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, 2019.
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. . . . . . . . . . . . . .
For the transition period from to
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
Ticker
Symbol(s)
Name of Each Exchange on Which
Registered
Ordinary shares, par value US$0.001
per share*
American depositary shares, each
representing 20 ordinary shares
FANH
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.
1,353,891,784 ordinary shares, par value US$0.001 per share as of December 31, 2019
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 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 2
Item 1.
Identity of Directors, Senior Management and Advisers .................................. 2
Item 2. Offer Statistics and Expected Timetable ........................................................... 2
Item 3. Key Information ................................................................................................ 2
Information on the Company .......................................................................... 37
Item 4.
Item 4A. Unresolved Staff Comments ............................................................................ 64
Item 5. Operating and Financial Review and Prospects ............................................. 64
Item 6. Directors, Senior Management and Employees .............................................. 87
Item 7. Major Shareholders and Related Party Transactions .................................... 98
Item 8.
Financial Information .....................................................................................100
Item 9. The Offer and Listing .....................................................................................102
Item 10. Additional Information...................................................................................102
Item 11. Quantitative and Qualitative Disclosures about Market Risk .......................113
Item 12. Description of Securities Other than Equity Securities .................................114
PART II .........................................................................................................................................116
Item 13. Defaults, Dividend Arrearages and Delinquencies .........................................116
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds ..........................................................................................................116
Item 15. Controls and Procedures ................................................................................116
Item 16A. Audit Committee Financial Expert ................................................................119
Item 16B. Code of Ethics .................................................................................................119
Item 16C. Principal Accountant Fees and Services.........................................................119
Item 16D. Exemptions from the Listing Standards for Audit Committees ....................120
Purchases of Equity Securities by the Issuer ...................................................................120
Item 16G. Corporate Governance ...................................................................................121
Item 16H. Mine Safety Disclosure ...................................................................................122
PART III ........................................................................................................................................122
Item 17. Financial Statements.......................................................................................122
Item 18. Financial Statements.......................................................................................122
Item 19. Exhibits ...........................................................................................................123
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 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 Special Administrative Region and Macau Special
Administrative Region;
“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), excluding, solely for the
purpose of this annual report, Taiwan, Hong Kong Special Administrative Region and Macau
Special Administrative Region;
“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.
-1-
PART I
Item 1.
Identity of Directors, Senior Management and Advisers
Not Applicable.
Item 2. Offer Statistics and Expected Timetable
Not Applicable.
Item 3. Key Information
A. Selected Financial Data
The following selected consolidated statements of income data for the years ended December 31, 2017,
2018 and 2019 and the consolidated balance sheets data as of December 31, 2018 and 2019 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, 2015 and 2016 and the selected consolidated balance sheets data as of December 31, 2015, 2016 and
2017 have been derived from our consolidated financial statements, which are not included in this annual
report. Our historical results do not necessarily indicate results expected for any future periods. The selected
consolidated financial data should be read in conjunction with, and are qualified in their entirety by
reference to, our audited consolidated financial statements and related notes and “Item 5. Operating and
Financial Review and Prospects” below. Our audited consolidated financial statements are prepared and
presented in accordance with U.S. GAAP.
In November 2017, we disposed of Fanhua Bocheng Insurance Brokerage Co., Ltd., or Bocheng,
which was the primary operating entity of our insurance brokerage segment. Accordingly, the insurance
brokerage segment was accounted as discontinued operations. Consolidated statements of operations for
the years ended 2015 and 2016 as presented below have been restated to conform to the current presentation.
-2-
2015
RMB
For the Year Ended December 31,
2016
2017
2018
2019
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)
Consolidated Statements of Income Data
Net revenues:
Agency ...............................................................
Life insurance business ...................................
P&C insurance business .................................
Claims adjusting ................................................
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
3,335,397
3,193,625
141,772
370,606
479,100
458,736
20,364
53,234
Total net revenues ...........................................
2,459,110
4,082,884
4,088,473
3,471,263
3,706,003
532,334
Operating costs and expenses:
Agency ...............................................................
Life insurance business ...................................
P&C insurance business .................................
Claims adjusting ................................................
(181,370)
(199,810)
(194,525)
(1,675,262)
(2,906,791)
(2,864,882)
(2,151,856)
(205,313)
(673,230)
(1,636,340)
(1,469,949)
(2,233,561)
(1,228,542)
(1,943,053)
(208,803)
(194,159)
(2,263,952)
(2,166,126)
(97,826)
(219,496)
(325,196)
(311,144)
(14,052)
(31,529)
Total operating costs .......................................
(1,856,632)
(3,106,601)
(3,059,407)
(2,346,015)
(2,483,448)
(356,725)
Selling expenses(1) .............................................
General and administrative expenses(1) ............
(125,041)
(387,362)
(502,802)
(221,785)
(448,989)
(481,947)
(231,075)
(534,145)
(278,085)
(475,107)
(39,944)
(68,245)
Total operating costs and expenses ..................
(2,430,662)
(4,091,350)
(3,815,337)
(3,045,520)
(3,236,640)
(464,914)
Income (loss) from continuing operations ......
28,448
(8,466)
273,136
425,743
469,363
67,420
Other income, net:
Investment income ............................................
Interest income...................................................
Others, net ..........................................................
Income from continuing operations before
income
income and
share of
impairment of affiliates, net and discontinued
operations .............................................................
taxes,
Income tax expense ..............................................
Share of income of affiliates ................................
Net income from continuing operations ..........
Net income from discontinued operations, net
of tax ......................................................................
65,624
57,206
20,964
115,275
6,901
10,341
191,784
25,891
14,284
195,456
34,207
11,807
79,070
2,828
9,664
11,358
406
1,388
172,242
124,051
505,095
667,213
(25,553)
(27,249)
(167,803)
(224,586)
26,924
173,613
48,293
145,095
108,944
446,236
174,468
617,095
560,925
80,572
(143,816)
(20,658)
(224,555)
(32,255)
192,554
27,659
41,868
22,543
5,480
—
—
—
Net income ...........................................................
215,481
167,638
451,716
617,095
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 .........
5,395
10,591
2,488
7,180
210,086
157,047
449,228
609,915
0.14
0.04
0.18
0.14
0.03
0.17
2.92
0.73
0.12
0.02
0.14
0.11
0.02
0.13
2.32
0.39
-3-
0.36
0.00
0.36
0.36
0.00
0.36
7.20
0.09
0.49
0.00
0.49
0.49
0.00
0.49
9.84
0.00
192,554
27,659
3,622
520
188,932
27,139
0.17
0.00
0.17
0.17
0.00
0.17
3.46
0.00
0.02
0.00
0.02
0.02
0.00
0.02
0.50
0.00
Net income ........................................................
Diluted: ...............................................................
Net income from continuing operation ............
Net income from discontinued operation
Net income ........................................................
Shares used in calculating net income per
share:
2015
RMB
3.65
2.79
0.70
3.49
For the Year Ended December 31,
2016
2017
2018
2019
RMB
(in thousands, except shares, per share and per ADS data)
RMB
RMB
RMB
2.71
2.23
0.37
2.60
7.29
7.20
0.09
7.29
9.84
9.83
0.00
9.83
3.46
3.46
0.00
3.46
US$
0.50
0.50
0.00
0.50
(in thousands, except shares, per share and per ADS data)
Basic ..............................................................
1,151,705,374
1,160,592,325
1,231,698,725
1,239,264,464
1,092,601,338
1,092,601,338
Diluted ...........................................................
1,203,323,521
1,208,821,796
1,261,223,049
1,240,854,034
1,093,229,436
1,093,229,436
(1)
Including share-based compensation expenses of RMB17.7 million, RMB4.9 million, nil, nil and RMB0.4 million in aggregate for the years
ended December 31, 2015, 2016, 2017, 2018 and 2019, respectively.
As of December 31,
2015
RMB
2016
RMB
2017
RMB
2018
RMB
2019
RMB
US$
(in thousands)
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
169,653
2,681,751
3,440,843
947,974
1,396,375
113,182
2,044,468
3,440,843
24,369
385,210
494,246
136,168
200,576
16,258
293,670
494,246
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 RMB6.9618 to US$1.00, the noon buying rate in effect as of December 31,
2019 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 24, 2020, the noon buying rate was RMB7.0813 to US$1.00.
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
-4-
D. Risk Factors
Risks Related to Our Business and Industry
If and when our contracts with insurance companies are suspended or changed, our business and
operating results will be materially and adversely affected.
We primarily act as agents for insurance companies in distributing their products to retail customers.
We also provide claims adjusting services principally to insurance companies. Our relationships with the
insurance companies are governed by agreements between us and the insurance companies. We have
entered into strategic partnership agreements with most of our major insurance company partners for the
distribution of life, property and casualty insurance products and the provision of claims adjusting services
at the corporate headquarters level. While this approach allows us to obtain more favorable terms from
insurance companies by combining the sales volumes and service fees of all of our subsidiaries operating
insurance agency and claims adjusting businesses, it also means that the termination of a major contract
could have a material adverse effect on our business. Under the framework of the headquarter-to-
headquarter agreements, our subsidiaries operating insurance agency and claims adjusting businesses
generally also enter into contracts at a local level with the respective provincial, city and district branches
of the insurance companies. Generally, each branch of these insurance companies has independent authority
to enter into contracts with our relevant subsidiaries, and the termination of a contract with one branch has
no significant effect on our contracts with the other branches. See “Item 4. Information on the Company
— B. Business Overview — Insurance Company Partners.” These contracts establish, among other things,
the scope of our authority, the pricing of the insurance products we distribute and our fee rates. These
contracts typically have a term of one year and certain contracts can be terminated by the insurance
companies with little advance notice. Moreover, before or upon expiration of a contract, the insurance
company that is a party to that contract may agree to renew it only with changes in material terms, including
the amount of commissions and fees we receive, which could reduce our revenues to be generated from
that contract.
For the year ended December 31, 2019, our top five insurance company partners were Huaxia Life
Insurance Co., Ltd., or Huaxia, Aeon Life Insurance Co., Ltd., or Aeon, Sinatay Life Insurance Co., Ltd.,
or Sinatay, Tian'an Life Insurance Co., Ltd., or Tian'an, and Evergrande Life Insurance Co., Ltd., or
Evergrande. Among these top five partners, each of Huaxia, Aeon, Sinatay, Tian'an accounted for more
than 10% of our total net revenues individually in 2019, with Huaxia accounting for 23.8%, Aeon
accounting for 18.3%, Sinatay accounting for 16.1% and Tian'an accounting for 12.1%, respectively.
If we fail to attract and retain productive agents, especially entrepreneurial agents, and qualified claims
adjustors, our business and operating results could be materially and adversely affected.
All of our sales of life insurance products and a substantial portion of our sales of property and casualty
insurance products are conducted through our individual sales agents, 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.
As of December 31, 2019, we had 670,104 sales agents and 1,627 claim adjustors. Out of the 670,104
sales agents, 394,327 were performing agents, who have sold at least one insurance policy in 2019. The
number of performing agents who have sold at least one life insurance policy in 2019 was 131,326. If we
-5-
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 the 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 collectively, the Participants.
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 bears an
interest at a rate of 8% per annum. Dividends distributed by the Company to which the Participants are
entitled to receive will be used to pay back interest on the loans when the loans are outstanding. Shares
beneficially owned by the Participants under the 521 Plan are pledged to the Company by the Participants
to secure the payment of the 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$19.580 on April 28, 2020, and fluctuated in between, largely affected by, among other things, impact
from the Covid-19 outbreak, uncertainty around the Sino-US trade tension 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, 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 are pledged to secure the payment of the loans which will mature at the
end of the five-year lock-up period, 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 loans 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 accident
insurance, short-term medical insurance, travel 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 place auto insurance underwritten by
multiple different insurance carriers on their mobile devices., 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 mutual aid platform that provides risk-protection programs on a mutual
commitment basis among program members. In August 2014, we also rolled out Chetong.net
(www.chetong.net), an online-to-offline public service platform that integrates claims services and auto
service resources from around the country including 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
-6-
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 and improving the technology and
content of our existing online and mobile initiatives. However, our efforts to develop our mobile and online
platforms may not be successful or yield the benefits that we anticipate. In addition, our expansion may
depend on a number of factors, many of which are beyond our control, including but not limited to:
the effectiveness of our marketing campaigns to build brand recognition among consumers and our
ability to attract and retain customers;
the acceptance of third-party e-commerce platforms as an effective channel for underwriters to
distribute their insurance products;
the acceptance of Lan Zhanggui and CNpad Auto as effective tools by sales agents;
public concerns over security of e-commerce transactions and confidentiality of information;
increased competition from insurance companies which directly sell insurance products through
their own websites, call centers, portal websites which provide insurance product information and
links to insurance companies’ websites, and other professional insurance intermediary companies
which may launch independent websites in the future;
further improvement in our information technology system designed to facilitate smoother online
transactions; and
further development and changes in applicable rules and regulations which may increase our
operating costs and expenses, impede the execution of our business plan or change the competitive
landscape.
On July 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. On December 13, 2019, the CBIRC published
a Draft Measures on the Supervision of Internet Insurance Business to seek public opinions, or the Draft
Measures, which intends to replace the Interim Measures. The Draft Measures provides clarity on the
qualifications of entities which are allowed to operate online insurance business and sets higher
requirements on entities which intend to engage in online insurance business. For example, the Draft
Measures requires that both insurance institutions and their self-operated online platforms shall obtain ICP
licenses or make ICP filing. According to the Draft Measures, “self-operated online platform” refers to the
information system established by an insurance institution for the purpose of engaging in internet insurance
business and does not include any online platform established by the branch or affiliate of an insurance
institution We operate part of our online insurance distribution business through www.baoxian.com.
Currently, our wholly-owned subsidiary Shenzhen Baowang E-Commerce Co., Ltd., or Shenzhen
Baowang, owns the domain name of www.baoxian.com and holds an ICP license, which may be deemed
non-compliant with new regulatory requirements once the Draft Measures is enacted since Shenzhen
Baowang does not hold any insurance operating license although it is directly owned by Fanhua Century
which holds a national insurance agency operating license. In addition, insurance institutions engaged in
online insurance business shall have IT systems that are certified as Safety Level III Computer Information
Systems, or Safety Level III. We are currently in the process of making rectification. Net revenues from
Baowang (www.baoxian.com) accounted for 3.3% of our total net revenues in 2019. If we are not able to
rectify non-compliance incidents on a timely basis and remain fully compliant, the business operation of
Baowang could be suspended which may adversely impact our business results of operation.
-7-
In addition, the Draft Measures, if enacted, will also apply to insurance consultation and sales
activities conducted by insurance institutions and their sales agents in the manners of offline face-to-face
meetings, online communication, voice calls, telemarketing and/or media advertisement, with web links
provided to potential insurance customers to complete the purchase and any other sales activities conducted
through a combination of online and offline methods. The sales activities of our sales agents heavily rely
on our mobile sales support applications, Lan Zhanggui and CNpad Auto, to engage with customers both
online and offline and complete transaction processing online. If such sales activities are deemed internet
insurance business, our operating entities of Lan Zhanggui and CNpad Atuo would be subject to the same
regulatory requirements under the Draft Measures as imposed on Shenzhen Baowang. Specifically, the
operating entities of Lan Zhanggui and CNpad APP may be required to hold both an insurance intermediary
license, and an ICP license or make ICP filing, and their information systems would be required to obtain
Safty Level III Certification. If we cannot obtain all necessary licenses and approval on a timely basis, our
results of operation would be materially and adversely affected.
There are uncertainties with regard to how the changing laws, regulations and regulatory
requirements would apply to our business. We cannot assure you that our operations will remain fully
compliant with the changes in and further development of regulations applicable to us or we will be able
to obtain the necessary approvals and licenses as required in a timely manner.
Any failure to successfully identify the risks as part of our expansion into the online and mobile
insurance distribution business may have a material adverse impact on our growth, business prospects and
results of operations, which could lead to a decline in the price of our ADSs.
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 our sales personnel fail to register or obtain a Practice
Certificate, 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 sales
agent or claims adjustor to 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 fines
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 personnel with the IIRIS and complete self-check and
verification of the IIRIS registration of all existing sales personnel affiliated with them, by July 31, 2019.
Certain of our subsidiaries have received fines for failure to register some of our sales personnel’s
information with the IIRIS, which were not material to us. If the CBIRC continues 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 by our sales agents or sales representatives to register with
the CBIRC and obtain the necessary practice certificates. Such fines or administrative proceedings could
materially and adversely affect our business, financial condition and results of operations.
-8-
Material changes in the regulatory environment could change the competitive landscape of our industry
or require us to change the way we do business. The administration, interpretation and enforcement of
the laws and regulations currently applicable to us could change rapidly. If we fail to comply with
applicable laws and regulations, we may be subject to civil and criminal penalties or lose the ability to
conduct our business.
We operate in a highly regulated industry. The laws and regulations applicable to us are evolving and
may change rapidly, which could change the competitive environment of our industry significantly and
cause us to lose some or all of our competitive advantages. 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 personnel, 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 CBIRC and its predecessor has increasingly tightened regulations and supervision
of the Chinese insurance market. For example, on April 2, 2019, the CBIRC issued a Notice to Rectify the
Irregularities in the Insurance Intermediary Market in 2019, requiring all insurance companies and
insurance intermediaries to conduct self-check on various practices in violation of relevant regulations.
Although we believe we have not had any material violations to date, we could be required to spend
significant time and resources in complying with the requirement and the attention of our management
team and key employees could be diverted to these efforts, which may adversely affect our business
operations.
On July 10, 2017, the CIRC, the predecessor of CBIRC, promulgated the Interim Measures on
Retrospective Management of Insurance Sales Behaviors, effective November 1, 2017 which required
ancillary insurance agencies to take video and audio-recording, or double-recording for the sales of all
insurance products that they facilitate and other insurance distribution channels to take double-recording
for the sales of investment linked insurance products and for sale of life insurance products with a payment
period of more than one year to the elderly of over 60 years old. On June 11, 2019, Jiangsu Branch of the
CBIRC published the Notice on Deepening the Implementation of the Retrospective Management of
Personal Insurance Sales Behaviors or the Notice, requiring all insurance companies and insurance
intermediary companies to start double-recording process for all long-term personal insurance products in
Jiangsu Province starting from October 1, 2019. Ningbo Branch of the CBIRC implemented similar rule in
Ningbo, Zhejiang Province starting from January 1, 2020. Since the implementation of the rules, as
substantially all of the life and health insurance products we distribute are long-term personal insurance
products, our sales in these two regions have dropped substantially. Although the implementation of these
rules have been temporarily suspended due to the COVID-19 outbreak, the resumption in the
implementation of these rules will adversely impact our sales activities in these two regions and if similar
rules are implemented nationwide, our compliance cost may be increased and our business and results of
operations may be adversely affected.
On March 13, 2018, the CIRC and CBRC merged to form the CBIRC. The CBIRC has extensive
authority to supervise and regulate the insurance industry in China. In exercising its authority, the CBIRC
is given wide discretion, and the administration, interpretation and enforcement of the laws and regulations
applicable to us involve uncertainties that could materially and adversely affect our business and results of
operations. The People’s Bank of China and other government agencies may promulgate new rules
governing online financial services. In July 2015, ten government agencies including the People’s Bank of
China, the Ministry of Finance and CIRC promulgated a guidance letter on how to promote the healthy
growth of internet financial services, which set forth the principles of supervision based on the rule of law,
appropriate level of regulation, proper categorization, cooperation among different government agencies
and promoting innovation. Not only may the laws and regulations applicable to us change rapidly, but also
-9-
it may sometimes be unclear how they apply to our business. For example, the laws and regulations
applicable to our online and mobile platforms may be unclear. Our products or services may be determined
or alleged to be in violation of the applicable laws and regulations. Any failure of our products or services
to comply with these laws and regulations could result in substantial civil or criminal liability, adversely
affect demand for our services, invalidate all or a portion of our customer contracts, require us to change
or terminate some of our businesses, require us to refund a portion of our services fees, or cause us to be
disqualified from serving customers, and therefore could have a material and adverse effect on our business.
Although we have not had any material violations to date, we cannot assure you that our operations
will always comply with the interpretation and enforcement of the laws and regulations implemented by
the CBIRC. Any determination by a provincial or national government authority that our activities or those
of our vendors or customers violate any of these laws could subject us to civil or criminal penalties, could
require us to change or terminate some of our operations or business, or could disqualify us from providing
services to insurance companies or other customers; and, thus could have an adverse effect on our business.
Our business could be negatively impacted if we are unable to adapt our services to regulatory changes
in China.
China’s insurance regulatory regime is undergoing significant changes. Some of these changes and
the further development of regulations applicable to us may result in additional restrictions on our activities
or more intensive competition in this industry. For example, the CIRC, the predecessor of CBIRC, issued
notices in September 2016 and May 2017 to further reinforce the regulation of life insurance products by
requiring insurance companies to revise or improve the design of a number of insurance products. For
instance, insurance companies are required to (i) increase the death benefit coverage for insurance products
including individual term life insurance, individual endowment insurance and individual whole life
insurance products, and (ii) seek CIRC approval for universal insurance products with a guaranteed interest
rate of above 3%. CIRC also required that (i) whole life insurance, annuity insurance and care insurance
products must not be designed as short-to-medium term products, (ii) the first payment of survival
insurance benefits for endowment products and annuity products must only occur after five years since the
policy has become effective, and the annual payment or partial payment must not exceed 20% of the paid
premiums, and (iii) insurance companies must not design universal insurance products or investment-linked
insurance products in the form of riders. These new requirements apply to a number of annuity products
sold by us. As a result, sales of annuity products dropped significantly in 2018. Pursuant to a notice issued
by the CBIRC in August 2019, insurance companies must seek approval for annuity insurance products
with the assumed valuation interest rate of above 3.5%. In November 2019, the CBIRC requested 13
insurance companies to terminate the sales of their annuity insurance products with 4.025% interest rate by
December 31, 2019. Several of our major insurance company partners have subsequently terminated their
high-interest rate annuity products. While the cessation of higher interest-rate annuity products boosted the
sales prior to the cessation, the sales of annuity products dropped substantially afterwards. Any change in
regulatory requirements that make our products less attractive to consumers or disrupt product supply, our
business results of operations could fluctuated significantly and be adversely affected.
Our financial results could be negatively impacted if we are unable to maintain the business volume of
our insurance agency business after shifting our focus from property and casualty insurance products
to life insurance products.
We have gradually shifted the focus of our insurance agency business from property and casualty
insurance products to life insurance products since 2016. This shift was reflected in our financial results.
Net revenues generated from our property and casualty insurance agency business decreased from
RMB2,755.9 million in 2016, representing 67.5% of total net revenues, to RMB141.8 million (US$20.4
million) in 2019, representing 3.8% of total net revenues. Net revenues generated from our life insurance
business increased from RMB990.5 million in 2016, representing 24.3% of total net revenues, to
RMB3,193.6 million (US$458.7 million) in 2019, representing 86.2% of total net revenues.
-10-
The markets for our insurance agency business are rapidly evolving and are subject to significant
challenges. Our business plan relies heavily upon a stable existing customer base and our ability to expand
such customer base. While we continue to adjust our business to adapt to market trends and satisfy the
needs of our customers, it may be difficult to evaluate our business and growth prospects, and we may not
succeed in any of these efforts. In addition, we face intense competition from other insurance intermediaries
that distribute life insurance products, as well as other insurance companies and financial institutions that
sell life insurance products directly to customers in China. If we are not able to adapt to and respond to
these increasingly competitive pressures after shifting the focus of our insurance agency segment to life
insurance products, our growth may slow down, which could materially and adversely affect our earnings.
We may be unsuccessful in identifying and acquiring suitable acquisition targets, which could adversely
affect our growth.
We may pursue acquisition of companies that can complement our existing business, diversify our
product offerings and improve our customers’ experience in the future. However, there is no assurance that
we can successfully identify suitable acquisition candidates. Even if we identify suitable candidates, we
may not be able to complete an acquisition on terms that are commercially acceptable to us. Our competitors
may be able to outbid us for these acquisition targets. If we are unable to complete acquisitions, our growth
strategy may be impeded and our earnings or revenue growth may be negatively affected.
Competition in our industry is intense and, if we are unable to compete effectively with both existing and
new market participants, we may lose customers and our financial results may be negatively affected.
The insurance intermediary industry in China is highly competitive, and we expect competition to
persist and intensify as more technology companies and other online insurance intermediaries enter the
market. In insurance product distribution, we face competition from insurance companies that use their in-
house sales force, exclusive sales agents, telemarketing and internet channels to distribute their products,
from business entities that distribute insurance products on an ancillary basis, such as commercial banks,
postal offices and automobile dealerships, as well as from other traditional or online insurance
intermediaries. In our claims adjusting business, we primarily compete with other independent claims
adjusting firms. We compete for customers on the basis of product offerings, customer services and
reputation. Many of our competitors, both existing and newly emerging, have greater financial and
marketing resources than we do and may be able to offer products and services that we do not currently
offer and may not offer in the future. If we are unable to compete effectively against those competitors, we
may lose customers and our financial results may be negatively affected.
Because the commission and fee we earn on the sale of insurance products is based on premiums,
commission and fee rates set by insurance companies, any decrease in these premiums, commission or
fee rates may have an adverse effect on our results of operations.
We are engaged in the life insurance, property and casualty insurance and claims adjusting businesses
and derive revenues primarily from commissions and fees paid by the insurance companies whose policies
our customers purchase and to whom we provide claims adjusting services. Our commission and fee rates
are set by insurance companies and are based on the premiums that the insurance companies charge or the
amount recovered by insurance companies. Commission and fee rates and premiums can change based on
the prevailing economic, regulatory, taxation-related and competitive factors that affect insurance
companies. These factors, which are not within our control, include the ability of insurance companies to
place new business, underwriting and non-underwriting profits of insurance companies, consumer demand
for insurance products, the availability of comparable products from other insurance companies at a lower
cost, the availability of alternative insurance products such as government benefits and self-insurance plans,
as well as the tax deductibility of commissions and fees and the consumers themselves. In addition,
premium rates for certain insurance products, such as the mandatory automobile liability insurance that
each automobile owner in the PRC is legally required to purchase, are tightly regulated by CBIRC.
-11-
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 usually the highest in the first quarter and lowest in the fourth quarter of any given
year as much of the jumpstart sales activities of life insurance companies occurs in January and February
during which life insurance companies would increase their sales efforts by offering more incentives for
insurance agents and insurance intermediaries to increase sales, while the preparation for the jumpstart
sales starts in the fourth quarter of each year. This general seasonality trend is expected to be affected by
the recent COVID-19 outbreak, which is expected to reduce our first year life insurance commission
revenue during the first quarter of 2020. The factors that cause the quarterly and annual variations are not
within our control. Specifically, regulatory changes to product design may result in cessation of products
from time to time and cause quarterly fluctuation in the results of our operations. In addition, consumer
demand for insurance products can influence the timing of renewals, new business and lost business, which
generally includes policies that are not renewed, and cancellations. As a result, you may not be able to rely
on quarterly or annual comparisons of our operating results as an indication of our future performance.
Our operating structure may make it difficult to respond quickly to operational or financial problems,
which could negatively affect our financial results.
We currently operate through our wholly-owned or majority-owned insurance agencies and claims
adjusting firms and their branches located in 31 provinces in China. These companies report their results
to our corporate headquarters monthly. If these companies delay either reporting results or informing
corporate headquarters of negative business developments such as losses of relationships with insurance
companies, regulatory inquiries or any other negative events, we may not be able to take action to remedy
the situation in a timely fashion. This in turn could have a negative effect on our financial results. In addition,
if one of these companies were to report inaccurate financial information, we might not learn of the
inaccuracies on a timely basis and be able to take corrective measures promptly, which could negatively
affect our ability to report our financial results.
Our future success depends on the continuing efforts of our senior management team and other key
personnel, and our business may be harmed if we lose their services.
Our future success depends heavily upon the continuing services of the members of our senior
management team and other key personnel, in particular, Mr. Chunlin Wang, or Mr. Wang, our chairman
of the board of directors and chief executive officer, and Mr. Peng Ge, or, Mr. Ge, our chief financial officer.
If one or more of our senior executives or other key personnel, are unable or unwilling to continue in their
present positions, we may not be able to replace them easily, or at all. As such, our business may be
disrupted and our financial condition and results of operations may be materially and adversely affected.
Competition for senior management and key personnel in our industry is intense because of a number of
factors including the limited pool of qualified candidates. We may not be able to retain the services of our
senior executives or key personnel, or attract and retain high-quality senior executives or key personnel in
the future. As is customary in the PRC, we do not have insurance coverage for the loss of our senior
management team or other key personnel.
-12-
In addition, if any member of our senior management team or any of our other key personnel joins a
competitor or forms a competing company, we may lose customers, sensitive trade information, key
professionals and staff members. Each of our executive officers and key employees has entered into an
employment agreement with us which contains confidentiality and non-competition provisions. These
agreements generally have an initial term of three years, and are automatically extended for successive one-
year terms unless terminated earlier pursuant to the terms of the agreement. See “Item 6. Directors, Senior
Management and Employees — A. Directors and Senior Management — Employment Agreements” for a
more detailed description of the key terms of these employment agreements. If any disputes arise between
any of our senior executives or key personnel and us, we cannot assure you of the extent to which any of
these agreements may be enforced.
Salesperson and employee misconduct is difficult to detect and deter and could harm our reputation or
lead to regulatory sanctions or litigation costs.
Salesperson and employee misconduct could result in violations of law by us, regulatory sanctions,
litigation or serious reputational or financial harm. Misconduct could include:
making misrepresentations when marketing or selling insurance to customers;
hindering insurance applicants from making full and accurate mandatory disclosures or inducing
applicants to make misrepresentations;
hiding or falsifying material information in relation to insurance contracts;
fabricating or altering insurance contracts without authorization from relevant parties, selling
false policies, or providing false documents on behalf of the applicants;
falsifying insurance agency business or fraudulently returning insurance policies to obtain
commissions;
colluding with applicants, insureds, or beneficiaries to obtain insurance benefits;
engaging in false claims; or
otherwise not complying with laws and regulations or our control policies or procedures.
On April 24, 2015, the PRC Insurance Law was amended and consequently on December 3, 2015, the
CIRC amended the Provisions on the Supervision of Professional Insurance Agencies, the Provisions on
the Supervision of Insurance Brokerages and the Provisions on the Supervision of Insurance Claims
Adjusting Firms. These amendments have made a number of significant changes to the regulatory regime,
including eliminating the requirement for an insurance agent, broker or claims adjusting practitioner to
obtain a qualification certificate issued by the CIRC. The elimination of the certificate requirement may
result in an increase in misconduct by sales or service persons, in particularly sales misrepresentation. We
have internal policies and procedures to deter salesperson or employee misconduct. However, the measures
and precautions we take to prevent and detect these activities may not be effective in all cases. Therefore,
salesperson or employee misconduct could lead to a material adverse effect on our business, results of
operations or financial condition. In addition, the general increase in misconduct in the industry could
potentially harm the reputation of the industry and have an adverse impact on our business.
Our investments in certain financial products may not yield the benefits we anticipate or incur financial
loss, which could adversely affect our cash position.
In order to improve our return on capital, we may from time to time, upon board approval, invest
certain portion of our cash in financial products, such as trust products, with terms of half a year to two
years. These products may involve various risks, including default risks, interest risks, and other risks. We
-13-
cannot guarantee these investments will yield the returns we anticipate and we could suffer financial loss
resulting from the purchase of these financial products.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able
to accurately report our financial results or prevent fraud.
We are subject to reporting obligations under U.S. securities laws. Pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002 and the related rules adopted by the Securities and Exchange Commission, or
the SEC, every public company is required to include a management report on the company’s internal
controls over financial reporting in its annual report, which contains management’s assessment of the
effectiveness of the company’s internal controls over financial reporting. In addition, an independent
registered public accounting firm must attest to and report on the effectiveness of the company’s internal
controls over financial reporting.
As required by Section 404 of the Sarbanes-Oxley Act and related rules as promulgated by the SEC,
our management assessed the effectiveness of the internal control over financial reporting as of December
31, 2019 using criteria established in “Internal Control — Integrated Framework (2013)” issued by the
Committee of Sponsoring Organizations of the Treadway Commission and concluded that our internal
control over financial reporting was effective as of December 31, 2019. Previously, our management
concluded that our internal control over financial reporting was not effective as of December 31, 2018 due
to the identification of a material weakness, which was that management review controls designed to
address risks associated with complex accounting matters that arise from significant nonroutine
transactions to ensure that those transactions are properly accounted for in accordance with U.S. GAAP did
not operate effectively. Management took corrective actions for the weakness and implemented procedures
to address such weakness during the fiscal year of 2019, concluding that these measures were fully
implemented and the material weakness were fully remedied during 2019. See “Item 15. Controls and
Procedures.” “Management’s Remediation Plans and Actions” for measures that we have implemented to
address this material weakness in our internal control over financial reporting.
Although the material weakness in our internal control over financial reporting as described above has
been fully remedied during 2019 and our internal control over financial reporting as of December 31, 2019
was concluded to be effective, there is no assurance that we will be able to maintain effective internal
control over financial reporting in the future. If we fail to do so, we may not be able to produce reliable
financial reports and prevent fraud. Failure to correct a material weakness 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, financial condition, results of operations and
prospects, as well as the trading price of our ADSs, may be materially and adversely affected. Moreover,
if we are not able to conclude that we have effective internal control over financial reporting, investors may
lose confidence in the reliability of our financial statements, which would negatively impact the trading
price of our ADSs. Our reporting obligations as a public company, including our efforts to comply with
Section 404 of the Sarbanes-Oxley Act, will continue to place a significant strain on our management,
operational and financial resources and systems for the foreseeable future.
We may face legal action by former employers or principals of entrepreneurial agents who join our
distribution and service network.
Competition for productive sales agents is intense within the Chinese insurance industry. When an
entrepreneurial agent leaves his or her employer or principal to join our distribution and service network
as our sales agent, we may face legal action by his or her former employer or principal of the entrepreneurial
agent on the ground of unfair competition or breach of contract. As of the date of this annual report, there
has been no such action filed or threatened against us. We cannot assure you that this will not happen in
the future. Any such legal actions, regardless of merit, could be expensive and time-consuming and could
divert resources and management’s attention from the operation of our business. If we were found liable in
such a legal action, we might be required to pay substantial damages to the former employer or principal
-14-
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, 2019, goodwill represented
RMB109.9 million (US$15.8 million), or 5.7% of our total shareholders’ equity, while other net intangible
assets represented less than 0.1% of our total shareholders’ equity. Our management performs impairment
assessment annually and we did not recognize any impairment loss between 2015 and 2019. 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. Our business
activities could be materially disrupted in the event of a partial or complete failure of any of these primary
information technology or communication systems, which could be caused by, among other things,
software malfunction, computer virus attacks or conversion errors due to system upgrading. In addition, a
prolonged failure of our information technology system could damage our reputation and materially and
adversely affect our future prospects and profitability.
We may face potential liability, loss of customers and damage to our reputation for any failure to protect
the confidential information of our customers.
Our customer database holds confidential information concerning our customers. We may be unable to
prevent third parties, such as hackers or criminal organizations, from stealing information provided by our
customers to us. Confidential information of our customers may also be misappropriated or inadvertently
disclosed through employee misconduct or mistake. We may also in the future be required to disclose to
government authorities certain confidential information concerning our customers.
In addition, many of our customers pay for our insurance services through third-party online payment
services. In such transactions, maintaining complete security during the transmission of confidential
information, such as personal information, is essential to maintaining consumer confidence. We have
limited influence over the security measures of third-party online payment service providers. In addition,
our third-party merchants may violate their confidentiality obligations and disclose information about our
customers. Any compromise of our security or third-party service providers' security could have a material
adverse effect on our reputation, business, prospects, financial condition and results of operations.
Though we have not experienced any material cybersecurity incidents in the past, if our database were
compromised by outside sources or if we are accused of failing to protect the confidential information of
-15-
our customers, we may be forced to expend significant financial and managerial resources in remedying
the situation, defending against these accusations and we may face potential liability. Any negative
publicity, especially concerning breaches in our cybersecurity systems, may adversely affect our public
image and reputation. Though we take proactive measures to protect against these risks and we believe that
our efforts in this area are sufficient for our business, we cannot be certain that such measures will prove
effective against all cybersecurity risks. In addition, any perception by the public that online commerce is
becoming increasingly unsafe or that the privacy of customer information is vulnerable to attack could
inhibit the growth of online services generally, which in turn may reduce the number of our customers.
Our business is subject to supplier concentration risks arising from dependence on a single or limited
number of suppliers.
We derive a significant portion of net revenues from distributing insurance products supplied by our
important insurance company partners. Among the top five of our insurance company partners, each of
Huaxia, Aeon, Sinatay and Tian’an contributed more than 10% of our total net revenues from continuing
operations in 2019, with Huaxia accounting for 23.8%, Aeon accounting for 18.3%, Sinatay accounting for
16.1% and Tian’an accounting for 12.1%.
Because of this concentration in the supply of the insurance products we distribute, our business and
operations would be negatively affected if we experience a partial or complete loss of any of these suppliers.
In addition, any significant adverse change in our relationship with any of these suppliers could result in
loss of revenue, increased costs and distribution delays that could harm our business and customer
relationships. In addition, this concentration can exacerbate our exposure to risks associated with the
termination by key insurance company partners of our agreements or any adverse change in the terms of
such agreements, which could have an adverse impact on our revenues and profitability.
If we are unable to respond in a timely and cost-effective manner to rapid technological change in the
insurance intermediary industry, it may result in a material adverse effect.
The insurance industry is increasingly influenced by rapid technological change, frequent new product
and service introductions and evolving industry standards. For example, the insurance intermediary
industry has increased the use of the Internet to communicate benefits and related information to consumers
and to facilitate information exchange, transactions and training. We believe that our future success will
depend on our ability to anticipate and adapt to technological changes and to offer additional products and
services that meet evolving standards on a timely and cost-effective manner. We may not be able to
successfully identify new product and service opportunities or develop and introduce these opportunities
in a timely and cost-effective manner. In addition, new products and services that our competitors develop
or introduce may render our products and services uncompetitive. As a result, if we are not able to respond
or adapt to technological changes that may affect our industry in the future, our business and results of
operations could be materially and adversely affected.
We face risks related to health epidemics, including the ongoing COVID-19 outbreak, severe weather
conditions and other catastrophes, which could materially and adversely affect our business.
Our business could be materially and adversely affected by the outbreak of novel coronavirus, avian
flu, severe acute respiratory syndrome, or SARS, another health epidemic, severe weather conditions or
other catastrophes. 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 April 2009, influenza A (H1N1) commonly referred to
as “swine flu” was first discovered in North America and quickly spread to other parts of the world,
including China. In February 2013, H7N9 Avian influenza was first discovered in Shanghai, China and
quickly widened its geographical spread in China.
-16-
In December 2019, a novel strain of coronavirus, referred to as Coronavirus Disease 2019, or COVID-
19, first surfaced in China and quickly spread to other countries. The PRC government has taken various
precautionary measures to contain the spread of the COVID-19, including extending the Chinese New Year
Holiday into February 2020, restricting travel, suspending transportation and banning gatherings. Our
business operations rely heavily on the efforts of individual sales agents and claims adjustors. Although we
have moved all training and marketing activities online to mitigate the impact, the limited ability of our
sales personnel to interact with customers face-to-face as result of the social distance measures has hindered
the sales activities of our sales force, which has had an adverse impact on our operating results of the first
quarter of 2020 and the operating income for the first quarter of 2020 is expected to significantly decrease
on a year-over-year basis. Such social distance measures to contain the spread of the COVID-19 is expected
to continue to have an adverse effect on our operating results in the near-to-medium-term. The COVID-19
outbreak has adversely impacted business operation of companies in a variety of industries. The business
operation of our non-consolidated affiliated investees has also been adversely impacted by the COVID-19
outbreak which will affect the fair value of our investment in affiliates. The extent to which the COVID-
19 outbreak will continue to impact our results will depend on its future developments, which are highly
uncertain and cannot be predicted, including new information which may emerge concerning the severity
of this disease and the actions to contain the disease or treat its impact, among others.
In addition, any occurrence of other adverse public health developments or recurrence of avian flu or
SARS, 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 also significantly disrupt our
staffing and otherwise reduce the activity level of our work force, thus causing a material and adverse effect
on our business operations.
We may be at risk of securities class action litigation.
Historically, securities class action litigation has often been brought against a company following
periods of instability in the market price of its securities. If we face such litigation, it could result in
substantial costs and a diversion of management’s attention and resources, which could harm our business.
Between August 2018 and February 2019, three short-selling focused firm issued short-sell thesis
reports which we believe contain false and misleading information about our strategy, business model and
financials and caused the trading price of our ADSs to fluctuate significantly. Following the issuance of
one of the reports, a shareholder class action lawsuit was filed against the Company in the United States
District Court for the Southern District of New York, or the Court. In March 2020, the Court granted in its
entirety our motion to dismiss the class action lawsuit and closed the case.
Recently, U.S. public companies that have substantially all of their operations in China, have been the
subject of intense scrutiny, criticism and negative publicity by some investors, financial commentators and
regulatory agencies. Much of the scrutiny, criticism and negative publicity has centered around financial
and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate
corporate governance policies or a lack of adherence thereto and, in some cases, allegations of fraud. As a
result of the scrutiny, criticism and negative publicity, the publicly traded stocks of many U.S.-listed
Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless.
Some of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are
conducting or subject to internal and external investigations into the allegations. Shortselling firms or others
may in the future publish additional short seller reports with respect to our business, officers, directors and
shareholders, and we may become subject to other unfavorable allegations, which might cause further
fluctuations in the trading price of our ADSs. Such volatility in our share price could subject us to increased
risk of securities class action lawsuits or derivative actions.
Any future class action lawsuit against us, whether or not successful, could harm our reputation and
restrict our ability to raise capital. In addition, if a claim is successfully made against us, we may be required
to pay significant damages, which could have a material adverse effect on our financial condition and
-17-
results of operations. Even if such allegations are ultimately proven to be groundless, the allegations or the
process of dealing with them could severely impact our business operations and stockholder’s equity, and
any investment in our ADSs could be greatly reduced.
We may be subject, from time to time, to adverse actions taken by other parties, including lawsuits and
negative reports and regulatory proceedings, which may divert resources and the time and attention of
our management and may otherwise adversely affect us.
From time to time, we may become a party to litigations incidental to the operation of our business,
including class action lawsuits and disputes with other third parties. Litigation usually requires a significant
amount of management time and effort, which may adversely affect our business by diverting
management’s focus from the needs of our business and the development of strategic opportunities.
We cannot predict the outcome of these lawsuits. Regardless of the outcome, these lawsuits, and any
other litigation that may be brought against us or our current or former directors and officers, could be time-
consuming, result in significant expenses and divert the attention and resources of our management and
other key employees. An unfavorable outcome in any of these matters could also exceed coverage provided
under applicable insurance policies, which is limited. Any such unfavorable outcome could have a material
effect on our business, financial condition, results of operations and cash flows. Further, we could be
required to pay damages or additional penalties or have other remedies imposed against us, or our current
or former directors or officers, which could harm our reputation, business, financial condition, results of
operations or cash flows.
In addition, the CBIRC may from time to time make inquiries and conduct examinations concerning
our compliance with PRC laws and regulations. These administrative proceedings have in the past resulted
in administrative sanctions, including fines, which have not been material to us. While we cannot predict
the outcome of any pending or future examination, we do not believe that any pending legal matter will
have a material adverse effect on our business, financial condition or results of operations. However, we
cannot assure you that any future regulatory proceeding will not have an adverse outcome, which could
have a material adverse effect on our operating results or cash flows.
Risks Related to Our Corporate Structure
If the PRC government finds that the structure for operating part of our China business does not comply
with applicable PRC laws and regulations, we could be subject to severe penalties.
Historically, PRC laws and regulations have restricted foreign investment in and ownership of
insurance intermediary companies. As a result, we conducted our insurance intermediary business through
contractual arrangements among our PRC subsidiaries, consolidated affiliated entities including Meidiya
Investment, Yihe Investment, Xinbao Investment and Dianliang Information and their individual
shareholders between December 2005 and May 2016.
In recent years, some rules and regulations governing the insurance intermediary sector in China have
begun to encourage foreign investment. For instance, under the Closer Economic Partnership Arrangement,
or CEPA, Supplement IV signed in June 29, 2007 and CEPA Supplement VIII signed on December 13,
2011, between the PRC Ministry of Commerce and the governments of Hong Kong and Macao Special
Administrative Region, local insurance agencies in Hong Kong and Macao are allowed to set up wholly-
owned insurance agency companies in Guangdong Province if they meet certain threshold requirements.
On December 26, 2007, the CIRC 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
-18-
and Reform Commission and Ministry of Commerce jointly issued the Catalogue for the Guidance of
Foreign Investment Industries (Revision 2015), or the CGFII 2015 Revision, pursuant to which insurance
brokerage firms are removed from the list of industries subject to foreign investment restriction.
We operate our online insurance distribution business through Baoxian.com which was subject to
foreign investment restrictions. Foreign investors are not allowed to own more than 50% of the equity
interests in a value-added telecommunications service provider (except for e-commerce, domestic multi-
party communication, storage and forwarding classes and call centers) under the Special Administrative
Measures for Access of Foreign Investment (Negative List) (2019 Edition), which was promulgated on
June 30, 2019 and implemented on July 30, 2019. However, on June 19, 2015, the Ministry of Industry and
Information Technology published a Notice on Removing the Foreign Ownership Restriction in Online
Data Processing and Transaction Processing Business (Operating E-commerce), or the No. 196 Notice.
Foreign ownership in online data processing and transaction process business is allowed to increase to 100%
as long as the foreign-invested entities obtain necessary licenses to conduct the business. However, there
remains uncertainty with regards to the implementation of the No. 196 Notice and the administrative
procedures with regards to the application of the data processing and transaction process business licenses.
Following the changes in applicable foreign investment regulations, we commenced a restructuring of
our company in October 2011 and subsequently terminated all the contractual arrangements among our
PRC subsidiaries and consolidated entities such as Meidiya Investment and Yihe Investment, which
became our wholly-owned subsidiaries in 2015 and Xinbao Investment and Dianliang Information, which
became our wholly-owned subsidiaries in 2016. As a result, we obtained direct controlling or significant
equity ownership in each of our insurance intermediary companies and our online platforms in 2016. See
“Item 4. Information on the Company — C. Organizational Structure.”
If our online insurance business operated through Baoxian.com is treated as value-added
telecommunication service other than e-commerce business by relevant authorities, our direct ownership
of our online platforms may be in violation of any existing or future PRC laws or regulations, or if our
online platforms fail to obtain or maintain any of the required permits or approvals, the relevant PRC
regulatory authorities, including the CBIRC (formerly CIRC), will have broad discretion in dealing with
such violations, including:
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.
-19-
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay
or prevent us from making loans to our PRC subsidiaries or making additional capital contributions to
our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund
and expand our business.
We are an offshore holding company conducting our operations in China through PRC subsidiaries in
order to provide additional funding to our PRC subsidiaries, we may make loans to our PRC subsidiaries,
or we may make additional capital contributions to our PRC subsidiaries.
Any loans we make to any of our directly-held PRC subsidiaries (which are treated as foreign-invested
enterprises under PRC law), namely, Fanhua Zhonglian Enterprise Image Planning (Shenzhen) Co., Ltd.,
or Zhonglian Enterprise, and Fanhua Xinlian Information Technology Consulting (Shenzhen) Co., Ltd., or
Xinlian Information, cannot exceed statutory limits and must be registered with the State Administration
of Foreign Exchange, or the SAFE, or its local counterparts. Under applicable PRC law, the Chinese
regulators must approve the amount of a foreign-invested enterprise’s registered capital, which represents
shareholders’ equity investments over a defined period of time, and the foreign-invested enterprise’s total
investment, which represents the total of the company’s registered capital plus permitted loans. The
registered capital/total investment ratio cannot be lower than the minimum statutory requirement and the
excess of the total investment over the registered capital represents the maximum amount of borrowings
that a foreign-invested enterprise is permitted to have under PRC law. Our directly-held PRC subsidiaries
were allowed to incur a total of HK$300 million (US$38.7 million) in foreign debts as of March 31, 2020.
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.
-20-
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.
interpretation and
Substantial uncertainties exist with respect
implementation of the PRC Foreign Investment Law and how it may impact the viability of our corporate
structure, corporate governance, business operations and financial results.
to the enactment
timetable,
On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which
will come into effect on January 1, 2020 and replace the trio of existing laws regulating foreign investment
in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative
Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their
implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC
regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international
practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic
investments. However, since it is relatively new, uncertainties still exist in relation to its interpretation and
implementation. For instance, under the Foreign Investment Law, “foreign investment” refers to the
investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in
China. Though it does not explicitly classify contractual arrangements as a form of foreign investment,
foreign investment via contractual arrangements could be interpreted as a type of indirect foreign
investment activities under the definition. In addition, the definition contains a catch-all provision which
includes investments made by foreign investors through means stipulated in laws or administrative
regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future
laws, administrative regulations or provisions promulgated by the State Council to provide for contractual
arrangements as a form of foreign investment. In any of these cases, it will be uncertain whether our
contractual arrangements will be deemed to be in violation of the requirements for foreign investment under
PRC laws and regulations.
If our control over our variable interest entities, or VIEs, through contractual arrangements are deemed
as foreign investment in the future, and any business of our VIEs is restricted or prohibited from foreign
investment at the time, we may be deemed to be in violation of the Foreign Investment Law, the contractual
-21-
arrangements that allow us to have control over our VIEs may be deemed invalid and illegal, and we may
be required to unwind such contractual arrangements and/or restructure our business operations. In addition,
if future laws, administrative regulations or provisions prescribed by the State Council mandate further
actions to be taken by companies with respect to existing contractual arrangements, we may face substantial
uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely
and appropriate measures to cope with any of these or similar regulatory compliance challenges could
materially and adversely affect our corporate structure, corporate governance, business operations and
financial results.
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 the 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 280,000,000 ordinary shares held by the 521 Plan Employee Companies as collateral to the
loans issued to the Participants, and we have potential exposure to the economics of the 521 Plan Employee
Companies 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.
If the 521 Plan Employee Companies 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 the 521 Plan Employee Companies 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 the 521 Plan Employee Companies, 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 the 521 Plan Employee
Companies and third parties were to impair our control over the 521 Plan Employee Companies, our ability
to consolidate the financial results of the 521 Plan Employee Companies would be affected, which would
in turn materially and adversely affect our business, financial condition and results of operations.
If we make equity compensation grants to persons who are PRC citizens, they may be required to register
with SAFE. We may also face regulatory uncertainties that could restrict our ability to adopt additional
equity compensation plans for our directors and employees and other parties under PRC law.
-22-
On February 15, 2012, the SAFE issued 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”, also known as “Circular 7”. Circular 7 covers all forms of
equity compensation plans including employee stock ownership plans, employee stock option plans and
other equity compensation plans permitted by relevant laws and regulations. For any plans that are so
covered and are adopted by a non-PRC listed company after February 15, 2012, Circular 7 requires all
participants of such plans who are PRC citizens to register with and obtain approvals from SAFE prior to
their participation in the plan.
Our 521 Plan, which enables eligible participants to invest in the Company by purchasing up to 14
million of the Company’s ADSs at a price of US$27.38 per ADS, could potentially be covered by Circular
7, and the participants of the 521 Plan might be required to abide by the registration and approval
requirements contemplated in Circular 7. We believe that ensuring all of the 521 Plan participants comply
with the Circular 7 requirements will be a burdensome and time-consuming process, and the required
registrations and approvals might not be obtained on a timely basis, or at all. Global Law Office has advised
us that pursuant to Circular 7, the SAFE may take regulatory measures and impose administrative sanctions
on individuals and companies who might be regarded as violating the provisions of Circular 7, which will
depend on how the SAFE interprets, applies and enforces Circular 7.
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 6.1% for 2019, according to data released by the PRC government in January
2020. Furthermore, China's GDP growth turned negative in the first quarter of 2020 due to the COVID-19
outbreak. The PRC government has implemented various measures to encourage economic development
and guide the allocation of resources. However, these measures may not be successful in transforming the
Chinese economy or spurring growth. While some of these measures benefit the overall PRC economy,
they may also have a negative effect on us. For example, our financial condition and results of operations
may be adversely affected by government control over capital investments or changes in tax regulations
that are applicable to us.
Although the PRC government has implemented measures since the late 1970s emphasizing the
utilization of market forces for economic reform, the reduction of state ownership of productive assets and
the establishment of improved corporate governance in business enterprises, the PRC government still
owns a substantial portion of productive assets in China. In addition, the PRC government continues to
play a significant role in regulating industry development by imposing industrial policies. The PRC
government also exercises significant control over China’s economic growth through the allocation of
resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and
providing preferential treatment to particular industries or companies. Actions and policies of the PRC
government could materially affect our ability to operate our business.
Uncertainties with respect to the PRC legal system could adversely affect us.
We conduct our business primarily through our subsidiaries in China. Our operations in China are
governed by PRC laws and regulations. Our subsidiaries are generally subject to laws and regulations
applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned
-23-
enterprises. The PRC legal system is based on written statutes. Prior court decisions may be cited for
reference but have limited precedential value.
Although since 1979, PRC legislation and regulations have significantly enhanced the protections
afforded to various forms of foreign investments in China, China has not developed a fully integrated legal
system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are relatively new, and because of the
limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of
these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on
government policies and internal rules (some of which are not published on a timely basis or at all) that
may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules
until sometime after the violation. In addition, any litigation in China may be protracted and result in
substantial costs and diversion of resources and management attention.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and
the remittance of currency out of China. Under existing PRC foreign exchange regulations, payments of
current account items, including profit distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from the SAFE by complying with
certain procedural requirements. However, approval from appropriate government authorities is required
where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such
as the repayment of loans denominated in foreign currencies. The PRC government may also at its
discretion restrict access in the future to foreign currencies for current account transactions. Under our
current corporate structure, the primary source of our income at the holding company level is dividend
payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the
ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to
us, or otherwise satisfy their foreign currency denominated obligations. If the foreign exchange control
system prevents us from obtaining sufficient foreign currency to satisfy our currency needs, we may not be
able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.
The PRC Enterprise Income Tax Law may increase the enterprise income tax rate applicable to some of
our PRC subsidiaries, which could have a material adverse effect on our result of operations.
According to the PRC Enterprise Income Tax Law, or the EIT Law, which became effective on
January 1, 2008, as further clarified by subsequent tax regulations implementing the EIT Law, foreign-
invested enterprises and domestic enterprises are subject to enterprise income tax, or EIT, at a uniform rate
of 25%, unless otherwise provided. Enterprises that were established and enjoyed preferential tax
treatments before March 16, 2007 will continue to enjoy such preferential tax treatments in the following
manners: (1) in the case of preferential tax rates, for a five-year transition period starting from January 1,
2008, during which the EIT rate of such enterprises will gradually increase to the uniform 25% EIT rate by
January 1, 2012; or (2) in the case of preferential tax exemption or reduction with a specified term, until
the expiration of such term. However, if such an enterprise has not enjoyed the preferential treatments yet
because of its failure to make a profit, its term for preferential treatments will be deemed to start from 2008.
As a result of the implementation of the EIT Law, certain preferential tax treatments enjoyed by some
of our subsidiaries expired on January 1, 2008. According to the EIT Law and related regulations, such as
the Circular on Issues Regarding Tax-related Preferential Policies for Further Implementation of Western
Development Strategy jointly issued by the State Ministry of Finance, General Administration of Customs,
China and State Administration for Taxation, enterprises located in the western China regions that fall into
the encouraged industries are entitled to 15% EIT preferential tax treatment from January 1, 2011 to
December 31, 2020. The preferential tax rates enjoyed by some of our PRC subsidiaries incorporated in
such regions, will increase to the uniform 25% EIT rate after 2020. 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.
-24-
Our global income or the dividends we receive from our PRC subsidiaries may be subject to PRC tax
under the EIT Law, which could have a material adverse effect on our results of operations.
Under the EIT Law, an enterprise established outside of the PRC with “de facto management bodies”
within the PRC is considered a resident enterprise and will be subject to the EIT at the rate of 25% on its
worldwide income. The Implementation Rules of the EIT Law, or the Implementation Rules, define the
term “de facto management bodies” as “establishments that carry out substantial and overall management
and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an
enterprise.” If we are deemed a resident enterprise, we may be subject to the EIT at 25% on our global
income, except that the dividends we receive from our PRC subsidiary will be exempt from the EIT. If we
are considered a resident enterprise and earn income other than dividends from our PRC subsidiaries, a 25%
EIT on our global income could significantly increase our tax burden and materially and adversely affect
our cash flow and profitability.
We have been advised by our PRC counsel, Global Law Office, that pursuant to the EIT Law and the
Implementation Rules, dividends payable by a foreign-invested enterprise in China to its foreign investors
will be subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation
has a tax treaty with China that provides for a different withholding arrangement. However, pursuant to the
Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of
Double Taxation and Prevention of Fiscal Evasion, or the Double Taxation Arrangement, which became
effective on January 1, 2007, dividends from our PRC subsidiaries paid to us through our Hong Kong
wholly-owned subsidiary CNinsure Holdings Ltd. are subject to a withholding tax at a rate of 5% since
CNinsure Holdings Ltd. is treated as a Hong Kong resident enterprise for taxation purpose. Under the EIT
Law and the Implementation Rules, if we are regarded as a resident enterprise, the dividends we receive
from our PRC subsidiaries will be exempt from the EIT. If, however, we are not regarded as a resident
enterprise, our PRC subsidiaries will be required to pay a 5% or 10% withholding tax, as the case may be,
for any dividends they pay to us. As a result, the amount of fund available to us to meet our cash
requirements, including the payment of dividends to our shareholders and ADS holders, could be materially
reduced.
We rely principally on dividends and other distributions on equity paid by our subsidiaries to fund any
cash and financing requirements we may have, and any limitation on the ability of our subsidiaries to
make payments to us could have a material adverse effect on our ability to conduct our business.
We are a holding company, and we rely principally on dividends from our subsidiaries in China for
our cash requirements, including any debt we may incur. Current PRC regulations permit our PRC
subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance
with PRC accounting standards and regulations. In addition, according to the PRC Company Law, each of
our PRC subsidiaries is required to set aside at least 10% of its after-tax profits each year as reported in its
PRC statutory financial statements, if any, to fund a statutory reserve until such reserve reaches 50% of its
registered capital. In addition, each of our PRC subsidiaries that are considered foreign-invested enterprises
is required to further set aside a portion of its after-tax profits as reported in its PRC statutory financial
statements to fund the employee welfare fund at the discretion of its board. These reserves are not
distributable as cash dividends. As of December 31, 2019, the total retained earnings of our PRC
subsidiaries available for dividend distributions were RMB1.3 billion (US$187.3 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.
-25-
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents
and employee stock options granted by overseas-listed companies may increase our administrative
burden, restrict our overseas and cross-border investment activity, or otherwise adversely affect us. If
our shareholders who are PRC residents, or our PRC employees who are granted or exercise stock
options, fail to make any required registrations or filings under such regulations, we may be unable to
distribute profits and may become subject to liability under PRC laws.
On October 21, 2005, the SAFE issued a Notice on Relevant Issues Concerning Foreign Exchange
Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special
Purpose Vehicles, generally known in China as SAFE Circular 75, requiring PRC residents to register with
the local SAFE branch before establishing or controlling any company outside of China, referred to in the
notice as an “offshore special purpose company,” for the purpose of raising capital backed by assets or
equities of PRC companies. PRC residents that are shareholders of offshore special purpose companies
established before November 1, 2005 were required to register with the local SAFE branch before March
31, 2006. On July 4, 2014, the SAFE issued the Notice on the Administration of Foreign Exchange Involved
in Overseas Investment, Financing and Return on Investment Conducted by PRC Residents via Special-
Purpose Companies, or SAFE Circular 37, simultaneously repealing SAFE Circular 75. SAFE Circular 37
also requires PRC residents to register with relevant Foreign Exchange Bureau for foreign exchange
registration of overseas investment before making contribution to a special purpose company, or SPC, with
legitimate holdings of domestic or overseas assets or interests. See “Item 4. Information on the Company
— B. Business Overview — Regulation — Regulations on Foreign Exchange — Foreign Exchange
Registration of Offshore Investment by PRC Residents.”
We have requested our beneficial owners who to our knowledge are PRC residents to make the
necessary applications, filings and amendments as required under SAFE Circular 37 and other related rules.
We attempt to comply, and attempt to ensure that our beneficial owners who are subject to these rules
comply with the relevant requirements. However, we cannot assure you that all of our beneficial owners
who are PRC residents will comply with our request to make or obtain any applicable registrations or
comply with other requirements under SAFE Circular 37 or other related rules. The failure of these
beneficial owners to timely amend their SAFE registrations pursuant to SAFE Circular 37 or the failure of
future beneficial owners of our company who are PRC residents to comply with the registration procedures
set forth in SAFE Circular 37 may subject such beneficial owners to fines and legal sanctions and may also
limit our ability to contribute capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to
distribute dividends to our company or otherwise adversely affect our business.
On December 25, 2006, the People’s Bank of China, or the PBOC, promulgated the Measures for the
Administration of Individual Foreign Exchange, and on January 5, 2007, the SAFE further promulgated
implementation rules for those measures. We refer to these regulations collectively as the Individual
Foreign Exchange Rules. The Individual Foreign Exchange Rules became effective on February 1, 2007.
According to these regulations, PRC citizens who are granted shares or share options by a company listed
on an overseas stock market according to its employee share option or share incentive plan are required,
through the PRC subsidiary of such overseas listed company or any other qualified PRC agent, to register
with the SAFE and to complete certain other procedures related to the share option or other share incentive
plan. Foreign exchange income received from the sale of shares or dividends distributed by the overseas
listed company may be remitted into a foreign currency account of such PRC citizen or be exchanged into
Renminbi. Our PRC citizen employees who have been granted share options became subject to the
Individual Foreign Exchange Rules upon the listing of our ADSs on the NASDAQ.
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
-26-
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.”
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.
Certain PRC regulations could also make it more difficult for us to pursue growth through acquisitions.
Among other things, the Mergers and Acquisitions of Domestic Enterprises by Foreign Investor, or
the M&A Rule, also established additional procedures and requirements that could make merger and
acquisition activities by foreign investors more time-consuming and complex, including requirements in
some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction
in which a foreign investor takes control of a PRC domestic enterprise. To date, we have conducted our
acquisitions in China exclusively through subsidiaries that used to be our PRC consolidated affiliated
entities. In the future, we may grow our business in part by directly acquiring complementary businesses.
Complying with the requirements of the new regulations to complete such transactions could be time
consuming, and any required approval processes, including obtaining approval from the Ministry of
-27-
Commerce, may prevent us from completing such transactions on a timely basis, or at all, which could
affect our ability to expand our business or maintain our market share.
Risks Related to Our ADSs
The trading price of our ADSs may be volatile.
The trading price of our ADSs may be volatile and could fluctuate widely due to factors beyond our
control. This may happen because of broad market and industry factors, like the performance and
fluctuation in the market prices or the underperformance or deteriorating financial results of other listed
companies based in China. The securities of some of these companies have experienced significant
volatility since their initial public offerings, including, in some cases, substantial price declines in the
trading prices of their securities. The trading performances of other Chinese companies’ securities after
their offerings, including internet and e-commerce companies, may affect the attitudes of investors toward
Chinese companies listed in the United States, which consequently may impact the trading performance of
our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions
about inadequate corporate governance practices or fraudulent accounting, corporate structure or matters
of other Chinese companies may also negatively affect the attitudes of investors towards Chinese
companies in general, including us, regardless of whether we have conducted any inappropriate activities.
In addition, securities markets may from time to time experience significant price and volume fluctuations
that are not related to our operating performance, which may have a material and adverse effect on the
trading price of our ADSs.
In addition to the above factors, the price and trading volume of our ADSs may be highly volatile due
to multiple factors, including the following:
changes in the economic performance or market valuations of other insurance intermediaries;
actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of
our expected results;
changes in financial estimates by securities research analysts;
conditions in the Chinese insurance industry;
announcements by us or our competitors of acquisitions, strategic relationships, joint ventures,
capital raisings or capital commitments;
additions to or departures of our senior management;
fluctuations of exchange rates between the RMB and the U.S. dollar or other foreign currencies;
potential litigation or administrative investigations;
sales or perceived potential sales of additional ordinary shares or ADSs; and
general economic or political conditions in China and abroad.
Any of these factors may result in large and sudden changes in the volume and trading price of our
ADSs. In addition, the stock market has from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular companies and industries.
The volatility resulting from any of the above factors may affect the price at which you could sell the
ADSs.
We may need additional capital, and the sale of additional ADSs or other equity securities could result
in additional dilution to our shareholders.
We believe that our current cash and cash equivalents and anticipated cash flow from operations will
be sufficient to meet our anticipated cash needs for the foreseeable future. We may, however, require
additional cash resources due to changed business conditions or other future developments, including any
-28-
investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash
requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of
additional equity securities could result in additional dilution to our shareholders. The incurrence of
indebtedness would result in increased debt service obligations and could result in operating and financing
covenants that would restrict our operations. We cannot assure you that financing will be available in
amounts or on terms acceptable to us, if at all.
Substantial future sales or perceived potential sales of our ordinary shares, ADSs or other equity
securities in the public market could cause the price of our ADSs to decline.
Additional sales of our ADSs in the public market, or the perception that these sales could occur, could
cause the market price of our ADSs to decline. If any existing shareholder or shareholders sell a substantial
amount of ordinary shares in the form of ADSs, the market price of our ADSs could decline. In addition,
we may issue additional ordinary shares as considerations for future acquisitions. If we do so, your
ownership interests in our company would be diluted and this in turn could have an adverse effect on the
price of our ADSs.
Our corporate actions are substantially controlled by our officers, directors and principal shareholders.
As of March 31, 2020, our executive officers and directors beneficially owned approximately 21.4%
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, 2020, 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 280,000,000
ordinary 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 of the Participant
if the Participant’s employment or agent contracts with the Company or its subsidiaries were terminated
within five years, or if the Participant failed to achieve at least 70% of 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.
Holders of our ADSs may have fewer rights than holders of our ordinary shares and must act through
the depositary to exercise those rights.
Holders of ADSs do not have the same rights as our registered shareholders. The holders of our ADSs
will not have any direct right to attend general meetings of our shareholders or to directly cast any votes at
such meetings. The holders of our ADSs will only be able to exercise the voting rights which are carried
by the underlying ordinary shares represented by their ADSs indirectly by giving voting instructions to the
depositary in accordance with the provisions of the deposit agreement (“unrestricted deposit agreement”),
and the deposit agreement for restricted securities (as defined below) (each also referred to as a “deposit
agreement”, and together the “deposit agreements”). Under the deposit agreements, the holders of our
ADSs may vote only by giving voting instructions to the depositary. Upon receipt of the voting instructions
from the holders of our ADSs, the depositary will vote the underlying ordinary shares represented by their
ADSs in accordance with these instructions. The holders of our ADSs will not be able to directly exercise
their right to vote with respect to the underlying ordinary shares unless they withdraw such shares and
-29-
become the registered holder of such shares prior to the record date for the general meeting. Under our
amended and restated memorandum and articles of association, the minimum notice period required to be
given by our company to our registered shareholders to convene a general meeting is fourteen calendar
days. When a general meeting is convened, the holders of our ADSs may not receive sufficient advance
notice of the meeting to permit the holders of our ADSs to withdraw the underlying ordinary shares
represented by their ADSs and become the registered holder of such shares to allow the holders of our
ADSs to attend the general meeting and to cast their vote directly with respect to any specific matter or
resolution to be considered and voted upon at the general meeting. Furthermore, under our amended and
restated memorandum and articles of association, for the purposes of determining those shareholders who
are entitled to attend and vote at any general meeting, our directors may close our register of members
and/or fix in advance a record date for such meeting, and such closure of our register of members or the
setting of such a record date may prevent the holders of our ADSs from withdrawing the underlying
ordinary shares represented by their ADSs and becoming the registered holder of such shares prior to the
record date, so that they would not be able to attend the general meeting or to vote directly. If we ask for
their instructions, the depositary will notify the holders of our ADSs of the upcoming vote and will arrange
to deliver our voting materials to them. We cannot assure the holders of our ADSs that they will receive
the voting materials in time to ensure that they can instruct the depositary to vote the ordinary shares
underlying their ADSs. In addition, the depositary and its agents are not responsible for failing to carry out
voting instructions or for their manner of carrying out the voting instructions of the holders of our ADSs.
This means that the holders of our ADSs may not be able to exercise their right to direct how the underlying
ordinary shares represented by their ADSs are voted and they may have no legal remedy if the underlying
ordinary shares represented by their ADSs are not voted as they requested. In addition, in their capacity as
an ADS holder, the holders of our ADSs will not be able to call a shareholders’ meeting. Furthermore, you
may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or
persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity
to exercise a right to vote.
Except as described in this annual report and in the deposit agreement, holders of our ADSs will not
be able to exercise voting rights attaching to the shares evidenced by our ADSs on an individual basis.
Holders of ADSs may instruct the depositary to exercise the voting rights attaching to the shares represented
by the ADSs. If no instructions are received by the depositary on or before a date established by the
depositary, the depositary shall deem the holders to have instructed it to give a discretionary proxy to a
person designated by us to exercise their voting rights. You may not receive voting materials in time to
instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers,
dealers or other third parties, will not have the opportunity to exercise a right to vote.
Right of holders of our ADSs to participate in any future rights offerings may be limited, which may
cause dilution to their holdings.
We may from time to time distribute rights to our shareholders, including rights to acquire our
securities. However, we cannot make rights available to holders of our ADSs in the United States unless
we register both the rights and the securities to which the rights relate under the Securities Act or an
exemption from the registration requirements is available. Under the deposit agreements, the depositary
will not make rights available to holders of our ADSs unless both the rights and the underlying securities
to be distributed to ADS holders are either registered under the Securities Act or exempt from registration
under the Securities Act. We are under no obligation to file a registration statement with respect to any
such rights or securities or to endeavor to cause such a registration statement to be declared effective and
we may not be able to establish a necessary exemption from registration under the Securities Act.
Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience
dilution in their holdings.
Holders of our restricted ADSs may be subject to limitations on transfer of their ADSs.
Restricted ADSs are transferable on the books of the depositary. However, the depositary may close
its transfer books at any time or from time to time when it deems expedient in connection with the
-30-
performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of
restricted ADSs generally when our books or the books of the depositary are closed, or at any time if we or
the depositary deems it advisable to do so because of any requirement of law or of any government or
governmental body, or under any provision of the deposit agreements, or for any other reason.
Certain judgments obtained against us by our shareholders may not be enforceable.
We are an exempted company incorporated under the laws of the Cayman Islands. We conduct our
operations outside the United States and substantially all of our assets are located outside the United States.
In addition, substantially all of our directors and officers are nationals or residents of jurisdictions other
than the United States and a substantial portion of their assets are located outside the United States. As a
result, it may be difficult or impossible for our shareholders to bring an action against us or against them
in the United States in the event that our shareholders believe that their rights have been infringed under
the U.S. federal securities laws or otherwise. Even if our shareholders are successful in bringing an action
of this kind, the laws of the Cayman Islands, the PRC or other relevant jurisdiction may render our
shareholders unable to enforce a judgment against our assets or the assets of our directors and officers.
Since we are a Cayman Islands company, the rights of our shareholders may be more limited than those
of shareholders of a company organized in the United States.
Under the laws of some jurisdictions in the United States, majority and controlling shareholders
generally have certain fiduciary responsibilities to the minority shareholders. Shareholder action must be
taken in good faith, and actions by controlling shareholders which are obviously unreasonable may be
declared null and void. Cayman Island law protecting the interests of minority shareholders may not be as
protective in all circumstances as the law protecting minority shareholders in some U.S. jurisdictions. In
addition, the circumstances in which a shareholder of a Cayman Islands company may sue the company
derivatively, and the procedures and defenses that may be available to the company, may result in the rights
of shareholders of a Cayman Islands company being more limited than those of shareholders of a company
organized in the United States.
Furthermore, our directors have the power to take certain actions without shareholder approval which
would require shareholder approval under the laws of most U.S. jurisdictions. The directors of a Cayman
Islands company, without shareholder approval, may implement a sale of any assets, property, part of the
business, or securities of the company. Our ability to create and issue new classes or series of shares without
shareholder approval could have the effect of delaying, deterring or preventing a change in control of our
Company without any further action by our shareholders, including a tender offer to purchase our ordinary
shares at a premium over prevailing market prices.
The audit reports included in this annual report have been prepared by our independent registered public
accounting firm whose work may not be inspected fully by the Public Company Accounting Oversight
Board and, as such, you may be deprived of the benefits of such inspection.
Our independent registered public accounting firm that issues the audit reports included in our annual
reports filed with the U.S. SEC, as auditors of companies that are traded publicly in the United States and
a firm registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, is
required by the laws of the United States to undergo regular inspections by the PCAOB to assess its
compliance with the laws of the United States and professional standards.
Because we have substantial operations within the PRC and the PCAOB is currently unable to
conduct inspections of the work of our independent registered public accounting firm as it relates to those
operations without the approval of the Chinese authorities, our independent registered public accounting
firm is not currently inspected fully by the PCAOB. This lack of PCAOB inspections in the PRC prevents
the PCAOB from regularly evaluating our independent registered public accounting firm’s audits and its
quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
-31-
On May 24, 2013, PCAOB announced that it had entered into a Memorandum of Understanding on
Enforcement Cooperation with the China Securities Regulatory Commission, or the CSRC, and the
Ministry of Finance which establishes a cooperative framework between the parties for the production and
exchange of audit documents relevant to investigations in the United States and China. On inspection, it
appears that the PCAOB continues to be in discussions with the Mainland China regulators to permit
inspections of audit firms that are registered with PCAOB in relation to the audit of Chinese companies
that trade on U.S. exchanges. On December 7, 2018, the SEC and the PCAOB issued a joint statement
highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement
audits of U.S.-listed companies with significant operations in China. The joint statement reflects a
heightened interest in this issue. 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 U.S.-listed companies,
is not or cannot be performed in a manner acceptable to authorities in China and the United States, we
could be unable to timely file future financial statements in compliance with the requirements of the
Exchange Act.
In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of
Practice and also under the Sarbanes-Oxley Act of 2002 against the mainland Chinese affiliates of the “Big
Four” accounting firms (including the mainland Chinese affiliate of our independent registered public
accounting firm). A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative
court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties
on the Chinese accounting firms including a temporary suspension of their right to practice before the SEC,
although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On
February 6, 2015, before a review by the Commissioner had taken place, the Chinese accounting firms
reached a settlement with the SEC whereby the proceedings were stayed. Under the settlement, the SEC
accepted that future requests by the SEC for the production of documents would normally be made to the
CSRC. The Chinese accounting firms would receive requests matching those under Section 106 of the
Sarbanes-Oxley Act of 2002, and would be required to abide by a detailed set of procedures with respect
to such requests, which in substance would require them to facilitate production via the CSRC. The CSRC
for its part initiated a procedure whereby, under its supervision and subject to its approval, requested classes
of documents held by the accounting firms could be sanitized of problematic and sensitive content so as to
render them capable of being made available by the CSRC to US regulators.
Under the terms of the settlement, the underlying proceeding against the four PRC-based accounting
firms was deemed dismissed with prejudice at the end of four years starting from the settlement date, which
was on February 6, 2019. Despite the final ending of the proceedings, the presumption is that all parties
will continue to apply the same procedures: i.e. the SEC will continue to make its requests for the
production of documents to the CSRC, and the CSRC will normally process those requests applying the
sanitization procedure. We cannot predict whether, in cases where the CSRC does not authorize production
of requested documents to the SEC, the SEC will further challenge the four PRC-based accounting firms’
compliance with U.S. law. If additional challenges are imposed on the Chinese affiliates of the “big four”
accounting firms, we could be unable to timely file future financial statements in compliance with the
requirements of the Exchange Act.
-32-
In the event that the SEC restarts the administrative proceedings, depending upon the final outcome
listed companies in the United States with major PRC operations may find it difficult or impossible to retain
auditors in respect of their operations in the PRC, which could result in financial statements being
determined to not be in compliance with the requirements of the Exchange Act, including possible delisting.
Moreover, any negative news about any such future proceedings against these accounting firms may cause
investor uncertainty regarding China-based, United States-listed companies and the market price of our
ADSs may be adversely affected.
As part of a continued regulatory focus in the United States on access to audit and other information
currently protected by foreign law, in particular China’s, in June 2019, a bipartisan group of lawmakers in
the United States introduced bills in both houses of Congress that would require the SEC to maintain a list
of issuers for which the PCAOB is not able to inspect or investigate an auditor report issued by a foreign
public accounting firm. The Ensuring Quality Information and Transparency for Abroad-Based Listings on
our Exchanges (EQUITABLE) Act prescribes increased disclosure requirements for such issuers and,
beginning in 2025, the delisting from national securities exchanges such as Nasdaq of issuers included for
three consecutive years on the SEC’s list. Enactment of this legislation or other efforts to increase U.S.
regulatory access to audit information could cause investors uncertainty for affected issuers, including us,
and the market price of our ADSs could be adversely affected. It is unclear if this proposed legislation will
be enacted.
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 discourage a third party from
acquiring us, which could limit our shareholders’ opportunity to sell their shares, including ordinary
shares represented by our ADSs, at a premium.
Our amended and restated memorandum and articles of association contain provisions which have the
potential to limit the ability of others to acquire control of our company or cause us to engage in change-
of-control transactions. These provisions have the effect of depriving our shareholders of an opportunity to
sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to
obtain control of our company in a tender offer or similar transaction. For example, our board of directors
has the authority, without further action by our shareholders, to issue preferred shares in one or more series
and to fix their designations, powers, preferences, privileges and other rights, including dividend rights,
conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may
be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise, at such time
and on such terms as they may think appropriate. In the event these preferred shares have better voting
rights than our ordinary shares, in the form of ADSs or otherwise, they could be issued quickly with terms
calculated to delay or prevent a change in control of our company or make removal of management more
difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the
voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely
affected.
You may have to rely primarily on price appreciation of our ADSs for any return on your investment.
Our board of directors has discretion as to whether to distribute dividends, subject to applicable laws.
Although our board of directors has announced a policy to declare and pay dividends on a quarterly basis,
the amount and form of future dividends will depend on, among other things, our future results of operations
and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from
our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our
-33-
board of directors. Accordingly, the return on your investment in our ADSs will likely depend primarily
upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in
value or even maintain the price at which you purchased the ADSs. You may not realize a return on your
investment in our ADSs and you may even lose your entire investment in our ADSs.
As a foreign private issuer, we are exempt from certain disclosure requirements under the Exchange
Act, which may afford less protection to our shareholders than they would enjoy if we were a domestic
U.S. company.
As a foreign private issuer, we are exempt from, among other things, the rules prescribing the
furnishing and content of proxy statements under the Exchange Act. In addition, our executive officers,
directors and principal shareholders are exempt from the reporting and short-swing profit and recovery
provisions contained in Section 16 of the Exchange Act. We are also not required under the Exchange Act
to file periodic reports and financial statements with the SEC as frequently or as promptly as domestic U.S.
companies with securities registered under the Exchange Act. As a result, our shareholders may be afforded
less protection than they would under the Exchange Act rules applicable to domestic U.S. companies.
You may face difficulties in protecting your interests, and your ability to protect your rights through the
U.S. federal courts may be limited, because we are incorporated under Cayman Islands law, conduct
substantially all of our operations in China and the majority of our officers reside outside the United
States
We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China
through our subsidiaries in China. Most of our officers reside outside the United States and some or all of
the assets of those persons are located outside of the United States. The legal system in Cayman, the PRC
or other relevant jurisdictions may not afford our shareholders the same level of protection as the legal
system in the United States would. For instance, the Securities Laws of the PRC regulates only security
issuances and trading outside of the PRC to the extent that such issuance and trading disrupts domestic
markets and negatively affects the interest of domestic investors in the PRC. As such, investors in the
United States may not be able to file a lawsuit under the Securities Law in the PRC. Even if you are
successful in bringing an action in the PRC, shareholder claims that are common in the United States,
including class action suits securities law and fraud claims, may be difficult or impossible to pursue as a
matter of law or practicality in the PRC. As a result, it may be difficult or impossible for you to bring an
action against us or against these individuals in the Cayman Islands or in China in the event that you believe
that your rights have been infringed under the securities laws or otherwise. Even if you are successful in
bringing an action of this kind outside the Cayman Islands or China, the laws of the Cayman Islands and of
China may render you unable to effect service of process upon, or to enforce a judgment against our assets
or the assets of our directors and officers.
The SEC, U.S. Department of Justice, or the DOJ, and other relevant regulatory authorities in the
United States play vital roles in enforcing laws and regulations that protect securities investors. These U.S.
authorities may face significant legal and other obstacles to obtaining information needed for investigations
or litigation. Further, these U.S. authorities may have substantial difficulties in bringing and enforcing
actions against non-U.S. companies and non-U.S. persons, including company directors and officers, which
will further limit protections available to our shareholders. According to the Securities Laws of the PRC,
without the approval of securities regulator and other actors within the Chinese government, no entity or
individual in China may provide documents and information relating to securities business activities to
overseas regulators. In addition, local authorities in Cayman, the PRC or other relevant jurisdicitions often
are constrained in their ability to assist U.S. authorities and overseas investors more generally. There are
also legal or other obstacles to seeking access to funds in a foreign country.
There is no statutory enforcement in the Cayman Islands of judgments obtained in the United States,
although a judgment obtained in the federal or state courts of the United States courts will be recognized
and enforced in the courts of the Cayman Islands at common law, without any re-examination of the
merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court
-34-
of the Cayman Islands, provided such judgment: (a) is given by a foreign court of competent jurisdiction,
(b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been
given, (c) is final, (d) is not in respect of taxes, a fine, or a penalty, and (d) was not obtained in a manner
and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the
Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from
the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is
determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal
or punitive in nature. A Cayman Islands court may stay enforcement proceedings if concurrent proceedings
are being brought elsewhere. A judgment of a court of another jurisdiction may be reciprocally recognized
or enforced if the jurisdiction has a treaty with China or if judgments of the PRC courts have been
recognized before in that jurisdiction, subject to the satisfaction of other requirements. However, China
does not have treaties providing for the reciprocal enforcement of judgments of courts with Japan, the
United Kingdom, the United States and most other Western countries.
Our corporate affairs are governed by our amended and restated memorandum and articles of
association and by the Companies Law (2020 Revision) (the “Company Law”) and the common law of the
Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by
minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are
to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman
Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as
from English common law, which has persuasive, but not binding, authority on a court in the Cayman
Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman
Islands law are not as clearly established as they would be under statutes or judicial precedents in the United
States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the
United States, and provides significantly less protection to investors. In addition, Cayman Islands
companies may not have standing to initiate a shareholder derivative action before the federal courts of the
United States.
As a result of all of the above, our investors may have more difficulty in protecting their interests
through actions against our management, directors or major shareholders than would shareholders of a
corporation incorporated in a jurisdiction in the United States.
We may be a passive foreign investment company for United States federal income tax purposes, which
could result in adverse United States federal income tax consequences to United States Holders of our
ADSs or ordinary shares.
We will be a passive foreign investment company, or PFIC. for United States federal income tax
purposes for any taxable year if, applying applicable look-through rules, either (1) at least 75% of our gross
income for such year is passive income or (2) at least 50% of the value of our assets (generally determined
based on an average of the quarterly values of the assets) during such year is attributable to assets that
produce passive income or are held for the production of passive income. We must make a separate
determination after the close of each taxable year as to whether we were a PFIC for that year. Based on the
market price of our ADSs, the value of our assets, and the composition of our income and assets, we do not
believe that we were a PFIC for United States federal income tax purposes for our taxable year ended
December 31, 2019. However, we believe we were a PFIC for 2017 and prior years. In addition, we believe
that it is likely that one or more of our subsidiaries were also PFICs for such prior years. Because the value
of our assets for purposes of the PFIC test will generally be determined by reference to the market price of
our ADSs or ordinary shares, our PFIC status will depend in large part on the market price of the ADSs or
ordinary shares, which may fluctuate significantly. If our market capitalization declines, we may be or
become a PFIC because our liquid assets and cash (which are for this purpose considered assets that produce
passive income) may then represent a greater percentage of our overall assets. In addition, the application
of the PFIC rules is subject to uncertainty in several respects, and we cannot assure you that the United
States Internal Revenue Service, or the IRS, will agree with any positions that we ultimately take.
Accordingly, we cannot assure you that we will not be treated as a PFIC for any taxable year or that the
IRS will not take a contrary position to any determination we make.
-35-
If we are a PFIC for any taxable year (as we believe we were for 2017 and prior years) during which
a United States Holder (as defined in “Item 10. Additional Information — E. Taxation — United States
Federal Income Taxation”) holds our ADSs or ordinary shares, certain adverse United States federal income
tax consequences could apply to such United States Holder. See “Item 10. Additional Information — E.
Taxation — United States Federal Income Taxation — Passive Foreign Investment Company.”
-36-
Item 4. Information on the Company
A. History and Development of the Company
History of Our Corporate Structure
We started our operation in 1999 through Guangzhou Nanyun Car Rental Services Co., Ltd. and
Guangdong Nanfeng Automobile Association Co., Ltd. In 2001, we formed China United Financial
Services Holdings Limited, or China United Financial Services, a British Virgin Islands company, as the
offshore holding company of our PRC subsidiaries. In June 2004, CISG Holdings Ltd., or CISG Holdings
was incorporated in British Virgin Islands. CISG Holdings became our holding company through share
exchanges with China United Financial Services.
In anticipation of our initial public offering, we incorporated CNinsure Inc. in the Cayman Islands in
April 2007. After a series of restructuring transactions, CNinsure Inc. became the ultimate holding company
of our group.
On October 31, 2007, we listed our ADSs on the Nasdaq Global Market under the symbol “CISG.”
We and certain selling shareholders of our company, completed the initial public offering of 13,526,773
ADSs, each representing 20 ordinary shares, on November 5, 2007.
In October 2012, we obtained license approval from the then CIRC to establish an insurance sales
service group company and renamed Shenzhen Nanfeng Investment, our wholly-owned subsidiary in the
PRC, as “Fanhua Insurance Sales Service Group Company Limited”, or Fanhua Group Company, to serve
as the onshore holding company of our PRC operating entities.
On December 6, 2016, our shareholders approved the change of our company name from CNinsure
Inc. to Fanhua Inc. Our ticker symbol was changed to “FANH” subsequently.
History of Our Business Operation
We began our insurance intermediary business in 1999 by distributing auto insurance products and
auto loans on an ancillary basis and expanded our product offerings to other property and casualty insurance
products in 2002. We commenced life insurance products distribution by acquiring three life insurance
agencies in 2006 and began to offer claims adjusting services by acquiring four claims adjusting firms in
2008. In June 2010, we established an insurance brokerage business unit to expand our product offerings
from retail to commercial lines.
We have grown both organically and through acquisitions. Since 2002, we expanded our operations
nationwide by establishing 21 insurance agencies and two insurance brokerage firms and acquiring majority
interests in 21 insurance agencies and five claims adjusting firms.
In October 2017, 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 started 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 online
claims services resource aggregating platform, was launched in 2014.
-37-
We have also made investments in complementary business areas, such as consumer finance and
wealth management since 2009. We currently own an 18.5% equity interest in CNFinance (NYSE: CNF),
a leading home equity loan service provider in China, and a 4.5% equity interest in Puyi Inc. (NASDAQ:
PUYI), a leading third-party wealth management service provider in China which beneficially owns 100%
in Fanhua Puyi Fund Distribution Co., Ltd., or Fanhua Puyi.
Our principal executive offices are located at 27/F, Pearl River Tower, No. 15 West Zhujiang Road,
Guangzhou, Guangdong 510623, People’s Republic of China. Our telephone number at this address is +86-
20-8388-6888. Our registered office is at the offices of Maples Corporate Services Limited, PO Box 309,
Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United
States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.
Capital Expenditure
Our capital expenditures have been used primarily to construct, upgrade and maintain our online
platforms. See “Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital
Resources.”
B. Business Overview
Overview
Driven by our cutting-edge technologies and insurance industry expertise, we are the leading
independent insurance intermediary group in China. We connect millions of individual customers to our
103 insurance company partners as of March 31, 2020. As an independent insurance agency, we possess
unique advantages over the exclusive distribution channels of insurance companies. We offer not only a
broad range of insurance products underwritten by multiple insurance companies to address the needs of
increasingly sophisticated customers with diverse needs and preferences but also quality services backed
by our nationwide network.
We focus on offering long-term life and health insurance products including critical illness,
endowment life, annuity, whole life and term life insurance and distribute property and casualty insurance
products including auto insurance, individual accident insurance, homeowner insurance, liability insurance
and travel insurance. We also provide insurance claims adjusting services such as damage assessment and
loss estimations.
With strategic focus on long-term life and health insurance products and services, we were one of
the first independent insurance agencies to enter China’s life insurance agency market. We began
distributing long-term life and health insurance products in 2006 and have become an industry leader after
accumulating valuable industry experience for over 10 years.
We have adopted an integrated offline-to-online (“O2O”) operating model. We use our technology
platforms to boost efficiency and improve user experience, and rely on our extensive offline distribution
and service network to facilitate sales of complex insurance products and offer reliable after-sales services.
We began building online platforms to sell insurance products as early as 2010 and pioneered the
adoption of digital technologies in China’s insurance agency industry. To meet demand for different
insurance products and services, we have established industry-leading online platforms including Lan
Zhanggui, CNpad Auto, Baowang (www.baoxian.com), eHuzhu (www.ehuzhu.com) and Chetong.net. Our
technology platforms enable intelligent deal management and streamline and expedite transaction
processes, while our offline distribution and service network provides an effective channel for us to engage
with and serve our clients. This O2O model significantly enhances our operational efficiency and scalability.
We have an extensive independent insurance product distribution network and comprehensive
insurance service network in China. With 670,104 sales agents, 758 sales outlets which include our
-38-
branches and sub-branches in 22 provinces as of December 31, 2019, our distribution network was the
largest among independent insurance agencies in China. With 1,627 claims adjusters in 159 service outlets
as of December 31, 2019, our claims adjustment service network covered 31 provinces in China. Our
extensive distribution and service network and sizable sales and service work force allow us to engage and
serve customers nationwide and serve as a substantial entry barrier to China’s insurance agency industry.
We operate in a fast-growing industry with abundant opportunities. The separation of insurance
underwriting and distribution is a significant trend in China’s insurance industry. Historically dominated
by in-house sales forces and exclusive agents, insurance distribution channels in China have gradually
shifted towards independent insurance agencies, as demand for insurance products and services has
diversified in recent years. With strong brand recognition, established relationships with major insurance
companies, an extensive distribution and sales network and cutting-edge technology, we intend to take
advantage of the opportunities resulting from the growth and transformation of the insurance agency
industry in China to increase our market share by aggressively expanding our sales force and offline
distribution and service network, broadening our product portfolio and developing our online platforms.
Our Platforms
Technological developments and the growth of mobile internet access have significantly changed the
way we operate our business. We operate several online platforms, which we define as websites and
Internet-enabled applications that aggregate insurance product offerings from various insurance companies:
Lan Zhanggui - an internet-based all-in-one platform which integrates our existing online platforms
and allows our agents to access and purchase a wide variety of insurance products, including long
term life and health insurance, auto insurance, accident insurance, travel insurance, and standard
medical insurance products from multiple insurance companies, through one integrated account on
their mobile devices. The platform is available in mobile application and WeChat official account
versions. As of March 31, 2020, Lan Zhanggui had approximately 1.2 million registered users.
CNpad Auto – an internet-based auto insurance portal 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 632,566 activated accounts as of March 31, 2020.
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, 2020,
Baowang had over 2.8 million registered members.
eHuzhu (www.ehuzhu.com) - an online non-profit mutual aid platform that provides low-cost
alternative risk-protection programs on a mutual aid basis among program members. eHuzhu
primarily offers programs that provide mutual aid for cancer in three different age groups and
accidental death. The platform is accessible primarily through its WeChat official account. When
a member signs up for a program offered by eHuzhu, he or she agrees to evenly contribute to and
is entitled to receive payout from other program members in case of any claims covered under such
program. The amount of fund that each member can claim is up to RMB500,000, with the
maximum contribution from each member limited to RMB3 for each valid claim. As of March 31,
2020, eHuzhu had attracted approximately 3.4 million paying members.
As of March 31, 2020, we, through Fanhua Group Company, operated one e-commerce insurance
platform and one online mutual aid platform, and controlled twelve insurance intermediary companies in
the PRC, of which nine were insurance agencies including two with national operating licenses and three
were insurance claims adjusting firms. As of March 31, 2020, we also owned (i) 18.5% of the equity
interests in CNFinance Holdings Ltd. (NYSE:CNF), a leading home equity loan service provider, (ii) 4.5%
-39-
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.
Recent Development
On April 3, 2020, we entered into a framework strategic partnership agreement, or the Agreement,
with Fanhua Puyi. Pursuant to the Agreement, both parties, on the basis of full compliance with relevant
regulatory and legal requirements , will share customer and channel resources and explore collaboration
opportunities on the provision of value-added asset management services to Chinese households, by
leveraging both parties’ respective strength in insurance and financial services.
Segment Information
As of December 31, 2019, 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 90.6% and 90.0% of our net revenues from continuing
operations in 2018 and 2019, respectively. Revenue from this segment is derived from two broad categories
of insurance products: (i) property and casualty insurance products, and (ii) life and health insurance
products, both primarily focused on meeting the insurance needs of individuals.
Life and health Insurance Products
Our life and health insurance business accounted for 86.2% of our net revenues from continuing
operations in 2019. We expect the sale of life insurance products to be the major source of our revenue in
the next several years. The life and health insurance products we distribute can be broadly classified into
the categories set forth below. Due to constant product innovation by insurance companies, some of the
insurance products we distribute combine features of one or more of the categories listed below:
Individual Health Insurance. The individual health insurance products we distribute primarily
consist of critical illness insurance products, which provide guaranteed benefits when the insured
is diagnosed with specified serious illnesses, and medical insurance products, which provide
conditional reimbursement for medical expenses during the coverage period. In return, the
insured makes periodic payment of premiums over a pre-determined period.
Individual Annuity. The individual annuity products we distribute generally provide annual
benefit payments after the insured attains a certain age, or for a fixed time period, and provide a
lump sum payment at the end of the coverage period. In addition, the beneficiary designated in
the annuity contract will receive guaranteed benefits upon the death of the insured during the
coverage period. In return, the purchaser of the annuity products makes periodic payments of
premiums during a pre-determined accumulation period.
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.
-40-
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.
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.
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 2019 were primarily underwritten by Huaxia, Aeon,
Sinatay, Tian'an and Evergrande.
Property and Casualty Insurance Products
Our property and casualty insurance business accounted for 3.8% of our net revenues from continuing
operations in 2019, primarily representing insurance products we distributed through Baowang, and CNpad
Auto to a lesser degree. Our main property and casualty insurance product in terms of net revenues
contribution in 2019 is individual accident insurance which we distribute through Baowang. In addition,
we also offer travel insurance, homeowner insurance and other property and casualty products on Baowang
and facilitate the sale of individual auto insurance through CNpad Auto. The major property and casualty
insurance products we offer or facilitate to individual customers can be further classified into the following
categories:
Individual Accident Insurance. The individual accident insurance products we distribute
generally provide a guaranteed benefit during the coverage period, which is usually one year or
a shorter period, in the event of death or disability of the insured as a result of an accident, or a
reimbursement of medical expenses to the insured in connection with an accident. These products
typically require only a single premium payment for each coverage period. Because most of the
individual accident insurance products we distribute are underwritten by property and casualty
insurance companies, we classify individual accident insurance products as property and casualty
insurance products.
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.
Homeowner Insurance. The homeowner insurance products we distribute primarily cover
damages to the insured house, along with furniture and household electrical appliance in the house
caused by a number of incidents such as fire, flood and explosion.
Short term health insurance. The short term health insurance products we facilitate typically have
a one-year term and provide conditional reimbursement for medical and surgical expenses
incurred for treating illnesses during the coverage period. These products typically require only
a single premium payment for each coverage period. Because most of these short-term health
-41-
insurance products we distribute are underwritten by property and casualty insurance companies,
we classify short-term health products as property and casualty insurance products.
Auto Insurance. We facilitate both standard auto insurance policies and supplemental policies,
which we refer to as riders. The standard auto insurance policies we facilitate 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 facilitate
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 facilitate cover additional losses, such as liability to passengers, losses arising from
vehicle theft and robbery, broken glass and vehicle body scratches.
We primarily partnered with Alliance Property and Casualty Insurance Company Limited, Ping An
Property and Casualty Insurance Company Limited, or Ping An, Taikang Online Property and Casualty
Insurance Company Limited, Zhong An Online Property and Casualty Insurance Company Limited, and
Asia Pacific Property and Casualty Insurance Co., Ltd., or Asia Pacific P&C for the distribution of property
and casualty insurance products in 2019.
Claims Adjusting Segment
Total net revenues derived from our claims adjusting segment accounted for 9.4% and 10.0% of our
total net revenues in 2018 and 2019, 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, China Life Property and Casualty Insurance Company Limited, Dinghe
Property and Casualty Insurance Company Limited and Asia Pacific P&C in 2019.
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
-42-
focus on the core aspects of their business, including product development and asset and risk management.
We believe we are well-positioned to capture such outsourcing opportunities.
Seasonality
See “Item 5. Operating and Financial Review and Prospects — A. Operating Results — Factors
Affecting Our Results of Operations — Seasonality.”
Distribution and Service Network and Marketing
We have an offline distribution and service network that, as of March 31, 2020, consisted of one
insurance sales and service group, nines insurance agencies including two with national operating licenses,
and three claims adjusting firms, with 922 sales and service branches and outlets, 650,065 registered
independent sales agents and 1,668 in-house claims adjustors. Our distribution and service network
consisted of 763 sales outlets in 22 provinces and 159 claims services outlets in 31 provinces.
The following table sets forth additional information concerning our distribution and service network
as of March 31, 2020, broken down by provinces:
-43-
Province
Shandong ........................
Guangdong ......................
Hebei ..............................
Anhui ..............................
Sichuan ...........................
Jiangsu ............................
Guangxi ..........................
Zhejiang ..........................
Hunan .............................
Henan .............................
Inner Mongolia ...............
Liaoning .........................
Yunnan ...........................
Fujian ..............................
Shaanxi ...........................
Chongqing .....................
Shanxi .............................
Tianjin ............................
Jiangxi ............................
Hubei ..............................
Beijing ............................
Shanghai .........................
Guizhou ..........................
Ningxia ...........................
Jilin .................................
Qinghai ...........................
Hainan ............................
Gansu ..............................
Xinjiang ..........................
Tibet ...............................
Heilongjiang ...................
Total .............................
Number of Sales
and Service Outlets
187
75
84
49
95
50
23
61
70
14
17
25
20
37
16
17
10
11
7
16
7
9
4
2
2
2
4
2
1
2
3
922
Number of Sales
Agents
168,930
78,136
69,873
41,660
35,402
32,658
31,150
28,831
24,971
20,537
18,993
16,535
15,872
15,286
11,943
9,586
9,223
7,721
5,823
5,435
1,500
—
—
—
—
—
—
—
—
—
—
650,065
Number of In-
house Adjustors
179
216
31
22
63
160
26
176
34
45
8
69
17
22
59
21
17
20
48
93
135
106
27
20
22
3
9
6
7
1
6
1,668
-44-
We market and sell long-term personal lines of life and health insurance products and property and
casualty insurance products to customers through mainly independent sales agents, who are not our
employees. We also market and sell accident, short-term health, travel and homeowner insurance products
directly to customers through our online platform Baowang (www.baoxian.com). We market and sell
insurance claims adjusting services primarily to insurance companies through our in-house professional
claims adjustors and to non-affiliated service representatives through Chetong.net, an online service
platform, by bidding for claims adjusting business contracts.
Customers
We sell life and health insurance products including critical illness, endowment insurance, annuity
insurance, whole life insurance and term life insurance primarily to individual customers as well as 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,
2019, no single individual customer who has purchased insurance products through us accounted for more
than 1% of our net revenues. Our customers for the claims adjusting services are primarily insurance
companies and online mutual-aid platforms.
As of December 31, 2019, we had accumulated approximately 11 million individual customers, of
which 1.1 million have purchased at least one regular long term life and health insurance policy. By
providing certain value-added services to these customers at no additional charge, we seek to build a loyal
customer base that generates referrals and cross-selling opportunities.
Insurance Company Partners
As of March 31, 2020, we had established business relationships with 103 insurance companies in the
PRC. In the Chinese insurance market, local branches of insurance companies generally have the authority
to enter into contracts in their own names with insurance intermediaries. Since 2007, we have sought to
establish business relationships with insurance companies at the corporate headquarters level in order to
leverage the combined sales volumes of all our subsidiaries located in different parts of China. For the
distribution of insurance products, we had outstanding contracts with 35 life insurance companies, four
health insurance companies and 19 property and casualty insurance companies, which were all signed at
the corporate headquarter level as of March 31, 2020. For the provision of claims adjusting services, we
also had outstanding contracts with 58 insurance companies, and 5 insurance brokerage firms and 10 other
institutions as of March 31, 2020.
Insurance Aggregator Site Partners
In October 2017, we shifted to a platform business model for our auto insurance business. Under the
new business model, we no longer enter into contracts with property and casualty insurance companies for
the distribution of auto insurance products through our individual sales agents to earn profits from the
commission spread. Rather, we operate CNpad Auto as an auto insurance transaction portal which connects
insurance distributors with our sales agents and received technology service fees from distributors which
provide auto insurance products on CNpad Auto based on the volume of insurance premiums they transact
through CNpad Auto. A technology service fee is typically much smaller than the commission we
previously received from insurance companies, though our costs are generally minimal. From 2018, we
started partnering with third party online auto insurance platforms, for the facilitation of auto insurance
products, by introducing agent traffic to these platforms. In 2019, net revenues derived from our
cooperation with these platforms accounting less than 1% of our total property and casualty insurance net
revenues. We stopped charging this technology service fee starting from the fourth quarter of 2019.
-45-
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 insurance.
We believe that we can compete effectively with insurance companies because we focus only on
distribution and offer our customers a broad range of insurance products underwritten by multiple
insurance companies.
Entities that offer insurance products online. In recent years, domestic insurance companies,
Internet companies and professional insurance intermediaries have begun to engage in the
Internet insurance business. However, each of their insurance e-commerce operations has its own
limitations. The insurance products offered on an insurance company’s website are usually
confined to those under its own brand. Most Internet companies have limited experience in
insurance operation with limited or no offline sales and service support. Our better brand
recognition, larger sales scale and broader sales and service network also differentiate us from
other professional insurance intermediaries. We believe that we can compete effectively with
these business entities because our online insurance platforms offer users access to a broad range
of insurance products underwritten by multiple insurance companies’ good after-sale services that
are backed by our nation-wide service network and better user experience.
Other business entities. In recent years, business entities that distribute insurance products as an
ancillary business, primarily commercial banks and postal offices, have been playing an
increasingly important role in the distribution of insurance products, especially life insurance
products. However, the insurance products distributed by these entities are mostly confined to
those related to their main lines of business, such as investment-related life insurance products.
We believe that we can compete effectively with these business entities because we offer our
customers a broader variety of products.
We compete primarily with the other major claims adjusting firms in China, particularly Min Tai’an
Insurance Surveyors & Loss Adjusters Co., Ltd., or Min Tai’an. We believe that we can compete effectively
with Min Tai’an and other major insurance claims adjusting firms because we offer our customers a
diversified range of claims adjusting services covering property insurance, auto insurance marine and cargo
insurance, and personal injury and accident and are able to leverage the business relationships we have
developed with insurance companies through the distribution of property and casualty insurance products.
-46-
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, 2020, we had 33 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.
-47-
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
-48-
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;
-49-
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
-50-
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.
-51-
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
-52-
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.
-53-
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:
-54-
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;
-55-
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 CBIRC. 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.
-56-
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
-57-
by SAFE in March, 2015. The Circular 19 is designed with the view to further deepening the reform of the
foreign exchange administration system, and better satisfying and facilitating the needs of foreign-invested
enterprises for business and fund operations. It states the management of the payment of the amount of
foreign exchanges settled shall be further standardized, and also the penalties of the foreign-invested
enterprises and banks that violates this notice in handling the settlement, use and other business of the
foreign exchange capitals of foreign-invested enterprises. The irregularities shall be investigated and
punished by foreign exchange bureaus pursuant to the Regulations of the People's Republic of China on
Foreign Exchange Administration and other relevant provisions.
SAFE Regulations on Employee Share Options
On December 25, 2006, the PBOC promulgated the “Measures for the Administration of Individual
Foreign Exchange,” and on January 5, 2007, the SAFE further promulgated the implementation rules on
those measures. Both became effective on February 1, 2007. According to the implementation rules, PRC
citizens who are granted shares or share options by a company listed on an overseas stock market according
to its employee share option or share incentive plan are required, through the PRC subsidiary of such
overseas listed company or any other qualified PRC agent, to register with the SAFE and to complete
certain other procedures related to the share option or other share incentive plan. Foreign exchange income
received from the sale of shares or dividends distributed by the overseas listed company may be remitted
into a foreign currency account of such PRC citizen or be exchanged into Renminbi. Our PRC citizen
employees who have been granted share options are subject to the Individual Foreign Exchange Rules.
On March 28, 2007, SAFE promulgated the Operating Rules for Administration of Foreign Exchange
in Domestic Individuals’ Participation in Employee Stock Ownership Plans and Stock Option plans of
Companies Listed Abroad, or the Operating Rules, or the Operating Rules. Stock Option Rule. On February
15, 2012, SAFE promulgated the No. 7 Notice, which supersedes the Stock Option Rule in its entirety and
immediately became effective upon circulation. According to the No. 7 Notice, domestic individuals, which
include any directors, supervisors, senior managerial personnel or other employees of a domestic company
who are Chinese citizens (including citizens of Hong Kong, Macao and Taiwan) or foreign individuals who
consecutively reside in the territory of PRC for one year, who participate in the same equity incentive plan
of an overseas listed company shall, through the domestic companies they serve, collectively entrust a
domestic agency to handle issues such as foreign exchange registration, account opening, funds transfer
and remittance, and entrust an overseas institution to handle issues such as exercise of options, purchasing
and sale of related stocks or equity, and funds transfer. Where a domestic agency needs to remit funds out
of China as required for individuals’ participation in an equity incentive plan, the domestic agency shall
apply with the local office of the SAFE for a foreign exchange payment quota on a yearly basis. A domestic
agency shall open a domestic special foreign exchange account in the bank. After repatriation of foreign
currency income earned by individuals from participation in an equity incentive plan, the domestic agency
shall request the bank to transfer the funds from its special foreign currency account to respective personal
foreign currency deposit accounts. In the case of any significant change to the equity incentive plan of a
company listed abroad (such as amendment to any major terms of the original plan, addition of a new plan,
or other changes to the original plan due to merger, acquisition or reorganization of the overseas listed
company or the domestic company or other major events), the domestic agency or the overseas trustee, the
domestic agency shall, within three months of the occurrence of such changes, go through procedures for
change of foreign exchange registration with the local office of the SAFE. The SAFE and its branches shall
supervise, administer and inspect foreign exchange operations related to individuals’ participation in equity
incentive plans of companies listed abroad, and may take regulatory measures and impose administrative
sanctions on individuals, domestic companies, domestic agencies and banks violating the provisions of the
No. 7 Notice.
We and our employees who have been granted applicable equity awards shall be subject to the No. 7
Notice. If we fail to comply with the No. 7 Notice, we and/or our employees who are subject to the No. 7
Notice may face sanctions imposed by foreign exchange authority or any other PRC government authorities.
-58-
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.
-59-
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.”
-60-
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.
-61-
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, 2020, we, through Fanhua Group Company, have a controlling equity ownership in two
insurance sales services companies with national operating licenses, 7 regional insurance agencies, and
three insurance claims adjusting firms. We also own 18.5%% equity interest of CNFinance, 4.5% equity
interest of Puyi Inc. and 14.9% equity interest of one online claim adjusting service company.
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.
The following diagram illustrates our corporate structure, including our principal subsidiaries, as of
March 31, 2020:
-62-
-63-
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, 2020, 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, Plants and Equipment
Our headquarters are located in Guangzhou, China, where we leased approximately 2,599 square
meters of office space as of December 31, 2019. Office space leased by our subsidiaries and consolidated
affiliated entities, including certain space used and paid by sales teams, was approximately 190,301 square
meters as of December 31, 2019. In 2019, our total rental expenses were RMB92.6 million (US$13.3
million).
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
The following discussion and analysis of our financial condition and results of operations should be
read in conjunction with our consolidated financial statements and the related notes included in this annual
report. This discussion and analysis contains forward-looking statements based upon current expectations
that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set forth under “Item 3. Key
Information — D. Risk Factors” or in other parts of this annual report. For discussion of 2017 items and
year-over-year comparisons between 2018 and 2017 that are not included in this annual report on Form 20-
F, refer to “Item 5. – Operating and Financial Review and Prospects” found in our Form 20-F for the year
ended December 31, 2018, that was filed with the Securities and Exchange Commission on April 30, 2019.
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;
-64-
the extent to which insurance companies in the PRC outsource the distribution of their products
and claims adjusting functions;
premium rate levels and commission and fee rates;
the size and productivity of our sales force;
commission rates for individual sales agents;
product and service mix;
share-based compensation expenses; 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, Aeon, Sinatay and Tian'an accounted for more than 10%
of our total net revenues from continuing operations individually in 2019, with Huaxia accounting for
23.8%, Aeon accounting for 18.3%, Sinatay accounting for 16.1% and Tian'an accounting for 12.1%. As a
result, any significant changes to our business relationship with the important insurance company partners
could have a material impact on our revenue and profit.
Total Premium Payments to Chinese Insurance Companies
The Chinese insurance industry has grown substantially in the past decade. Between 2009 and 2019,
total insurance premiums increased from RMB1.1 trillion to RMB4.3 trillion, representing a compound
annual growth rate, or CAGR, of 14.6%, according to the CBIRC. 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
-65-
intermediaries can have a positive impact on our financial condition and results of operations. Similarly, as
competition intensifies and the insurance market becomes more mature in China, we expect that more
insurance companies will choose to outsource claims adjusting functions to professional service providers
such as our affiliated claims adjusting firms while they focus on the core aspects of their business, including
product development and asset and risk management.
Premium Rate Levels and Commission and Fee Rates
Because the commissions and fees we receive from insurance companies for the distribution of
insurance products or from third-party internet companies for using our auto insurance transaction system
are generally calculated as a percentage of premiums paid by our customers to the insurance companies,
our revenue and results of operations are affected by premium rate levels and commission and fee rates.
Premium rate levels and commission and fee rates can change based on the prevailing economic conditions,
competitive and regulatory landscape, and other factors that affect insurance companies and third-party
internet companies. These other factors include the ability of insurance companies to place new business,
underwriting and non-underwriting profits of insurance companies, consumer demand for insurance
products, the availability of comparable products from other insurance companies at a lower cost, and the
tax deductibility of commissions and fees. In general, we can negotiate for better rates as an incentive for
generating a larger volume of business.
Since China’s entry into the WTO in December 2001, competition among insurance companies has
intensified as a result of a significant increase in the number of insurance companies and the existing
insurance companies’ expansion into new geographic markets. This competition has led to a gradual
increase in the commission and fee rates offered to insurance intermediaries, and such increase has had a
positive impact on our results of operations.
The Size and Productivity of Our Sales Force
As a distributor of insurance products, we generate revenue primarily through our sales force who are
individual sales agents in our distribution and service network. The size of our sales force and its
productivity, as measured by the average number of insurance products sold per performing sales agent,,
the average premium per product sold and the average premiums generated per performing sales agent
during any specified period, directly affect our revenue and results of operations. Performing sales agents
refer to sales agents who have sold at least one insurance policy. 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 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 auto insurance products in 1999, expanded our product offerings to other
property and casualty insurance products in 2002, and started distributing long term individual life and
health insurance products in 2006, primarily to individual customers. We further broadened our service
offering to cover insurance claims adjusting services in 2008. In 2010, we started to offer insurance
-66-
brokerage services for commercial line insurance to corporate clients and reinsurance brokerage services,
which were subsequently disposed of in November 2017.
Insurance Agency Segment
Our largest segment by revenue, the insurance agency segment, provides a broad range of life and
health and property and casualty insurance products to individual customers.
Most individual life and health insurance policies we distribute require periodic payment of premiums,
typically annually, during a pre-determined payment period, generally ranging from 5 to 25 years. For each
such policy that we distribute, insurance companies will pay us a first-year commission and fee based on a
percentage of the first-year premiums, and subsequent commissions and fees based on smaller percentages
of the renewal premiums paid by the insured throughout the payment period of the policy. Therefore, once
we distribute 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 fulfills his or her
premium payment commitment.
Because of the recurring nature of commissions derived from long term life insurance business, and
the higher gross margin of our life insurance business than that of our property and casualty insurance
business, we intend to focus our efforts on distributing more life insurance products, which we believe will
have a positive impact on our revenue and gross margin in the long term.
The property and casualty insurance policies we distribute primarily consist of individual accident
insurance, short-term health insurance, travel insurance, and homeowner insurance we distribute through
Baoxian.com and auto insurance we facilitate through CNpad Auto. Because the insurance products that
we distribute through Baoxian.com are mostly underwritten by property and casualty insurance companies,
we classify them as property and casualty insurance products. These property and casualty insurance
policies we distribute are typically for a one-year term, with a single premium payable at the beginning of
the term. Accordingly, we receive a single commission or fee for each property and casualty policy we
distribute. 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.
We started to distribute certain long-term critical illness, whole life and term life insurance products
on Baoxian.com in 2019, which contributed less than 1% of our total net revenues for the year ended
December 31, 2019 and therefore we included the revenues derived from these products in the total net
revenues generated by the property and casualty insurance segment. For auto insurance that we distribute
through CNpad Auto, the fees we receive from insurance distributors are calculated based on the volume
of insurance premiums they transact through CNpad Auto, which are typically much lower than the
commissions we previously received from insurance companies, though our costs are generally minimal.
Claims Adjusting Segment
The fees we receive for our claims adjusting services are calculated based on the types of insurance
products involved. For services provided in connection with property and casualty insurance (other than
marine cargo insurance and automobile insurance), our fees are calculated as a percentage of the recovered
amount from insurance companies plus travel expenses. For services provided in connection with marine
cargo insurance, our fees are charged primarily on an hourly basis and, in some cases, as a percentage of
the amount recovered from insurance companies. For services provided in connection with auto insurance,
individual accident insurance and health insurance, our fees are generally fixed and the amounts collected
are based on the types of services provided. In some cases, our fees are charged based on the number of
claims adjustors involved in providing the services. We pay our in-house claims adjustors a base salary
plus a commission calculated based on a small percentage of the service fees we receive from insurance
companies or the insured. The claims adjusting business has become and likely will continue to be a steady
source of our net revenues. The gross margin and operating margin of our claims adjusting segment are
-67-
generally higher than those of our insurance agency segment. 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 2018 and 2019, we incurred share-based compensation expenses of nil and RMB 0.4 million,
respectively. See “Item 5. Operating and Financial Review and Prospects — A. Operating Results — Key
Performance Indicators — Operating Costs and Expenses — Share-based Compensation Expenses” for a
more detailed discussion of our historical share-based compensation expenses. In order to attract and retain
the best personnel for positions of substantial responsibility, provide additional incentive to employees,
directors and consultants and promote the success of our business, we adopted a share incentive plan in
October 2007. Under our 2007 Share Incentive Plan, as amended and restated in December 2008, we issued
an aggregate number of 136,874,658 ordinary shares which equaled to 15% of our total number of shares
outstanding immediately after the closing of our initial public offering, to cover awards granted under the
plan. See “Item 6. Directors, Senior Management and Employees — B. Compensation — Share Incentives
— 2007 Share Incentive Plan.” All of the share-based compensation expenses related to the options granted
under the 2007 Share Incentive Plan have been amortized as of December 31, 2016. On June 14, 2018, we
announced the 521 Plan, which enabled the Participants, consisting of certain key employees and
independent sales agent team leaders, to invest in the Company by purchasing a total of 280,000,000
ordinary shares of the Company, representing 14 million of the Company’s ADSs at the subscription price
of US$27.38 per ADS. Accordingly, we started to recognize share-based compensation expenses in 2019
and we expect that share-based compensation expenses will not be a significant component of our operation
expenses.
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 in 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 Holiday, which occur during the first quarter of each year. As a
result, our commission and fee revenue derived from property and casualty insurance products in 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 of the coming year by preparing to launch new products, making
marketing plans and organizing training. During the jumpstart sales season, life insurance companies will
offer incentives that are more attractive to insurance intermediaries and sales agents to boost sales.
Accordingly, our commission and fee revenue derived from life insurance business is generally the highest
in the first quarter of a year and the lowest in the fourth quarter of a year.
Key Performance Indicators
As of December 31, 2019, 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.
-68-
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 sales taxes. In 2018 and 2019, we generated net revenues of RMB3.5
billion and RMB3.7 billion (US$ 532.3 million), respectively. We derive net revenues from the following
sources:
Insurance agency segment: commissions paid by insurance companies for the distribution of (i)
life and health insurance products, and (ii) commoditized property and casualty products sold
through Baoxian.com and (iii) technology service fee generated from CNpad Auto for the
transaction of auto insurance products, which accounted for 90.6% and 90.0% of our net revenues
for 2018 and 2019, respectively;
Claims adjusting segment: commissions and fees primarily paid by
insurance
companies,mutual aid platforms and, to a lesser degree, by the insureds for the provision of claims
adjusting services, which accounted for 9.4% and 10.0% of our net revenues for 2018 and 2019,
respectively;
the
The following table sets forth our total net revenues earned from each of our reporting segments both
in absolute amounts and as percentages of total net revenues, for the periods indicated:
Year Ended December 31,
2018
RMB
%
RMB
2019
US$
%
Agency............................................................
Life insurance business ............................
P&C insurance business ...........................
Claims adjusting ............................................
Total net revenues .......................................
3,143,873
2,870,776
273,097
327,390
3,471,263
(in thousands except percentages)
90.6
82.7
7.9
9.4
3,335,397
3,193,625
141,772
370,606
100.0
3,706,003
479,100
458,736
20,364
53,234
532,334
90.0
86.2
3.8
10.0
100.0
Insurance agency segment primarily covers distribution of life and health insurance products and
property and casualty insurance products to individuals. Net revenues from the insurance agency segment
decreased from 2018 to 2019 in both absolute amount and as a percentage of our total net revenues.
Net revenues generated from distribution of life and health insurance products have become our
primary source of revenue. We began distributing individual life and health insurance products in 2006.
Net revenues generated from distribution of life and health insurance products increased from 2018 to 2019,
both in absolute amounts and as a percentage of our net revenues. We expect our life insurance business to
grow rapidly and bring in significant revenue that will continue to represent a high percentage of our total
net revenues in the next several years. We believe this growth will be driven by a number of factors
including stronger demand for traditional life and health insurance products as a result of the aging
population and the Chinese consumers’ increasing awareness of the benefits of insurance.
Net revenues generated from distribution of property and casualty insurance products decreased
significantly from 2018 to 2019, in both absolute amounts and as a percentage of our net revenues, primarily
due to cessation of underwriting by one insurance company for certain insurance product which was the
key product that Baoxian.com placed for one of its major channel partners since June 2018. We expect our
net revenues to be derived from distribution of property and casualty insurance products will remain stable
in 2020.
-69-
We began providing claims adjusting services in 2008. Net revenues from our claims adjusting
segment increased from 2018 to 2019, reflecting our increased efforts to expand individual accident and
health insurance-related claims adjusting services. We expect that net revenues from claims adjusting
services as a percentage of our total net revenues will be stable in the next few years.
The commissions and fees we receive from the distribution of insurance products are based on a
percentage of the premiums paid by the insured. Commission and fee rates generally depend on the type of
insurance products, the particular insurance company and the region in which the insurance products are
sold. We typically receive payment of the commissions and fees from insurance companies for insurance
products on a monthly basis. Some of the fees are paid to us annually or semi-annually in the form of
performance bonuses after we achieve specified premium volume or policy renewal goals as agreed upon
between the insurance companies and us.
The fees we received from third party online insurance platforms were based on a percentage of the
premiums transacted over CNpad Auto. We typically received payment of such fees on a quarterly basis.
We stop charging technology service fees starting from the fourth quarter of 2019.
We are compensated primarily by insurance companies for our claims adjusting services. The fees we
receive for our claims adjusting services depend on the types of insurance products involved. For services
provided in connection with marine cargo insurance, our fees are charged primarily on an hourly basis and,
in some cases, as a percentage of the amount recovered from insurance companies. For claims adjusting
services related to auto insurance, individual accident insurance and health insurance, our fees are generally
fixed on a per claim basis, or in some cases, on a per head basis. These fees are typically paid to us on a
quarterly basis. For services provided in connection with other property and casualty insurance, our fees
are calculated as a percentage of the recovered amount from insurance companies plus travel expenses. We
typically receive payment for these fees on a semi-annual or annual basis.
Operating Costs and Expenses
Our operating costs and expenses consist of costs incurred in connection with the distribution of
insurance products and the provision of claims adjusting services, selling expenses and general and
administrative expenses. The following table sets forth the components of our operating costs and expenses,
both in absolute amounts and as percentages of our net revenues, for the periods indicated.
Year Ended December 31,
2018
RMB
%
RMB
2019
US$
%
Total net revenues .......................................
Operating costs .............................................
Selling expenses ............................................
General and administrative expenses ..........
3,471,263
(2,346,015)
(231,075)
(468,430)
(in thousands except percentages)
100.0
(67.6)
(6.7)
(13.5)
3,706,003
532,334
(2,483,448)
(278,085)
(475,107)
(356,725)
(39,944)
(68,245)
Total operating costs and expenses ..........
(3,045,520)
(87.8)
(3,236,640)
(464,914)
100.0
(67.0)
(7.5)
(12.8)
(87.3)
Operating Costs
We incur costs primarily in connection with the distributions of insurance products and the provision
of claims adjusting services. Our operating costs increased from 2018 to 2019, which was in line with the
increase in revenue during the same period. We rely mainly on individual sales agents and to a much lesser
degree, on Baoxian.com for the distributions of insurance products. For claims adjusting services, we rely
mainly on our in-house claims adjustors and non-affiliated claims adjustors through Chetong.net. Operating
costs incurred as a percentage of net revenues decreased from 2018 to 2019, primarily due to the growth of
our renewal life insurance business which has higher operating margin than our property and casualty
insurance business and new life insurance business. We anticipate that our operating costs will increase in
absolute amounts as we further grow our business.
-70-
Selling Expenses
Our selling expenses primarily consist of:
salaries and employment benefits for employees who work in back office below the provincial
management level;
office rental, telecommunications and office supply expenses incurred in connection with sales
activities; and
advertising and marketing expenses.
We expect that our selling expenses will increase as we expand our distribution and service network
in both existing markets and new geographic regions. As we grow in size, we also intend to spend more on
marketing and advertising to enhance our brand recognition and promote our online platforms. Selling
expenses in 2019 remained stable as compared to 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 online insurance platforms.
Share-based compensation expenses. As share options granted under the 2012 Share Incentive Plan
have all vested by 2016, there was no share-based compensation expenses incurred in 2017 and 2018. We
recognized share-based compensation expenses of RMB0.4 million in 2019 as a result of the 521 Plan. The
521 Plan was initially recognized as a liability award, pursuant to the original Loan Agreement related to
the 521 Plan and accordingly, share-based compensation expense related to the 521 Plan was variable based
on the change of the fair value at the reporting date for each of the first, second and third quarter of 2019.
Pursuant to the Second Supplement to the Loan Agreement entered into in November 2019, the 521 Plan
-71-
was modified which resulted in a change of the award's classification from liability to equity. RMB1.6
million of share-based compensation expenses in connection with the 521 Plan will be amortized on a
straight-line basis over the remaining vesting period from 2020 to 2023. For more information about our
share-based compensation expenses, please see Note 19 to our audited consolidated financial statements
included in this annual report.
The following table sets forth our share-based compensation expenses, both in absolute amounts and
as percentages of our selling expenses and general and administrative expenses, for the periods indicated.
For the Year Ended December 31,
2018
RMB
%
RMB
2019
US$
%
(in thousands except percentages)
Share-based compensation expenses ...........
Others .............................................................
Selling expenses ............................................
Share-based compensation expenses ...........
Others .............................................................
General and administrative expenses ......
—
231,075
231,075
—
100.0
100.0
—
—
468,430
468,430
100.0
100.0
281
277,804
278,085
113
468,317
468,430
40
39,904
39,944
16
68,114
68,130
0.1
99.9
100.0
*
100.0
100.0
Taxation
We and each of our subsidiaries file separate income tax returns.
The Cayman Islands, the British Virgin Islands and Hong Kong
Under the current laws of the Cayman Islands and the British Virgin Islands, we and our subsidiaries
incorporated in the British Virgin Islands are not subject to income or capital gains taxes. In addition,
dividend payments are not subject to withholding tax in those jurisdictions.
On March 21, 2018, the Hong Kong Legislative Council passed The Inland Revenue (Amendment)
(No. 7) Bill 2017 (the “Bill”) which introduces the two-tiered profits tax rates regime. The Bill was signed
into law on March 28, 2018 and was gazetted on the following day. Under the two-tiered profits tax rates
regime, the first 2 million Hong Kong Dollar of profits of the qualifying group entity will be taxed at 8.25%,
and profits above HK$2 million will be taxed at 16.5%.
The provision for current income taxes of the subsidiaries operating in Hong Kong has been calculated
by applying the current rate of taxation of 8.25% for the years ended December 31, 2018 and 2019. 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 8.25% for the years ended December 31, 2018 and 2019.
Pursuant to the relevant laws and regulations in the PRC, each of Ying Si Kang Information
Technology (Shenzhen) Co., Ltd., or Ying Si Kang, and Shenzhen Huazhong United Technology Co., Ltd.,
or Shenzhen Huazhong, both our wholly-owned subsidiaries, was recognized as a software company and
thus exempted from PRC Income Tax for two years starting from its first profit-making year, followed by
-72-
a 50% reduction for the next three years. For Ying Si Kang, year 2014 was the first profit-making year and
accordingly it has made a 12.5% tax provision for its profits for the year ended December 31, 2018. For
Shenzhen Huazhong, 2017 was the first profit-making year and accordingly it has made a 12.5% tax
provision for its profits for the year ended December 31, 2019.
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, was
relocated to Tianfu New Area, Sichuan province, PRC. Subsequently, Lianxin will enjoy 15% EIT tax rate
instead of unified 25% from September 1, 2018 to December 31, 2020. Tibet Zhuli Investment Co. Ltd.
("Tibet Zhuli"), our wholly-owned subsidiary, was entitled to a preferential tax rate of 9% for the period
from January 1, 2015 to December 31, 2017 and 15% for the years ended December 31, 2018 and 2019, as
it was established with approval in Tibet, PRC, before January 1, 2018.
Business Tax and VAT
In November 2011, the Ministry of Finance and the State Administration of Taxation jointly issued
two circulars setting out the details of the pilot VAT reform program, which change the charge of sales tax
from business tax to VAT for certain pilot industries. The VAT reform program initially applied only to
the pilot industries in Shanghai, and was expanded to eight additional regions, including, among others,
Beijing and Guangdong province, in 2012. In August 2013, the program was further expanded nationwide.
With respect to all of our PRC entities for the period immediately prior to the implementation of the
VAT reform program, revenues from our services are subject to a 5% PRC business tax. Revenues from
our online advertising services are subject to an additional 3% cultural business construction fee.
In March 2016, during the fourth session of the 12th National People’s Congress, it was announced
that the VAT reform will be fully rolled out and extended to all industries including construction, real estate,
financial services and lifestyle services. Subsequently, the State Administration of Taxation and Ministry
of Finance jointly issued a Notice on Preparing for the Full Implementation of the VAT Reform (Cai Shui
[2016] No. 36). Accordingly, revenues from our services are subject to value-added tax instead of business
tax starting from May 1, 2016.
PRC Urban Maintenance and Construction Tax and Education Surcharge
Any entity, foreign-invested or purely domestic, or individual that is subject to consumption tax, VAT
and business tax is also required to pay PRC urban maintenance and construction tax. The rates of urban
maintenance and construction tax are 7%, 5% or 1% of the amount of consumption tax, VAT and business
tax actually paid depending on where the taxpayer is located. All entities and individuals who pay
consumption tax, VAT and business tax are also required to pay education surcharge at a rate of 3%, and
local education surcharges at a rate of 2%, of the amount of VAT, business tax and consumption tax actually
paid.
Critical Accounting Policies
We prepare financial statements in accordance with U.S. GAAP, which requires us to make judgments,
estimates and assumptions that affect the reported amounts of our assets and liabilities and the disclosure
of our contingent assets and liabilities at the end of each fiscal period, as well as the reported amounts of
revenues and expenses during each fiscal period. We continually evaluate these judgments and estimates
based on our own historical experience, knowledge and assessment of current business and other conditions,
our expectations regarding the future based on available information and assumptions that we believe to be
reasonable. This forms our basis for making judgments about matters that are not readily apparent from
-73-
other sources. Since the use of estimates is an integral component of the financial reporting process, our
actual results could differ from those estimates. Some of our accounting policies require a higher degree of
judgment than others in their application.
The selection of critical accounting policies, the judgments and other uncertainties affecting
application of those policies and the sensitivity of reported results to changes in conditions and assumptions
are factors that should be considered when reviewing our financial statements. We believe the following
accounting policies involve the most significant judgments and estimates used in the preparation of our
financial statements.
Revenue Recognition
Our revenue 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 Company 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 de minimis to date are recognized
upon notification from the insurance carriers. Actual commission and fee adjustments in connection with
the cancellation of policies were 0.1% and 0.1% of the total commission and fee revenues during years
ended December 31, 2018 and 2019, respectively.
For 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 insurance premium
amount multiplied by an agreed-upon percentage. The contingent commissions are recorded when a
performance obligation is being achieved. Performance bonus represent a form of variable consideration
-74-
associated with certain sales volume, for which we earn commissions. The contingent commissions are
recorded when a performance obligation is being achieved. We estimate the amount of consideration with
a constraint applied that will be received in the coming year such that a significant reversal of revenue is
not probable and accrue performance bonus relative to the recognition of the corresponding core
commissions. For the years ended December 31, 2018 and 2019, we recognized contingent performance
bonus of RMB23.2 million and RMB58.1 million (US$8.3 million), respectively.
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.
Contract balances
Our contract balances include accounts receivable and contract asset. The balances of account
receivable as of December 31, 2018 and 2019 are all derived from contracts with 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 asset included in accounts receivable. The balances of contract
asset are RMB84.9 million and RMB131.1 million (US$18.8 million) as of December 31, 2018 and
December 31, 2019, respectively.
We have no advance from customers in advance of revenue recognition, or contract liability and,
therefore, none of revenue recognized in the current period that was previously recognized as a contract
liability.
Practical Expedients and Exemptions
We generally expense sales commissions when incurred because the amortization period would have
been one year or less. These costs are recorded within sales and marketing expenses in the consolidated
statements of operations and comprehensive income, as the amortization period is less than one year and
we have elected the practical expedient included in ASC 606.
We have applied the optional exemption provided by ASC 606 to not disclose the value of remaining
performance obligations not yet satisfied as of period end for contracts with original expected duration of
one year or less.
Investment in Affiliates
We use the equity method of accounting for investments in which we have the ability to exercise
significant influence, but do not have a controlling interest.
We continually review our investment in equity investees to determine whether a decline in fair value
to an amount below the carrying value is other-than temporary. The primary factors we consider in our
determination are the duration and severity of the decline in fair value; the financial condition, operating
performance and the prospects of the equity investee; and other company specific information such as the
stock price of the investee and its corresponding volatility, if publically traded, our intent and ability to
hold the investment until recovery, and changes in the macro-economic, competitive and operational
environment of the investee. If the decline in fair value is deemed to be other-than-temporary, the carrying
value of the equity investee is written down to fair value.
-75-
The fair values of the investments in equity investees are determined based on valuation techniques
using the best information available, including but not limited to such as quoted prices for the investments
or similar investments in active markets, the investees' current and expected future performance, industry
trend and projected revenue growth rates and profit margin, forecasted cash flows based on discounted
rates and terminal growth rates, etc.
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 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.
Classification of 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.
-76-
We measure an equity award based on the awards’ fair value on grant date and recognize the
compensation cost over the vesting periods, with the corresponding credit recorded as paid-in capital.
Modification of an award
A modification of the terms or conditions of an equity award is treated as an exchange of the original
award for a new award. We measure the effects of a modification as follows: i) incremental compensation
cost shall be measured as the excess, if any, of the fair value of the modified award determined over the
fair value of the original award immediately before its terms are modified, measured based on the share
price and other pertinent factors at that date; and ii) the total recognized compensation cost for an equity
award shall at least equal the fair value of the award at the grant date unless at the date of the modification
the performance or service conditions of the original award are not expected to be satisfied. We recorded
the incremental fair-value-based measure, if any, of the modified award, as compensation cost on the date
of modification (for vested awards) or over the remaining service (vesting) period (for unvested awards).
Share-based compensation expenses of nil, nil and RMB0.4 million (US$56,290.8) for the years ended
December 31, 2017, 2018 and 2019, respectively, were included in the selling, general and administrative
expenses.
Variable Interest Entities ("VIEs")
The 521 Plan
On June 14, 2018, we announced that our board of directors has approved a 521 Share Incentive Plan
(the “521 plan”). The 521 Plan is designed to incentivize the Company's employees and independent sales
agents (collectively the “Participants”) by purchasing a total of 280,000,000 ordinary shares of the
Company. 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.
Pursuant to the 521 Plan, we set up three companies which are Fanhua Employees Holdings Limited, Step
Tall Limited and Treasure Chariot Limited (collectively the “521 Plan Employee Companies”) to hold the
Company'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
Company. Each shareholder is either an employee, or a founder who is also a shareholder and director of
the Company.
In determining whether we are the primary beneficiary of the 521 Plan Employee Companies, we
applied the following critical judgements: 1) our ordinary shares are the only significant assets held by the
521 Plan Employee Companies, which serve as collaterals to the loans issued by the Company to the
Participants during the vesting period; 2) the activities most significantly impacting the 521 Plan Employee
Companies' economic performance are the decision making related to managing the shares in the 521 Plan
Employee Companies. Given the only substantial recourse to the loans issued by the Company 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 Company and the Company has potential exposure
to the economics of the 521 Plan Employee Companies. In addition to that, we control 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 we have potential exposure to the
economics of the VIEs resulting from the fluctuation in value of the ADS, which is more than insignificant.
Further, we 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.Therefore, the Company has variable interests in the 521 Plan Employee Companies during
the vesting period. Since we have the power to direct the activities that most significantly impact the 521
Plan Employee Companies’ economic performance and 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 of the ADS which will be indirectly absorbed by the Company or the Participants as described in
-77-
the various vesting scenarios in “Item 6. Directors, Senior Management and Employees — B.
Compensation — 521 Plan”, we are the primary beneficiary of the 521 Plan Employee Companies and the
521 Plan Employee Companies are deemed to be VIEs of the Company and are consolidated by the
Company.
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.
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 Pronouncements
For a summary of recently issued accounting pronouncements not yet adopted that may potentially
impact our financial position and results of operations, see Note 2(ac) to the consolidated financial
statements of Fanhua Inc. pursuant to Item 18 of Part III of this annual report.
Results of Operations
The following table sets forth our net revenues, operating costs and expenses and income from
operations by reportable segments for the periods indicated.
We are currently operating under two reporting operating segments: (1) insurance agency, and (2)
claims adjusting.
2018
RMB
For the Year Ended December 31,
2018 to 2019
Percentage Change
2019
%
RMB
US$
(in thousands except percentages)
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 from continuing operations
Other income, net:
Investment income .........................................
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)
(3,045,520)
529,280
10,491
(114,028)
425,743
195,456
-78-
6.1
11.2
(48.1)
13.2
6.8
5.2
11.5
(53.1)
13.0
5.9
20.3
1.4
6.3
1.6
(13.2)
(32.0)
10.2
(59.5)
3,335,397
3,193,625
141,772
370,606
3,706,003
(2,263,952)
(2,166,126)
(97,826)
(219,496)
(2,483,448)
(278,085)
(475,107)
(3,236,640)
537,746
9,132
(77,515)
469,363
479,100
458,736
20,364
53,234
532,334
(325,196)
(311,144)
(14,052)
(31,529)
(356,725)
(39,944)
(68,245)
(464,914)
77,243
1,311
(11,134)
67,420
79,070
11,358
Interest income ...............................................
Others, net .......................................................
Income from continuing operations before
income taxes and share of income and
impairment of affiliates, net .......................
Income tax expense ........................................
Share of income and impairment of affiliates,
net ................................................................
Net income from continuing operations ...
Net income from discontinued operations,
net of tax ........................................................
Net income .....................................................
Less: Net
attributable
income
the
to
noncontrolling interests ..............................
Net income attributable to the Company’s
shareholders ..............................................
2018
RMB
For the Year Ended December 31,
2018 to 2019
Percentage Change
%
RMB
(in thousands except percentages)
34,207
11,807
667,213
(224,586)
174,468
617,095
—
617,095
7,180
(91.8)
(18.2)
(15.9)
(36.0)
*
(68.8)
*
(68.8)
(49.6)
2019
2,828
9,664
560,925
(143,816)
(224,555)
192,554
—
192,554
3,622
US$
406
1,388
80,572
(20,658)
(32,255)
27,659
—
27,659
520
609,915
(69.0)
188,932
27,139
*
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.
-79-
Year ended December 31, 2019 Compared to Year Ended December 31, 2018
Net Revenues
Our total net revenues increased by 6.8% from RMB3,471.3 million in 2018 to RMB3,706.0 million
(US$532.3 million) in 2019.
Net revenues from our insurance agency segment increased by 6.1% from RMB3,143.9 million in
2018 to RMB3,335.4 million (US$479.1 million) in 2019. The increase was primarily due to
growth in life insurance business, from RMB2,870.8 million in 2018 to RMB3,193.6 million
(US$458.7 million) in 2019, partially offset by a decrease in net revenues derived from P&C
insurance business.
The increase in net revenues generated from the life insurance agency business was primarily
driven by the establishment of new branches in more regions. The increase was mainly driven by
(i) a 3.1% year-over-year growth in first year commissions to RMB2,390.8 million and (ii) a 45.4%
year-over-year growth in renewal commissions to RMB802.8 million. Revenues generated from
our life insurance business accounted for 86.2% of our total net revenues in 2019.
The decline of the property and casualty insurance agency business was primarily due to (i) the
decline of sales on Baowang (www.baoxian.com) mainly resulting from the decision by certain
insurance companies to cease underwriting certain popular insurance products and (ii) the decline
in platform fees received for the auto insurance business. Revenues for the P&C insurance business
were mainly derived from commissions generated from Baowang and the technology service fees
we charged based on the volume of insurance premiums transacted through CNpad Auto.
Net revenues from our claims adjusting segment increased by 13.2% from RMB327.4 million in
2018 to RMB370.6 million (US$53.2 million) for 2019. The increase was mainly due to the strong
growth of our medical insurance-related claims adjusting business in 2019.
Operating Costs and Expenses
Operating costs and expenses increased by 6.3% from RMB3,045.5 million in 2018 to RMB3,236.6
million (US$464.9 million) for 2019.
Operating Costs. Our operating costs increased by 5.9% from RMB2,346.0 million in 2018 to
RMB2,483.4 million (US$356.7 million) in 2019, primarily because of an increase in operating cost in life
insurance business.
Operating costs for our insurance agency segment increased by 5.2% from RMB2,151.9 million in
2018 to RMB2,264.0 million (US$325.2 million) in 2019, primarily due to an increase of 11.5%
in costs for the life insurance agency business from RMB1,943.1 million in 2018 to RMB2,166.1
million (US$311.1 million) in 2019, which was mainly due to growth in revenue generated from
the life business, partially offset by a decrease in costs for the property and casualty insurance
agency business from RMB208.8 million in 2018 to RMB97.8 million (US$14.1 million) in 2019,
which is in line with the decrease in revenue generated from the property and casualty insurance
agency business.
Operating costs for our claims adjusting segment increased by 13.0% from RMB194.2 million in
2018 to RMB219.5 million (US$31.5 million) in 2019, primarily due to business expansion of
medical insurance-related claims adjusting service.
Selling Expenses. Our selling expenses increased by 20.3% from RMB231.1 million in 2018 to
RMB278.1 million (US$39.9 million) in 2019, primarily attributable to the opening of new sales outlets.
-80-
General and Administrative Expenses. Our general and administrative expenses increased by 1.4%
from RMB468.4 million in 2018 to RMB475.1 million (US$68.2 million) in 2019, primarily due to the
increase in payroll and rental expenses, partially offset by the decrease in depreciation and amortization
and other disbursements.
Income from Operations
As a result of the foregoing factors, income from operations increased by 10.2% from RMB425.7
million in 2018 to RMB469.4 million (US$67.4 million) in 2019.
Income from operations for our agency insurance segment increased by 1.6% from RMB529.3
million in 2018 to RMB537.7 million (US$77.2 million) in 2019, which was primarily due to the
growth of life insurance business contribution, partially offset by the decline in the property and
casualty insurance agency business.
Income from operations for our claims adjusting segment decrease by 13.2% from RMB10.5
million in 2018 to RMB9.1 million (US$1.3 million) in 2019, which was primarily due to new
business in 2019 which has lower margin.
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 32.0%
from RMB114.0 million in 2018 to RMB77.5 million (US$11.1 million) in 2019, primarily due to
decrease in depreciation and disbursements at the headquarters.
Other Income
Investment Income. Investment income represents income received from short-term investments in
collective trust products and interbank deposits. Our investment income decreased by 59.5% from
RMB195.5 million in 2018 to RMB79.1 million (US$11.4 million) in 2019. The decrease in yields from
short-term investments in financial products was mainly due to (i) change in composition of our short-term
investment portfolio, with increased allocation to wealth management products issued by banks which offer
relatively lower yields as compared to other financial products in the portfolio; (ii) a year-over-year
decrease in yields from wealth management products issued by banks; and (iii) a decrease in cash available
for investment in short-term investment products due to the share buyback program, declaration of cash
dividends and the implementation of the Company’s 521 Plan since the second half of 2018.
Interest Income. Our interest income decreased by 91.8% from RMB34.2 million in 2018 to RMB2.8
million (US$0.4 million) in 2019, primarily due to (i) the settlement of certain one-year term interest-
bearing receivables in August 2018; (ii) the decrease in cash available for investment; and (iii) the decrease
in bank interest rates in 2019.
Income Tax Expense
Our income tax expense decreased by 36.0% from RMB224.6 million in 2018 to RMB143.8 million
(US$20.7 million) in 2019. The effective tax rate for 2019 was 25.6% compared with 33.7% in 2018. The
decrease in effective tax rate was primarily due to (i) the start of a tax holiday from the fourth quarter of
2018 enjoyed by Fanhua Lianxing Insurance Sales Service Co., Ltd., our wholly-owned subsidiary which
is the holding company of our life insurance operation; and (ii) the decrease in withholding tax paid in
connection with dividend distribution in 2019.
Share of Income and Impairment of Affiliates, net
Our share of income and impairment of affiliates was negative RMB224.6 million (US$32.3 million)
for 2019, as compared to share of income of affiliates of RMB174.5 million in 2018. The share of income
-81-
of affiliates mainly represented share of income from CNFinance in which we own 18.5% of the equity
interest. The share of income and impairment from CNFinance included a RMB322.7 million (US$46.3
million) impairment on investment in CNFinance, to reflect a write-down to the fair value of the investment
as measured by the closing market price of CNFinance on December 31, 2019, offsetting the share of
income of CNFinance of RMB98.7 million (US$14.2 million) from CNFinance in 2019.
Net Income Attributable to the Non-controlling Interests
The net income attributable to the non-controlling interests decreased by 49.6% from RMB7.2 million
in 2018 to RMB3.6 million (US$0.5 million) in 2019, primarily due to the decrease in profits from our
subsidiaries operating claims adjusting business in which we currently own 44.7% equity interests.
Net Income Attributable to the Company’s Shareholders
As a result of the foregoing factors, our net income attributable to our shareholders decreased by 69.0%
from RMB609.9 million in 2018 to RMB188.9 million (US$27.1 million) for 2019. The decrease was
mainly due to the decreases in investment income and share of income from CNFinance.
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 1.4%, 2.0%, 1.6%, 2.1% and 2.9% in
2015, 2016, 2017, 2018 and 2019, 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 2018 and 2019. 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 RMB7.0137 per U.S. dollar in December 2019. The fluctuation of the exchange
rate between the RMB and U.S. dollar and HK dollar resulted in foreign currency translation gain of RMB
10.2 million (US$1.5 million) in 2019, 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, 2019, we had RMB169.7 million (US$24.4 million) in cash and cash equivalents, and
RMB1.6 billion (US$231.6 million) in short-term investments. Our cash and cash equivalents consist of
cash on hand and bank deposits and our short term investments consist of short-term, highly liquid
investments that are readily convertible to known amounts of cash, and have insignificant risk of changes
in value related to changes in interest rates. Our principal uses of cash have been to fund dividend
distribution 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.
-82-
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:
Net cash generated from operating activities
Net cash (used in) generated from investing activities
2018
RMB
Year Ended December 31,
2019
RMB
US$
(in thousands)
523,827
1,567,585
178,324
11,959
25,615
1,717
Net cash generated (used in) from financing activities
(1,664,506)
(792,106)
(113,778)
Net increase (decrease) in cash and cash equivalents and restricted cash
426,906
(601,823)
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
439,033
848,166
848,166
265,605
(86,446)
121,831
38,152
Operating Activities
Net cash generated from operating activities amounted to RMB178.3 million for the year ended
December 31, 2019, primarily attributable to (i) a net income of RMB192.6 million, (ii) adjustments of
depreciation expense of RMB16.3 million, non-cash operating lease expense of RMB69.5 million,
investment income of RMB65.6 million and share of income and impairment of affiliates, net of RMB224.6
million representing share of net income generated by CNFinance offset by an impairment of the
investment in CNFinance, which were non-cash items and, and (iii) an increase of accounts payable of
RMB50.2 million offset by (i) an increase of accounts receivable of RMB180.2 million contributed by our
major customers, Huaxia and Sinatay, which in aggregate accounted for 39.9% of our revenue and 44.8%
of account receivable as of year end of 2019 as certain amount of sales bonus from Huaxia and Sinatary
was settled quarterly and annually, among which the receivable from Sinatay has been fully settled in
March 2020, (ii) decrease of other payable of RMB25.5 million, (iii) decrease of income tax payable of
RMB50.0 million and (iv) decrease of lease liability of RMB76.6 million.
Net cash generated from operating activities amounted to RMB523.8 million for the year ended
December 31, 2018, primarily attributable to (i) a net income of RMB617.1 million, (ii) adjustments of
depreciation of RMB10.8 million, amortization of acquired intangible assets of RMB15.9 million and share
of income of affiliates of RMB174.5 million, which were non-cash items, and (iii) an increase of accounts
payable of RMB129.7 million and other payable of RMB21.5 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 in investment adjustment income from collective trust funds and inter-bank deposit.
-83-
Investing Activities
Net cash from investing activities for the year ended December 31, 2019 was RMB12.0 million,
primarily attributable to proceeds from disposal of short term investments of RMB7,523.3 million that
matured offset by cash used to purchase short term investment products including collective trust funds and
inter-bank deposits of RMB7,498.7 million and purchase of property, plant and equipment of RMB19.7
million.
Net cash generated from investing activities for the year ended December 31, 2018 was RMB1, 567.6
million, primarily attributable to (i) proceeds from short term investments of RMB12.5 billion that had
matured, (ii) loan repayment from third party of RMB500.0 million and (iii) purchase of property, plant
and equipment of RMB22.8 million partially offset by cash used to purchase short term investment products
including collective trust funds and inter-bank deposits of RMB11.4 billion.
Financing Activities
Net cash used in financing activities was RMB792.1 million for the year ended December 31, 2019,
attributable to (i) cash used for share repurchase program in 2019 of RMB484.0 million and (ii) dividend
payments of totaling RMB435.1 million, partially offset by proceeds from employees and agents’ share
subscriptions of RMB111.3 million.
Net cash used in financing activities was RMB1,664.5 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 and (ii) dividend payments of totaling RMB331.7
million, partially offset by proceeds from employees and agents’ share subscription of RMB211.1 million
and proceeds related to disposal of Fanhua Times Sales & Services Co., Ltd and its subsidiaries of
RMB22.7 million.
Capital Expenditures
We incurred capital expenditures of RMB20.9 million, RMB22.8 million and RMB19.7 million
(US$2.8 million) for the years ended December 31, 2017, 2018 and 2019, 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, 2018 and 2019, 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
-84-
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, 2019, our restricted net asset was RMB1.4 billion (US$202.6 million).
This amount is composed of the registered equity of our PRC subsidiaries and the statutory reserves
described above. Our ability to pay dividends primarily depends upon dividends paid by our subsidiaries.
As of December 31, 2019, we had aggregate undistributed earnings of approximately RMB1.3 billion
(US$ 187.3 million) that were available for distribution. These undistributed earnings are considered to be
indefinitely reinvested, and will be subject to PRC dividend withholding taxes upon distribution.
C. Research and Development, Patents and Licenses, etc.
See “Item 4. Information on the Company—B. Business Overview—Intellectual Property.”
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, 2019 to December 31, 2019 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, 2019, we did not have any off-balance sheet arrangements that had or were reasonably likely
to have a current or future effect on our financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
F. Tabular Disclosure of Contractual Obligations
The following table sets forth our contractual obligations and commercial commitments as of
December 31, 2019:
Payment Due by Period
Total
Less
than
1 year
1-3
years
(in thousands of RMB)
3-5
years
More
than 5
years
Undiscounted minimum lease payment included in
the measurement of operating lease liabilities ........ 204,530
Total ...................................................................... 204,530
87,333
87,333
89,996
89,996
24,728
24,728
2,473
2,473
Not included in the table above are uncertain tax liabilities of RMB70.4 million (US$10.1 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.
-85-
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, 2019.
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
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.
-86-
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 .....................................
Peng Ge ...............................................
Yinan Hu .............................................
Yunxiang Tang ....................................
Stephen Markscheid. ...........................
Allen Warren Lueth .............................
Mengbo Yin ........................................
50
48
54
74
66
51
64
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 has been our chairman of the board of directors since September 2017 and has
been our chief executive officer since October 2011. He has been our director since March 2016. From
April 2011 to October 2011, he was our chief operating officer. From January 2007 to October 2011, he
was vice president and head of the property and casualty insurance unit of our company. From 2003 to
January 2007, he served as assistant to our chairman. From 2002 to 2005, he served as the general manager
of Guangdong Nanfeng, one of our first affiliated insurance intermediaries in the PRC. From 1998 to 2002,
Mr. Wang served as a branch manager at Guangzhou Nanyun Car Rental Services Co., Ltd. and later
Guangdong Nanfeng Automobile Association Co., Ltd., our predecessors. Mr. Wang received his
bachelor’s degree in law from Central-Southern University of Politics and Law in China.
Mr. Peng Ge has been our chief financial officer since April 2008 and has been our director since
December 2016. He is currently a member of the board of directors of CNFinance, which is a public
company listed in the U.S. From 2005 to April 2008, he served as the general manager of the finance and
accounting department and vice president of our company. From August 2007 to September 2008, he was
also a director of our company. From 1999 to 2005, Mr. Ge headed our Beijing operations. From 1994 to
1999, Mr. Ge was a financial manager at a subsidiary of China National Native Produce and Animal By-
Products Import & Export Corporation. Mr. Ge received his bachelor’s degree in international accounting
and his MBA degree from the University of International Business and Economics in China.
Mr. Yinan Hu is our co-founder and has been our director since our inception in 1998. He is currently
a member of the board of directors of Puyi Inc., which is a public company listed in the U.S. From 1998 to
September 2017, he was the chairman of our board of directors. From 1998 to October 2011, Mr. Hu served
as our chief executive officer. From 1993 to 1998, Mr. Hu served as chairman of the board of directors of
Guangdong Nanfeng Enterprises Co., Ltd., a company he co-founded that engaged in import and export,
manufacturing of wooden doors and construction. From 1991 to 1995, Mr. Hu was an instructor of money
and banking at Guangdong Institute for Managers in Finance and Trade. Mr. Hu received a bachelor’s
degree and a master’s degree in economics from Southwestern University of Finance and Economics in
China.
Mr. Yunxiang Tang, a senior economist, has been our independent director since May 2012. Mr. Tang
served as general manager of the People's Insurance Company (Group) of China Limited, or the PICC and
chairman of the Board of Directors of PICC P&C, PICC Asset Management Company Limited, PICC Life
Insurance Company Limited and PICC Health Insurance Company Limited from 2000 to 2007. He was the
president of Insurance Association of China from 2001 to 2003 and vice chairman of the CIRC from 1998
to 2000. Prior to that, he served in different senior leadership roles in the financial regulatory authorities,
including head of the PBOC Guangdong Branch and chief of State Administration of Foreign Exchange,
Guangdong Branch and assistant governor of the PBOC.
-87-
Mr. Stephen Markscheid has been our independent director since August 2007. Mr. Markscheid is
chairman of Still Waters Greent Technology, a United Kingdom based renewable energy developer, and
chief financial officer of Childwise, an early childhood education and training provider in the U.S. and
China. He is a member of the board of directors of Jinko Solar, Inc. and Hexindai Inc., which are public
companies listed in U.S. and ZZ Capital International Limited, a public company listed in Hong Kong. He
is also a trustee of Princeton-in-Asia, a nonprofit social service organization affiliated with Princeton
University. He was a member of the board of directors of a number of other listed companies, including
TKK Symphony Acquisition Corporation (currently named Glory Star New Media Group Holdings
Limited), Ener-Core, Inc., China Ming Yang Wind Power Group and ChinaCast Education Corporation.
He acted as a director and interim chief executive officer and chief financial officer of Fellazo Inc. in 2020.
From 2014 to 2017, he was a partner of Wilton Partners, a Shanghai-based boutique investment bank. From
2007 to 2011, he was the chief executive officer of Synergenz BioScience, Inc., a genomics company based
in Hong Kong. Prior to that, Mr. Markscheid was the chief executive officer of HuaMei Capital Company,
Inc., a Sino-U.S. investment advisory firm from 2006 to 2007. From 1998 to 2006, Mr. Markscheid worked
for GE Capital. During his time with GE Capital, Steve led GE Capital's business development activities
in China and Asia Pacific, primarily acquisitions and direct investments. Prior to joining GE, Mr.
Markscheid worked with the Boston Consulting Group throughout Asia from 1994 to 1997. Prior to that,
Mr. Markscheid had been a commercial banker for ten years in London, Chicago, New York, Hong Kong
and Beijing with Chase Manhattan Bank and First National Bank of Chicago. Prior to that, he worked with
the US-China Business Council in Washington D.C. and Beijing. Mr. Markscheid received his bachelor’s
degree in East Asian studies from Princeton University, a master’s degree in international affairs and
economics from the School of Advanced International Studies at Johns Hopkins University, and an MBA
degree from Columbia University.
Mr. Allen Lueth has been our independent director since August 2007. Mr. Lueth is currently a member
of the board of directors of Greatview Aseptic Packaging Company Limited, a company listed in Hong
Kong. Since September 2019, Mr. Lueth has served as a president and chief financial officer of
International Institute of Education Group, a company mainly engaged in language education in the PRC.
From 2017 to 2019 and 2010 to 2017, Mr. Lueth served as a chief financial officer for Asia-Pacific region
and a vice president of finance for the PRC region for Cardinal Health, Inc., a Fortune 500 company
engaged in the healthcare industry respectively. From 2005 to 2010, Mr. Lueth served as a vice president
of finance and strategy formation for the PRC region for Zuellig Pharma China, which was then acquired
by Cardinal Health, Inc. in 2010. Mr. Lueth worked for GE Capital from 1998 to 2004 in a variety of roles,
including chief financial officer and chief executive officer for the Taiwan operations, and the
representative for China. Earlier, he served with Coopers & Lybrand as an auditor. Mr. Lueth obtained his
certificate as a certified public accountant in 1991 and a certified management accountant in 1994. Mr.
Lueth received his bachelor of science in accounting degree from the University of Minnesota and an MBA
degree from the J.L. Kellogg School of Management.
Dr. Mengbo Yin has been our independent director since September 2008. He is currently a PhD
advisor at Southwestern University of Finance and Economics in China, where he also serves as head of
the university’s postgraduate department. Previously, he was the dean of the university’s school of finance
from 1996 to 2007. Professor Yin received his master’s and PhD degrees in finance from Southwestern
University of Finance and Economics in China.
Employment Agreements
Each of our executive officers has entered into an employment agreement with us. Under these
agreements, each of our executive officers is employed for a specified time period. We may terminate the
employment for cause, at any time, without notice or remuneration, for certain acts of the employee,
including but not limited to a conviction or plea of guilty to a felony, negligence or dishonesty to our
detriment, failure to perform the agreed-to duties after a reasonable opportunity to cure the failure and
failure to achieve the performance measures specified in the employment agreement. An executive officer
may terminate his employment at any time with one-month prior written notice if there is a material
reduction in his authority, duties and responsibilities or in his annual salary before the next annual salary
-88-
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 2019, the aggregate cash compensation, including reimbursement of expenses, to our executive
officers was approximately RMB2.5 million (US$0.4 million), and the aggregate cash compensation to our
non-executive directors was approximately RMB3.3 million (US$0.5 million). We did not set aside or
accrue any amounts to provide pension, retirement or similar benefits for our executive officers and
directors except for statutory social security payment.
Share Incentives
2007 Share Incentive Plan
Our 2007 Share Incentive Plan is intended to attract and retain the best available personnel for
positions of substantial responsibility, provide additional incentive to employees, directors and consultants
and promote the success of our business. We have reserved 136,874,658 ordinary shares for issuance under
our 2007 Share Incentive Plan, which was approximately 15% of our outstanding ordinary shares at the
time we authorized the number of ordinary shares reserved for issuance. The 2007 Share Incentive Plan
expired upon the tenth anniversary of the shareholder approval of the 2007 Share Incentive Plan.
On November 21, 2008, our board of directors approved the grant of options to purchase an aggregate
of 32,000,000 ordinary shares to various directors, officers and employees pursuant to the 2007 Share
Incentive Plan (the “2008 Option”). The exercise price of these options is US$0.28 per ordinary share,
equal to the closing price of our ADS on the Nasdaq Global Market at the grant date (after adjusting for the
20 ordinary shares to 1 ADS ratio). The options are scheduled to vest over a four-year period starting from
March 31, 2010, subject to the achievement of certain key performance indicators by the option holders
and their continued employment with us. As of March 31, 2018, all of the 2008 Option had been exercised
or forfeited.
On March 9, 2009, our board of directors voted to grant options to purchase an aggregate of
10,000,000 ordinary shares to employees under the amended and restated 2007 Share Incentive Plan (the
“2009 Option”). The exercise price of these options is US$0.34 per ordinary share, equal to the closing
price of our ADS on the Nasdaq Global Select Market at the grant date (after adjusting for the 20 ordinary
shares to 1 ADS ratio). These options are scheduled to vest over a four-year period starting from March 31,
2010, subject to the achievement of certain key performance indicators by the option holders and their
-89-
continued employment with us. As of March 31, 2018, all of the 2009 Option had been exercised or
forfeited.
On March 12, 2012, pursuant to the amended and restated 2007 Share Incentive Plan, our board of
directors approved the grant of options to certain directors, officers, key employees and sales agents to
purchase an aggregate of 93,445,000 ordinary shares at an exercise price of US$0.30 per ordinary share
and approved the grant of options to two independent directors who are residents of the United States in an
aggregate of 3,200,000 ordinary shares at an exercise price of US$0.31 per ordinary share (the “2012
Options”). These options are scheduled to vest over a five-year period starting from May 31, 2012, subject
to the achievement of certain key performance indicators by certain option holders and all option holders'
continued employment with us.
In November 2014, the board and compensation committee passed a resolution to modify the exercise
price of the 2012 Options. Except for the 2012 Options granted to one of the independent directors who is
a US resident, the exercise price of the rest of the 2012 Options was reduced from US$0.30 per ordinary
share (for certain directors, officers, key employees and sales agents) and US$0.31 per ordinary share (for
the other independent director who is a US resident) to US$0.001 per ordinary share while the maximum
aggregate award of 96,645,000 ordinary shares was reduced to 46,722,500 ordinary shares. The options are
subject to the same service period. As of December 31, 2014, except for the options granted to one of the
independent directors, outstanding options to purchase 91,327,722 ordinary shares were modified into
45,663,861 shares options. There was no incremental cost as a result of such option modification. As of
March 31, 2020, except for the options to purchase 400,000 ordinary shares granted to one of the
independent directors, all of the 2012 Options had been exercised or forfeited.
The following paragraphs describe the principal terms of our amended and restated 2007 Share
Incentive Plan as currently in effect.
Types of Awards. The types of awards we may grant under our 2007 Share Incentive Plan include the
following:
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
-90-
case of options, the award agreement may also specify whether the option constitutes an ISO or a non-
qualifying share option.
Acceleration of Awards upon Corporate Transactions. The outstanding awards will accelerate upon
occurrence of a change-of-control corporate transaction where the successor entity does not assume our
outstanding awards under the 2007 Share Incentive Plan. In such event, each outstanding award will
become fully vested and immediately exercisable, and the transfer restrictions on the awards will be
released and any forfeiture provisions will terminate immediately before the date of the change-of-control
transaction. If the successor entity assumes our outstanding awards and later terminates the grantee’s
service without cause within 12 months of the change-of-control transaction, the outstanding awards will
automatically become fully vested and exercisable.
Exercise Price and Term of Awards. The exercise price per share subject to an option will be
determined by the plan administrator and set forth in the award agreement which may be a fixed or variable
price related to the fair market value of our ordinary shares; provided, however, that no options may be
granted to an individual subject to taxation in the United States at less than the fair market value on the
date of grant. To the extent not prohibited by applicable laws or any exchange rule, a downward adjustment
of the exercise prices of any outstanding options may be made in the absolute discretion of the plan
administrator and will be effective without the approval of our shareholders or the approval of the affected
participants. If we grant an ISO to an employee who, at the time of that grant, owns shares representing
more than 10% of the voting power of all classes of our share capital, the exercise price cannot be less than
110% of the fair market value of our ordinary shares on the date of that grant. The term of each award will
be stated in the award agreement. The term of an award shall not exceed 10 years from the date of the grant,
except that five years is maximum term of an ISO granted to an employee who holds more than 10% of the
voting power of our share capital.
Amendment and Termination. Our board of directors may at any time amend, suspend or terminate
the 2007 Share Incentive Plan. Amendments to the 2007 Share Incentive Plan are subject to shareholder
approval to the extent required by law, or stock exchange rules or regulations. Additionally, shareholder
approval will be specifically required to increase the number of shares available for issuance under the
2007 Share Incentive Plan or to extend the term of an option beyond ten years. Unless terminated earlier,
the 2007 Share Incentive Plan will expire and no further awards may be granted after the tenth anniversary
of the shareholder approval of the 2007 Share Incentive Plan.
As of March 31, 2020, options to purchase 400,000 ordinary shares were outstanding. The following
table summarizes the outstanding options as of March 31, 2020.
Name(1)
Options
Outstanding
Exercise Price (Per
Ordinary
Share)( US$)
Grant Date
Expiration Date
Mengbo Yin .........................
400,000
0.001
March 12, 2012 March 12, 2022
(1) Upon cash exercise of all of the share options beneficially owned by Mr. Chunlin Wang, Mr. Peng
Ge and Mr. Yinan Hu in November 2017, 4,050,000, 5,350,000 and 6,500,000 ordinary shares have
been issued to Kingsford Resources, Green Ease and Sea Synergy which were respectively 100%
beneficially owned by Mr. Wang, Mr. Ge and Mr. Hu.
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
-91-
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, 2020, there were 92,646,780 ordinary shares outstanding
held by the 2014 Employee Companies.
521 Plan
On June 14, 2018, we obtained approval from our board of directors to implement the 521 Plan, which
enabled eligible Participants to participate in 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 is earlier. The repayment of the loan and interests can be extended with
mutual agreements upon maturity of the loan. The Participants are entitled to receive dividends, but during
the period when the loans are outstanding any dividends distributed to them will be used to repay interest
on the loan before their loans are repaid in full while any residual dividends will be settled at maturity.
When the loans are due, the shares and settlement of the loans will be handled as follows, based on
whether the Participant achieved certain performance targets detailed in the loan agreement:
If the Participant fails to meet the performance targets or if the Participant is an employee and the
sales team(s) of the agency or platform to which the Participant provide services collectively fail
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,
the relevant 521 Plan Employee Company will sell the shares and the proceeds from the sale will
be used to repay the principal and interest owed under the loans from the Company. If the proceeds
from the sale are more than sufficient to repay the amount owed, then any remaining amount will
be used to (i) repay the Participant’s capital contribution in purchasing the shares and (ii) pay the
Participant an interest on his or her capital contribution at a rate of up to 8% per annum. Any
remaining proceeds will be paid to the Company.
If the Participant partially meets the performance targets or if the Participant is an employee of the
Company and the sales team(s) of the agency or platform to which the Participant provide services
collectively partially meet the performance targets, part of the Participant’s shares will vest, or the
Vested Shares, in proportion to the percentage of the performance targets achieved (total number
of shares * 50%* percentage of the the performance targets achieved). Upon vesting, the Company
will settle the Vested Shares with ADS at a value equal to the excess of the settlement date fair
value of the ADS over the loan balance (principal plus interest) (net share settlement). The
settlement of the outstanding loan balance (if any) shall be otherwise negotiated and determined
by the Company and the Participants. The remaining shares not vested will be sold by the relevant
521 Plan Employee Company and the proceeds will be used to repay the principal and interest
owed under the loans. If the proceeds from the sale are more than sufficient to repay the amount
owed, then any remaining amount will be used to (i) repay the Participant’s capital contribution in
purchasing the shares, and (ii) pay the Participant an interest on his or her capital contribution at a
rate of up to 8% per annum. Any remaining proceeds will be paid to the Company.
If the Participant meets the performance target or if the Participant is an employee of the Company
and the sales team(s) of the agency or platform to which the Participant provides services
collectively meet the performance target, all of the Participant’s shares will vest. Upon vesting, the
Company will settle the Vested Shares with ADS at a value equal to the excess of the settlement
-92-
date fair value of the ADS over the loan balance (principal plus interest) (net share settlement). The
settlement of the outstanding loan balance (if any) shall be otherwise negotiated and determined
by the Company and the Participants.
Three stock holding vehicle companies, or the 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 shareholder and director 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 former principal
shareholder or from the Company and holds the shares on behalf of the Participant until the loan has been
repaid.
The following is a summary of the contractual agreements that we entered into relating to the 521 Plan:
• Loan Agreements and Entrusted Share Purchase Agreements
The nature and structure of the 521 Plan Employee Companies is that they are investment vehicle
companies holding the Company’s shares on behalf of the Participants for the purpose of the 521 Plan.
Loan agreements and entrusted share purchase agreements were signed among 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 Company for a loan representing 90% of the subscription price of the ordinary shares under the 521
Plan. Participants executed an entrusted share purchase agreement with one of the 521 Employee
Companies whereby the 521 Plan Employee Company will legally hold the ordinary shares on behalf of
the Participants. As of December 31, 2018 and 2019, the loan agreements provided a total of US$184.8
million and US$345.0 million, respectively, of loans to the VIEs and Participants of the 521 Plan with the
sole purpose of providing funds necessary for the purchase of the our ordinary shares under the 521 Plan.
All the ordinary shares are pledged as collateral to the Company for the loans and are not yet vested, 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 shall terminate after five year or upon termination
of agency relationship and 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.
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
-93-
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 2019, our board of directors
met in person or passed resolutions by unanimous written consent eight times. In addition, our independent
directors held executive sessions without the presence of non-independent directors or members of
management twice during 2019. 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 2019, our audit committee held meetings or passed resolutions by unanimous written consent six
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:
-94-
reviewing and recommending to the board with respect to the total compensation package for our
chief executive officer;
approving and overseeing the total compensation package for our executives other than the chief
executive officer;
reviewing and making recommendations to the board with respect to the compensation of our
directors; and
reviewing periodically and approving any long-term incentive compensation or equity plans,
programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
In 2019, our compensation committee held meetings or passed resolutions by unanimous written
consent twice.
Corporate Governance and Nominating Committee. Our corporate governance and nominating
committee consists of Mengbo Yin(chairman), Allen Lueth and Stephen Markscheid, all of whom satisfy
the “independence” requirements of Rule 5605 of the Nasdaq Listing Rules. The corporate governance and
nominating committee assists our board of directors in identifying individuals qualified to become our
directors and in determining the composition of the board and its committees. The corporate governance
and nominating committee is responsible for, among other things:
identifying and recommending to the board nominees for election or re-election to the board, or
for appointment to fill any vacancy;
reviewing annually with the board the current composition of the board in light of the
characteristics of independence, skills, experience and availability of service to us;
identifying and recommending to the board the names of directors to serve as members of the
audit committee and the compensation committee, as well as the corporate governance and
nominating committee itself;
advising the board periodically with respect to significant developments in the law and practice
of corporate governance, as well as our compliance with applicable laws and regulations, and
making recommendations to the board on all matters of corporate governance and on any
corrective action to be taken; and
monitoring compliance with our code of business conduct and ethics, including reviewing the
adequacy and effectiveness of our procedures to ensure proper compliance.
In 2019, our corporate governance and nominating committee held meetings or passed resolutions by
unanimous written consent three times.
Duties of Directors
Under Cayman Islands law, our directors have a fiduciary duty to act honestly, in good faith and with
a view to our best interests. Our directors also have a duty to exercise the skill they actually possess and
such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In
fulfilling their duty of care to us, our directors must ensure compliance with our amended and restated
memorandum and articles of association as amended and restated from time to time. In certain limited
circumstances, it may be possible for our shareholders to bring a derivative action on behalf of our company
if a duty owed by our directors to our company is breached.
-95-
Terms of Directors and Executive Officers
All directors hold office until their successors have been duly elected and qualified. Outside of certain
specified circumstances, including resigning, becoming bankrupt or being of unsound mind or being absent
from board meetings without special leave of absence for six consecutive months and the board of directors
resolves that his office be vacated, a director may only be removed by a special resolution of the
shareholders. Officers are elected by and serve at the discretion of the board of directors. We do not have
contracts in place with any of our directors providing for benefits upon termination of employment. For the
period during which the directors and executives have served in the office, please see “Item 6. Directors,
Senior Management and Employees — A. Directors and Senior Management.”
D. Employees
Employees, Sales Agents and Training
We had 3,344, 3,863 and 4,746 employees as of December 31, 2017, 2018 and 2019, 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, 2019:
Management and administrative staff .....................................
Financial and accounting staff ...............................................
Professional claims adjustors ..................................................
Information technology staff ...................................................
Total ......................................................................................
Number of
Employees
% of Total
2,818
211
1,627
90
4,746
59.4
4.4
33.3
1.9
100.0
As of December 31, 2017, 2018 and 2019, we had 506,231, 807,858 and 670,104 registered sales
representatives, respectively. All of these sales representatives are independent sales agents who are not
our employees and are only compensated by commissions. We have contractual relationships with these
sales agents. We primarily distribute life insurance policy with a periodic premium payment schedule. For
the sale of each of such life insurance policy, we pay the sales agent who has generated the sale periodic
commissions based on a percentage of the commissions and fees we receive from the insurance companies
for the sale and renewal of that policy, 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 insurance companies
for the sale of that policy. For the sale of each auto insurance policy through CNpad Auto, the sales agent
who has generated the sale will be paid a single commission based on a percentage of the insurance
premiums he or she generated by our third party auto insurance aggregator site partners.
Our life insurance sales agents are typically organized into sales teams with a multilevel hierarchy,
typically with five layers. A life insurance sales agent not only receives a commission for the insurance
policies that he or she sells, but also a commission for insurance policies sold by agents under his or her
management.
Our sales agents, in-house sales representatives and claims adjustors are valuable to us and are
instrumental in helping us build and maintain long-term relationships with our customers. Therefore, we
place a strong emphasis on training our sales force. We provide trainings to both new sales agents and
existing sales agents, on a monthly or quarterly basis, both offline and online. For new sales agents, we
offer orientation courses that are designed to familiarize them with corporate culture, insurance products,
and sales skills. For the existing sales agents, we offer on-the-job training courses that aim to enhance their
sales skills and knowledge of different insurance products and develop skills to build and manage their own
-96-
sales teams. Online 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, 2020, by:
each of our current directors and executive officers; and
each person known to us to own beneficially more than 5% of our shares.
As of March 31, 2020, there were 1,353,891,784 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) ..............................................................................
Peng Ge(4) ........................................................................................
Yinan Hu(5) ......................................................................................
Stephen Markscheid ........................................................................
Allen Warren Lueth .........................................................................
Mengbo Yin
All Directors and Executive Officers as a Group ..............................
39,252,100
48,562,260
199,739,310
*
*
*
290,373,670
2.9%
3.6%
14.8%
*
*
*
21.4%
Principal Shareholders:
Sea Synergy Limited(6) .....................................................................
Fanhua Employees Holdings Limited(7)
189,689,110
200,000,000
14.0%
14.8%
* 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 1,353,891,784
ordinary shares outstanding as of March 31, 2020, 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
-97-
promulgated thereunder, Better Rise Investments and Mr. Wang may be deemed to beneficially own
all of the Ordinary Shares of the Issuer held by Kingsford Resources.
(4) Includes 48,562,260 ordinary share held by Green Ease, which is 100% held by High Rank Investments
Limited, or High Rank. High Rank was 100% held by a family trust, of which Mr. Ge is the settlor and
co-beneficiary. Pursuant to Section 13(d) of the Exchange Act and the rules promulgated thereunder,
High Rank Investments and Mr. Ge may be deemed to beneficially own all of the Ordinary Shares of
the Issuer held by Green Ease.
(5) Includes (i) 10,041,200 ordinary shares in the form of ADSs directly held by Mr. Hu, and (ii)
189,698,110 ordinary shares of our company directly held by Sea Synergy Limited, or Sea Synergy.
Sea Synergy is 100% held by a family trust, of which Mr. Hu is the settlor and co-beneficiary. Pursuant
to Section 13(d) of the Exchange Act and the rules promulgated thereunder, Mr. Hu may be deemed to
beneficially own all of the Ordinary Shares of the Issuer held by Sea Synergy.
(6) Includes 189,698,110 ordinary shares of the Company directly held by Sea Synergy. The registered
address of Sea Synergy is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British
Virgin Islands.
(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, 2020, 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 49.0% 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
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, 14 million ADSs had been purchased by 521 Plan Employee
Companies at the weighted average price of US$27.38 per ADS. 14 million ADSs had been pledged to the
Company and restricted from trading, hence these 14 million ADSs were recorded as treasury shares for
accounting purpose. 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.
-98-
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 loans in the aggregate
amount of RMB2.4 billion (US$345.0 million) to the Participants. As of March 31, 2020, RMB2.4 billion
(US$345.0 million) of the principal of the loan was outstanding. 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 is earlier. 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 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.
Investment in Financial Products Offered by a Related Party
In 2019, 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, 2019, the wealth management products have matured and the principal
and interest of the wealth management products have been received. Investment income of RMB0.4 million
(US$0.1 million) has been recognized during the year of 2019.
Revenues and Other Incomes from Affiliates
In 2018 and 2019, we purchased certain wealth management products offered by an online peer-to-
peer (“P2P”) lending platform, which is considered to be a related party as the legal representative of the
company that operates the P2P platform is a relative to Mr. Yinan Hu, the Company's co-founder and
director. The wealth management products purchased on the platform by the subsidiary bear interests at
7.3% with terms of 90 days. Principal and interests are payable upon maturity of those products or on a
quarterly basis. As of December 31, 2018, the value of the outstanding wealth management products
recorded as short term investments in the consolidated statements of financial position was RMB15.0
million and no investment income has been recognized before maturity. As of December 31, 2019, these
wealth management products were matured. The principal of RMB15.0 million and interests of RMB0.4
million recorded as investment income in the consolidated statements of income have been received in
2019. There was no balance outstanding as of December 31, 2019 with regard to such products.
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.
-99-
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 was due by May 1, 2019; and our reply was 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 filed a motion to dismiss the
amended compliant on April 1, 2019.
On March 2, 2020, the Court granted in its entirety our motion to dismiss the class action lawsuit. The
dismissal was with prejudice to all claims save one relating to purported improper business practices, on
which the Court gave Plaintiff until March 20, 2020 to submit any amended complaint. Absent an amended
complaint by that date, the Court’s dismissal was to be with prejudice as to all claims. On March 12, 2020,
Plaintiff submitted a letter to the Court stating that it would not be amending its complaint, after which the
Court closed the case.
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 of RMB750,000 in aggregate in 2019, which were not material to us. While we
cannot predict the outcome of any pending or future examination, we do not believe that any pending legal
matter will have a material adverse effect on our business, financial condition or results of operations.
However, we cannot assure you that any future regulatory proceeding will not have an adverse outcome,
which could have a material adverse effect on our operating results or cash flows.
Dividend Policy
Our board of directors has discretion as to whether to distribute dividends, subject to certain
restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or
share premium account, and provided always that in no circumstances may a dividend be paid unless,
immediately following the date on which it is to be paid, our company will be able to pay its debts as they
fall due in the ordinary course of business. In addition, our shareholders may by ordinary resolution declare
a dividend, but no dividend may exceed the amount recommended by our directors. The timing, amount
-100-
and form of dividends, if any, will depend on, among other things, our future results of operations and cash
flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our
subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board
of directors.
On February 28, 2017, our board of directors approved a cash dividend policy, which provided for an
annual cash dividend to shareholders of no less than 30% of our net income attributable to shareholders in
the previous fiscal year. On April 20, 2017, our board of directors declared an annual cash dividend of
US$0.006 per ordinary share, or US$0.12 per ADS, payable on or around May 18, 2017 to shareholders of
record on May 8, 2017.
On September 18, 2017, our board of directors modified the dividend policy to adopt a quarterly
payment schedule in lieu of an annual dividend, with the dividend payout ratio of no less than 50% of net
operating income attributable to the Company's shareholders instead of no less than 30% under the annual
dividend policy previously announced on April 20, 2017. The following table summarizes the quarterly
dividend payments since the announcement of the quarterly dividend policy.
Declaration Date
November 20, 2017
March 9, 2018
May 12, 2018
August 18, 2018
November 17, 2018
March 18, 2019
May 22, 2019
August 20, 2019
November 20, 2019
March 18, 2020
Quarterly Dividend (Per
Ordinary Share)( US$)
Quarterly Dividend
(Per ADS)( US$)
0.01
0.01
0.0125
0.0125
0.0125
0.0125
0.0150
0.0150
0.0150
0.0150
0.20
0.20
0.25
0.25
0.25
0.25
0.30
0.30
0.30
0.30
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
June 6, 2019
April 3, 2019
June 20, 2019
September 4, 2019
September 19, 2019
December 5, 2019
December 19, 2019
April 2, 2020
April 16, 2020
When we pay dividends, we pay our ADS holders to the same extent as holders of our ordinary shares,
subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Any
dividend we declare will be distributed by the depositary bank to the holders of our ADSs. Cash dividends
on our ordinary shares, will be paid in U.S. dollars. Currently, we have no plan to repatriate the remaining
undistributed earnings from our subsidiaries in China and we intend to retain all of our available funds held
by subsidiaries in China and their future earnings to operate and expand our business.
We are a holding company incorporated in the Cayman Islands. We rely on dividends from our
subsidiaries in China or share premium to fund our payment of dividends, if any, to our shareholders.
Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits,
if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our
subsidiaries in China is required to set aside a certain amount of its accumulated after-tax profits each year,
if any, to fund certain statutory reserves. These reserves may not be distributed as cash dividends. Further,
if our subsidiaries in China incur debt on their own behalf, the instruments governing the debt may restrict
their ability to pay dividends or make other payments to us. Furthermore, there are still uncertainties under
the new PRC EIT law and the related regulations regarding whether the dividends we receive from our
PRC subsidiaries or dividends paid to our shareholders will be subject to PRC withholding tax. See “Item
3. Key Information — D. Risk Factors — Risks Related to Doing Business in China — Our global income
or the dividends we receive from our PRC subsidiaries may be subject to PRC tax under the EIT Law,
which could have a material adverse effect on our results of operations.” and “Item 3. Key Information —
D. Risk Factors — Risks Related to Doing Business in China — Under the EIT Law, dividends payable by
us and gains on the disposition of our shares or ADSs could be subject to PRC taxation.”
-101-
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.
B. Memorandum and Articles of Association
The following are summaries of material provisions of our amended and restated memorandum and
articles of association, as adopted by our shareholders by special resolution at the extraordinary general
meeting held on December 6, 2016, as well as the Cayman Companies Law insofar as they relate to the
material terms of our ordinary shares.
Registered Office and Objects
The registered office of our company is at the offices of Maples Corporate Services Limited, PO Box
309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands, or at such other place within the Cayman
Islands as our board of directors may decide. The objects for which our company is established are
unrestricted and we have full power and authority to carry out any object not prohibited by the Companies
Law or as the same may be revised from time to time, or any other law of the Cayman Islands.
-102-
Board of Directors
See “Item 6. Directors, Senior Management and Employees — C. Board Practices — Board of
Directors.”
Ordinary Shares
General. Our authorized share capital consists of 10,000,000,000 ordinary shares, with a par value of
US$0.001 each. All of our issued and outstanding ordinary shares are fully paid and non-assessable.
Certificates representing the ordinary shares are issued in registered form. Our shareholders who are
nonresidents of the Cayman Islands may freely hold and vote their shares.
Dividend Rights. The holders of our ordinary shares are entitled to such dividends as may be declared
by our board of directors subject to the Companies Law.
Voting Rights. On a show of hands, each shareholder present in person or by proxy (or, for a
corporation or other non-natural person, present by its duly authorized representative or proxy) at general
meeting shall have one vote and on a poll, shall have one vote for each share registered in his name in the
register of members of our company. Voting at any meeting of shareholders is by show of hands unless a
poll is demanded. A poll may be demanded by the chairman of the meeting or by any one or more
shareholders together holding at least ten percent of our paid up voting share capital, present in person or
by proxy.
A quorum required for a meeting of shareholders consists of shareholders holding in aggregate not
less than one-third of our issued voting share capital present in person or by proxy or, if a corporation or
other non-natural person, by its duly authorized representative. We may, but are not obliged, to hold an
annual general meeting of shareholders. General meetings may be convened by our board of directors on
its own initiative or upon a request to the directors by shareholders holding in aggregate not less than one-
third of our voting share capital. Advance notice of at least 14 calendar days is required for the convening
of our annual general meeting and other shareholders meetings.
An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple
majority of the votes attaching to the ordinary shares cast in a general meeting or may be approved in
writing by all of the shareholders entitled to vote at a general meeting, while a special resolution requires
the affirmative vote of no less than two-thirds of the votes attaching to the ordinary shares cast in a general
meeting or may be passed as a unanimous written resolution. A special resolution is required for important
matters such as a change of name. Holders of the ordinary shares may effect certain changes by ordinary
resolution, including consolidating and dividing all or any of our share capital into shares of larger amount
than our existing shares, and canceling any shares which have not been taken or agreed to be taken.
Transfer of Shares. Subject to the restrictions of our articles of association, as applicable, any of our
shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual
or common form or any other form approved by our board.
Liquidation. On a return of capital on winding up or otherwise (other than on conversion, redemption
or purchase of shares), assets available for distribution among the holders of ordinary shares may be
distributed among the holders of the ordinary shares as determined by the liquidator, subject to sanction of
an ordinary resolution of our company.
Calls on Shares and Forfeiture of Shares. Our board of directors may from time to time make calls
upon shareholders for any amounts unpaid on their shares in a notice served to such shareholders at least
14 days prior to the specified time of payment. The shares that have been called upon and remain unpaid
on the specified time are subject to forfeiture.
-103-
Redemption, Repurchase and Surrender of Shares. Subject to the provisions of the Companies Law
and our articles of association, we may issue shares on terms that they are subject to redemption, at our
option or at the option of the holders, on such terms and in such manner as our board of directors may
determine before the issue of such shares. We also may purchase our own shares, provided that our
shareholders have approved the manner of purchase by ordinary resolution or the manner of purchase is in
accordance with that specified in our articles of association. The manner of purchase specified in our
articles of association, which cover purchases of shares listed on an internationally recognized stock
exchange and shares not so listed, is in accordance with Section 37(2) of the Companies Law or any
modification or reenactment thereof for the time being in force. In addition, our company may accept the
surrender of any fully paid share for no consideration. Pursuant to the Companies Law, upon the repurchase,
redemption or surrender of shares, the board of directors can determine whether or not to cancel those
shares or hold them as treasury shares pending cancellation, transfer or sale. The company must obtain
authorization to hold such shares as treasury shares either in accordance with the procedures set out in the
company’s articles of association or (if there are none) by a board resolution before being repurchased,
redeemed or surrendered in accordance with the usual rules and articles.
Variations of Rights of Shares. All or any of the special rights attached to any class of shares may,
subject to the provisions of the Companies Law, be varied either with the written consent of the holders of
a majority of the issued shares of that class or with the sanction of a special resolution passed at a general
meeting of the holders of the shares of that class.
Inspection of Books and Records. Holders of our ordinary shares have no general right under Cayman
Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However, we
make our annual reports, which contain our audited financial statements, available to our shareholders. See
“Item 10. Additional Information — H. Documents on Display.”
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 prospective
and retroactive change and is included here for information purposes only. This summary is not intended
to be, and should not be construed as, legal or tax advice, does not consider any investor’s particular
circumstances, and does not deal with all possible tax consequences relating to an investment in our ADSs
or ordinary shares, such as the tax consequences under state, local and other tax laws.
Cayman Islands Taxation
According to Maples and Calder (Hong Kong) LLP, our Cayman Islands counsel, the Cayman Islands
currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation
and there is no taxation in the nature of inheritance tax ,estate duty or gift tax. No Cayman Islands stamp
duty will be payable unless an instrument is executed in, or after execution brought within the jurisdiction
of the Cayman Islands, or produced before a court of the Cayman Islands. The Cayman Islands is a party
to a double tax treaty with the United Kingdom but otherwise is not a party to any double tax treaties. There
are no exchange control regulations or currency restrictions in the Cayman Islands.
-104-
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.
Income Tax and Withholding Tax
The EIT Law, applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises
and domestic enterprises. The EIT Law imposes a withholding tax of 10% on dividends distributed by a
PRC foreign-invested enterprise to its immediate holding company outside of China, if such immediate
holding company is considered a “non-resident enterprise” without any establishment or place within China
or if the received dividends have no connection with the establishment or place of such immediate holding
company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax
treaty with China that provides for a different withholding arrangement. Holding companies in Hong Kong,
for example, are subject to a 5% withholding tax rate. The Cayman Islands, where we are incorporated,
does not have such a tax treaty with China. Thus, dividends paid to us by our subsidiaries in China may be
subject to the 10% withholding tax if we are considered a “non-resident enterprise” under the EIT Law.
Under the EIT Law and its implementation rules, any interest or premium with respect to the notes
and any gains realized on the transfer of the notes by holders who are deemed under the EIT Law as non-
resident enterprise may be subject to PRC enterprise income tax if such interest, premium or gains are
regarded as income derived from sources within the PRC. Under the EIT Law, a “non-resident enterprise”
means an enterprise established under the laws of a jurisdiction other than the PRC and whose actual
-105-
administrative organization is not in the PRC but has established offices or premises in the PRC, or which
has not established any offices or premises in the PRC but has obtained incomes derived from sources
within the PRC.
The EIT Law provides that enterprises established outside of China whose “de facto management
bodies” are located in China are considered “resident enterprises” and are therefore subject to PRC
enterprise income tax at the rate of 25% with respect to their income sourced from both within and outside
of China. The Implementing Regulation defines the term “de facto management body” as a management
body that exercises substantial and overall control and management over the production and operations,
personnel, accounting and properties of an enterprise. Circular 82 provides certain specific criteria for
determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated
enterprise is located in China. The Resident Enterprise Administrative Measures provide clarification for
resident status determination and competent tax authorities. However, Circular 82 and the Resident
Enterprise Administrative Measures apply only to offshore enterprises controlled by PRC enterprises, not
those invested in or controlled by PRC individuals, like our company. Currently there are no further detailed
rules or precedents applicable to us regarding the procedures and specific criteria for determining “de facto
management body” for the company of our type. It is still unclear if the PRC tax authorities would
determine that we should be classified as a PRC “resident enterprise.”
Although we have not been notified that we are treated as a PRC resident enterprise, we cannot assure
you that we will not be treated as a “resident enterprise” under the EIT Law, any aforesaid circulars or any
amended regulations in the future. If we are treated as a PRC resident enterprise for PRC enterprise income
tax purposes, among other things, we would be subject to the PRC enterprise income tax at the rate of 25%
on our worldwide taxable income. Furthermore, if we are treated as a PRC resident enterprise, payments
of dividends and/or other expenses of similar nature by us may be regarded as derived from sources within
the PRC and therefore we may be obligated to withhold PRC income tax at 10% on payments of dividends
on the ADSs or shares and/or interest or other expenses of similar nature on the notes to non-PRC resident
enterprise investors. In the case of non-PRC resident individual investors, the tax may be withheld at a rate
of 20%.
In addition, if we are treated as a PRC resident enterprise, any gain realized on the transfer of the
ADSs and/or ordinary shares by non-PRC resident investors may be regarded as derived from sources
within the PRC and accordingly may be subject to a 10% PRC income tax in the case of non-PRC resident
enterprises or 20% in the case of non-PRC resident individuals. The PRC tax on interest or gains may be
reduced or exempted under applicable tax treaties between the PRC and the ADS holder’s home country.
For example, according to an arrangement between the PRC and Hong Kong, for the avoidance of double
taxation, ADS holders who are Hong Kong residents, including both enterprise holders and individual
holders, may be exempted from PRC income tax on capital gains derived from a sale or exchange of the
notes.
United States Federal Income Taxation
The following discussion describes the material United States federal income tax consequences to a
United States Holder (as defined below), under current law, of an investment in our ADSs or ordinary
shares. This discussion is based on the federal income tax laws of the United States as of the date of this
annual report on Form 20-F, including the United States Internal Revenue Code of 1986, as amended (the
“Code”), existing and proposed Treasury Regulations promulgated thereunder, judicial authority, published
administrative positions of the United States Internal Revenue Service (“IRS”) and other applicable
authorities, all as of the date of this annual report on Form 20-F. All of the foregoing authorities are subject
to change, which change could apply retroactively and could significantly affect the tax consequences
described below. We have not sought any ruling from the IRS with respect to the statements made and the
conclusions reached in the following discussion and there can be no assurance that the IRS or a court will
agree with our statements and conclusions. This summary does not discuss the so-called Medicare tax on
net investment income, any United States federal non-income tax laws, including the United States federal
estate and gift tax laws, or the laws of any state, local or non-United States jurisdiction.
-106-
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;
persons required to accelerate the recognition of any item of gross income with respect to our
ADSs or ordinary shares as a result of such income being recognized on an applicable financial
statement; or
persons that hold, directly, indirectly or by attribution, ADSs, ordinary shares or other ownership
interests in us prior to our initial public offering.
If a partnership (including an entity or arrangement treated as a partnership for United States federal
income tax purposes) holds our ADSs or ordinary shares, the tax treatment of a partner in the partnership
generally will depend upon the status of the partner and the activities of the partnership. A partnership or a
partner in a partnership holding our ADSs or ordinary shares should consult its tax advisors regarding the
tax consequences of investing in and holding our ADSs or ordinary shares.
-107-
The following discussion is for informational purposes only and is not a substitute for careful tax
planning and advice. Investors should consult their tax advisors with respect to the application of
the United States federal income tax laws to their particular situations, as well as any tax
consequences arising under the federal estate or gift tax laws or the laws of any state, local or non-
United States taxing jurisdiction and under any applicable tax treaty.
For purposes of the discussion below, a “United States Holder” is a beneficial owner of our ADSs or
ordinary shares that is, for United States federal income tax purposes:
an individual who is a citizen or resident of the United States;
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.
Passive Foreign Investment Company
Based on the market price of our ADSs, the value of our assets and the composition of our income
and assets, we do not believe we were a passive foreign investment company (“PFIC”) for United States
federal income tax purposes for our taxable year ended December 31, 2019. However, we believe we were
a PFIC for 2017 and prior years. In addition, we believe that it is likely that one or more of our subsidiaries
were also PFICs for such prior years. The determination of PFIC status is based on an annual determination
that cannot be made until the close of a taxable year, involves extensive factual investigation, including
ascertaining the fair market value of all of our assets on a quarterly basis and the character of each item of
income that we earn, and is subject to uncertainty in several respects. Accordingly, we cannot assure you
that we will not be a PFIC for any taxable year or that the IRS will not take a contrary position to any
determination we make.
We will be a PFIC for United States federal income tax purposes for any taxable year if, applying
applicable look-through rules, either:
at least 75% of our gross income for such year is passive income; or
at least 50% of the value of our assets (generally determined based on a quarterly average) during
such year is attributable to assets that produce or are held for the production of passive income.
-108-
For this purpose, passive income generally includes dividends, interest, royalties and rents (other than
certain royalties and rents derived in the active conduct of a trade or business and not derived from a related
person). We will be treated as owning a proportionate share of the assets and earning a proportionate share
of the income of any other corporation in which we own, directly or indirectly, at least 25% by value of the
stock. Although the law in this regard is unclear, we treat our VIEs as being owned by us for United States
federal income tax purposes, because we exercise effective control over the operation of such entities and
because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their
results of operations in our consolidated United States GAAP financial statements.
Changes in the composition of our income and assets may cause us to be or become a PFIC. The
determination of whether we will be a PFIC for any taxable year may depend in part upon the value of our
goodwill and other unbooked intangibles not reflected on our balance sheet (which may depend upon the
market price of our ADSs or ordinary shares from time to time, which may fluctuate significantly) and also
may be affected by how, and how quickly, we spend our liquid assets and the cash we generate from our
operations and raise in any offering. Among other matters, if our market capitalization declines, we may
be or become a PFIC because our liquid assets and cash (which are for this purpose considered assets that
produce passive income) may then represent a greater percentage of our overall assets. Further, while we
believe our classification methodology and valuation approach is reasonable, it is possible that the IRS may
challenge our classification or valuation of our goodwill and other unbooked intangibles, which may result
in our being or becoming a PFIC for the current or one or more future taxable years.
If we are a PFIC for any taxable year (as we believe we were for 2017 and prior years) during which
you hold ADSs or ordinary shares, we will continue to be treated as a PFIC with respect to you for all
succeeding years during which you hold ADSs or ordinary shares, unless we cease to be a PFIC (as we
believe we did in 2018) and you make a “deemed sale” election with respect to the ADSs or ordinary shares,
as applicable. If such election is made, you will be deemed to have sold the ADSs or ordinary shares you
hold at their fair market value and any gain from such deemed sale would be subject to the rules described
in the following two paragraphs. After the deemed sale election, so long as we do not become a PFIC in a
subsequent taxable year, the ADSs or ordinary shares with respect to which such election was made will
not be treated as shares in a PFIC and, as a result, you will not be subject to the rules described below with
respect to any “excess distribution” you receive from us or any gain from an actual sale or other disposition
of the ADSs or ordinary shares. You are strongly urged to consult your tax advisors as to the possibility
and consequences of making a deemed sale election as we believe we ceased to be a PFIC in 2018.
If we are a PFIC for any taxable year (as we believe we were for 2017 and prior years) during which
you hold ADSs or ordinary shares, then, unless you make a “mark-to-market” election (as discussed below),
you generally will be subject to special and adverse tax rules with respect to any “excess distribution” that
you receive from us and any gain that you recognize from a sale or other disposition, including a pledge,
of the ADSs or ordinary shares. For this purpose, distributions that you receive in a taxable year that are
greater than 125% of the average annual distributions that you received during the shorter of the three
preceding taxable years or your holding period for the ADSs or ordinary shares will be treated as an excess
distribution. Under these rules:
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.
-109-
If we are a PFIC for any taxable year (as we believe we were for 2017 and prior years) during which
you hold our ADSs or ordinary shares and any of our non-United States subsidiaries that are corporations
(or other corporations in which we own equity interests) is also a PFIC, you would be treated as owning a
proportionate amount (by value) of the shares of each such non-United States entity classified as a PFIC
(each such entity, “a lower tier PFIC”) for purposes of the application of these rules. You should consult
your tax advisors regarding the application of the PFIC rules to any of our lower tier PFICs.
If we are a PFIC for any taxable year (as we believe we were for 2017 and prior years) during which
you hold ADSs or ordinary shares, then in lieu of being subject to the tax and interest-charge rules discussed
above, you may make an election to include gain on our ADSs or ordinary shares as ordinary income under
a mark-to-market method, provided that our ADSs or ordinary shares constitute “marketable stock” (as
defined below). If you make a mark-to-market election for our ADSs or ordinary shares, you will include
in gross income for each year that we are a PFIC an amount equal to the excess, if any, of the fair market
value of the ADSs or ordinary shares you hold as of the close of your taxable year over your adjusted basis
in such ADSs or ordinary shares. You will be allowed a deduction for the excess, if any, of the adjusted
basis of the ADSs or ordinary shares over their fair market value as of the close of the taxable year. However,
deductions will be allowable only to the extent of any net mark-to-market gains on the ADSs or ordinary
shares included in your income for prior taxable years. Amounts included in your income under a mark-to-
market election, as well as any gain from the actual sale or other disposition of the ADSs or ordinary shares,
will be treated as ordinary income. Ordinary loss treatment will apply to the deductible portion of any mark-
to-market loss on the ADSs or ordinary shares, as well as to any loss from the actual sale or other disposition
of the ADSs or ordinary shares, to the extent that the amount of such loss does not exceed the net mark-to-
market gains previously included for such ADSs or ordinary shares. Your basis in the ADSs or ordinary
shares will be adjusted to reflect any such income or loss amounts. If you make a valid mark-to-market
election, any distributions we make would generally be subject to the tax rules discussed below under “—
Dividends and Other Distributions on the ADSs or Ordinary Shares,” except the lower capital gains rate
applicable to qualified dividend income generally would not apply.
The mark-to-market election is available only for “marketable stock.” Marketable stock is stock that
is regularly traded on a qualified exchange or other market, as defined in applicable Treasury Regulations.
Our ADSs, but not our ordinary shares, are listed on the Nasdaq Global Select Market, which is a qualified
exchange or other market for these purposes. Consequently, if the ADSs remain listed on the Nasdaq Global
Select Market and are regularly traded, and you are a holder of ADSs, we expect that the mark-to-market
election will be available to you, but no assurances are given in this regard.
If you make a mark-to-market election, it will be effective for the taxable year for which the election
is made and all subsequent taxable years unless the ADSs are no longer regularly traded on a qualified
exchange or other market, or the IRS consents to the revocation of the election. You are urged to consult
your tax advisors regarding the availability of mark-to-market election, and whether making the election
would be advisable in your particular circumstances.
Because a mark-to-market election cannot be made for any lower tier PFICs that we may own, if we
were a PFIC for any taxable year (as we believe we were for 2017 and prior years), a United States Holder
that makes the mark-to-market election may continue to be subject to the tax and interest charges under the
general PFIC rules with respect to such United States Holder’s indirect interest in any investments held by
us that are treated as an equity interest in a PFIC for United States federal income tax purposes.
In certain circumstances, a United States shareholder in a PFIC may avoid the adverse tax and interest-
charge regime described above by making a “qualified electing fund” election to include in income its share
of the corporation’s income on a current basis. However, you may make a qualified electing fund election
with respect to your ADSs or ordinary shares only if we agree to furnish you annually with a PFIC annual
information statement as specified in the applicable Treasury Regulations. We do not intend to prepare or
provide the information that would enable you to make a qualified electing fund election.
-110-
A United States Holder that holds our ADSs or ordinary shares in any year in which we are a PFIC
(as we believe we were for 2017 and prior years) will be required to file an annual report containing such
information as the United States Treasury Department may require. You are strongly urged to consult
your tax advisors regarding the impact of our ceasing to be a PFIC in 2018 on your investment in
our ADSs or ordinary shares, as well as the application of the PFIC rules to your investment in our
ADSs or ordinary shares and the availability, application and consequences of the elections discussed
above.
Dividends and Other Distributions on the ADSs or Ordinary Shares
Subject to the passive foreign investment company rules discussed above, the gross amount of any
distribution that we make to you with respect to our ADSs or ordinary shares (including any amounts
withheld to reflect PRC or other withholding taxes) will be taxable as a dividend, to the extent paid out of
our current or accumulated earnings and profits, as determined under United States federal income tax
principles. Such income (including any withheld taxes) will be includable in your gross income on the day
actually or constructively received by you, if you own the ordinary shares, or by the depositary, if you own
ADSs. Because we do not intend to determine our earnings and profits on the basis of United States federal
income tax principles, any distribution paid will generally be reported as a “dividend” for United States
federal income tax purposes. Such dividends will not be eligible for the dividends-received deduction
allowed to qualifying corporations under the Code.
Dividends received by a non-corporate United States Holder may qualify for the lower rates of tax
applicable to “qualified dividend income,” if the dividends are paid by a “qualified foreign corporation”
and other conditions discussed below are met. A non-United States corporation is treated as a qualified
foreign corporation (i) with respect to dividends paid by that corporation on shares (or American depositary
shares backed by such shares) that are readily tradable on an established securities market in the United
States or (ii) if such non-United States corporation is eligible for the benefits of a qualifying income tax
treaty with the United States that includes an exchange of information program. However, a non-United
States corporation will not be treated as a qualified foreign corporation if it is a passive foreign investment
company in the taxable year in which the dividend is paid or the preceding taxable year.
Under a published IRS Notice, common or ordinary shares, or American depositary shares
representing such shares, are considered to be readily tradable on an established securities market in the
United States if they are listed on the Nasdaq Global Select Market, as are our ADSs (but not our ordinary
shares). Based on existing guidance, it is unclear whether the ordinary shares will be considered to be
readily tradable on an established securities market in the United States, because only the ADSs, and not
the underlying ordinary shares, are listed on a securities market in the United States. We believe, but we
cannot assure you, that dividends we pay, if any, on the ordinary shares that are represented by ADSs, but
not on the ordinary shares that are not so represented, will, subject to applicable limitations, be eligible for
the reduced rates of taxation. In addition, if we are treated as a PRC resident enterprise under the PRC tax
law (see “Item 10. Additional Information — Taxation — PRC Taxation”), then we may be eligible for the
benefits of the income tax treaty between the United States and the PRC. If we are eligible for such benefits,
then dividends that we pay on our ordinary shares, regardless of whether such shares are represented by
ADSs, would, subject to applicable limitations, be eligible for the reduced rates of taxation.
Even if dividends would be treated as paid by a qualified foreign corporation, a non-corporate United
States Holder will not be eligible for reduced rates of taxation if it does not hold our ADSs or ordinary
shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date or
if the United States Holder elects to treat the dividend income as "investment income" pursuant to Section
163(d)(4) of the Code. In addition, the rate reduction will not apply to dividends of a qualified foreign
corporation if the non-corporate United States Holder receiving the dividend is obligated to make related
payments with respect to positions in substantially similar or related property.
-111-
You should consult your tax advisors regarding the availability of the lower tax rates applicable to
qualified dividend income for any dividends that we pay with respect to the ADSs or ordinary shares, as
well as the effect of any change in applicable law after the date of this annual report on Form 20-F.
Any PRC or other non-United States withholding taxes imposed on dividends paid to you with respect
to the ADSs or ordinary shares generally will be treated as foreign taxes eligible for credit against your
United States federal income tax liability, subject to the various limitations and disallowance rules that
apply to foreign tax credits generally. For purposes of calculating the foreign tax credit, dividends paid to
you with respect to the ADSs or ordinary shares will be treated as income from sources outside the United
States and generally will constitute passive category income. The rules relating to the determination of the
foreign tax credit are complex, and you should consult your tax advisors regarding the availability of a
foreign tax credit in your particular circumstances.
Disposition of the ADSs or Ordinary Shares
You will recognize gain or loss on a sale or exchange of the ADSs or ordinary shares in an amount
equal to the difference between the amount realized on the sale or exchange and your tax basis in the ADSs
or ordinary shares. Subject to the discussion under “E. Taxation — Passive Foreign Investment Company,”
above, such gain or loss generally will be capital gain or loss. Capital gains of a non-corporate United States
Holder, including an individual that has held the ADSs or ordinary shares for more than one year currently
are eligible for reduced tax rates. The deductibility of capital losses is subject to limitations.
Any gain or loss that you recognize on a disposition of the ADSs or ordinary shares generally will be
treated as United States-source income or loss for foreign tax credit limitation purposes. However, if we
are treated as a PRC resident enterprise for PRC tax purposes and PRC tax is imposed on gain from the
disposition of the ADSs or ordinary shares (see “Item 10. Additional Information — Taxation — PRC
Taxation”), then a United States Holder that is eligible for the benefits of the income tax treaty between the
United States and the PRC may elect to treat the gain as PRC-source income for foreign tax credit purposes.
If such an election is made, the gain so treated will be treated as a separate class or “basket” of income for
foreign tax credit purposes. You should consult your tax advisors regarding the proper treatment of gain
or loss, as well as the availability of a foreign tax credit, in your particular circumstances.
Information Reporting and Backup Withholding
Information reporting to the IRS and backup withholding generally will apply to dividends in respect
of our ADSs or ordinary shares, and the proceeds from the sale or exchange of our ADSs or ordinary shares,
that are paid to you within the United States (and in certain cases, outside the United States), unless you
furnish a correct taxpayer identification number and make any other required certification, generally on
IRS Form W-9 or you otherwise establish an exemption from information reporting and backup
withholding. Backup withholding is not an additional tax. Amounts withheld as backup withholding
generally are allowed as a credit against your United States federal income tax liability, and you may be
entitled to obtain a refund of any excess amounts withheld under the backup withholding rules if you file
an appropriate claim for refund with the IRS and furnish any required information in a timely manner.
United States Holders who are individuals (and certain entities closely held by individuals) generally
will be required to report our name, address and such information relating to an interest in the ADSs or
ordinary shares as is necessary to identify the class or issue of which the ADSs or ordinary shares are a
part. These requirements are subject to exceptions, including an exception for ADSs or ordinary shares
held in accounts maintained by certain financial institutions and an exception applicable if the aggregate
value of all “specified foreign financial assets” (as defined in the Code) does not exceed US$50,000.
United States Holders should consult their tax advisors regarding the application of the information
reporting and backup withholding rules.
-112-
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.
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, 2020, 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
-113-
December 31, 2019, 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$6.0
million and HK dollar-denominated financial assets amounting to HK$3.2 million as of December 31, 2019.
A 10% appreciation of the RMB against the U.S. dollar and HK dollar would have resulted in a decrease
of RMB4.5 million (US$0.6 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.
-114-
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
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
(a) Depositing or
substituting the
underlying
shares
(b) Receiving or
distributing
dividends
(c) Selling or
exercising
rights
(d) Withdrawing an
underlying
security
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
(e) Transferring,
Transfers, combining or grouping of depositary receipts
splitting or
grouping
receipts
(f) General
depositary
services,
particularly
those charged
on an annual
basis.
• Other services performed by the depositary in administering
the ADRs
• Provide information about the depositary’s right, if any, to
collect fees and charges by offsetting them against dividends
received and deposited securities
(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
• Any other charge payable by depositary or its agents
-115-
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
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
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,
2018 and 2019, the depositary reimbursed US$1.7 million and US$1.7 million, respectively. For the years
ended December 31, 2018 and 2019, 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 December 31, 2019, our disclosure controls and procedures
were effective in ensuring that the 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.
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 generally accepted accounting principles 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
-116-
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.
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.
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, 2019 using criteria established in “Internal Control — Integrated Framework (2013)” issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management concluded that our internal control over financial reporting
was effective as of December 31, 2019, based on the criteria established in “Internal Control—Integrated
Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Management’s Implementation of Remediation Plans and Actions
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. Our management concluded that
there was a material weakness in our internal control over financial reporting as of December 31, 2018 due
to the ineffective management review over complex accounting matters that arise from significant
nonroutine transactions to ensure those transactions are properly accounted for in accordance with U.S.
GAAP.
To remediate the material weakness described above, we implemented the following remediation
measures during the fiscal year 2019:
● We increased the level of relevant training in accounting and disclosure under the requirements of
U.S. GAAP to our financial reporting department personnel
● We implemented robust financial reporting and management reviews controls over complex
accounting matters that arise from significant non-routine transactions during the planning stage
of these transactions, 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
● We set up a Financial Reporting & Disclosure Committee with regular meetings of no less than
quarterly, which committee is in charge of ensuring all operational, legal and financial information
are timely collected for the purpose of accounting analysis, and also oversees the effectiveness of
management's reviews of the accounting analysis on significant non-routine transactions
Our management has concluded that these measures have been fully implemented and the material
weakness has been fully remedied during 2019.
-117-
Report of 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. and its subsidiaries (the
“Company”) as of December 31, 2019, 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, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2019, 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, 2019, of the Company and our report dated April 29,
2020, expressed an unqualified opinion on those financial statements and included explanatory paragraphs
relating to the translation of Renminbi amounts into United States dollars amounts on those financial
statements, the financial statements of the Company's equity investment that were audited by other auditors,
and the Company's adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) and
related ASUs using a modified-retrospective approach.
Basis for Opinion
The Company'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 Company'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 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 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.
-118-
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.
/s/Deloitte Touche Tohmatsu
Hong Kong
April 29, 2020
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 only those changes
implemented by management and described under “—Management’s Implementation of Remediation
Plans and Actions” above and the change due to adoption of the new accounting standards related to leases
occurred during the period covered by this annual report on Form 20-F. Management believes the measures
that have been implemented to remediate the material weakness have had a material impact on our internal
control over financial reporting, and anticipates that these measures and other ongoing enhancements will
continue to have a material impact on our internal control over financial reporting in future periods.
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.
-119-
Audit fees(1) ................................................................................................................
Audit-related fees(2) ...................................................................................................
Tax fees(3) ...................................................................................................................
All other fees(4) ..........................................................................................................
For the Year Ended December 31,
2018
1,656.0
120.0
—
—
2019
(in thousands of US$)
1,693.3
250.8
—
0.4
(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 independent
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, which are approved by the Audit Committee prior to the completion
of the audit.
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, representing
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. The 2018 Share Purchase Program has expired on December
31, 2018. The table below details ADSs repurchased pursuant to this program.
Total Number of
ADSs Purchased(1)
Average Price Paid
per ADSs
Total Number of ADSs
Purchased as Part of
Publicly Announced
Programs
Maximum Number of
ADSs that May Yet Be
Purchased Under the
Programs
Period
August 2018
September 2018
October 2018
November 2018
149,760
356,652
498,268
419,094
Total
1,423,774
US$23.4961
US$25.5573
US$26.7835
US$24.7382
US$25.5285
149,760
506,412
1,004,680
1,423774
1,423774
6,350,240
5,993,588
5,495,320
5,076,226
-
-120-
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 December 31, 2019, we had repurchased
2,511,191 ADSs, representing 50,223,820 ordinary shares, for an aggregate price of approximately
US$70.7 million on the open market, under the 2019 Share Repurchase Program. The table below details
ADSs repurchased pursuant to this program. The 2019 Share Purchase Program has expired on December
31, 2019.
Total Number of
ADSs Purchased(1)
Average Price Paid
per ADSs
Total Number of ADSs
Purchased as Part of
Publicly Announced
Programs
Maximum Dollar Value
of ADSs that May Yet Be
Purchased Under the
Programs
Period
March 2019
April 2019
May 2019
June 2019
July 2019
August 2019
554,226
496,564
615,236
405,566
114,670
324,929
Total
2,511,191
US$25.7582
US$25.9009
US$27.4309
US31.5995
US$32.8101
US$31.2336
US$28.1701
554,226
1,050,790
1,666,026
2,071,592
2,186,262
2,511,191
2,511,191
US$185,724,136
US$172,862,681
US$155,986,204
US$143,170,521
US$139,408,187
US$129,259,485
-
Purchases of Equity Securities by Affiliated Purchasers
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 2019.
-121-
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, in the form of 1,423,774 ADS of treasury stocks and newly issue and sell 101,524,520 ordinary
shares in the form of 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. and its subsidiaries are included at the end of
this annual report.
-122-
Item 19. Exhibits
Exhibit Number
Description of Document
1.1
1.2
1.3
2.1
2.2
2.3
2.4*
4.1
4.2
4.3
4.4
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
Description of securities
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)
-123-
Exhibit Number
Description of Document
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
Share Purchase Agreement dated June 14, 2018, between Joy Magnificent Limited (later
renamed as Fanhua Employee Holdings Limited) and Master Trend Limited (incorporated
by reference to Exhibit 4.11 of our annual report on Form 20-F filed with the Commission
on April 30, 2019)
Share Purchase Agreement dated January 20, 2019, between Fanhua Inc. and Fanhua
Employees Holding Limited (incorporated by reference to Exhibit 4.12 of our annual report
on Form 20-F filed with the Commission on April 30, 2019)
Share Purchase Agreement dated January 20, 2019, between Fanhua Inc. and Treasure
Chariot Limited (incorporated by reference to Exhibit 4.13 of our annual report on Form
20-F filed with the Commission on April 30, 2019)
Share Purchase Agreement dated January 20, 2019, between Fanhua Inc. and Step Tall
Limited (incorporated by reference to Exhibit 4.14 of our annual report on Form 20-F filed
with the Commission on April 30, 2019)
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 (incorporated by reference to Exhibit
4.15 of our annual report on Form 20-F filed with the Commission on April 30, 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 (incorporated by reference to Exhibit 4.16 of our annual report on Form 20-F filed
with the Commission on April 30, 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 (incorporated by reference to Exhibit 4.17 of
our annual report on Form 20-F filed with the Commission on April 30, 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 (incorporated by reference to Exhibit 4.18 of our annual report
on Form 20-F filed with the Commission on April 30, 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 (incorporated by reference to Exhibit 4.19
of our annual report on Form 20-F filed with the Commission on April 30, 2019)
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 (incorporated by
reference to Exhibit 4.20 of our annual report on Form 20-F filed with the Commission on
April 30, 2019)
English Translation of Form of Supplementary Loan Agreement, dated January 10, 2019,
between various employees of the Company and Fanhua Employees Holdings Limited
(incorporated by reference to Exhibit 4.21 of our annual report on Form 20-F filed with the
Commission on April 30, 2019)
-124-
Exhibit Number
Description of Document
4.16
4.17
4.18*
4.19*
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 (incorporated by reference to Exhibit 4.22 of our annual report on Form
20-F filed with the Commission on April 30, 2019)
English Translation of Letter of Undertaking, dated December 12, 2018, issued by each
sole shareholder and director of 521 Plan Employee Companies (incorporated by reference
to Exhibit 4.23 of our annual report on Form 20-F filed with the Commission on April 30,
2019)
English Translation of Form of Second Supplement to Loan Agreement, dated November
2019, between various employees of the Company, CISG Holdings Ltd. and Fanhua
Employees Holdings Limited, Treasure Chariot Limited, or Step Tall Limited
English Translation of Form of Second Supplement to Loan Agreement, dated November
2019, between various entrepreneurial team leaders of the Company, CISG Holdings Ltd.
and Fanhua Employees Holdings Limited, Treasure Chariot Limited, or Step Tall Limited
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, 2019, prepared in accordance with U.S. Generally Accepted Accounting Principles:
(i)
(ii)
Consolidated Balance Sheets as of December 31, 2018 and 2019;
Consolidated Statements of Comprehensive Income for the Years Ended December
31, 2017, 2018 and 2019;
(iii) Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended
(i)
December 31, 2017, 2018 and 2019;
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017,
2018 and 2019; 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 27, 2020)
-125-
Exhibit Number
Description of Document
101*
Financial information from Registrant for the year ended December 31, 2019 formatted
in Inline eXtensible Business Reporting Language (XBRL):
(i)
(ii)
Consolidated Balance Sheets as of December 31, 2018 and 2019;
Consolidated Statements of Income and Comprehensive Income for the Years
Ended December 31, 2017, 2018 and 2019;
(iii) Consolidated Statements of Shareholder’s Equity for the Years Ended December
31, 2017, 2018 and 2019;
(iv) Consolidated Statements of Cash Flows for the Years Ended December 31, 2017,
2018 and 2019;
(v)
Notes to Consolidated Financial Statements; and
Schedule 1 — Condensed Financial Statements of Fanhua Inc.
104
(vi) Cover Page Interactive Data File (embedded within the Inline XBRL document)
*
**
Filed with this Annual Report on Form 20-F.
Furnished with this Annual Report on Form 20-F.
-126-
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 29, 2020
-127-
EXHIBIT 8.1
List of Subsidiaries and Affiliated Entities
(As of March 31, 2020)
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%
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
PRC
22. Fanhua Lianxing Insurance Sales Co., Ltd. (16)
100%
PRC
Subsidiaries and Affiliated Entities(1)
23. Jiangsu Fanhua Lianchuang Insurance Agency Co.,
Ltd. (15)
24. Zhejiang Fanhua Tongchuang Insurance Agency Co.,
Ltd. (15)
25. Liaoning Fanhua Gena Insurance Agency Co., Ltd. (15)
26. Shanghai Fanhua Guosheng Insurance Agency Co.,
Ltd. (15)
27. Jiangxi Fanhua Insurance Agency Co., Ltd. (15)
28. Hunan Fanhua Insurance Agency Co., Ltd. (17)
29. Fujian Fanhua Guoxin Insurance Agency Co., Ltd. (18)
Insurance Claims Adjusting Segment
30. Fanhua Insurance Surveyors & Loss Adjustors Co.,
Ltd. (19)
31. Shanghai Fanhua Teamhead Insurance Surveyors &
Loss Adjustors Co., Ltd. (20)
32. Shenzhen Fanhua Training Co., Ltd. (21)
33. Shenzhen Fanhua Software Technology Co., Ltd. (21)
34. Shenzhen Huazhong United Technology Co., Ltd. (22)
35. Guangzhou Suiyuan Insurance Surveyors & Loss
Adjustors Co., Ltd. (23)
Consolidated Variable Interest Entities
1. Fanhua Employee Holdings Limited
2. Step Tall Limited
3. Treasure Chariot Limited
Affiliated Entities
4. Puyi Inc.(24)
5. CNFinance Holdings Limited(25)
6. Shanghai Teamhead Automobile Surveyors Co., Ltd.
(26)
Percentage
Attributable to
Our Company
Place of
Incorporation
100%
100%
100%
100%
100%
55%
100%
44.7%
44.2%
44.7%
44.7%
44.7%
100%
100%
100%
100%
4.5%
18.5%
17.7%
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) 100% of the equity interests in this company are held directly by Fanhua Insurance Sales Service Group Company Limited. It 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) 44.7% of the equity interests in the company are held directly by Guangdong Meidiya Investment Co., Ltd.
(20) 99% of the equity interests in this company are held directly by Fanhua Insurance Surveyors & Loss Adjustors Co., Ltd.
(21) 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.
(22) 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.
(23) 99.99% of the equity interests in this company are held directly by Fanhua Insurance Sales Service Group Company Limited, and the
remaining 0.01% are held by an individual on behalf of the Company.
(24) We directly own 4.5% of the equity interests in this company.
(25) We directly own 18.5% of the equity interests in this company.
(26) 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 29, 2020
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 29, 2020
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, 2019 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 29, 2020
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, 2019 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 29, 2020
By: /s/ Peng Ge
Name: Peng Ge
Title: Chief Financial Officer
[Letterhead of Maples and Calder]
EXHIBIT 15.1
Our ref
Direct tel
Email
RHT/628018-000001/16446973V1
+852 3690 7537
ray.tso@maples.com
Fanhua Inc.
27/F, Pearl River Tower
No. 15 West Zhujiang Road
Guangzhou, Guangdong 510623
People’s Republic of China
April 29, 2020
Dear Sirs
Re: Fanhua Inc. (the “Company”)
We consent to the reference to our firm under the headings “Item 10. Additional Information—E. Taxation—
Cayman Islands Taxation” and “Item 16G. Corporate Governance” in the Company’s Annual Report on Form 20-
F for the year ended December 31, 2019 , which will be filed with the United States Securities and Exchange
Commission in the month of April 2020.
Yours faithfully
/s/ Maples and Calder (Hong Kong) LLP
Maples and Calder (Hong Kong) LLP
[Letterhead of Global Law Office]
EXHIBIT 15.2
April 29, 2020
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, 2019 ,
which will be filed with the Securities and Exchange Commission in April 2020.
Yours faithfully,
/s/ Global Law Office
Global Law Office
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 29, 2020, relating to the financial statements of Fanhua Inc. and its subsidiaries (the
“Company”) and the effectiveness of the Company's internal control over financial reporting, appearing in this
Annual Report on Form 20-F of Fanhua Inc. for the year ended December 31, 2019 .
EXHIBIT 15.3
/s/Deloitte Touche Tohmatsu
Hong Kong
April 29, 2020
Exhibit 15.4
Consent of Independent Registered Public Accounting Firm
The Board of Directors
We consent to the incorporation by reference on Form 20-F of Fanhua, Inc. of our report dated April 27, 2020,
with respect to the consolidated balance sheets of CNFinance Holdings Limited as of December 31, 2019 and
2018, 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, 2019, and the related notes, which
report appears in the December 31, 2019 annual report on Form 20-F of CNFinance Holdings Limited.
Our report dated April 27, 2020 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 29, 2020
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, 2018 and 2019 ................................ F-5
Consolidated Statements of Income and Comprehensive Income for the Years Ended December
31, 2017, 2018 and 2019.................................................................................................................... F-7
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2017, 2018
and 2019 ........................................................................................................................................... F-9
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2018 and 2019 ...... F-11
Notes to the Consolidated Financial Statements .................................................................................. F-14
Schedule 1—Condensed Financial Statements of Fanhua Inc. ............................................................. F-58
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. and its
subsidiaries (the “Company”) as of December 31, 2018 and 2019, 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, 2019, and 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 Company as of December 31, 2018 and 2019, and the results
of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in
conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2(aa) to the financial statements, the Company has changed its method of accounting
for leases on January 1, 2019 due to the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases
(Topic 842) and related ASUs using a modified-retrospective approach.
Convenience Translation
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(v) to the
consolidated financial statements. Such United States dollar amounts are presented solely for the convenience of
readers outside of People's Republic of China.
Other Matter
We did not audit the financial statements of CNFinance Holdings Limited, or CNFinance, the Company’s
investment in which is accounted for by use of the equity method. The accompanying financial statements of the
Company include its equity investment in CNFinance of RMB576 million and RMB353 million as of December
31, 2018 and 2019, respectively, and its equity earnings in CNFinance of RMB109 million, RMB171 million,
and RMB99 million for the years ended December 31, 2017, 2018, and 2019, 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 Company’s internal control over financial reporting as of December 31,
2019, 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 29, 2020, expressed an
unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’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
F-2
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 and the report of the other auditors provide a reasonable
basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the
financial statements that was communicated or required to be communicated to the audit committee and that (1)
relates to accounts or disclosures that are material to the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any
way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical
audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to
which it relates.
Investment in Affiliates - Other-than-temporary Impairment ("OTTI") assessment of the equity method
investment in CNFinance Holdings Limited ("CNFinance") — Refer to Notes 2(i) and 7 to the consolidated
financial statements
Critical Audit Matter Description
The Company accounts for its 18.5% of equity interests in CNFinance using the equity method (the "EMI
in CNFinance" or the "investment"). The Company reviews its equity method investment periodically to
determine whether an other-than-temporary exist. The factors used by management to make this determination
include the duration and severity of the fair value decline, the financial condition and near-term prospects of
CNFinance, and the Company's intent and ability to hold its EMI in CNFinance until recovery. As of December
31, 2019, the fair value of the EMI in CNFinance was below the carrying value although the EMI in CNFinance
generated positive equity income. Based on management’s evaluation, it was concluded that the decline in fair
value of its investment in CNFinance below its carrying value is deemed to be other-than-temporary.
Given the significant judgment required to determine whether the decline in fair value of the EMI in
CNFinance represents a temporary or other-than-temporary impairment, performing audit procedures to
evaluate the reasonableness of management’s assessment required a high degree of auditor judgement and an
increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the evaluation of the reasonableness of the Company's impairment
assessment discussed above included the following, among others:
We tested the design and operating effectiveness of the controls relating to management’s impairment
assessment for the EMI in CNFinance.
We evaluated the appropriateness of management's OTTI assessment that the loss in value was other-
than-temporary in accordance with accounting principles generally accepted in the United States of
America, including 1) whether relevant positive and negative factors have been appropriately identified;
2) considerations around the severity and/or duration of the decline in the market value of CNFinance
represents an other-than-temporary loss; and 3) the Company's expectation of likelihood of recovery to
occur in the near term and its intent and ability to hold the impaired equity investment until recovery.
We evaluated the appropriateness and accuracy of information used in the OTTI assessment by
inspecting evidence used in management’s assessment and corroborating the information to appropriate
independent data. The data and key assumptions include the following:
‐
‐
Historical and expected financial condition and near-term prospects of CNFinance
The publicly traded stock price of CNFinance and corresponding volatility
F-3
‐
Changes to the macro-economic, competitive and operational environment
/s/ Deloitte Touche Tohmatsu
Hong Kong
April 29, 2020
We have served as the Company’s auditor since 2007.
F-4
FANHUA INC.
Consolidated Statements of Financial Position
(In thousands, except for shares and per share data)
2018
RMB
As of December 31,
2019
RMB
2019
US$
Note 2(v)
ASSETS:
Current assets:
772,823
Cash and cash equivalents .............................................
Restricted cash ..............................................................
75,343
Short term investments (Note 2(d)) ................................ 1,554,060
Accounts receivable, net of allowance for
doubtful accounts of RMB21,241 and
RMB20,495
of
as
December 31, 2018
and 2019,
respectively (Note 2(e)) ..............................................
Insurance premium receivables (Note 2(e)) ....................
Other receivables, net (Note 4) ......................................
508,474
5,267
86,150
58,990
Other current assets .......................................................
Total current assets ..................................................... 3,061,107
(US$2,944)
Non-current assets:
37,934
Property, plant, and equipment, net (Note 5) ..................
109,869
Goodwill, net (Note 6) ...................................................
1,264
Intangible assets, net (Note 2(g))....................................
9,320
Deferred tax assets (Note 12) .........................................
587,517
Investments in affiliates (Note 7) ...................................
59,600
Other non-current assets (Note 2(j)) ...............................
Right of use assets (Note 8) ...........................................
—
805,504
Total non-current assets ..............................................
Total assets .................................................................. 3,866,611
LIABILITIES AND EQUITY:
Current liabilities:
Accounts payable ...........................................................
Insurance premium payables ...........................................
Other payables and accrued expenses
(Including
rights
refundable
deposits of the consolidated VIE of
RMB8,184 and nil as of December 31,
2018 and 2019, respectively) (Note 10) .......................
Accrued payroll ..............................................................
Income taxes payable .....................................................
332,685
15,248
share
Current operating lease liability (Note 8).........................
Total current liabilities .................................................
254,824
97,637
205,189
—
905,583
169,653
95,952
1,612,351
682,171
5,067
61,570
54,987
2,681,751
40,806
109,869
322
7,327
363,414
46,917
190,437
759,092
3,440,843
24,369
13,783
231,600
97,988
728
8,844
7,898
385,210
5,862
15,782
46
1,052
52,201
6,739
27,354
109,036
494,246
382,882
7,901
54,998
1,135
220,290
101,664
155,251
79,986
947,974
31,643
14,603
22,300
11,489
136,168
The accompanying notes are an integral part of the consolidated financial statements.
F-5
FANHUA INC.
Consolidated Statements of Financial Position—(Continued)
(In thousands, except for shares and per share data)
Non-current liabilities:
Other tax liabilities (Note 12).........................................
Deferred tax liabilities (Note 12) ....................................
Refundable share rights deposits (Including refundable
share rights deposits of the consolidated VIE of
RMB138,328 and RMB266,901 as of December 31,
2018 and 2019, respectively) (Note 9(b)) ....................
Non-current operating lease liability (Note 8) .................
Total non-current liabilities.........................................
As of December 31,
2018
RMB
2019
RMB
2019
US$
Note 2(v)
70,350
5,624
70,350
7,898
10,105
1,134
138,328
—
214,302
266,901
103,252
448,401
Total liabilities .............................................................
1,119,885
1,396,375
Commitments and contingencies (Note 17)
each;
1,301,915,084
Equity:
Ordinary shares (Authorized shares:10,000,000,000 at
US$0.001
and
issued
1,252,367,264 shares, of which 1,123,475,604 and
1,073,891,784 shares were outstanding as of
December 31, 2018 and 2019, respectively) (Note
13) .............................................................................
Treasury stock (Note 20) ...............................................
Additional paid-in capital ..............................................
Statutory reserves (Note 15)...........................................
Retained earnings ..........................................................
Accumulated other comprehensive loss ..........................
Total shareholders’ equity ...........................................
Noncontrolling interests ..............................................
Total equity ..................................................................
Total liabilities and shareholders' equity ....................
9,583
(1,156)
437,176
480,881
1,799,989
(93,290)
2,633,183
113,543
2,746,726
3,866,611
9,235
(1,146)
393
508,739
1,479,494
(65,429)
1,931,286
113,182
2,044,468
3,440,843
The accompanying notes are an integral part of the consolidated financial statements.
F-6
38,338
14,831
64,408
200,576
1,327
(165)
56
73,076
212,516
(9,398)
277,412
16,258
293,670
494,246
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 from operations ...............................
Other income, net:
Investment income .........................................
Interest income ...............................................
Others, net ......................................................
Income
from continuing operations
before income taxes, share of income
and impairment of affiliates, net and
discontinued operations ............................
Income tax expense ........................................
Share of
impairment of
income and
affiliates, net ...............................................
Net income from continuing operations...........
Net income from discontinued operations,
net of tax (Note 2(w) & Note 3) ...................
Net income ....................................................
income attributable
Less: net
the
to
noncontrolling interests ...............................
Net income attributable to the Company’s
shareholders ..............................................
Year Ended December 31,
2017
RMB
2018
RMB
2019
RMB
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)
3,335,397
3,193,625
141,772
370,606
3,706,003
(2,263,952)
(2,166,126)
(97,826)
(219,496)
(2,483,448)
(278,085)
(475,107)
(3,815,337)
(3,045,520)
(3,236,640)
2019
US$
Note 2(v)
479,100
458,736
20,364
53,234
532,334
(325,196)
(311,144)
(14,052)
(31,529)
(356,725)
(39,944)
(68,245)
(464,914)
273,136
425,743
469,363
67,420
191,784
25,891
14,284
195,456
34,207
11,807
79,070
2,828
9,664
11,358
406
1,388
505,095
(167,803)
108,944
446,236
5,480
451,716
667,213
(224,586)
174,468
617,095
560,925
(143,816)
(224,555)
192,554
80,572
(20,658)
(32,255)
27,659
—
—
—
617,095
192,554
27,659
2,488
7,180
3,622
520
449,228
609,915
188,932
27,139
The accompanying notes are an integral part of the consolidated financial statements.
F-7
FANHUA INC.
Consolidated Statements of Income and Comprehensive Income - Continued
(In thousands, except for shares and per share data)
2017
RMB
Year Ended December 31,
2018
RMB
2019
RMB
2019
US$
Note 2(v)
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:
Basic:
Diluted
Net income
Other comprehensive income (loss), net of
tax:
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
0.17
0.00
0.17
0.17
0.00
0.17
3.46
0.00
3.46
3.46
0.00
3.46
0.02
0.00
0.02
0.02
0.00
0.02
0.50
0.00
0.50
0.50
0.00
0.50
1,231,698,725
1,261,223,049
1,239,264,464
1,240,854,034
1,092,601,338
1,093,229,436
1,092,601,338
1,093,229,436
451,716
617,095
192,554
27,659
Foreign currency translation adjustments
(10,664)
(10,194)
10,178
1,462
Unrealized net gains (loss) on available-for-
sale 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)
1,263
441,683
—
17,231
2,475
(1,763)
605,138
452
220,415
65
31,661
2,488
7,180
3,622
520
439,195
597,958
216,793
31,141
The accompanying notes are an integral part of the consolidated financial statements.
F-8
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
Balance as of January 1, 2017
Net income .............................................
1,165,072,926
—
Foreign currency translation..................
Exercise of share options .......................
Provision for statutory reserves .........
Private placement ...................................
Subscription receipt ...............................
Distribution of dividend.........................
Disposal of subsidiaries .........................
Unrealized net gains (loss) on
available-for-sale investments ............
Share of other comprehensive
gain of affiliates...................................
—
69,118,158
—
66,000,000
—
—
—
—
—
Balance as of December 31,
2017 ..................................................... 1,300,191,084
—
—
1,760,000
Net income .............................................
Foreign currency translation
Exercise of share options ...................
Repurchase of ordinary shares from
Amounts
RMB
8,658
Additional
Paid-in Capital
RMB
2,301,655
—
—
458
—
455
—
—
—
—
—
—
—
64,488
—
200,632
—
(137,216)
—
—
—
9,571
—
—
12
2,429,559
—
—
3,274
shareholder (Note 13)
Repurchase of ordinary shares from
open market (Note 20)
Provision for statutory reserves .............
Subscription receipt ...............................
Distribution of dividend.........................
Share of other comprehensive
loss of affiliates ...................................
—
—
—
—
—
—
—
—
—
—
—
—
(1,464,163)
150,000,000
(251,024)
—
—
(280,470)
28,475,480
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Statutory
Reserves
RMB
311,590
Retained
Earnings
RMB
1,018,928
—
449,228
—
—
30,658
—
—
—
(31,210)
—
—
—
—
(30,658)
—
—
—
31,210
—
—
311,038
—
—
—
1,468,708
609,915
—
—
—
—
—
169,843
—
—
—
(169,843)
—
(108,791)
Accumulated
Other
Comprehensiv
e loss
RMB
(65,844)
—
(27,895)
—
—
—
—
—
—
(632)
1,263
(93,108)
—
1,581
—
—
—
—
—
—
—
—
(1,763)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(960)
(196)
—
—
—
—
Subscription
Receivables
RMB
(288,135)
—
17,231
—
—
—
22,187
—
—
—
—
(248,717)
—
(11,775)
—
—
—
—
260,492
—
—
—
Noncontrolling
Interests
RMB
117,242
2,488
—
—
—
—
—
—
(8,388)
—
—
111,342
7,180
—
—
Total
RMB
3,404,094
451,716
(10,664)
64,946
—
201,087
22,187
(137,216)
(8,388)
(632)
1,263
3,988,393
617,095
(10,194)
3,286
—
(1,465,123)
—
—
—
(4,979)
(251,220)
—
260,492
(394,240)
—
(1,763)
113,543
2,746,726
Balance as of December 31,
2018 ..................................................... 1,301,951,084
9,583
437,176
178,475,480
(1,156)
480,881
1,799,989
(93,290)
The accompanying notes are an integral part of the consolidated financial statements.
F-9
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
—
—
—
—
—
—
Net income ..............................................
—
Foreign
currency
translation .............................................
—
Exercise of share options ....................... 640,000
Repurchase of ordinary
open
shares
market (Note 20)..................................
from
—
—
4
—
(437,176)
50,223,820
(342)
Cancellation of treasury
shares ...................................................
(50,223,820)
(352)
—
(50,223,820)
352
Share-based
compensation .......................................
Provision
for
statutory
reserves .................................................
Distribution of dividend .........................
Disposal of subsidiaries..........................
Unrealized net gains on
available-for-sale
investments ..........................................
Share
other
of
comprehensive gain of
affiliates ..........................................
Balance as of December
—
—
—
—
—
—
—
—
—
—
—
—
393
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Retained
Earnings
RMB
188,932
—
(46,497)
—
—
(38,814)
(435,072)
10,956
—
—
—
—
—
—
38,814
—
(10,956)
—
—
Accumulated
Other
Comprehensive
loss
RMB
Subscription
Receivables
RMB
Noncontrolling
Interests
RMB
Total
RMB
—
10,178
—
—
—
—
—
—
17,231
452
—
—
—
—
—
—
—
—
—
—
—
3,622
192,554
10,178
4
(484,015)
—
393
—
—
—
—
(3,790)
(193)
—
(438,862)
(193)
—
—
17,231
452
113,182
2,044,468
31, 2019 .......................................... 1,252,367,264
9,235
393
178,475,480
(1,146)
508,739
1,479,494
(65,429)
Balance as of December
31, 2019 in US$ ............................. 1,252,367,264
1,327
56
178,475,480
(165)
73,076
212,516
(9,398)
16,258
293,670
The accompanying notes are an integral part of the consolidated financial statements.
F-10
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 expense .........................................
Amortization of intangible assets ........................
Non-cash operating lease expense ......................
Allowance for doubtful accounts ........................
Compensation expenses associated with stock
options ...........................................................
Loss (gain) on disposal of property, plant and
equipment .......................................................
Fair value change of non-current assets ..............
Investment income .............................................
Loss (gain) on disposal of subsidiaries ................
Share of income and impairment of affiliates,
net ..................................................................
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 ..............................................
Lease liability ....................................................
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..........
Proceeds
from disposal of property and
equipment .......................................................
Disposal of subsidiaries, net of cash disposed
of RMB94,677, RMB576 and RMB1,517
(US$218)
in 2017, 2018 and 2019,
respectively ....................................................
Increase in other receivables ...............................
2017
RMB
Year Ended December 31,
2018
RMB
RMB
2019
2019
US$
Note 2(v)
451,716
617,095
192,554
27,659
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
16,280
942
69,482
6,533
393
2,339
135
9,981
938
56
25
4,241
(65,616)
58
4
609
(9,425)
8
224,555
4,475
(180,230)
200
3,973
—
4,003
1,612
50,205
(7,347)
(25,533)
4,052
(49,969)
—
(76,564)
—
178,324
32,255
643
(25,888)
29
571
—
575
232
7,211
(1,055)
(3,668)
582
(7,178)
—
(10,998)
—
25,615
(11,055,424)
(11,380,198)
(7,498,701)
(1,077,121)
11,531,556
(20,899)
12,488,495
(22,765)
7,523,257
(19,686)
1,080,648
(2,829)
156
203
47
7
(20,564)
(500,000)
F-11
—
—
7,042
—
1,012
—
FANHUA INC.
Consolidated Statements of Cash Flows— (Continued)
(In thousands)
2017
RMB
Year Ended December 31,
2018
RMB
2019
RMB
—
—
41,452
500,000
(18,150)
(50,000)
50,000
—
—
—
—
2019
US$
Note 2(v)
—
—
—
—
(23,723)
1,567,585
11,959
1,717
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 ........................................................
Cash flows from financing activities:
Repayment of advances from a disposed
subsidiary.......................................................
(103,446)
—
—
—
Proceeds
of
employee
and
grantee
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
its
Sales & Services Co., Ltd and
subsidiaries
Net cash generated (used in) from financing
activities ........................................................
Net increase (decrease) in cash and cash
equivalents, and restricted cash ....................
Cash and cash equivalents and restricted
22,187
211,054
111,304
15,988
201,087
(137,216)
—
64,946
—
(326,725)
(4,979)
3,286
—
(435,072)
(3,790)
4
—
(62,494)
(544)
1
—
—
—
(251,220)
(484,015)
(69,525)
(1,318,611)
—
—
22,689
19,463
2,796
47,558
(1,664,506)
(792,106)
(113,778)
175,962
426,906
(601,823)
(86,446)
cash at beginning of year ..............................
273,979
439,033
848,166
121,831
Effect of exchange rate changes on cash and
cash equivalents ..............................................
Cash and cash equivalents and restricted
cash at end of year ........................................
(10,908)
(17,773)
19,262
2,767
439,033
848,166
265,605
38,152
in
Reconciliation
amounts
consolidated Financial position:
Cash and cash equivalents at end of year,
excluding held for sale .......................................
the
on
Restricted cash at end of year, excluding
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 ...................................
363,746
772,823
169,653
75,287
75,343
95,952
24,369
13,783
439,033
848,166
265,605
38,152
103,155
109,863
189,487
27,218
F-12
FANHUA INC.
Consolidated Statements of Cash Flows— (Continued)
(In thousands)
Supplemental disclosure of non-cash
operating activity:
Interest repayment (Note 2(m)) ................
Supplemental disclosure of non-cash
investing activities:
Disposal of subsidiaries ...........................
Other receivable and other non-current
asset related to disposal of entities .........
assets
Right-of-use
obligations
exchange
(Note 8) ................................................
obtained
lease
for
in
loan
Conversion of
receivables
interest
(Note 3 (e))...........................................
the convertible
equity
into
Supplemental disclosure of non-cash
financing activities:
Dividends offset against proceeds of
employee subscriptions (Note 2(m)) ......
Dividends payment offset ........................
10% consideration related to repurchase
of ordinary shares from a shareholder
(Note 9) ................................................
2017
RMB
Year Ended December 31,
2018
RMB
2019
RMB
2019
US$
Note 2(v)
—
5,557
—
—
46,582
10,638
61,372
8,816
—
—
—
—
—
78,344
11,253
10,929
1,570
49,438
(62,536)
—
—
—
—
146,512
(8,184)
(1,176)
64,152
—
—
—
—
—
F-13
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 9 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 base 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 estimates of allowance for doubtful receivables, estimates made in
assumptions related to the valuation of the convertible loan receivable, estimates associated with equity-method
investment impairment assessments. Actual results could differ from those estimates.
(c)
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash on hand, bank deposits and short-term, highly liquid
investments 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 RMB3,823 and RMB4,646 as of December 31,
2018 and 2019, 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 Banking and Insurance Regulatory Commission ("CBIRC") 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 balance for guarantee and
entrustment deposits were RMB71,520 and RMB91,306 as of December 31, 2018 and 2019, respectively.
F-14
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2)
Summary of Significant Accounting Policies (Continued)
(d)
Short Term Investments
Short term investments are mainly available-for-sale investments in debt securities that do not have a
quoted market price in an active market. Available-for-sale investments are carried at fair values and the
unrealized gains or losses from the changes in fair values are included in accumulated other comprehensive
income or loss. The Group benchmarks the values of its other investments against fair values of comparable
investments and reference to product valuation reports as of the balance sheet date, and categorizes all fair value
measures of short term investments as level 2 of the fair value hierarchy.
The short term investments balance were RMB1,554,060 and RMB1,612,351 as of December 31, 2018
and 2019, respectively. No impairment loss on short term investments was identified for each of the years ended
December 31, 2017, 2018 and 2019.
(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,
2018
RMB
529,715
(21,241)
508,474
2019
RMB
702,666
(20,495)
682,171
The following table summarizes the movement of the Group's allowance for doubtful accounts for
accounts receivables:
Balance at the beginning of the year ..............................................................................
16,792
Provision for doubtful accounts .....................................................................................
14,052
(10,646)
Write-offs .....................................................................................................................
20,198
Balance at the end of the year ........................................................................................
20,198
6,791
(5,748)
21,241
2017
RMB
2018
RMB
2019
RMB
21,241
6,533
(7,279)
20,495
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-15
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2)
Summary of Significant Accounting Policies (Continued)
(f)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization are calculated using the
straight-line method over the following estimated useful lives, taking into account residual value:
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 expense recognized in the consolidated statements of income and comprehensive
income:
Operating costs .............................................................................................................. 43
Selling expenses ............................................................................................................ 2,775
11,281
General and administrative expenses ..............................................................................
14,099
Depreciation expense .....................................................................................................
232
4,769
5,832
10,833
216
7,144
8,920
16,280
2017
RMB
2018
RMB
2019
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, 2019. 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.
F-16
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2)
Summary of Significant Accounting Policies (Continued)
(g)
Goodwill and Other Intangible Assets (Continued)
Goodwill and amortization of intangible assets (Continued)
In 2018 and 2019, 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, 2018 and 2019.
Identifiable intangibles assets are required to be determined separately from goodwill based on their fair
values. In particular, an intangible asset acquired in a business combination should be recognized as an asset
separate from goodwill if it satisfies either the “contractual-legal” or “separability” criterion. Intangible assets with
a finite economic life are carried at cost less accumulated amortization. Amortization for identifiable intangible
assets categorized as customer relationships are computed using the accelerated method, while amortization for
other identifiable intangible assets are computed using the straight-line method over the intangible assets'
economic lives. Intangible assets with indefinite economic lives are not amortized but carried at cost less any
subsequent accumulated impairment losses. If an intangible asset that is not being amortized is subsequently
determined to have a finite economic life, it will be tested for impairment and then amortized prospectively over
its estimated remaining economic life and accounted for in the same manner as other intangible assets that are
subject to amortization. Intangible assets with indefinite economic lives are tested for impairment annually or more
frequently if events or changes in circumstances indicate that they might be impaired.
Separately identifiable intangible assets consist of brand names, trade names, customer relationships, non-
compete agreements, agency agreement and licenses, and software and systems.
The intangible assets, net consisted of trade names with cost of RMB8,898. The trade names have an
estimated useful life of 9.4 to 10 years and accumulated amortization of RMB7,634 and RMB8,576 as of
December 31, 2018 and 2019.
Aggregate amortization expenses for intangible assets were RMB33,177, RMB15,946 and RMB942 for
the years ended December 31, 2017, 2018 and 2019, respectively.
Impairment of intangible assets with definite lives
The Group evaluates the recoverability of identifiable intangible assets with determinable useful lives
whenever events or changes in circumstances indicate that these assets' carrying amounts may not be recoverable.
The Group measures the carrying amount of identifiable intangible assets with determinable useful lives against
the estimated undiscounted future cash flows associated with each asset. Impairment exists when the sum of the
expected future net cash flows is less than the carrying value of the asset being evaluated. Impairment loss is
calculated as the amount by which the carrying value of the asset exceeds its fair value. Fair value is estimated
based on various valuation techniques, including the discounted value of estimated future cash flows. The
evaluation of asset impairment requires the Group to make assumptions about future cash flows over the life of the
asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed
and estimated amounts. During the years ended December 31, 2017, 2018 and 2019, the Group recognized no
impairment losses on identifiable intangible assets with determinable useful lives.
F-17
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2)
Summary of Significant Accounting Policies (Continued)
(g)
Goodwill and Other Intangible Assets (Continued)
Impairment of 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, 2017, 2018 and 2019, the Group
recognized no impairment losses on its indefinite-lived intangible assets.
The estimated amortization expenses for the next five years are: RMB322 in 2020 and nil in years after
2020.
(h)
Other Receivables and Other Current Assets
Other receivables and other current assets mainly consist of loans and amounts due from third parties,
advances, deposits, interest receivables and prepaid expenses. See Note 4 for details.
(i)
Investment in Affiliates
The Group uses the equity method of accounting for investments in which the Group has the ability to
exercise significant influence, but does not have a controlling interest.
The Group continually reviews its investment in equity investees to determine whether a decline in fair
value to an amount below the carrying value is other-than temporary. The primary factors the Group considers in
its determination are the duration and severity of the decline in fair value; the financial condition, operating
performance and the prospects of the equity investee; and other company specific information such as the stock
price of the investee and its corresponding volatility, if publically traded, the Group's intent and ability to hold the
investment until recovery, and changes in the macro-economic, competitive and operational environment of the
investee. If the decline in fair value is deemed to be other-than-temporary, the carrying value of the equity investee
is written down to fair value.
(j)
Other Non-current Assets
Other non-current assets mainly represent long-term equity investments accounted for under the
measurement alternative method and the convertible loan receivable.
Equity securities without readily determinable fair value
The Group has long-term investments in equity security of certain privately held companies which the
Group exerts no significant influence or a controlling interest. As a result of adoption of "Financial Instruments-
Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU
2016-01") in January 1, 2018, equity securities without readily determinable fair values that do not qualify for the
practical expedient in ASC 820, Fair Value Measurements and Dislcosure to estimate fair value using the net asset
value per share (or its equivalent) of the investment, are measured and recorded using a measurement alternative
that measures the securities at cost less impairment, if any, plus or minus changes resulting from qualifying
observable price changes.
F-18
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2)
Summary of Significant Accounting Policies (Continued)
(j)
Other Non-current Assets (Continued)
Equity securities without readily determinable fair value (Continued)
The Group reviews its equity securities without readily determinable fair value for impairment at each
reporting period by considering factors including, but not limited to, current economic and market conditions, the
operating performance of the companies including current earning trends and other company specific information.
The Group assessed that there has been no impairment or qualifying observable price changes related to its
investments in privately held companies in the years ended December 31, 2018 and 2019. Investments in privately
held companies are reported in other non-current assets.
Convertible loan receivable
The Group has elected the fair value option for the convertible loan receivable, which permits the
irrevocable fair value option election on an instrument-by-instrument basis at initial recognition of an asset or
liability or upon an event that gives rise to a new basis of accounting for that instrument. The convertible loan
receivable accounted for under the fair value option are carried at fair value with realized or unrealized gains and
losses recorded in the consolidated income statements. See Note 3(e) for details.
(k)
Impairment of Long-Lived Assets
Property, plant, and equipment are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized for the amount by which the carrying value of the asset exceeds the fair value of
the asset.
(l)
Insurance Premium Payables
Insurance premium payables are insurance premiums collected on behalf of insurance companies but not
yet remitted as of the balance sheet dates.
(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. 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. 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 of while RMB49,438 of principal and RMB5,557 of interest were offset by the
Company's dividend distributions. As of December 31, 2018, the principal and interest of the loans have been fully
collected.
F-19
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2)
Summary of Significant Accounting Policies (Continued)
(n)
Treasury shares
Treasury shares represent ordinary shares repurchased by the Group that are no longer outstanding and are
held by the Group. The repurchased ordinary shares are recorded whereby the total par value of shares acquired is
recorded as treasury stock and the difference between the par value and the amount of cash paid is recorded in
additional paid-in capital. If additional paid-in capital is not available or is not sufficient, the remaining amount is
to reduce retained earnings. See Note 20 for details.
(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.
(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.
F-20
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2)
Summary of Significant Accounting Policies (Continued)
(p)
Share-based Compensation (Continued)
Nonemployee share-based compensation
The Group early adopted the ASU 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.
Classification of award
Options or similar instruments on shares shall be classified as liabilities instead of equity if either of the
following conditions is met:
The underlying shares are classified as liabilities;
The Group can be required under any circumstances to settle the option or similar instrument by
transferring cash or other assets.
The Group measures a liability award under a share-based payment arrangement based on the award’s fair
value remeasured at each reporting date until the date of settlement. The corresponding credit is recorded as a
share-based liability. Compensation cost for each period until settlement shall be based on the change (or a portion
of the change, depending on the percentage of the requisite service that has been rendered at the reporting date) in
the fair value of the instrument for each reporting date.
The Group measures an equity award based on the awards' fair value on grant date and recognizes the
compensation cost over the vesting periods, with the corresponding credit recorded as paid-in capital.
Modification of an Award
A change in any of the terms or conditions of the awards is accounted for as a modification of the award.
Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the
fair value of the original award immediately before its terms are modified, measured based on the fair value of the
awards and other pertinent factors at the modification date. For vested awards, the Group recognizes incremental
compensation cost in the period the modification occurs. For unvested awards, the Group recognizes over the
remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized
compensation cost for the original award on the modification date. If the fair value of the modified award is lower
than the fair value of the original award immediately before modification, the minimum compensation cost the
Group recognizes is the cost of the original award.
Share-based compensation expenses of nil, nil and RMB393 for the years ended December 31, 2017, 2018
and 2019, respectively, were included in the selling, general and administrative expenses.
F-21
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2)
Summary of Significant Accounting Policies (Continued)
(q)
Employee Benefit Plans
As stipulated by the regulations of the PRC, the Group’s subsidiaries in the PRC participate in various
defined contribution plans organized by municipal and provincial governments for its employees. The Group is
required to make contributions to these plans at a percentage of the salaries, bonuses and certain allowances of the
employees. Under these plans, certain pension, medical and other welfare benefits are provided to employees. The
Group has no other material obligation for the payment of employee benefits associated with these plans other than
the annual contributions described above. The contributions are charged to the consolidated statements of income
and comprehensive income as they become payable in accordance with the rules of the above mentioned defined
contribution plans.
(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 22 for detailed disaggregated revenue information that is disclosed for each reportable
segment. The following is a description of the accounting policy for the principal revenue streams of the Group.
Insurance agency services revenue
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.
F-22
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2)
Summary of Significant Accounting Policies (Continued)
(r)
Revenue Recognition (Continued)
Insurance agency services revenue (Continued)
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 de minims 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%, 0.1% and 0.1% of the total commission and fee revenues during years ended
December 31, 2017, 2018 and 2019, respectively.
For 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. Performance bonus represent a form of variable consideration associated
with certain sales volume, for which the Group earn commissions. The contingent commissions are recorded when
a performance obligation is being achieved. The Group estimates the amount of consideration with a constraint
applied that will be received in the coming year such that a significant reversal of revenue is not probable and
accrues performance bonus relative to the recognition of the corresponding core commissions. For the year ended
December 31, 2018 and 2019, the Group recognized contingent performance bonus of RMB23,166 and
RMB58,124, respectively.
Insurance claims adjusting services revenue
For Insurance claims adjusting services, performance obligations are considered met and revenue is
recognized when the services are rendered and completed, at the time loss adjusting reports are confirmed being
received by insurance companies. The Group does not accrue any service fee before the receipt of an insurance
company’s acknowledgement of receiving the adjusting reports. Any subsequent adjustments in connection with
discounts which have been de minims to date are recognized in revenue upon notification from the insurance
companies.
Contract balances
The Group’s contract balances include accounts receivable and contract asset. The balances of accounts
receivable as of December 31, 2018 and 2019 are all derived from contracts with customers. See Note 2(e) for
details.
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 asset included in accounts receivable. The balances of contract asset are RMB84,907 and
RMB131,063 as of December 31, 2018 and December 31, 2019, respectively.
The Group has no advance from customers in advance of revenue recognition, or contract liability and,
therefore, none of revenue recognized in the current period that was previously recognized as a contract liability.
F-23
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2)
Summary of Significant Accounting Policies (Continued)
(r)
Revenue Recognition (Continued)
Practical Expedients and Exemptions
The Group generally expenses sales commissions when incurred because the amortization period would
have been one year or less. These costs are recorded within sales and marketing expenses in the consolidated
statements of operations and comprehensive income, as the amortization period is less than one year and the Group
has elected the practical expedient included in ASC 606.
The Group has applied the optional exemption provided by ASC 606 to not disclose the value of
remaining performance obligations not yet satisfied as of period end for contracts with original expected duration
of one year or less.
Value-Added Tax and Surcharges
The Group presents revenue net of sales and value-added taxes incurred. The sales taxes amounted to
RMB25,239, RMB21,508 and RMB21,916 for the years ended December 31, 2017, 2018 and 2019, 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, 2017, 2018 and 2019
amounted to RMB157,607, RMB179,317 and RMB197,067 respectively.
(s)
Fair Value of Financial Instruments
Fair value is considered to be the price that would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. When determining the fair
value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers
the principal or most advantageous market in which it would transact and considers assumptions that market
participants would use when pricing the asset or liability. The established fair value hierarchy requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A
financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is
significant to the fair value measurement. The three levels of inputs may be used to measure fair value include:
Level 1
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.
F-24
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2)
Summary of Significant Accounting Policies (Continued)
(s)
Fair Value of Financial Instruments (Continued)
Measured at fair value on a recurring basis
As of December 31, 2018 and 2019, 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,
2018
RMB
Significant
Other
Observable
Inputs
(Level 2)
RMB
Significant
Unobservable
Inputs
(Level 3)
RMB
1,554,060
—
1,554,060
—
Fair Value Measurements at Reporting Date Using
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
RMB
As of
December 31,
2019
RMB
Significant
Other
Observable
Inputs
(Level 2)
RMB
Significant
Unobservable
Inputs
(Level 3)
RMB
1,612,351
—
1,612,351
—
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 measured these investments at fair values and the unrealized gains or losses from the changes in fair
values are included in accumulated other comprehensive income or loss, at the balance sheet date. It is classified as
Level 2 of the fair value hierarchy since fair value measurement at reporting date is benchmarked against fair value
of comparable investments.
Measured at fair value on a non-recurring basis
The Group measures certain assets, including equity securities without readily determinable fair values,
equity method investments and intangible assets, at fair value on a nonrecurring basis when they are deemed to be
impaired. The fair values of these investments and intangible assets are determined based on valuation techniques
using the best information available, and may include management judgments, future performance projections, etc.
An impairment charge to these investments is recorded when the cost of the investment exceeds its fair value and
this condition is determined to be other-than-temporary. Impairment charge to the intangible assets is recorded
when their carrying amounts may not be recoverable.
F-25
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2)
Summary of Significant Accounting Policies (Continued)
(s)
Fair Value of Financial Instruments (Continued)
Measured at fair value on a non-recurring basis (Continued)
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
Goodwill (Note 6) and intangible assets (Note 2(g)) with indefinite lives are measured at fair value on a
nonrecurring basis, and they are recorded at fair value only when impairment is recognized by applying
unobservable inputs such as forecasted financial performance of the acquired business, discount rate, etc. to the
discounted cash flow valuation methodology that are significant to the measurement of the fair value of these
assets (Level 3).
Investments in affiliates (Note 7) are measured at fair value on a nonrecurring basis, and they are
recorded at fair value only when there is other-than-temporary-impairment. The fair value of investment in an
affiliate that is publicly listed is determined based on the market value of its share (Level 1) on the date such
impairment is recorded.
(t)
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
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.
(u)
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 RMB216,457 and RMB220,895 of cash and cash
equivalents and restricted cash denominated in RMB as of December 31, 2018 and 2019, respectively.
F-26
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2)
Summary of Significant Accounting Policies (Continued)
(v)
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 = RMB6.9618, representing the noon buying rate in the City of New York for cable transfers of RMB on
December 31, 2019, the last business day in fiscal year 2019, 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.
(w)
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. Please see Note (3) for more
information. The Group's results of operations related to discontinued operations have been restated as
discontinued operations for the year ended December 31, 2017.
(x)
Segment Reporting
As of December 31, 2019, the Group operated two segments: (1) the insurance agency segment, which
mainly consists of providing agency services for P&C insurance products and life insurance products to individual
clients, and (2) the claims adjusting segment, which consists of providing pre-underwriting survey services, claim
adjusting services, disposal of residual value services, loading and unloading supervision services, and consulting
services. Details of operating segments are further described in Note 22. Operating segments are defined as
components of an enterprise for which separate financial information is available and evaluated regularly by the
Group’s chief operating decision maker in deciding how to allocate resources and in assessing performance.
Substantially all revenues of the Group are derived in the PRC and all long-lived assets are located in the
PRC.
(y)
Earnings per Share ("EPS") or ADS
Basic EPS is calculated by dividing the net income available to common shareholders by the weighted
average number of ordinary shares /ADS outstanding during the year. Diluted EPS is calculated by using the
weighted average number of ordinary shares /ADS outstanding adjusted to include the potentially dilutive effect of
outstanding share-based awards, unless their inclusion in the calculation is anti-dilutive.
The contingently issuable shares /ADS related to the 521 Plan (see Note 19(b) for details), are subject to
fulfillment of the performance conditions as stipulated under the 521 Plan. Therefore, these shares are excluded
from basic earnings per share until the shares are fully vested upon the achievement of performance conditions
under the 521 Plan by the Participants.
F-27
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2)
Summary of Significant Accounting Policies (Continued)
(z)
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs amounted to RMB35,741, RMB34,663 and
RMB44,387 for the years ended December 31, 2017, 2018 and 2019, respectively.
(aa)
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The Group adopted this new
standard on January 1, 2019 and used the effective date as the date of initial application on a modified
retrospective basis. The Group elected to apply the transition requirements as the effective date rather than at the
beginning of the earliest comparative period presented with a cumulative effect adjustment to the opening balance
of retained earnings in the period of adoption, and prior periods were not restated. Upon adoption, the Group
elected to use the package of three practical expedients in transition under ASC 842, exempting the Group from
reassessing the lease identification, lease classification and initial direct costs associated with any expired or
existing contracts as of the date of adoption. However, the Group determined not to elect to adopt the hindsight
practical expedient and therefore maintained the lease terms previously determined under ASC 840.
The Group leases office space, vehicles and certain equipment under operating leases for terms ranging
from short term (under 12 months) to 7 years. The Group does not have options to extend or terminate leases, as
the renewal or termination of relevant lease is on negotiation basis. As a lessee, the Group does not have any
financing leases and none of the leases contain material residual value guarantees or material restrictive covenants.
The Group's office space leases typically have initial lease terms of 2 to 7 years, and vehicles and equipment leases
typically have an initial term of 12 months or less. The Group's office space leases include fixed rental payments.
The lease payments for the Group's office space leases do not consist of variable lease payments that depend on an
index or a rate.
The Group determines whether a contract contains a lease at contract inception. A contract contains a lease
if there is an identified asset and the Group has the right to control the use of the identified asset. At the
commencement of each lease, management determines its classification as an operating or finance lease. For leases
that qualify as operating leases, the Group recognizes a right-of-use (“ROU”) asset and a lease liability based on
the present value of the lease payments over the lease term in the consolidated statements of financial position at
commencement date. As all of the leases do not have implicit rates available, the Group uses incremental
borrowing rates based on the information available at lease commencement date in determining the present value
of future payments. The incremental borrowing rates are estimated to approximate the interest rate on a
collateralized basis with similar terms and payments, and in economic environments where the leased assets are
located.
Upon adoption of ASU 2016-02 on January 1, 2019, the Group elected to use the remaining lease term as
of January 1, 2019 in the estimation of the applicable discount for rate for leases that were in place at adoption. For
the initial measurement of the lease liabilities for leases commencing after January 1, 2019, the Group uses the
discount rate as of the commencing date of the lease, incorporating the entire lease term. Current maturities and
long-term portions of operating lease liabilities are classified as current operating lease liability and non-current
operating lease liability, respectively, in the consolidated statements of financial position. As a result of the
adoption, the Group recognized approximately RMB181,576 of ROU assets recorded in right-of-use assets and a
lease liability of approximately RMB181,457 in operating lease liability in the consolidated statements of financial
position as of January 1, 2019. The adoption had no material impact on the Group’s consolidated statements of
income and consolidated statements of cash flows for the year ended December 31, 2019.
F-28
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2)
Summary of Significant Accounting Policies (Continued)
(aa)
Leases (Continued)
The ROU asset is measured at the amount of the lease liabilities with adjustments, if applicable, for lease
prepayments made prior to or at lease commencement, initial direct costs incurred and lease incentives. For office
space leases beginning in 2019 and later, the Group identifies the lease and non-lease components (e.g., common-
area maintenance costs) and accounts for non-lease components separately from lease component. The Group's
office space lease contracts have only one separate lease component and have no non-components (e.g., property
tax or insurance). Most of the office space lease contracts have no non-lease components. For the office space
lease contracts include non-lease components, the fixed lease payment is typically itemized in the office space
lease contract for separate lease component and non-lease component. Therefore, the Group does not allocate the
consideration in the contract to the separate lease component and the non-lease component.
Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The
Group has made an accounting policy election to exempt leases with an initial term of 12 months or less without a
purchase option that is likely to be exercised from being recognized on the balance sheet. Payments related to
those leases continue to be recognized in the consolidated statement of income and comprehensive income on a
straight-line basis over the lease term.
In addition, we do not have any related-party leases or sublease transactions. Please see Note 8.
(ab)
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.
(ac) Recently Issued Accounting Standards
New accounting standards not yet adopted that could affect the Group's consolidated financial statements
in the future are summarized as follows:
In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments. This standard requires entities to measure all expected
credit losses of financial assets held at a reporting date based on historical experience, current conditions, and
reasonable and supportable forecasts in order to record credit losses in a timelier manner. ASU 2016-13 also
amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with
credit deterioration. In April 2019, the FASB issued ASU 2019-04, clarify a variety of topics previously covered in
Update 2016-13. The standard and the amendments in this ASU are effective for interim and annual reporting
periods beginning after December 15, 2019, although early adoption is permitted for interim and annual periods
beginning after December 15, 2018.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326):
Targeted Transition Relief, to provide an option to irrevocably elect the fair value option for certain financial
assets previously measured at amortized cost basis. ASU 2019-05 is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2019.
F-29
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2)
Summary of Significant Accounting Policies (Continued)
(ac) Recently Issued Accounting Standards (Continued)
In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial
Instruments – Credit Losses. Among other narrow-scope improvements, the new ASU clarifies guidance around
how to report expected recoveries. “Expected recoveries” describes a situation in which an organization recognizes
a full or partial write-off of the amortized cost basis of a financial asset, but then later determines that the amount
written off, or a portion of that amount, will in fact be recovered. While applying the credit losses standard,
stakeholders questioned whether expected recoveries were permitted on assets that had already shown credit
deterioration at the time of purchase (also known as PCD assets). In response to this question, the ASU permits
organizations to record expected recoveries on PCD assets. In addition to other narrow technical improvements,
the ASU also reinforces existing guidance that prohibits organizations from recording negative allowance for
available-for-sale debt securities. For entities that have not yet adopted the amendments in ASU 2016-13 as of the
issuance date of this ASU, the effective dates and transition requirements for the amendments are the same as the
effective dates and transition requirements in ASU 2016-13. The Group is in the process of completing its
evaluation of the impact of the ASUs.
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,
2018. 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. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. Early adoption is permitted, where the entity 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.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the
Accounting for Income Taxes. The amendments in this update simplify the accounting for income taxes by
removing exceptions related to the incremental approach for intra-period tax allocation, certain deferred tax
liabilities, and the general methodology for calculating income taxes in an interim period. The amendment also
provides simplification related to accounting for franchise (or similar) tax, evaluating the tax basis step up of
goodwill, allocation of consolidated current and deferred tax expense, reflection of the impact of enacted tax law
or rate changes in annual effective tax rate calculations in the interim period that includes enactment date, and
other minor codification improvements. For public business entities, the amendments are effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the
amendments is permitted, including adoption in any interim period for public business entities for periods in which
financial statements have not yet been issued. The Group is currently in the process of evaluating the impact of
adoption of this standard on the Group's consolidated financial statements.
F-30
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(3)
Acquisitions, disposals and reorganization
Disposal of subsidiaries in 2019
a.
Disposal of Guangdong Fanhua Fangzhong Investment Management Co., Ltd.
In July 2019, the Group disposed of Guangdong Fanhua Fangzhong Investment Management Co., Ltd. to
its minority shareholder, for a total consideration of RMB61,372, which has been offset against the Group's other
payables due to the disposed subsidiary as of December 31, 2019. As the sales consideration equals to the net book
value of the subsidiary at the time of disposal, no gain or loss on disposal of the subsidiary was recognized by the
Group. Guangdong Fanhua Fangzhong Investment Management Co., Ltd. is an investment holding company with
no actual business operation after year 2010.
b. Disposal of Hubei Fanhua Insurance Agency Co., Ltd.
In November 2019, the Group disposed of Hubei Fanhua Insurance Agency Co., Ltd. to three independent
third party individuals, for a total consideration of RMB300, which has been settled as of December 31, 2019. The
Group recognized a loss of RMB58 on disposal of this subsidiary, which was determined by the excess of the net
book value of the subsidiary over the sales consideration at the time of disposal.
Disposal of subsidiaries in 2018
c. Disposal of InsCom service Limited and InsCom Holding Limited
In October 2018, the Group disposed of InsCom service Limited, InsCom Holding Limited and their
subsidiaries (collectively "InsCom") to an independent third party, for a total consideration of RMB11,214, which
were settled as of December 31, 2018. No gain or loss on disposal of InsCom was recognized by the Group, which
was determined by the sales consideration equaling to the net book value of the subsidiaries at the time of disposal.
InsCom Service Limited, InsCom Holdings Limited and their subsidiaries are investment holding companies with
no actual business operation after the Group's restructuring in 2016.
Disposal of subsidiaries in 2017
d. 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.
e. Disposal of Fanhua Times Sales & Service Co., Ltd. and its subsidiaries
In October 2017, the Group entered into a share transfer agreement with Beijing Cheche Technology Co.
Ltd., or Cheche. Under this agreement, 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 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. As of December 31, 2018 and 2019, the Group has RMB19,463 and nil
other receivable outstanding related to the cash consideration, respectively. 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.
F-31
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(3)
Acquisitions, disposals and reorganization (Continued)
Disposal of subsidiaries in 2017 (Continued)
e. Disposal of Fanhua Times Sales & Service Co., Ltd. and its subsidiaries (Continued)
Under such election, the convertible 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 convertible 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 RMB22,000, 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 RMB22,000 was initially recognized and the
balance remained the same and retained in other non-current assets as of December 31, 2017.
The convertible loan receivable also carries a 10% interest return per annum which could be satisfied by
cash or converted equity interest in Cheche. The related interest income in 2017 is about RMB367. When the
convertible loan receivable expires, the Group has the right to convert to the equity interests of Cheche, or recover
the principal and interests of the convertible loan receivable according to the agreement. The Group recognized
RMB884 gain on disposal of these subsidiaries 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.
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 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.
On October 10, 2019, the Group exercised the conversion option to partially convert RMB80,000，a
portion of original RMB130,000 convertible loan receivable, into 28,684,255 ordinary shares of Cheche Cayman,
representing 3.3% equity interest. As stipulated in the original agreement, the unconverted balance of RMB50,000
remains outstanding with the original maturity date of October 31, 2020 and interest rate of 10% per annum, and is
no longer convertible.
The fair value of the convertible loan receivable on the day of the conversion, amounted to RMB17,759.
Upon conversion, the Group uses the relative carrying amount approach to record RMB10,929 as the initial cost of
the equity investments of Cheche Cayman as other non-current assets, and RMB6,830 as other receivables, net
(see Note 4) in the consolidated statements of financial position. Accordingly, no gain or loss has been recognized
upon conversion of this convertible loan receivable.
After the conversion, the Group meansured the investment using the measurement alternative as Cheche
Cayman is a privately-held company without readily detrerminable fair value. The Group assess that the carrying
amount of investments of Cheche Cayman to approximate its fair value at initial recognition, and there has been no
impairment for the year ended December 31, 2019.
F-32
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(3)
Acquisitions, disposals and reorganization (Continued)
Disposal of subsidiaries in 2017 (Continued)
e. Disposal of Fanhua Times Sales & Service Co., Ltd. and its subsidiaries (Continued)
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 yield rate and risk-free interest rate. The assumption used in
determining the fair value of the embedded conversion option on December 31, 2018 and the conversion date, or
October 10, 2019, were as follows:
Assumptions
December 31,
2018
October 10,
2019
Expected dividend yield (Note i) .......................................................
Risk-free interest rate (Note ii) ..........................................................
Expected volatility (Note iii) .............................................................
Expected life (Note iv) ......................................................................
Share price per ordinary share on valuation date ................................
0.00%
2.48%
58.20%
1.8 years
RMB1.00
0.00%
1.91%
47.19%
0.03 years
RMB0.36
(i)
Expected dividend yield:
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 and 1-year U.S. Government Bond yield as of
each of the valuation date.
(iii)
Expected volatility:
As Cheche is a non-listed company, the Company adopted corresponding 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 of the option based on the agreement with Cheche.
f. 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 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 31, 2017. And
accordingly, the segment note disclosure to the prior year consolidated financial statements have been restated.
F-33
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(3)
Acquisitions, disposals and reorganization (Continued)
Disposal of subsidiaries in 2017 (Continued)
f. Disposal of Fanhua Bocheng Brokerage Limited ("Bocheng") (Continued)
The activities of the brokerage business were segregated and reported as discontinued operations in the
consolidated statements of income and comprehensive income for 2017.
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,
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, 2017
RMB
172,993
(163,079)
(190)
(3,380)
40
(904)
5,480
—
5,480
Year ended
December 31, 2017
RMB
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-34
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(4)
Other Receivables, net
Other receivables, net are analyzed as follows:
Advances to staff (i) ....................................................................................
Advances to entrepreneurial agents (ii) ........................................................
Advances to a third party channel vendor (iii) .............................................
Rental deposits ............................................................................................
Amount due from a third party (iv) ..............................................................
Amount due from payment platform ............................................................
Other (v) .....................................................................................................
As of December 31,
2018
RMB
2019
RMB
10,036
1,362
8,400
12,580
19,463
7,082
27,227
86,150
9,578
3,523
13,575
14,333
6,830
9,926
3,805
61,570
(i)
This represented advances to staff of the Group for daily business operations which are unsecured, interest-
free and repayable on demand.
(ii) This represented advances to entrepreneurial agents who provide services to the Group. The advances are
used by agents to develop business. The advances were unsecured, interest-free and repayable on demand.
(iii) This represented advances to a third-party channel vendor, which are unsecured, interest-free and repayable
on demand.
(iv) This represented the residual balance of uncollected cash consideration related to the disposal of P&C
business. In 2019, the Group collected the full amount of the cash consideration. The balance of RMB6,830
as of December 31, 2019 represents the amount receivable from Cheche as a result of conversion of loan
receivable, which is due in October 2020. See Note 3(e) for details.
(v) This represented other miscellaneous receivables, receivable related to disposal of a subsidiary, advance
payments to designated governmental authorities on behalf of our employees regarding statutory employee
benefits and other deposits, etc. In August 2017, the Group disposed of the equity interests in Baosikang
Information Technology (shenzhen) Co., Ltd. to a third party for a total cash consideration of RMB7,557
(US$1,099), of which nil and RMB7,557 was collected as of December 31, 2018 and 2019, respectively.
F-35
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(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,
2018
RMB
12,317
129,848
10,292
14,284
166,741
(128,807)
37,934
2019
RMB
12,317
131,878
11,228
24,386
179,809
(139,003)
40,806
No impairment for property, plant and equipment was recorded for the years ended December 31, 2017,
2018 and 2019.
(6)
Goodwill
The gross amount of goodwill and accumulated impairment losses by segment as of December 31, 2018
and 2019 are as follows:
Agency
segment
RMB
Gross as of December 31, 2018 and 2019 .................................................... 131,977
Accumulated impairment loss as of December 31, 2018
(22,108)
and 2019 ..................................................................................................
Net as of December 31, 2018....................................................................... 109,869
Net as of December 31, 2019....................................................................... 109,869
Claims
Adjusting
segment
RMB
21,137
(21,137)
—
—
Total
RMB
153,114
(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, 2017, 2018 and 2019.
(7)
Investments in Affiliates
As of December 31, 2019, the Group’s investments accounted for under the equity method totaled
RMB363,414 (as of December 31, 2018: RMB587,517).
Investment in CNFinance Holdings Limited ("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.
F-36
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(7)
Investments in Affiliates (Continued)
Investment in CNFinance Holdings Limited ("CNFinance") (Continued)
As of December 31, 2019, due to the continued decline in the share price of CNFinance, the Group
recognized an other-than-temporary impairment of RMB322,655 to reduce the carrying value of the investment to
RMB352,541.
Investment in Puyi Inc.
The Group accounted for 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 Fanhua Puyi Fund Distribution Co., Ltd., or Fanhua Puyi” and Chengdu Puyi
Bohui Information Technology Co., Ltd., or Puyi Bohui, 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 Fanhua Puyi 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. As of
December 31, 2019, the fair value of Group's equity interest determined based on Puyi's ordinary shares market
price was RMB117,005.
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, 2017, 2018 and 2019, the Group recognized its share of income of
affiliates in the amount of RMB108,944 and RMB174,468 and RMB98,100 respectively. During the year ended
December 31, 2019, the Group recognized an impairment of RMB322,655 on investment in CNFinance, to reflect
a write-down to the fair value of the investment as measured by the closing market price of CNFinance's ordinary
share. During the years ended December 31, 2017, 2018 and 2019, the Group recognized its share of other
comprehensive income of RMB1,263, and other comprehensive loss of RMB1,763, and RMB452, respectively.
Investments as of December 31, 2018 and 2019 were as follows:
Teamhead Automobile ................................................................................
Puyi. ...........................................................................................................
CNFinance ..................................................................................................
Total ...........................................................................................................
F-37
As of December 31,
2018
RMB
119
11,350
576,048
587,517
2019
RMB
204
10,670
352,540
363,414
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(7)
Investments in Affiliates (Continued)
The summarized financial information of equity method investees is
illustrated as below:
Statements of Financial Position
Non-current assets .......................................................................................
Non-current liabilities .................................................................................
19,630,092
16,339,829
3,114,616
9,510,013
As of December 31,
2018
RMB
2019
RMB
Results of operation
Income from operations...............................................................................
Net profit ....................................................................................................
(8)
Leases
2017
RMB
Year Ended December 31,
2018
RMB
1,210,690
907,724
804,163
529,524
2019
RMB
689,259
520,539
The Group's lease payments for office space leases include fixed rental payments and do not consist of
any variable lease payments that depend on an index or a rate. As of December 31, 2019, there was no leases that
have not yet commenced.
The following represents the aggregate ROU assets and related lease liabilities as of December 31, 2019:
Operating lease ROU assets.........................................................................
Current operating lease liability ...................................................................
Non-current operating lease liability ............................................................
Total operating leased liabilities ..................................................................
As of December
31, 2019
RMB
190,437
79,986
103,252
183,238
The weighted average lease term and weighted average discount rate as of December 31, 2019 were as
follows:
Weighted average lease term:
Operating leases ..........................................................................................
Weighted average discount rate:
Operating leases ..........................................................................................
As of December
31, 2019
RMB
2.99
4.78%
F-38
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(8)
Leases (Continued)
The components of lease expenses for the year 2019 were as follows:
Operating lease cost .......................................................
Short term lease cost ......................................................
Total ..............................................................................
As of December 31,
2019
RMB
77,406
15,148
92,554
Supplemental cash flow information related to leases for the years ended December 31, 2019 were as
follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases ....................................................
Supplemental noncash information:
Right-of-use assets obtained in exchange for lease obligations .....................
Maturities of lease liabilities at December 31, 2019:
Year ending December 31:
2020.........................................................................................................................
2021.........................................................................................................................
2022.........................................................................................................................
2023.........................................................................................................................
2024.........................................................................................................................
Thereafter ................................................................................................................
Total remaining undiscounted lease payments ..............................................................
Less: Interest ....................................................................................................................
Total present value of lease liabilities ............................................................................
Less: Current operating lease liability ...............................................................................
Non-current operating lease liability .............................................................................
(9)
Variable Interest Entities ("VIE")
(a) VIEs related to operations
As of December 31,
2019
RMB
74,265
78,344
Minimum Lease
Payment
RMB
87,333
57,638
32,358
17,458
7,270
2,473
204,530
(21,292)
183,238
(79,986)
103,252
PRC laws and regulations place certain restrictions on foreign investment in and ownership of insurance
agencies, brokerages and on-line business. Accordingly, the Group conducted some of its operations in China
through contractual arrangements among its PRC subsidiaries, two PRC affiliated entities and the equity
shareholders of these PRC affiliated entities, who are PRC nationals.
In recent years, some rules and regulations governing the insurance intermediary sector in China have
begun to encourage foreign investment. The Group commenced a restructuring which resulted in obtaining
controlling equity ownership in a majority of its affiliated insurance intermediary companies.
The Group conducts all of its operations in China through its directly owned subsidiaries.
F-39
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(9)
Variable Interest Entities ("VIE") (Continued)
(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 101,524,520 ordinary shares (5,076,226 ADSs) at US$25.52 per ADS in January 2019 to the 521
Plan Employee Companies.
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, but Participants 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. Please see Note 16. The
RMB8,184 represents excess contribution received from Participants, which have been fully refunded in April,
2019.
As of December 31, 2019, the Group had already transferred all the 280 million ordinary shares to the 521
Plan Employee Companies with an average price at US$27.38 per ADS. The 10% subscription price contributed
by Participants amounted to RMB266,901 and is recorded as non-current refundable share right deposits on the
statement of financial position.
Pursuant to the 521 Plan, the Group set up three companies which are Fanhua Employees Holdings
Limited, Step Tall Limited and Treasure Chariot Limited (collectively the “521 Plan Employee Companies”) to
hold the Group’s ordinary shares on behalf of the Participants of the 521 Plan. Each of the 521 Plan Employee
Companies is a legal entity formed in the British Virgin Islands with a sole shareholder appointed by the Group.
Each shareholder is either an employee, or a founder who is also a shareholder and director of the Group.
F-40
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(9)
Variable Interest Entities ("VIE") (Continued)
(b) VIEs related to the 521 Plan (Continued)
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 during the vesting period. 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 during the vesting period. 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 of the ADS which will be indirectly absorbed by the Group or the Participants
as described in the various vesting scenarios in Note 19(b), 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 and 2019, the loan
agreements provide a total of US$184,815 and US$344,988, respectively, in loans to the VIEs and Participants of
the 521 Plan with the sole purpose of providing funds necessary for the purchase of the Group’s ordinary shares
under the 521 Plan. All the ordinary shares are pledged as collateral to the Group for the loans and are not yet
vested, the Participants cannot direct the sale of the ordinary shares without the consent of the Group until the
ordinary shares are fully vested in accordance with the 521 Plan’s agreed target performance. The loan agreement
and the entrusted share purchase agreement shall terminate after five year or upon termination of agency
relationship and employment relationship or the settlement of the loan, whichever comes first.
F-41
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(9)
Variable Interest Entities ("VIE") (Continued)
(b) VIEs related to the 521 Plan (Continued)
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.
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, 2018 and 2019, respectively:
Total assets .................................................................................
Total liabilities ..............................................................................
—
146,512
—
266,901
The VIEs are related to the 521 Plan as explained above, which did not have any operation or cash flows
activities during 2018 and 2019.
2018
RMB
As of December 31,
2019
RMB
F-42
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(10)
Other Payables and Accrued Expenses
Components of other payables and accrued expenses are as follows:
As of December 31,
2018
RMB
2019
RMB
Business and other tax payables……………………………………………
Refundable deposits from employees and agents……………………………
Refundable share rights deposits (Note 9(b)) ..............................................
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 ........................................................................................................
70,237
26,790
8,184
17,105
42,324
8,618
62,459
19,107
254,824
72,998
23,478
—
13,958
22,610
—
76,765
10,481
220,290
(11)
Employee Benefit Plans
Employees of the Group located in the PRC are covered by the retirement schemes defined by local
practice and regulations, which are essentially defined contribution plans.
In addition, the Group is required by law to contribute certain percentage of applicable salaries for
medical insurance benefits, unemployment and other statutory benefits. The contribution percentages may be
different from district to district which is subject to the specific requirement of local regime government. The PRC
government is directly responsible for the payments of the benefits to these employees.
For the years ended December 31, 2017, 2018 and 2019, the Group contributed and accrued RMB66,370,
RMB74,179 and RMB90,438, respectively.
(12)
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
2,000 Hong Kong Dollar ("HKD") of profits of the qualifying group entity will be taxed at 8.25%, and profits
above HKD 2,000 will be taxed at 16.5%.
The provision for current income taxes of the subsidiaries operating in Hong Kong has been calculated by
applying the current rate of taxation of 16.5% for the years ended December 31, 2017, and 8.25% for the years
ended December 31, 2018 and 2019.
F-43
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(12)
Income Taxes (Continued)
Pursuant to the relevant laws and regulations in the PRC, Ying Si Kang Information Technology
(Shenzhen) Co., Ltd. ("Ying Si Kang") and Shenzhen Huazhong United Technology Co., Ltd. ("Shenzhen
Huazhong"), subsidiaries of the Group, was regarded as a software company and thus exempted from PRC Income
Tax for two years starting from its first profit-making year, followed by a 50% reduction for the next three years.
For Ying Si Kang, year 2014 was the first profit-making year and accordingly it has made a 12.5% tax provision
for its profits for the years ended December 31, 2016, 2017 and 2018. For Shenzhen Huazhong, year 2017 was the
first profit-making year and accordingly it has made a 12.5% tax provision for its profits for the year ended
December 31, 2019.
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 entity 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. Tibet Zhuli Investment Co. Ltd. ("Tibet Zhuli"), our wholly-owned
subsidiary, was entitled to a preferential tax rate of 9% for the period from January 1, 2015 to December 31, 2017
and 15% for the years ended December 31, 2018 and 2019, as it was established with approval in an economy
development zone in the PRC before January 1, 2018.
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 the each of the 3 years in the period ended December 31, 2019, which was issued by the Hong Kong
Inland Revenue Department. CNinsure Holdings Limited qualified a Hong Kong resident certificate and was
entitled to enjoy a reduced tax rate of 5% for the dividends paid by PRC subsidiaries for the year ended December
31, 2019 under Bulletin [2018] No. 9 (e.g. beneficial ownership, shareholding percentage and holding period).
The Group accounts for uncertain income tax positions by prescribing a minimum recognition threshold
in the financial statements.
The movements of unrecognized tax benefits are as follows:
Balance as of January 1, 2017 ..............................................................................
Change in unrecognized tax benefits .....................................................................
Gross increase in tax positions ..............................................................................
Balance as of December 31, 2017 .........................................................................
Change in unrecognized tax benefits .....................................................................
Gross increase in tax positions ..............................................................................
Balance as of December 31, 2018 .........................................................................
Change in unrecognized tax benefits .....................................................................
Gross decrease in tax positions .............................................................................
Balance as of December 31, 2019 ...........................................................................
F-44
RMB
72,778
—
(2,428)
70,350
—
—
70,350
—
—
70,350
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(12)
Income Taxes (Continued)
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, 2018 and 2019. In
addition, the outcome of these examinations may impact the valuation of certain deferred tax assets (such as net
operating losses) in future periods. The Group’s policy is to recognize interest and penalties accrued on any
unrecognized tax benefits, if any, as a component of income tax expense. The Company does not anticipate any
significant increases or decreases to its liability for unrecognized tax benefit within the next twelve months.
According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if
the underpayment of income taxes is due to computational errors made by the taxpayer. The statute of limitations
will be extended to five years under special circumstances, which are not clearly defined, but an underpayment of
income tax liability exceeding RMB100 is specifically listed as a special circumstance. In the case of a transfer
pricing related adjustment, the statute of limitations is ten years. There is no statute of limitations in the case of tax
evasion.
Income tax expenses are comprised of the following:
Current tax expense ........................................................
Deferred tax (income) expense .......................................
Income tax expense ........................................................
2017
RMB
Year Ended December 31,
2018
RMB
2019
RMB
158,291
9,512
167,803
243,330
(18,744)
224,586
139,549
4,267
143,816
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,
2018
RMB
2019
RMB
35,686
6,129
(32,495)
9,320
122
5,502
5,624
40,498
5,311
(38,482)
7,327
—
7,898
7,898
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 RMB32,495 and RMB38,482 valuation
allowance for the years ended December 31, 2018 and 2019, respectively.
F-45
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(12)
Income Taxes (Continued)
The Group had total operating loss carry-forwards of RMB142,745 and RMB162,704 as of December 31,
2018 and 2019, respectively. As of December 31, 2019, the operating loss carry-forwards of RMB9,576,
RMB15,323, RMB41,224, RMB55,890 and RMB40,691, are to expire during the years ending December 31, 2020,
2021, 2022, 2023, and 2024, respectively. During the years ended December 31, 2017, 2018 and 2019,
RMB13,284, RMB16,288 and RMB6,060, respectively, of tax loss carried forward has been expired and canceled.
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 .................................................
Deferred income tax for dividend distribution .................
Other .............................................................................
Income tax expense ........................................................
2017
RMB
Year Ended December 31,
2018
RMB
2019
RMB
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
560,925
25%
140,231
2,516
(36,527)
730
5,987
—
49,267
(18,388)
143,816
Additional PRC income taxes that would have been payable without the tax exemption amounted to
approximately RMB826, RMB8,307 and RMB36,527 for the years ended December 31, 2017, 2018 and 2019,
respectively. Without such exemption, the Group’s basic net profit per share for the years ended December 31,
2017, 2018 and 2019 would have been decreased by RMB0.00, RMB0.01 and RMB0.03, and diluted net profit per
share for the years ended December 31, 2017, 2018 and 2019 would have been decreased by RMB0.00, RMB0.01
and RMB0.03, respectively.
If the entities were to be non-resident for PRC tax purposes, dividends paid to it out of profits earned after
January 1, 2008 would be subject to a withholding tax. In the case of dividends paid by PRC subsidiaries, the
withholding tax would be 10%, whereas in the case of dividends paid by PRC subsidiaries which are 25% or more
directly owned by tax residents in the Hong Kong Special Administrative Region, the withholding tax would be
5%. The Group’s subsidiary, CNinsure Holdings Limited qualified as Hong Kong resident for the each of the 3
years in the period ended December 31, 2019 and was entitled to enjoy 5% reduced tax rate under Bulletin [2018]
No. 9 for the years ended December 31, 2017, 2018 and 2019, respectively.
Aggregate undistributed earnings of the Group’s subsidiaries and VIEs in the PRC that are available for
distribution to the Group of approximately RMB1,441,628 and RMB1,303,923 as of December 31, 2018 and 2019
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 RMB66,580 and RMB65,196, respectively.
F-46
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(12)
Income Taxes (Continued)
During the years ended 2018 and 2019, the Group has provided RMB53,702 and RMB49,267,
respectively, deferred income tax for the declared dividend distribution based on a 5% withholding tax rate.
Under applicable accounting principles, a deferred tax liability should be recorded for taxable temporary
differences attributable to the excess of financial reporting over tax basis, including those differences attributable
to a more-than-50-percent-owned domestic subsidiary. However, recognition is not required in situations where
the tax law provides a means by which the reported amount of that investment can be recovered tax-free and the
enterprise expects that it will ultimately use that means.
(13)
Capital Structure
On January 10, 2019, the Company had granted an additional 6.5 million ADS (equivalent of 130,000,000
ordinary shares) at US$25.6 per ADS (equivalent of US$1.28 per ordinary share) to the Participants, of which the
1,423,774 ADS was repurchased from open market during 2018 and was held by the Company as treasury shares
as of December 31, 2018. Pursuant to the Company’s 521 Plan, 280,000,000 ordinary shares had been purchased
by 521 Plan Employee Companies at the weighted average price of US$1.37 per ordinary share and 178,475,480
shares of which were recorded as treasury shares as of December 31, 2018 and 2019.
During 2019, the Company has purchased and cancelled an aggregate of 2,511,191 ADSs (equivalent of
50,223,820 ordinary shares), representing 4.7% of the total shares outstanding as of December 31, 2019, at an
average price of approximately US$28.2 per ADS for a total amount of approximately RMB484,015 (US$69,525),
under its share buyback program to repurchase up to US$200 million ADSs by December 31, 2019, as previously
announced by its board of directors in March 2019.
During 2019, the Company issued 640,000 new shares for the exercise of options, representing 0.1% of
the total shares outstanding as of December 31, 2019.
During 2018, the Company repurchased 1,423,774 ADS (equivalent of 28,475,480 ordinary shares) on the
open market and 7.5 million ADS (equivalent of 150,000,000 shares) from Master Trend Limited to execute the
521 Plan in 2018, for an accumulated cash consideration of RMB1,716,343, representing 2.19% and 11.52% of the
total shares outstanding as of December 31, 2018 respectively. Master Trend Limited is an investment vehicle
company beneficially owned by Mr. Qiuping Lai, co-founder and former president of the Group who 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 represented 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 held 5.08% of the total
shares outstanding of the Company as of December 31, 2017 and its purchased shares were subject to a contractual
one-year lock-up.
F-47
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(14)
Net Income per Share
The computation of basic and diluted net income per ordinary share is as follows:
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 ..
shares
Weighted
average number of ordinary
outstanding .................................................................
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 .............................................
Basic net
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 ..
shares
Weighted
average number of ordinary
outstanding .................................................................
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 ..........................................
Year Ended December 31,
2018
RMB
2017
RMB
2019
RMB
446,236
5,480
451,716
2,488
449,228
617,095
—
617,095
7,180
609,915
192,554
—
192,554
3,622
188,932
1,231,698,725
1,239,264,464
1,092,601,338
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
0.17
0.00
0.17
3.46
0.00
3.46
192,554
—
192,554
3,622
188,932
1,231,698,725
1,239,264,464
1,092,601,338
29,524,324
1,261,223,049
1,589,570
1,240,854,034
628,098
1,093,229,436
0.36
0.00
0.36
7.20
0.09
7.29
0.49
0.00
0.49
9.83
0.00
9.83
0.17
0.00
0.17
3.46
0.00
3.46
The shares subscribed by Participants under the 521 Plan is record as treasury shares and excluded from
the computation of basic and diluted income per ordinary share during the year ended December 31, 2018 and
2019. Further, the contingently issuable shares subject to the 521 Plan will be excluded from basic income per
ordinary share and diluted earnings per share until all the performance conditions have been satisfied.
F-48
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(15)
Distribution of Profits
As stipulated by the relevant PRC laws and regulations applicable to China’s foreign investment enterprise,
the Group’s subsidiaries and VIEs in the PRC are required to maintain non-distributable reserves which include a
statutory surplus reserve as of December 31, 2018 and 2019. Appropriations to the statutory surplus reserve are
required to be made at not less than 10% of individual company’s net profit as reported in the PRC statutory
financial statements of the Company’s subsidiaries and VIEs. The appropriations to statutory surplus reserve are
required until the balance reaches 50% of the registered capital of respective subsidiaries and VIEs.
The statutory surplus reserve is used to offset future losses. These reserves represent appropriations of
retained earnings determined according to PRC law and may not be distributed. 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 RMB480,881 and RMB508,739 as of
December 31, 2018 and 2019, respectively.
(16)
Related-party Balances and Transactions
The principal related-party balances as of December 31, 2018 and 2019, and transactions for the years
ended December 31, 2017, 2018 and 2019 are as follows:
(i) The Group advanced a short-term loan with a principal amount of RMB50,000 to Shenzhen Baoying
Factoring Co., Ltd. (“Shenzhen Baoying”) in August 2018, which was controlled by Puyi, the Group's affiliate.
The amounts is unsecured, bearing interest at 8.5% per annum and are repayable after 6 months from the date of
the agreement. The principal and interest of the loan have been received on November 2018. Interest income from
loan receivable from Shenzhen Baoying for 2018 is RMB989.
The Group charged CNFinance interest income of RMB8,714, nil and nil for loans receivable for the
years ended December 31, 2017, 2018 and 2019, respectively. The Group invested in senior units of structure fund
issued by CNFinance with a principal amount of RMB138,000 and recognized investment income of RMB610
during the year 2018. The principal and investment income have been received before July 2018.
In 2018 and 2019, one of the Group's subsidiaries purchased certain wealth management products offered
by an online peer-to-peer (“P2P”) lending platform, which is considered to be a related party as the legal
representative of the company that operates the P2P platform is a relative to Mr. Yinan Hu, the Group's co-founder
and director. The wealth management products purchased on the platform by the subsidiary bear interests at 7.3%
with terms of 90 days. Principal and interests are payable upon maturity of those products or on a quarterly basis.
As of December 31, 2018, the value of the outstanding wealth management products recorded as short term
investments in the consolidated statements of financial position was RMB15,000 and no investment income has
been recognized before maturity. As of December 31, 2019, these wealth management products were matured. The
principal of RMB15,000 and interests of RMB360 recorded as investment income in the consolidated statements
of income have been received in 2019. There was no balance outstanding as of December 31, 2019 with regard to
such products.
(ii) During 2018, the Group has repurchased a total of 7.5 million of the Company's outstanding ADS
(equivalent of 150,000,000 ordinary shares) from Master Trend at US$29.0 per ADS (equivalent to US$1.45 per
ordinary share), representing the average closing price of the 30 trading days prior to the Group’s Board approval
on June 14, 2018. In form of loan to the 521 plan’s participants, the Group had paid RMB1,318,611 as 90% of
shares purchase consideration to Master Trend during 2018. The remaining 10% in the amount of RMB146,512
was paid by the 521 Plan’s Participants directly to Master Trend, in which the Group recorded RMB8,184 and
RMB138,328 as current and non-current refundable share right deposits on the statement of financial position as of
December 31, 2018, respectively.
Master Trend is beneficially owned by Mr. Qiuping Lai and Master Trend was then a related party
because it was a principal owners of the Group at the time of the repurchase. Master Trend still held 4.3% ordinary
shares of the Group as of October 10, 2018, upon the Group's completion of its repurchase transactions of 7.5
million ADS.
F-49
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(17)
Commitments and Contingencies
(i) See Note 8 for the Company’s commitments for future minimum lease payments under operating
leases.
(ii) On March 2, 2020, the U.S. District Court for the Southern District of New York has granted in its
entirety the Company’s motion to dismiss the class action lawsuit originally filed on September 7, 2018 against the
Group and three of its current or former executive officers and closed the case on March 12, 2020. Given the class
action lawsuit has been closed with the court’s dismissal of the plaintiff’s complaints, the uncertainty about
management’s assessment of financial reporting impact has been resolved and the management determined that no
contingent liability is to be incurred.
(18)
Concentrations of Credit Risk
Concentration risks
Details of the customers accounting for 10% or more of total net revenues are as follows:
2017
RMB
% of sales
Year ended December 31,
% of sales
2018
RMB
2019
RMB
% of sales
Huaxia Life Insurance Company
Limited ("Huaxia") .................
AEON Life Insurance Company,
Ltd ("AEON"). .......................
Sinatay Life Insurance Company,
Ltd ("Sinatay") ...........................
Tianan Life Insurance Company
Limited ("Tianan")................
990,865
24.2%
1,100,027
31.7%
882,539
23.8%
*
*
*
*
453,120
13.1%
677,707
18.3%
*
*
595,600
16.1%
913,456
1,904,321
22.3%
46.5%
704,933
2,258,080
20.3%
65.1%
447,430
2,603,276
12.1%
70.3%
* represented less than 10% of total net revenues as of the year.
Details of the customers which accounted for 10% or more of gross accounts receivable are as follows:
Huaxia ...........................................................
Sinatay...........................................................
Tianan ...........................................................
AEON ...........................................................
2018
RMB
161,908
*
75,777
74,538
312,223
As of December 31,
2019
%
RMB
31.8%
*
14.9%
14.7%
61.4%
213,851
100,872
*
*
314,723
%
30.4%
14.4%
*
*
44.8%
* represented less than 10% of accounts receivable as of the year end.
The Group performs ongoing credit evaluations of its customers and generally does not require collateral
on accounts receivable.
The Group places its cash and cash equivalents and short investments with financial institutions with high-
credit ratings and quality.
F-50
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(19)
Share-based Compensation
(a) 2012 Option 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 in November 2014. The fair value of the options was determined by using the Black-Scholes
option pricing model.
For the years ended December 31, 2017, 2018 and 2019, share-based compensation expenses of nil were
recognized in connection with the 2012 Options G, respectively. During the year ended December 31, 2019,
640,000 shares of 2012 Options G had been exercised. During the years ended December 31, 2017, 2018 and 2019,
400,000, nil 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.
For each of the three years ended December 31, 2017, 2018 and 2019, changes in the status of total
outstanding options, were as follows:
Outstanding as of January 1, 2017 ..................................
Exercised .......................................................................
Forfeited ........................................................................
Outstanding as of December 31, 2017 ............................
Exercised .......................................................................
Forfeited ........................................................................
Outstanding as of December 31, 2018 ............................
Exercised .......................................................................
Forfeited ........................................................................
Outstanding as of December 31, 2019 ............................
Exercisable as of December 31, 2019 .............................
Weighted
average
exercise price in
RMB
0.92
0.96
0.01
1.17
0.01
—
0.01
0.01
—
0.01
0.01
Aggregate
Intrinsic Value
RMB
141,274
16,422
7,841
3,613
3,613
Number of
options
72,318,158
(69,118,158)
(400,000)
2,800,000
(1,760,000)
—
1,040,000
(640,000)
—
400,000
400,000
As of December 31, 2019, 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, 2017, 2018 and 2019:
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,
2018
RMB
2019
RMB
2017
RMB
—
270,419
—
—
16,884
—
—
5,703
—
F-51
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(19)
Share-based Compensation (Continued)
(a) 2012 Option G (Continued)
The following table summarizes information about the Company’s stock option plans as of December 31,
2019:
Weighted
average
remaining
contractual life
(Years)
Weighted
average
exercise price
in RMB
Options
Exercisable
Options outstanding
2012 Options G ..................................
400,000
2.25
0.01
400,000
(b) The 521 Plan
In-substance recourse loans and option grants
As disclosed in Note 9, the 521 Plan was designed to incentivize the Participants, 90% of the subscription
price of the shares under the 521 Plan shall be settled by the Group through in-substance nonrecourse loans with
interest at a rate of 8% to the Participants. While the remaining 10% is contributed by the Participants. The loan is
repayable by the Participants upon the earlier of the expiry date of the 521 Plan, termination of employment or the
agency contract or within five years.
Given the consideration received from the employee consists of an in-substance nonrecourse loans, the
award is, accounted for as an option until the note is repaid. In addition to the underlying shares which are
collaterals to the loans, the Group also has legal recourse to the Participants’ personal assets until the loans and
interests are paid in full. However, the Group considers these loans to be in-substance nonrecourse loans due to the
uncertainty of the Group’s ability to recover sufficient assets from the Participants to justify the recourse nature of
the loan. In accordance of ASC 718, the rights and obligations embodied in a transfer of equity shares to
Participants for loans that provides no recourse, other than the shares, to other assets of the employee are
substantially the same as those embodied in a grant of share options. Accordingly, the 521 Plan is accounted for as
grant of share options. The principal and interest are included as part of the exercise price of the “option”
(therefore, no interest income is recognized). Substantively, each share under the 521 Plan is an option to purchase
a fixed number of share at a strike price per ADS equal to the subscription price (i.e., the exercise price) of
US$27.38 per ADS increasing over time as interest accrues on the loan, offset by any dividends declared on the
share. Further, because the shares sold on a nonrecourse basis are accounted for as options, the note and the shares
are not recorded. Rather, compensation cost is recognized over any requisite service period, with an offsetting
credit to additional paid-in capital (“APIC”). Periodic principal and interest payments, if any, are treated as
deposits.
Refundable share right deposits are recorded as a liability until the note is paid off, at which time the
deposit balance is transferred to APIC. Nonrefundable deposits are immediately recorded as a credit to APIC as
payments are received.
F-52
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(19)
Share-based Compensation (Continued)
(b) The 521 Plan (Continued)
Vesting conditions:
Vesting, Forfeiture, and Settlement Terms:
The Participants’ rights to ownership benefits of the shares are subject to the Participants’ achievement of
service and performance vesting conditions. Each award agreement contains a condition for service from January 1,
2019 through December 31, 2023 (which coincides with loan maturity date) as well as individually determined
performance conditions based on cumulative sales over the service period. Participants must achieve both the
service and performance conditions for their shares to fully vest at the end of the loan maturity date, otherwise the
share appreciation profits at the end of the vesting period, if any, after principals and accrued interests of the loans
are fully repaid to the Group, will be either fully retained or partially retained by the Group. On November 15,
2019, the Board of Directors of the Company approved an exemption of the first-year performance condition for
all Participants under the 521 Plan.
Under these vesting and profit distribution arrangements, the Group can be required to settle the option or
similar instrument by transferring cash, representing a noncontingent cash settlement feature which requires the
521 awards to be liability classified.
Option modification
In November 2019, the Board of Directors and Compensation Committee approved a modification of the
settlement terms of the 521 Plan from cash settlement to net share settlement of vested ADS options. Under the
amended award agreement, the Group will settle the vested ADS option with shares of the Group at a value equal
to the excess of the settlement date fair value of the ADS over the loan principal plus interest. If the ADS
depreciated or have not appreciated sufficiently to repay the loan principal and interest, the outstanding loan
balance (if any) shall be otherwise negotiated and determined by the Group and the Participants. The modification
result in a change of awards' classification from liability to equity. Other terms of the options grants remain
unchanged.
The modified award was accounted for as an equity award going forward from the date of modification
with a fair value measured on the modification date on a straight-line basis over the remaining requisite service
period. The Group compared the fair value of the options granted immediately before the modification to the fair
value of the modified award and there is no change in the fair value at the modification date. Therefore, at the
modification date, the Company reclassified the amounts previously recorded as a share-based compensation
liability as a component of equity in the form of a credit to additional paid-in capital.
At the modification date on November 18, 2019, the Company used the Black-Scholes valuation model in
determining the fair value of the options granted, which requires the input of certain assumptions, including the
expected life of the stock option, stock price volatility, dividend rate and risk-free interest rate. The assumption
used in determining the fair value of the options on the modification date were as follows:
Assumptions
Expected dividend yield (Note i) ......................................................................................
Risk-free interest rate (Note ii) .........................................................................................
Expected volatility (Note iii) ............................................................................................
Expected life (Note iv) .....................................................................................................
Share price per ordinary share on valuation date ...............................................................
November 18, 2019
3.00%
1.61%
50.25%
4.12 years
US$26.64
F-53
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(19)
Share-based Compensation (Continued)
(b) The 521 Plan (Continued)
Option modification (Continued)
(i)
Expected dividend yield:
The expected dividend yield was estimated by the Company based on its historical dividend policy.
(ii)
Risk-free interest rate:
Risk-free interest rate was estimated based on the 5-year US Government Bond yield as of the valuation
date.
(iii)
Expected volatility:
The volatility of the underlying ordinary shares was estimated based on the annualized standard deviation
of the continuously compounded rate of return on the daily average adjusted share price of the Group as of
the Valuation Date.
(iv)
Expected life:
The expected life was the contractual life of the 521 plan.
As of December 31, 2019, the Group had reserved 280,000,000 ordinary shares available to be granted as
share-based awards under the 521 Plan. The 521 Plan is generally scheduled to be vested over five years.
150,000,000 ordinary shares were granted on December 31, 2019 and the rest has been granted on January 10,
2019 subsequently. The Group estimates the forfeiture rate for both independent agents and employees to be nil for
2019.
For the years ended December 31, 2019, changes in the status of total outstanding options under 521 Plan,
was as follows:
Number of
options
—
Outstanding as of January 1, 2018 ..................................
Granted .......................................................................... 150,000,000
—
Exercised .......................................................................
—
Forfeited ........................................................................
Outstanding as of December 31, 2018 ............................. 150,000,000
Granted .......................................................................... 130,000,000
—
Exercised .......................................................................
—
Forfeited ........................................................................
Outstanding as of December 31, 2019 ............................. 280,000,000
Weighted
average
exercise
price in US$
—
1.5
—
—
1.5
1.3
—
—
1.4
Weighted
average
remaining
contractual
life (Years)
—
5.00
—
—
5.00
5.00
—
—
4.00
Aggregate
Intrinsic
Value
RMB
—
—
—
—
—
—
—
—
—
For the year ended December 31, 2018 and 2019, the Company recognized nil and RMB393 share-based
compensation expense related to the 521 plan, respectively. As of December 31, 2019, there was RMB1,573
unrecognized share-based compensation expense related to unvested share options granted to the 521 plan's
participants.
F-54
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(20)
Treasury Stock
During the year 2019, a total of 50,223,820 ordinary shares (2,511,191 ADSs) have been repurchased from
the open market under the Company's share buyback program at an average price of approximately US$28.2 per
ADS and cancelled during the year. The Company was entitled to repurchase up to US$200,000 by December 31,
2019 under this program, and an aggregate of 2,511,191 ADSs for a total amount of approximately US$69,525 has
been repurchased under the program as of December 31, 2019.
During the year 2018, a total of 178,475,480 ordinary shares, comprising 28,475,480 ordinary shares has
been repurchased from the open market and 150,000,000 ordinary shares has been purchased from Master Trend, a
related party of the Group at the time of the transaction. The shares were 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 par value 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 9 for details of the 521 Plan.
There was no repurchase of ordinary shares by the Group during the years ended December 31, 2017.
(21)
Restricted Net Assets
Relevant PRC statutory laws and regulations permit payments of dividends by the Group’s PRC
subsidiaries only out of their retained earnings, if any, as determined in accordance with PRC accounting standards
and regulations. As a result of these PRC laws and regulations, the Group’s PRC subsidiaries are restricted in their
ability to transfer a portion of their net assets either in the form of dividends, loans or advances. As of December
31, 2018 and 2019, the Company had restricted net assets of RMB1,382,574 and RMB1,410,432 (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 15.
(22)
Segment Reporting
As of December 31, 2019, 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. Operating segments are defined as components of an enterprise about which separate financial
information is available and evaluated regularly by the Group’s chief operating decision maker in deciding how to
allocate resources and in assessing performance.
The following table shows the Group’s operations by business segment for the years ended December 31,
2017, 2018 and 2019. Other includes revenue and expenses that are not allocated to reportable segments and
corporate related items.
F-55
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(22)
Segment Reporting (Continued)
Net revenues
Agency ..............................................................
Claims Adjusting ...............................................
Total net revenues ............................................
Operating costs and expenses
Year ended December 31,
2017
RMB
2018
RMB
2019
RMB
2019
US$
3,780,217
308,256
4,088,473
3,143,873
327,390
3,471,263
3,335,397
370,606
3,706,003
479,100
53,234
532,334
Agency ..............................................................
(3,408,499)
Claims Adjusting ...............................................
Other .................................................................
(308,321)
(98,517)
(2,614,593)
(316,899)
(2,797,651)
(361,474)
(114,028)
(77,515)
(401,857)
(51,923)
(11,134)
Total operating costs and expenses ..................
(3,815,337)
(3,045,520)
(3,236,640)
(464,914)
Income (loss) from operations
Agency ..............................................................
Claims Adjusting ...............................................
Other .................................................................
Income (loss) from operations ..........................
371,718
(65)
(98,517)
273,136
529,280
10,491
537,746
9,132
77,243
1,311
(114,028)
(77,515)
(11,134)
425,743
469,363
67,420
As of December 31,
2018
RMB
2019
RMB
2019
US$
Segment assets
Agency ........................................................................................
Claims Adjusting .........................................................................
Other ...........................................................................................
Total assets .................................................................................
816,596
1,133,121
266,077
276,885
2,783,938
3,866,611
2,030,837
3,440,843
162,763
39,772
291,711
494,246
Substantially all of the Group’s revenues for the three years ended December 31, 2017, 2018 and 2019
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-56
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(23)
Subsequent events
(i) On March 18, 2020, the Group's Board of Directors declared a quarterly dividend of US$0.015 per
ordinary share, or US$0.30 per ADS for the fourth quarter of 2019. The dividend will be paid to shareholders of
record on April 2, 2020.
Based on our expectation on operating income for 2020, on March 18, 2020, the Group announced that its
Board of Directors has approved the management’s proposal for annual dividend of US$1.0 per ADS, or US$0.05
per ordinary share for the fiscal year of 2020. The dividend will be paid on a quarterly basis, with US$0.25 per
ADS, or US$0.0125 per ordinary share, payable in each of the next four quarters.
(ii) Along with the outbreak of the recent coronavirus disease 2019 (“COVID-19”) in late January 2020,
the Chinese government has implemented various precautionary measures to contain the spread of the COVID-19,
such as extending the Chinese New Year Holiday into February 2020, quarantines, travel restrictions, suspending
transportation and banning gatherings. Our business operations rely heavily on the efforts of individual sales
agents and claims adjustors in a way of face-to-face interactions with the general public or policy holders.
Although we have moved all training and marketing activities online to mitigate the impact, we have seen
disruption in our sales activities to a certain extent, which is expected to have an adverse effect on our operation
results of 2020. Given the pandemic of COVID-19 has the potential to cause significant operational disruptions on
China’s macroeconomy and is expected to adversely affect a varity of industries, including the financial markets,
the value of the Group's short term investments are susceptible to the potential adverse impact related to COVID-
19.
The extent to which COVID-19 will impact the Group's financial position, results of operations and cash
flows will depend on future developments, which are highly uncertain and cannot be reasonably predicted,
including, among others, the duration of the outbreak, new information which may emerge concerning the severity
of COVID-19 and the actions, especially those taken by governmental authorities, to contain or treat its impact.
Accordingly, an estimate of the impact cannot be made at this time.
F-57
SCHEDULE 1—CONDENSED FINANCIAL STATEMENTS OF THE COMPANY
FANHUA INC.
Statements of Financial Position
(In thousands, except for shares and per share data)
As of December 31,
2018
RMB
2019
RMB
2019
US$
ASSETS:
Current assets:
Cash and cash equivalents ..............................................
Short term investments ...................................................
Other receivables and amounts due from
subsidiaries and affiliates ............................................
Total current assets ......................................................
Non-current assets:
Investment in subsidiaries ..............................................
Investment in an affiliate ................................................
1,119,686
1,486,548
2,638,621
11,350
366,862
—
32,314
36,416
4,642
5,231
1,378,556
198,017
1,447,286
207,890
2,855,907
10,670
410,225
1,533
Total assets ...................................................................
4,136,519
4,313,863
619,648
LIABILITIES AND SHAREHOLDERS’
EQUITY:
1,337,039
27,969
1,330,068
785,608
191,052
112,846
Current liabilities:
Other payables and accrued expenses .............................
Amounts due to subsidiaries ...........................................
Non-current liabilities:
Refundable share rights deposits (Including
refundable share rights deposits of the
consolidated VIE of RMB138,328 and
RMB266,901 as of December 31, 2018
and 2019, respectively) ...............................................
shares
Total liabilities ..............................................................
Ordinary
(Authorized
shares:10,000,000,000 at US$0.001 each;
issued 1,301,915,084 and 1,252,367,264
shares, of which 1,123,475,604 and
1,073,891,784 shares were outstanding as
of December 31, 2018 and 2019,
respectively) ..............................................................
Treasury stock................................................................
Additional paid-in capital ...............................................
Retained earnings ...........................................................
Accumulated other comprehensive loss ..........................
9,583
(1,156)
437,176
2,280,870
(93,290)
138,328
266,901
38,338
1,503,336
2,382,577
342,236
9,235
(1,146)
393
1,988,233
(65,429)
1,327
(165)
56
285,592
(9,398)
Total equity ..................................................................
2,633,183
1,931,286
277,412
Total liabilities and shareholders' equity .....................
4,136,519
4,313,863
619,648
F-58
SCHEDULE 1—CONDENSED FINANCIAL STATEMENTS OF THE COMPANY—(Continued)
FANHUA INC.
Statements of Income and Comprehensive Income
(In thousands)
General and administrative expenses ..............
Selling expenses.............................................
Interest income ..............................................
Equity in earnings of subsidiaries and an
affiliate .......................................................
attributable
Company's shareholders...........................
Income
the
to
Net
Other comprehensive (loss) income:
Foreign currency translation adjustments ........
Unrealized net gains (loss) on available-
for-sale investments ....................................
Share of other comprehensive gain (loss)
of affiliates .................................................
Comprehensive income attributable to the
Company's shareholders...............................
2017
RMB
(4,435)
—
2,229
Year Ended December 31,
2018
RMB
(6,973)
—
10,624
2019
RMB
(6,480)
(281)
1,767
2019
US$
(931)
(40)
254
451,434
606,264
193,926
27,856
449,228
609,915
188,932
27,139
(10,664)
(10,194)
10,178
1,462
(632)
1,263
—
17,231
2,475
(1,763)
452
65
439,195
597,958
216,793
31,141
F-59
SCHEDULE 1—CONDENSED FINANCIAL STATEMENTS OF THE COMPANY — (Continued)
FANHUA INC.
Statements of Shareholders’ Equity
(In thousands, except for shares)
Number of
Share
Balance as of January 1,
2017
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 .................................. —
Unrealized net
loss on
available-for-sale
investments ................................................... —
Share
other
of
comprehensive loss in
affiliates ........................................................ —
Balance as of December
1,300,191,084
31, 2017 ........................................................
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 .............................. —
Subscription receipt ......................................... —
Distribution of dividend .................................. —
other
Share
income
of
comprehensive
of affiliates
—
Balance as of December
1,301,951,084
31, 2018 ........................................................
Net income ....................................................... —
Foreign
currency
translation .....................................................
Exercise of share options ................................
Cancellation of ordinary
—
640,000
—
12
—
—
—
—
—
9,583
—
—
4
shares.............................................................
(50,223,820)
(352)
Repurchase of ordinary
shares from open market .............................. —
Share-based compensation .............................. —
Distribution of dividend .................................. —
Unrealized net gains on
available-for-sale
investments .............................................. —
other
income
of
Share
comprehensive
of affiliates
—
—
—
—
—
—
Share Capital
Treasury Stock
Additional
Paid-in
Capital
RMB
Amounts
RMB
8,658
—
2,301,655
—
—
458
—
455
—
—
—
—
—
64,488
—
200,632
—
(137,216)
—
—
9,571
—
2,429,559
—
—
3,274
Number of
Share
Amounts
RMB
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,464,163)
150,000,000
(251,024)
—
(280,470)
28,475,480
—
—
(960)
(196)
—
—
Accumulated
Other
Comprehensiv
e Loss
RMB
(65,844)
—
(27,895)
—
—
—
—
—
(632)
1,263
(93,108)
—
1,581
—
—
—
—
—
Retained
Earnings
RMB
1,330,518
449,228
—
—
—
—
—
—
—
—
1,779,746
609,915
—
—
—
—
—
(108,791)
Subscription
Receivables
RMB
Total
RMB
(288,135)
—
3,286,852
449,228
17,231
—
—
—
22,187
—
—
—
(248,717)
—
(11,775)
—
(10,664)
64,946
—
201,087
22,187
(137,216)
(632)
1,263
3,877,051
609,915
(10,194)
3,286
—
(1,465,123)
—
260,492
—
(251,220)
260,492
(389,261)
—
—
—
—
(1,763)
437,176
—
178,475,480
—
(1,156)
—
2,280,870
188,932
—
—
—
—
—
(50,223,820)
(437,176)
393
—
50,223,820
—
—
—
—
—
—
—
—
352
(342)
—
—
—
—
—
—
—
(46,497)
—
(435,072)
—
—
(93,290)
—
10,178
—
—
—
—
—
17,231
452
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,763)
2,633,183
188,932
10,178
4
—
(484,015)
393
(435,072)
17,231
452
1,931,286
277,412
Balance as of December
31, 2019 ........................................................
1,252,367,264
9,235
393
178,475,480
(1,146)
1,988,233
(65,429)
Balance as of December
31, 2019 in US$ .....................................
1,252,367,264
1,327
56
178,475,480
(165)
285,592
(9,398)
F-60
SCHEDULE 1—CONDENSED FINANCIAL STATEMENTS OF THE COMPANY — (Continued)
FANHUA INC.
Statements of Cash Flows
(In thousands)
Year Ended December 31,
2017
RMB
2018
RMB
2019
RMB
2019
US$
OPERATING ACTIVITIES
Net income ...............................................................
Adjustments
to
income to net cash used
operating activities:
reconcile net
in
449,228
609,915
188,932
27,139
Equity in earnings of subsidiaries and
an affiliate .............................................................. (451,434)
(606,264)
(193,926)
(27,856)
Compensation expenses associated
with stock options ..................................................
—
—
393
Changes in operating assets and
liabilities:
Other receivables .......................................................
Other payables ...........................................................
(6,489)
(5,693)
10,644
1,326,440
(4)
1,214
56
(1)
174
Net cash (used in) from
operating activities ...................................................
Cash flows (used
in) generated
from investing activities
Purchase of short-term investments.............................
Changes in investment in subsidiaries
(14,388)
1,340,735
(3,391)
(488)
—
—
(178,371)
(25,620)
and an affiliate .......................................................
98,399
Advances
to
subsidiaries
and
affiliates .................................................................
(38,609)
Proceeds from disposal of short-term
investments ............................................................
—
Decrease in advances to subsidiaries
and affiliates ..........................................................
Net cash generated from investing
activities ................................................................
174,012
233,802
Cash flows generated from (used
in ) financing activities:
Proceeds on exercise of stock options .........................
Proceeds of employee and grantee
64,946
subscriptions ..........................................................
22,187
Dividends paid ........................................................... (137,216)
Repurchase of ordinary shares from
open market ...........................................................
Repurchase of ordinary shares from
shareholder ............................................................
Net
cash generated used
in
financing activities ................................................
Net increase (decrease) in cash and
—
—
81,129
467,995
—
—
(6,623)
498,774
143,581
—
549,124
457,361
(952)
71,644
20,625
—
65,697
3,286
211,054
(326,725)
4
1
111,304
(435,072)
15,988
(62,494)
(251,220)
(484,015)
(69,525)
(1,318,611)
—
—
(50,083)
(1,682,216)
(807,779)
(116,030)
cash equivalents ....................................................
169,331
207,643
(353,809)
(50,821)
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 ................................
10,746
(10,664)
169,413
169,413
(10,194)
366,862
366,862
19,261
32,314
52,696
2,767
4,642
F-61
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, 2019, RMB1,410,432 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, 2017, 2018 and 2019.
F-62