
The complaint asserts claims under Section 10(b) of the Security Exchange Act of 1934, or the Exchange Act, and
Rule 10b-5 thereunder and under Section 20(a) of the Exchange Act.
In an order dated December 13, 2018, the Court appointed Miao Long as lead plaintiff and approved the
selection of Pomerantz LLP as lead counsel.
On January 2, 2019, the United States District Court for the Southern District of New York ordered a
briefing schedule, providing that after the court’s entry of an order appointing a lead plaintiff under the Private
Securities Litigation Reform Act, the lead plaintiff must either file a consolidated complaint or give notice of its
intent not to do so (and therefore proceed on its initial complaint) by February 20, 2019. The Group's response to
the operative complaint was due by April 1, 2019; the lead plaintiff’s opposition is due by May 1, 2019; and the
Group's reply is due by May 15, 2019.
On February 20, 2019, the lead plaintiff filed an amended complaint. The Group (which is the only
defendant that has been served so far) filed a motion to dismiss the amended compliant on April 1, 2019.
The outcome of the above class action cannot be reliably estimated with reasonable certainty at this stage
and no provision has thus been made as of December 31, 2018.
F-46
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(17)
Concentrations of Credit Risk
Concentration risks
Details of the customers accounting for 10% or more of total net revenues are as follows:
Huaxia Life Insurance Company
Limited ("Huaxia") .................
Tianan Life Insurance Company
Limited ("Tianan")..................
AEON Life Insurance Company,
Ltd ("AEON"). .......................
PICC Property and Casualty
Company Limited ...................
China Pacific Property Insurance
Co., Ltd. ...............................
2016
RMB
% of sales
Year ended December 31,
% of sales
2017
RMB
2018
RMB
% of sales
517,759
12.7%
990,865
24.2%
1,100,027
31.7%
*
*
878,249
439,749
1,835,757
*
*
21.5%
10.8%
45.0%
913,456
22.3%
704,933
20.3%
*
*
*
*
453,120
13.1%
*
*
*
1,904,321
*
46.5%
*
2,258,080
*
65.1%
* represented less than 10% of total net revenues as of the year.
Details of the customers which accounted for 10% or more of accounts receivable are as follows:
Huaxia ...........................................................
Tianan ...........................................................
AEON ...........................................................
2017
RMB
229,444
92,988
*
322,432
As of December 31,
2018
%
RMB
44.5%
18.0%
*
62.5%
161,908
75,777
74,538
312,223
%
31.8%
14.9%
14.7%
61.4%
* represented less than 10% of account receivables as of the year end.
The Group performs ongoing credit evaluations of its customers and generally does not require collateral
on accounts receivable.
The Group places its cash and cash equivalents and short investments with financial institutions with high-
credit ratings and quality.
Currency risk
The proceeds from the initial public offering and the follow-on offering of the Group were in USD,
substantially all of the revenue-generating operations of the Group are transacted in RMB, which is not freely
convertible into foreign currencies. On January 1, 1994, the PRC government abolished the dual rate system and
introduced a single rate of exchange as quoted by the People’s Bank of China. However, the unification of the
exchange rate does not imply convertibility of RMB into USD or other foreign currencies. All foreign exchange
transactions must take place either through the People’s Bank of China or other institutions authorized to buy and
sell foreign exchange or at a swap center. Approval of foreign currency payments by the People’s Bank of China
or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping
documents and signed contracts.
F-47
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(18)
Share-based Compensation
(a)2012 Option
(i) 2012 Options G
On March 12, 2012, the Company granted options ("2012 Options G") to its directors and employees to
purchase up to 92,845,000 ordinary shares of the Company. Pursuant to the option agreements entered into
between the Company and the option grantees, the options shall vest over a five-year service period from 2012 to
2016. The expiration date of the 2012 Options is March 12, 2022. The 2012 Options G had an exercise price of
US$0.30 (RMB1.90) and an intrinsic value of US$0.04 (RMB0.26) per ordinary share, except for the 3,200,000
options granted to the two independent directors which had an exercise price of US$0.31 (RMB1.98) and an
intrinsic value of US$0.03(RMB0.17) per ordinary share. The exercise price for Option G was later modified to
US$0.001 (RMB0.006) and the number of shares are reduced by half with no incremental cost as a result of such
option modification. The fair value of the options was determined by using the Black-Scholes option pricing
model.
For the years ended December 31, 2016, 2017 and 2018, share-based compensation expenses of
RMB4,367, nil and nil were recognized in connection with the 2012 Options G, respectively. During the year
ended December 31, 2018, 1,760,000 shares of 2012 Options G had been exercised. During the years ended
December 31, 2016, 2017 and 2018, 10, 400,000 and nil shares of 2012 Options G, respectively, were forfeited
due to employee resignations. No share-based compensation expense related to the forfeited options was
recognized.
(ii) 2012 Options H
On March 12, 2012, the Company granted options ("2012 Options H") to its entrepreneurial agents and
captains (non-employees) to purchase 3,800,000 ordinary shares of the Company, of which 3,000,000 and 800,000
options were granted to agents and captains respectively. Pursuant to the option agreements entered into between
the Company and the option grantees, 40% ("Option H1"), 40% ("Option H2") and 20% ("Option H3") of the
3,000,000 award options granted to agents shall vest in May 31, 2014, 2015 and 2016 of each year respectively;
and 40% ("Option H4"), 40% ("Option H5") and 20% ("Option H6") of the 800,000 award options granted to
captains shall vest in May 31, 2013, 2014 and 2015 of each year respectively. The expiration date of the 2012
Options H is March 12, 2022. The 2012 Options H had an exercise price of US$0.30 (RMB1.90), which was later
modified to US$0.001 (RMB0.006) and an intrinsic value of US$0.04 (RMB0.26) per ordinary share as of the date
of grant. The fair value of the options was determined by using the Black-Scholes option pricing model and
revaluated every balance sheet date until the options was vested.
For the years ended December 31, 2016, 2017 and 2018, share-based compensation expenses of RMB570,
nil and nil were recognized in connection with the 2012 Options H, respectively. By the year ended December 31,
2017, the remaining outstanding of 2012 Option H has been fully exercised. During the year ended December 31,
2018, nil of 2012 Options H had been exercised. During the years ended December 31, 2016, 2017 and 2018,
141,789 shares, nil share and nil share shares of 2012 Options H, respectively, were forfeited due to termination of
agency contracts. No share-based compensation expense related to the forfeited options was recognized.
Prior to 2012 Option, the company granted options its employees under 2009 options and 2008 options
(collectively the "Options"). The Options shall vest over a four-year period subject to the continuous employment
of the option grantees and their key performance indicators ("KPI") results for the year 2009. The expiration date
of the Options is March 31, 2015, which was later modified to December 31, 2017 with an incremental
compensation cost of RMB6,700 charged for the period in which the modification occurred in December 2013.
During the year ended December 31, 2018, nil shares and nil shares had been exercised for 2009 options and 2008
F-48
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
options respectively. No share-based compensation expense was recognized for the years ended December 31,
2016, 2017 and 2018.
For each of the three years ended December 31, 2016, 2017 and 2018, changes in the status of total
outstanding options under 2012 Options, 2009 Options and 2008 Options, were as follows:
Outstanding as of January 1, 2016 ..................................
Exercised .......................................................................
Forfeited ........................................................................
Outstanding as of December 31, 2016 ............................
Exercised .......................................................................
Forfeited ........................................................................
Outstanding as of December 31, 2017 ............................
Exercised .......................................................................
Forfeited ........................................................................
Outstanding as of December 31, 2018 ............................
Exercisable as of December 31, 2018 .............................
Weighted
average
exercise price in
RMB
0.90
0.45
0.01
0.92
0.96
0.01
1.17
0.01
—
0.01
0.01
Aggregate
Intrinsic Value
RMB
148,348
141,274
16,422
7,841
7,841
Number of
options
75,063,552
(2,597,400)
(147,994)
72,318,158
(69,118,158)
(400,000)
2,800,000
(1,760,000)
—
1,040,000
1,040,000
As of December 31, 2018, all of the above options were fully vested.
The following table summarizes information about the Company’s share option plans for the years ended
December 31, 2016, 2017 and 2018:
Weighted-average grant-date fair value per share of
options granted ...........................................................
Total intrinsic value of options exercised ........................
Total fair value of share options vested ...........................
Year ended December 31,
2017
RMB
2018
RMB
2016
RMB
—
6,406
13,631
—
270,419
—
—
16,884
—
The following table summarizes information about the Company’s stock option plans as of December 31,
2018:
Weighted
average
remaining
contractual life
(Years)
Weighted
average
exercise price
in RMB
Options
Exercisable
Options outstanding
2012 Options G ..................................
1,040,000
4.25
0.01
1,040,000
(b) The 521 Plan
In substance recourse loans and option grants
As disclosed in note 8, 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.
F-49
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
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. 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 to other assets of the employee (that is, other than the shares) 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.
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 to fully vest in the shares 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.
The Company used the Black-Scholes valuation model in determining the fair value of 521 plan's
ordinary shares granted, which requires the input of highly subjective 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 521 plan's ordinary shares on the grant date were as follows:
Assumptions
December 31, 2018
Expected dividend yield (Note i) ......................................................................................
Risk-free interest rate (Note ii) .........................................................................................
Expected volatility (Note iii) ............................................................................................
Expected life (Note iv) .....................................................................................................
Fair value per ordinary share on grant date .......................................................................
2.64%
2.51%
55.5%
5 years
USD0.37
(i)
Expected dividend yield:
The expected dividend yield was estimated by the Company based on its historical dividend policy.
(ii)
Risk-free interest rate:
F-50
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
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.
(iv)
Expected life:
The expected life was the contractual life of the 521 plan.
As of December 31, 2018, 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. The Group estimate the forfeiture rate for both independent agents and employees will be nil
and nil for 2018 respectively.
For the years ended December 31, 2018, changes in the status of total outstanding options under 521 Plan,
was as follows:
Number of
options
Outstanding as of January 1, 2018................................... —
150,000,000
Granted ..........................................................................
Exercised ....................................................................... —
Forfeited ........................................................................ —
150,000,000
Outstanding as of December 31, 2018 .............................
Weighted
average
exercise
price in USD
—
1.5
—
—
1.5
Weighted
average
remaining
contractual
life (Years)
—
5.00
—
—
5.00
Aggregate
Intrinsic
Value
RMB
—
—
—
No share-based compensation expense related to the 521 plan was recognized for the year ended
December 31, 2018. As the 521 plan was initially recognised as a liability award, the unrecognised share base
compensation expense related to 521 plan is variable based on the change of the fair value at each reporting date.
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 period. As of December 31, 2018, there was RMB7,368 unrecognized share-
based compensation expense related to unvested share options granted to the 521 plan's participants.
(19) Treasury Stock
During the year ended December 31, 2018, a total of 178,475,480 ordinary shares, comprising 28,475,480
ordinary shares repurchased from the open market and 150,000,000 ordinary shares purchased from Master Trend,
a related party of the Group at the time of the transaction. The shares are repurchased from Master Trend at US$29
per ADS, representing the average closing price of the 30 trading days prior to the Board approval date of June 14,
2018. The Company accounts for repurchased ordinary shares under the cost method and includes such treasury
stock as a component of the shareholders’ equity. The ordinary shares subject to the 521 Plan are considered
contingently issuable. Refer to Note 8 for details of the 521 Plan.
There was no repurchase of ordinary shares by the Group during the years ended December 31, 2016 and
2017.
F-51
(20) Restricted Net Assets
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
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, 2017 and 2018, the Company had restricted net assets of RMB2,245,077 and RMB 2,977,988 (including nil
and nil restricted share capital and statutory reserves of the VIEs), 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 14.
(21)
Segment Reporting
As of December 31, 2018, 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 preunderwriting 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.
F-52
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
The following table shows the Group’s operations by business segment for the years ended December 31,
2016, 2017 and 2018. Other includes revenue and expenses that are not allocated to reportable segments and
corporate related items.
Net revenues
Agency ..............................................................
Claims Adjusting ...............................................
Total net revenues ............................................
Operating costs and expenses
Year ended December 31,
2016
RMB
2017
RMB
2018
RMB
2018
US$
3,746,471
336,413
4,082,884
3,780,217
308,256
4,088,473
3,143,873
327,390
3,471,263
457,257
47,617
504,874
Agency ..............................................................
(3,667,004)
(3,408,499)
Claims Adjusting ...............................................
Other .................................................................
Total operating costs and expenses ..................
Income (loss) from operations
Agency ..............................................................
Claims Adjusting ...............................................
Other .................................................................
Income (loss) from operations ..........................
(306,804)
(117,542)
(308,321)
(98,517)
(2,614,593)
(316,899)
(114,028)
(380,276)
(46,091)
(16,585)
(4,091,350)
(3,815,337)
(3,045,520)
(442,952)
79,467
29,609
(117,542)
(8,466)
371,718
(65)
(98,517)
273,136
529,280
10,491
76,981
1,526
(114,028)
(16,585)
425,743
61,922
As of December 31,
2017
RMB
2018
RMB
2018
US$
Segment assets
Agency ........................................................................................
Claims Adjusting .........................................................................
Other ...........................................................................................
Total assets .................................................................................
680,602
271,616
3,785,524
4,737,742
816,596
266,077
2,783,938
3,866,611
118,770
38,699
404,908
562,377
Substantially all of the Group’s revenues for the three years ended December 31, 2016, 2017 and 2018
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.
F-53
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(22)
Subsequent events
On January 10, 2019, the Company had granted an additional 6.5 million ADS (equivalent of 130,000,000
ordinary shares) to the Participants. On January 24, 2019, the Group announced the completion of its expanded
share repurchase program under the 521 Plan previously authorized by its board of directors (the “Board”).
Pursuant to Board approval previously announced in August 2018, on January 24, 2019, the Company resold the
1,423,774 ADS (equivalent of 28,475,480) ordinary shares which were held in treasury to Employee Companies
established on behalf of 521 plan’s Participants, at USD25.6 per ADS (equivalent of USD1.28 per ordinary share).
In the meantime, the Company was approved by the Board to newly issue and sell 101,524,520 ordinary shares to
521 Plan Employee Companies established on behalf of 521 plan’s Participants at the same price. There was
RMB35,304 unrecognized share-based compensation expense related to unvested share options granted to the 521
plan’s participants as of January 10, 2019. 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 USD1.37 per ordinary share.
On March 11, 2019, the Group's Board of Directors declared a quarterly dividend of US$0.0125 per
ordinary share, or US$0.25 per ADS, amounting to a total of US$17,498. The dividend will be paid to
shareholders of record on March 21, 2019.
On March 11, 2019, the Group announced that its board of directors has approved its management’s
proposal to increase its annual aggregate dividend by 20% from US$1.0 per American Depository Share (“ADS”)
in 2018 to US$1.2 per ADS, or US$0.06 per ordinary share in 2019. The dividend will be paid on a quarterly basis,
with US$0.3 per ADS, or US$0.015 per ordinary share, payable in each of the next four quarters.
F-54
SCHEDULE 1—CONDENSED FINANCIAL STATEMENTS OF THE COMPANY
FANHUA INC.
Statements of Financial Position
(In thousands, except for shares and per share data)
ASSETS:
As of December 31,
2017
RMB
2018
RMB
2018
US$
Current assets:
Cash and cash equivalents ..............................................
Other receivables and amounts due from
subsidiaries and affiliates ............................................ 1,641,554
Total current assets ...................................................... 1,810,967
Non-current assets:
Investment in subsidiaries .............................................. 2,126,599
—
Investment in an affiliate ................................................
Total assets ................................................................... 3,937,566
169,413
366,862
53,358
1,119,686
162,852
1,486,548
216,210
2,638,621
11,350
383,772
1,650
4,136,519
601,632
LIABILITIES AND SHAREHOLDERS’
EQUITY:
Current liabilities:
Other payables and accrued expenses .............................
Amounts due to subsidiaries ...........................................
Non-current liabilities:
2,415
58,100
1,337,039
27,969
194,464
4,068
Other Non-current liabilities ...........................................
—
138,328
20,119
Total liabilities ..............................................................
Ordinary shares (Authorized
60,515
1,503,336
218,651
9,571
shares:10,000,000,000 at US$0.001 each;
issued and outstanding shares:
1,300,191,084 and 1,301,951,084 as of
December 31, 2017 and 2018,
respectively) ..............................................................
—
Treasury stock................................................................
Additional paid-in capital ............................................... 2,429,559
Retained earnings ........................................................... 1,779,746
(93,108)
Accumulated other comprehensive loss ..........................
(248,717)
Subscription receivables .................................................
Total equity .................................................................. 3,877,051
Total liabilities and shareholders' equity ..................... 3,937,566
9,583
1,394
(1,156)
437,176
2,280,870
(93,290)
—
(168)
63,584
331,739
(13,568)
—
2,633,183
382,981
4,136,519
601,632
F-55
SCHEDULE 1—CONDENSED FINANCIAL STATEMENTS OF THE COMPANY—(Continued)
FANHUA INC.
Statements of Income and Comprehensive Income
(In thousands)
General and administrative expenses ..............
Interest income ..............................................
Equity in earnings of subsidiaries and an
affiliate .......................................................
Net Income attributable to the
Company's shareholders...........................
Other comprehensive (loss) income:
Foreign currency translation adjustments ........
Changes in fair value of short term
investments.................................................
Share of other comprehensive gain (loss)
of affiliates .................................................
Comprehensive income attributable to the
Company's shareholders...............................
Year Ended December 31,
2016
RMB
(9,938)
8,271
2017
RMB
(4,435)
2,229
2018
RMB
(6,973)
10,624
2018
US$
(1,014)
1,545
158,714
451,434
606,264
88,177
157,047
449,228
609,915
88,708
2,177
(10,664)
(10,194)
(1,483)
632
(632)
-
-
(37,911)
1,263
(1,763)
( 256)
121,945
439,195
597,958
86,969
F-56
SCHEDULE 1—CONDENSED FINANCIAL STATEMENTS OF THE COMPANY — (Continued)
FANHUA INC.
Statements of Shareholders’ Equity
(In thousands, except for shares)
Share Capital
Treasury Stock
Number of
Share
Amounts
RMB
Number of
Share
Balance as of January 1,
2016
1,155,059,526
Net income ....................................................... —
Foreign currency
—
translation .....................................................
Exercise of share options ................................
2,597,400
Share-based compensation .............................. —
Acquisition of additional
interests in a subsidiary ................................
7,416,000
Disposal of subsidiaries................................... —
Changes in fair value of
short term investments ................................. —
Share of other
comprehensive income
in affiliates .................................................... —
Balance as of December
31, 2016 ........................................................
1,165,072,926
Net income ....................................................... —
Foreign currency
—
translation .....................................................
Exercise of share options ................................
69,118,158
Share-based compensation .............................. —
Private placement ............................................
66,000,000
Subscription receipt ......................................... —
Distribution of dividend .................................. —
Changes in fair value of
short term investments ................................. —
Share of other
comprehensive loss in
affiliates ........................................................ —
Balance as of December
31, 2017 ........................................................
1,300,191,084
Net income ....................................................... —
Foreign currency
translation .....................................................
Exercise of share options ................................
Repurchase of ordinary
—
1,760,000
shares from shareholder ............................... —
Repurchase of ordinary
shares from open market .............................. —
Private placement ............................................ —
Subscription receipt ......................................... —
Distribution of dividend .................................. —
Changes in fair value of
short term investments ................................. —
Share of other
comprehensive income
of affiliates
Balance as of December
—
Additional
Paid-in
Capital
RMB
Amounts
RMB
8,592
—
2,454,244
—
—
17
—
49
—
—
—
—
1,127
4,937
(174,779)
16,126
—
—
8,658
—
2,301,655
—
—
458
—
455
—
—
—
—
—
64,488
—
200,632
—
(137,216)
—
—
9,571
—
2,429,559
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
12
—
—
—
—
—
—
—
—
3,274
(1,464,163)
150,000,000
(251,024)
—
—
(280,470)
28,475,480
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(960)
(196)
—
—
—
—
—
Retained
Earnings
RMB
1,173,471
157,047
—
—
—
—
—
—
—
1,330,518
449,228
—
—
—
—
—
—
—
—
1,779,746
609,915
—
—
—
—
—
—
(108,791)
—
—
Accumulated
Other
Comprehensive
Loss
RMB
(50,048)
—
21,483
—
—
—
—
632
(37,911)
(65,844)
—
(27,895)
—
—
—
—
—
(632)
1,263
(93,108)
—
1,581
—
—
—
—
—
—
—
(1,763)
(93,290)
Subscription
Receivables
RMB
Total
RMB
(268,829)
—
3,317,430
157,047
(19,306)
—
—
—
—
—
—
2,177
1,144
4,937
(174,730)
16,126
632
(37,911)
(288,135)
—
3,286,852
449,228
17,231
—
—
—
22,187
—
—
—
(10,664)
64,946
—
201,087
22,187
(137,216)
(632)
1,263
(248,717)
—
3,877,051
609,915
(11,775)
—
(10,194)
3,286
—
(1,465,123)
—
—
260,492
—
—
—
—
—
(251,220)
—
260,492
(389,261)
—
(1,763)
2,633,183
382,981
31, 2018 ........................................................
1,301,951,084
9,583
437,176
178,475,480
(1,156)
2,280,870
Balance as of December
31, 2018 in US$ ..................................... —
1,394
63,584
—
(168)
331,739
(13,568)
F-57
SCHEDULE 1—CONDENSED FINANCIAL STATEMENTS OF THE COMPANY — (Continued)
FANHUA INC.
Statements of Cash Flows
(In thousands)
Year Ended December 31,
2016
RMB
2017
RMB
2018
RMB
2018
US$
OPERATING ACTIVITIES
Net income ...............................................................
Adjustments to reconcile net
income to net cash used in
operating activities:
Equity in earnings of subsidiaries and
157,047
449,228
609,915
88,708
an affiliate .............................................................. (158,714)
(451,434)
(606,264)
(88,176)
Compensation expenses associated
with stock options ..................................................
4,937
—
—
—
Changes in operating assets and
liabilities:
Other receivables .......................................................
Other payables ...........................................................
Net cash used in operating activities ........................
Cash flows (used in) generated
from investing activities
(9,290)
3,506
(2,514)
Decrease in investment in
subsidiaries and an affiliate .....................................
127,475
Advances to subsidiaries and
affiliates ................................................................. (122,885)
Decrease in advances to subsidiaries
and affiliates ..........................................................
Net cash generated from investing
activities ................................................................
Cash flows generated from (used
in ) financing activities:
Proceeds on exercise of stock options .........................
Proceeds of employee subscriptions ............................
Dividends paid ...........................................................
Repurchase ordinary shares from
open market ...........................................................
Repurchase ordinary shares from
shareholder ............................................................
Net cash generated from (used in)
financing activities ................................................
Net increase in cash and cash
—
4,590
1,144
—
—
—
—
(6,489)
(5,693)
(14,388)
98,399
(38,609)
174,012
64,946
22,187
(137,216)
—
—
10,644
1,326,440
1,340,735
1,548
192,923
195,003
81,129
467,995
—
3,286
211,054
(326,725)
11,799
68,066
—
79,865
478
30,697
(47,520)
(251,220)
(36,538)
(1,318,611)
(191,784)
233,802
549,124
1,144
(50,083)
(1,682,216)
(244,667)
equivalents ............................................................
3,220
169,331
207,643
30,201
Cash and cash equivalents and
restricted cash at beginning of
year .......................................................................
Effect of exchange rate changes on
cash and cash equivalents .......................................
Cash and cash equivalents and
restricted cash at end of year ................................
5,349
2,177
10,746
10,746
(10,664)
169,413
169,413
(10,194)
366,862
24,640
(1,483)
53,358
F-58
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 statements as to the financial position, changes in financial position and results
of operations of a parent company as of the same dates and for the same periods for which audited consolidated
financial statements have been presented when the restricted net assets of the consolidated and unconsolidated
subsidiaries (including variable interest entities) together exceed 25 percent of consolidated net assets as of the end of
the most recently completed fiscal year. As of December 31, 2018, RMB2,977,988 of the restricted capital and
reserves are not available for distribution, and as such, the condensed financial statements of the Company have been
presented for the years ended December 31, 2016, 2017 and 2018.
F-59