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, 2022.
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)
60/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
60/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.
1,072,842,484 ordinary shares, par value US$0.001 per share as of December 31, 2022
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.
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 ☐
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 whether the registrant has filed a report on and attestation to its management’s
assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the
Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit
report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial
statements of the registrant included in the filing reflect the correction of an error to previously issued financial
statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery
analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant
recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements
included in this filing:
U.S. GAAP ☒
International Financial Reporting Standards as issued Other ☐
by the International Accounting Standards Board ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial
statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Item 17 ☐ Item 18 ☐
(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 ☒
Yes ☐ No ☐
TABLE OF CONTENTS
INTRODUCTION
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on the Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures about Market Risk
Item 12. Description of Securities Other than Equity Securities
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions from the Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Item 16F. Change in Registrant’s Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure.
Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Item 16J. Insider Trading Policies
PART III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
ii
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i
In this annual report, unless the context otherwise requires:
INTRODUCTION
●
“we,” “us,” “our company,” “the Company” or “our” refers to Fanhua Inc., formerly known as CNinsure
Inc. and its subsidiaries and, in the context of describing its operations and consolidated financial
information, its variable interest entities which are its consolidated affiliated entities, if applicable. As
described elsewhere in this annual report, we do not own the VIEs, and the results of the VIEs’ operations
only accrue to us through contractual arrangements between the VIEs, and the VIEs’ nominee
shareholders, and certain of our subsidiaries. Accordingly, in appropriate contexts we will describe the
VIEs’ activities separately from those of our direct and indirect owned subsidiaries, and our use of the
terms “we,” “us,” and “our” may not include the VIEs in those contexts;
●
“Parent” refers to Fanhua Inc., a Cayman Islands holding company;
●
●
●
“consolidated VIEs” refers to Shenzhen Xinbao Investment Management Co., Ltd. (“Xinbao
Investment”) Fanhua RONS (Beijing) Technologies Co., Ltd. (“Fanhua RONS Technologies”) and their
subsidiaries;
“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 (“Hong Kong”) and Macau Special
Administrative Region(“Macau”);
“provinces” of China refers to the 23 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 and Macau;
●
“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 Hong Kong;
“customer” refers to policyholder or our insurance company partner which we define as customer under
ASC 606; 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.
Our Corporate Structure
Fanhua Inc. is a Cayman Islands holding company primarily operating in China through (i) its PRC
subsidiaries, including Fanhua Zhonglian Enterprise Image Planning (Shenzhen) Co., Ltd., or Zhonglian
Enterprise, and Fanhua Xinlian Information Technology Consulting (Shenzhen) Co., Ltd., or Xinlian Information,
and their subsidiaries in which we hold equity ownership interests, and (ii) contractual arrangements among (x)
our wholly-owned PRC subsidiaries Fanhua Insurance Sales Service Group Company Limited, or Fanhua Group
Company and Beijing Fanlian Investment Co., Ltd., or Fanlian Investment, (y) the consolidated VIEs, namely,
Shenzhen Xinbao Investment Management Co., Ltd., or Xinbao Investment, and Fanhua RONS (Beijing)
Technologies Co., Ltd., or Fanhua RONS Technologies, two limited liability companies established under PRC
law, and (z) the individual nominee shareholder of the consolidated VIEs. Fanhua Inc. holds 49% equity interests
in Xinbao Investment. Investors in the ADSs thus are not purchasing, and may never directly hold all equity
interests in the consolidated VIEs. PRC laws, regulations, and rules restrict and impose conditions on direct
foreign investment in certain types of business, and we therefore operate these businesses in China through the
consolidated VIEs. For a summary of these contractual arrangements, see “Item 4. Information on the Company—
ii
C. Organizational Structure.” As used in this annual report, “we”, “us”, or “our” refers to Fanhua Inc. and its
subsidiaries.
Our corporate structure is subject to risks relating to our contractual arrangements with Xinbao Investment,
Fanhua RONS Technologies and their individual nominee shareholders. If the PRC government finds these
contractual arrangements non-compliant with the restrictions on direct foreign investment in the relevant
industries, or if the relevant PRC laws, regulations, and rules or the interpretation thereof change in the future,
we could be subject to severe penalties or be forced to relinquish our interests in the consolidated VIEs or forfeit
our rights under the contractual arrangements. Fanhua Inc. and investors in the ADSs face uncertainty about
potential future actions by the PRC government, which could affect the enforceability of our contractual
arrangements with Xinbao Investment and Fanhua RONS Technologies and, consequently, significantly affect
the financial condition and results of operations of Fanhua Inc. If we are unable to claim our right to control the
assets of the consolidated VIEs, the ADSs may decline in value or become worthless. See “Item 3. Key
Information—D. Risk Factors—Risks Related to Our Corporate Structure.”
We face various legal and operational risks and uncertainties relating to doing business in China. We operate
our business primarily in China, and are subject to complex and evolving PRC laws and regulations. For example,
we face risks relating to regulatory approvals in connection with a future offering of our securities to foreign
investors, oversight on cybersecurity and data privacy, and the expanding efforts in anti-monopoly enforcement.
Uncertainties in the PRC legal system and the interpretation and enforcement of PRC laws and regulations could
limit the legal protection available to you and us, hinder our ability to offer or continue to offer the ADSs, result
in a material adverse effect on our business operations, and damage our reputation, which might further cause the
ADSs to significantly decline in value or become worthless. See “Item 3. Key Information—D. Risk Factors—
Risks Related to Doing Business in China.”
The Holding Foreign Companies Accountable Act
On December 16, 2021, the PCAOB issued a report notifying the Commission of its determinations that they
are unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in
mainland China and Hong Kong. The report sets forth lists identifying the registered public accounting firms
headquartered in mainland China and Hong Kong, respectively, that the PCAOB is unable to inspect or investigate
completely. Our financial statements contained in this annual report on Form 20-F for the fiscal year ended
December 31, 2022 have been audited by Deloitte Touche Tohmatsu Certified Public Accountants LLP, or
Deloitte, an independent registered public accounting firm that is headquartered in Mainland China and is on such
lists.
On May 26, 2022, we have been conclusively identified by the Commission as a Commission-Identified
Issuer under the Holding Foreign Company Accountable Act, or the HFCA Act. If, in the future, we have been
identified by the Commission for three consecutive years as an issuer whose registered public accounting firm is
determined by the PCAOB that it is unable to inspect or investigate completely because of a position taken by one
or more authorities in China, the Commission may prohibit our shares or ADSs from being traded on a national
securities exchange or in the “over-the-counter” trading market in the United States. Additionally, on December
29, 2022, the Consolidated Appropriations Act, 2023 was signed into law, which, among others, amended the
HFCA Act to reduce the number of consecutive years an issuer can be identified as a Commission-Identified
Issuer before the SEC must impose an initial trading prohibition on the issuer’s securities from three years to two.
Therefore, once an issuer is identified as a Commission-Identified Issuer for two consecutive years, the SEC is
required under the HFCA Act to prohibit the trading of the issuer’s securities on a national securities exchange
and in the over-the-counter market. On December 15, 2022, the PCAOB issued a report that vacated its December
16, 2021 determination and removed mainland China and Hong Kong from the list of jurisdictions where it is
unable to inspect or investigate completely registered public accounting firms. Therefore, our auditor is currently
able to be fully inspected and investigated by the PCAOB. Accordingly, until such time as the PCAOB issues any
new determination, we are at no risk of having our securities subject to a trading prohibition under the HFCA Act.
Each year, the PCAOB will determine whether it can inspect and investigate completely audit firms in mainland
China and Hong Kong, among other jurisdictions. If the PCAOB determines in the future that it no longer has full
access to inspect and investigate completely accounting firms in mainland China and Hong Kong and we use an
accounting firm headquartered in one of these jurisdictions to issue an audit report on our financial statements
filed with the SEC, we would be identified as a Commission-Identified Issuer following the filing of the annual
report on Form 20-F for the relevant fiscal year. In accordance with the HFCA Act, our securities would be
prohibited from being traded on a national securities exchange or in the over-the-counter trading market in the
United States if we are identified as a Commission-Identified Issuer for two consecutive years in the future.
Furthermore, we and our investors may be deprived of the benefits of such PCAOB inspections. The inability of
iii
the PCAOB to conduct inspections of auditors in China 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 of China that are subject to the PCAOB inspections, which could cause investors and potential
investors in our securities to lose confidence in the audit procedures and reported financial information and the
quality of our financial statements. If we fail to meet the new listing standards specified in the HFCA Act, we
could face possible delisting from the Nasdaq, cessation of trading in the “over-the-counter” market, deregistration
from the Commission and/or other risks, which may materially and adversely affect, or effectively terminate, our
ADSs trading in the United States.
iv
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
The Consolidated VIEs and China Operations
Fanhua Inc. is a Cayman Islands holding company primarily operating in China through (i) its PRC
subsidiaries, including Zhonglian Enterprise and Xinlian Information, and their subsidiaries in which we hold
equity ownership interests, and (ii) contractual arrangements among (x) our wholly-owned PRC subsidiary Fanhua
Group Company and Fanlian Investment, (y) the consolidated VIEs, Xinbao Investment and Fanhua RONS
Technologies, limited liability companies established under PRC law, and (z) the individual nominee shareholders
of the consolidated VIEs. Fanhua Inc. holds 49% equity interests in Xinbao Investment. Investors in the ADSs
thus are not purchasing, and may never directly hold all equity interests in the consolidated VIEs.
We commenced a restructuring in August 2021 to re-establish the VIE structure for our online insurance
business where our direct equity interests in Xinbao Investment were reduced from 100% to 49% and the
remaining 51% was nominally held by an employee of the Company on behalf of the Company. The restructuring
completed in December 2021. Concurrently, our wholly-owned PRC subsidiary, Fanhua Group Company, entered
into contractual arrangements with Xinbao Investment and the individual nominee shareholder. These agreements
include:(i) a technology consulting and service agreement, which enables us to receive all of the economic benefits
of Xinbao investment and its subsidiaries, (ii) a loan agreement, powers of attorney and an equity pledge
agreement, which provide us with effective control over Xinbao Investment, and (iii) an exclusive purchase option
agreement, which provides us with the option to purchase part of the equity interests in Xinbao Investment.
On June 24, 2022, our wholly owned subsidiary Fanlian Investment transferred all of the equity interests in
Fanhua RONS Technologies to Mr. Peng Ge, our chief financial officer to hold the shares of Fanhua RONS
Technologies nominally on behalf of the Company. Concurrently, Fanlian Investment entered into contractual
arrangements with Fanhua RONS Technologies and Mr. Ge. The contractual arrangements are substantially
similar to those among Fanhua Group Company, Xinbao Investment and its individual nominee shareholder.
For more details of the restructuring and the contractual arrangements, see “Item 4. Information on the
Company—C. Organizational Structure.”
In the opinion of the Company’s legal counsel, (i) the ownership structure relating to the consolidated VIEs
of the Company is in compliance with PRC laws and regulations; (ii) the contractual arrangements with the
consolidated VIEs and the individual shareholders are legal, valid and binding obligation of such party, and
enforceable against such party in accordance with their respective terms; and (iii) the execution, delivery and
performance of the consolidated VIEs and its shareholders do not result in any violation of the provisions of the
articles of association and business licenses of the consolidated VIEs, and any violation of any current PRC laws
and regulations.
However, control through these contractual arrangements may be less effective than direct ownership, and
we could face heightened risks and costs in enforcing these contractual arrangements, because there are substantial
uncertainties regarding the interpretation and application of current and future PRC laws, regulations, and rules
relating to these contractual arrangements, and these contractual arrangements have not been tested in a court of
law. If the PRC government finds such agreements non-compliant with relevant PRC laws, regulations, and rules,
or if these laws, regulations, and rules or the interpretation thereof change in the future, we could be subject to
severe penalties or be forced to relinquish our interests in Xinbao Investment and Fanhua RONS Technologies or
forfeit our rights under the contractual arrangements. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Our Corporate Structure—If the PRC government finds that the contractual arrangements that establish
- 1 -
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 Our
Corporate Structure—We rely on contractual arrangements with our consolidated VIEs, Xinbao Investment and
Fanhua RONS Technologies, and their shareholders to conduct a small part of our China operations, which may
not be as effective in providing operational control as direct ownership, and these contractual arrangements have
not been tested in a court of law.”
The following diagram illustrates the corporate structure of us and the consolidated VIEs, including the names,
places of incorporation and the proportion of ownership interests in our and the consolidated VIEs’ significant
subsidiaries and their respective subsidiaries as of March 31, 2023:
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, 2023, see Exhibit 8.1 to this annual report.
Fund Flows between Fanhua Inc., its Subsidiaries and the Consolidated VIEs
Under PRC law, we may provide funding to our PRC subsidiaries only through capital contributions or loans,
and to the consolidated VIEs only through loans, subject to the satisfaction of applicable government registration
and approval requirements. We rely on dividends and other distributions from our PRC subsidiaries to satisfy part
of our liquidity requirement. Under the contractual arrangements among Fanhua Group Company, the
consolidated VIEs, and the shareholders of the consolidated VIEs, Fanhua Group Company is entitled to all of the
economic benefits of the consolidated VIEs and its subsidiaries in the form of service fees. For risks relating to
the fund flows of our China operations, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing
Business in China—We rely principally on dividends and other distributions on equity paid by our subsidiaries to
- 2 -
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.”
Assets Transfer Occurred Between Fanhua Inc., its Subsidiaries and the Consolidated VIEs
Under the Contractual Arrangements, Fanhua Group Company and Fanlian Investment provide consultation
and training services to the consolidated VIEs and are entitled to receive service fees from the consolidated VIEs
in exchange. The Contractual Arrangements provide that the consolidated VIEs shall pay a quarterly fee calculated
primarily based on a percentage of its revenues.
Technology consulting and service agreements were entered into between (i) Fanhua Group Company and
(ii) Xinbao Investment and each of its subsidiaries on March 1, 2022 and consulting and service agreements were
entered into between (i) Fanlian Investment and (ii) Fanhua RONS Technologies and each of its subsidiaries. No
service fees have been incurred in 2022. The cash flows occurred between our subsidiaries and the consolidated
VIEs included the following: (1) cash received by the VIEs from our subsidiaries as inter-company advances
amounted to RMB43.0 million for the year ended December 31, 2022; and (2) commissions received offset by
technology services paid by our subsidiaries to the VIEs amounted to RMB94.9 million for the year ended
December 31, 2022.
Dividends or Distributions on Our ADSs or Ordinary Shares Made to the U.S. Investors and Their Tax
Consequences
Our board of directors has discretion as to whether to distribute dividends, subject to applicable laws.
Although Fanhua Inc. has previously paid dividends on a quarterly basis, the amount and form of future dividends
will depend on, among other things, our future results of operations and cash flow, our capital requirements and
surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition,
contractual restrictions and other factors deemed relevant by our board of directors. See “Item 8. Financial
Information—A. Consolidated Statements and Other Financial Information—Dividend Policy.”
In addition, subject to the passive foreign investment company rules discussed in detail under “Item 10.
Additional Information—E. Taxation—United States Federal Income Taxation—Passive Foreign Investment
Company”, the gross amount of any distribution that we make to investors 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. Furthermore, if we are considered a PRC tax resident enterprise for tax purposes, any
dividends we pay to our overseas shareholders may be regarded as China-sourced income and as a result may 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.” For further
discussion on PRC and United States federal income tax considerations of an investment in the ADSs, see “Item
10—Additional Information—E. Taxation.”
Restrictions on Foreign Exchange and the Ability to Transfer Cash between Entities, Across Borders and
to U.S. Investors
Our cash dividends were paid in U.S. dollars. The PRC government imposes controls on the convertibility of
Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. The majority of
our income is received in Renminbi and shortages in foreign currencies may restrict our ability to pay dividends
or other payments, or otherwise satisfy our foreign-currency-denominated obligations, if any. 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
SAFE as long as certain procedural requirements are met. Approval from appropriate government authorities is
required if Renminbi is 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, at its discretion, impose
restrictions on access to foreign currencies for current account transactions and if this occurs in the future, we may
not be able to pay dividends in foreign currencies to our shareholders.
Relevant PRC laws and regulations permit the PRC companies to pay dividends only out of their retained
earnings, if any, as determined in accordance with PRC accounting standards and regulations. Additionally, our
PRC subsidiaries and the consolidated VIEs can only distribute dividends upon approval of the shareholders after
they have met the PRC requirements for appropriation to the statutory reserves. As a result of these and other
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restrictions under the PRC laws and regulations, our PRC subsidiaries and the consolidated VIEs are restricted to
transfer a portion of their net assets to us either in the form of dividends, loans or advances. Even though we
currently do not require any such dividends, loans or advances from our PRC subsidiaries and the consolidated
VIEs for working capital and other funding purposes, we may in the future require additional cash resources from
our PRC subsidiaries and the consolidated VIEs due to changes in business conditions, to fund future acquisitions
and developments, or merely pay dividends to or distributions to our shareholders.
Financial Information Related to the VIEs
The following tables set forth the summary consolidated balance sheets data as of December 31, 2022 of the
Parent, our wholly-owned foreign subsidiary (“WOFEs”), or Fanhua Group Company and Fanlian Investment,
that are the primary beneficiaries of the VIEs under accounting principles generally accepted in the United States,
or U.S. GAAP (the “Primary Beneficiaries of VIEs”), our other subsidiaries and the consolidated VIEs and their
subsidiaries, and the summary of the consolidated statement of income and cash flows for the year ended
December 31, 2022. Our consolidated financial statements are prepared and presented in accordance with U.S.
GAAP. Our and the consolidated VIEs’ historical results are not necessarily indicative of results expected for
future periods. You should read this information together with our consolidated financial statements and the
related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report.
As of December 31, 2022
Consolidated
VIEs and
their
Parent
subsidiaries WOFEs
Other
Subsidiaries
Eliminating
adjustments
Consolidated
total
Assets
Cash and cash equivalents
Restricted cash
Short term investments
Accounts receivable, net
Contract assets, net
Other receivables, net
Amounts due from internal
companies
Investment in an affiliate
Investments in subsidiaries
and the VIEs and VIEs’
subsidiaries
Right-of-use assets, net
Property, plant, and
equipment, net
Other non-current assets
Deferred tax assets
Other assets
Total assets
Liabilities
Short-term loan
Accounts payable
Accrued commissions
Other payables and accrued
expenses
Amounts due to internal
companies
Income tax payable
Deferred tax liabilities
Operating lease liability
Accrued payroll
Other tax liabilities
Insurance premium payable
(RMB in thousands)
38,512
—
27,619
—
—
—
38,169 112,399
—
27,115
—
—
—
21,380
—
—
1,951 181,086
378,445
53,571
320,135
372,220
659,788
48,012
—
—
—
—
—
—
417,613
4,035
208,630 943,158 3,056,014 (4,625,415 )
—
—
—
—
567,525
80,686
347,754
393,600
659,788
231,049
—
4,035
2,520,667
—
— 1,178,977
13,074
5,273
64,000 (3,763,644 )
—
126,739
—
145,086
—
—
—
—
3,008,446
2,322
1,289
—
5,000
—
1,755 387,545
—
—
—
—
311,595 2,817,528 5,341,006 (8,389,059 )
94,848
11,400
15,402
140,432
98,459
11,400
20,402
529,732
3,089,516
—
—
—
—
8,600
—
—
—
—
35,679
353,752
267,349
—
—
—
35,679
362,352
267,349
3,599
3,267
2,597
164,863
—
174,326
1,381,444
—
—
—
—
—
—
170,839 2,102,968
852
—
14,107
4,853
—
—
7,509
—
4,955
10,941
26,147
16,571
972,406 (4,627,657 )
—
121,663
—
102,455
—
117,432
—
80,485
—
10,500
—
9
—
130,024
102,455
136,494
96,279
36,647
16,580
- 4 -
Total liabilities
Total net assets
1,385,043
1,623,403
248,829 2,125,377 2,226,593 (4,627,657 )
62,766 692,151 3,114,413 (3,761,402 )
1,358,185
1,731,331
As of December 31, 2021
Consolidated
VIE and its
subsidiaries WOFEs
Parent
Other
Subsidiaries
Eliminating
adjustments
Consolidated
total
Assets
Cash and cash equivalents
Restricted cash
Short term investments
Accounts receivable, net
Contract assets, net
Other receivables, net
Amounts due from internal
companies
Investment in an affiliate
Investments in subsidiaries
and the VIE and VIE’s
subsidiaries
Right-of-use assets, net
Property, plant, and
equipment, net
Other non-current assets
Deferred tax assets
Other assets
Total assets
Liabilities
Accounts payable
Accrued commissions
Other payables and accrued
expenses
Amounts due to internal
companies
Income tax payable
Deferred tax liabilities
Operating lease liability
Accrued payroll
Other tax liabilities
Insurance premium payable
Total liabilities
Total net assets
(RMB in thousands)
14,507
—
34,705
—
—
—
2,301 211,909
—
30,343
— 537,953
—
—
1,590
32,406
—
949
335,907
61,555
298,024
415,698
455,539
58,216
—
—
—
(57,772 )
—
—
635,953
6,378
116,351 711,908 3,561,209 (5,025,421 )
—
329,430
—
—
564,624
91,898
870,682
390,332
455,539
60,755
—
335,808
3,328,864
—
— 416,099
16,113
1,190
500,000 (4,244,963 )
—
208,374
—
225,677
—
—
—
—
4,020,407
1,679
—
—
924
—
—
—
—
186,143 1,902,273 6,461,451 (9,328,156 )
44,937
31,459
12,211
148,892
184
—
6,517
—
46,800
31,459
18,728
149,816
3,242,118
—
—
62,132
—
—
—
330,792
139,706
(57,203 )
—
335,721
139,706
2,903
1,601
4,261
169,392
—
178,157
2,179,619
—
—
—
—
—
—
2,182,522
1,837,885
35,933 1,346,557 1,463,881 (5,025,990 )
—
6,617
—
—
—
1,286
—
2,166
—
—
24,054
—
133,789 1,377,087 2,671,551 (5,083,193 )
52,354 525,186 3,789,900 (4,244,963 )
119,165
73,505
196,938
105,071
73,101
—
4,440
211
17,071
4,435
112
—
—
130,222
73,716
215,295
111,672
73,213
24,054
1,281,756
1,960,362
For the year ended December 31, 2022
Consolidated
VIEs and
their
Parent
subsidiaries WOFEs
Other
subsidiaries
Eliminating
adjustments (1)
Consolidated
total
Total net revenues
Third-party revenues
Intra-Group revenues
Total operating costs and
(RMB in thousands)
—
—
—
165,270 — 2,747,360
141,086 — 2,640,528
106,832
24,184 —
(131,016 )
—
(131,016 )
2,781,614
2,781,614
—
expenses
(11,318 )
(173,131 ) (36,227 ) (2,523,279 )
131,016
(2,612,939 )
- 5 -
Third-party operating
costs and expenses
Intra-Group operating
costs and expenses
Income (loss) from
operations
Interest income
Investment income
Others, net
Share of income from
(11,062 )
(67,789 ) (36,126 ) (2,497,962 )
—
(2,612,939 )
(256 )
(105,342 )
(101 )
(25,317 )
131,016
—
(11,318 )
5
—
17,495
(7,861 ) (36,227 )
388 11,606
— 6,600
(149 )
578
224,081
1,675
11,209
(21,747 )
—
—
—
—
168,675
13,674
17,809
(3,823 )
subsidiaries and the VIEs
and VIEs’ subsidiaries
Share of income of affiliates,
96,432
— 156,578
—
(253,010 )
—
net of impairment
Income tax expenses
Net income
(2,342 )
—
100,272
— —
2,759 (2,906 )
(4,136 ) 135,502
(67,254 )
(40,869 )
107,095
—
—
(253,010 )
(69,596 )
(41,016 )
85,723
Note:
(1) The elimination mainly represents (i) the intercompany service fee related to agency services for distributing
life insurance products and P&C insurance products on behalf of insurance companies provide by
consolidated affiliated entities to subsidiaries and (ii) the intercompany service fee related to technology
services provided by our consolidated variable interest entities to our subsidiaries.
For the year ended December 31, 2021
Consolidated
VIE and its
subsidiaries WOFEs
Parent
Other
subsidiaries
Eliminating
adjustments (1)
Consolidated
total
Total net revenues
Third-party revenues
Intra-Group revenues
Total operating costs and
expenses
Third-party operating
costs and expenses
Intra-Group operating
costs and expenses
Income (loss) from
operations
Interest income
Investment income
Others, net
Share of income from
(RMB in thousands)
—
—
—
16,267 — 3,268,763
16,267 — 3,254,847
13,916
— —
(13,916 )
—
(13,916 )
3,271,114
3,271,114
—
(331 )
(15,730 ) (37,677 ) (2,929,387 )
13,916
(2,969,209 )
(331 )
(1,814 ) (37,677 ) (2,929,387 )
—
(2,969,209 )
—
(13,916 ) —
—
13,916
—
(331 )
2
—
—
537 (37,677 )
374
60
— 21,767
90 12,014
339,376
2,535
11,131
21,210
—
—
—
—
301,905
2,971
32,898
33,314
subsidiaries and the VIE
and VIE’s subsidiaries
Share of loss of affiliates
Income tax expenses
Net income
254,526
(3,208 )
—
250,989
Note:
— 300,599
— —
(172 ) 1,760
515 298,837
—
(17,365 )
(92,162 )
264,725
(555,125 )
—
—
(555,125 )
—
(20,573 )
(90,574 )
259,941
(1) The elimination mainly represents the intercompany service fee related to agency services for distributing life
insurance products and P&C insurance products on behalf of insurance companies provide by consolidated
affiliated entities to subsidiaries.
- 6 -
For the year ended December 31, 2022
Consolidated
VIEs and
their
Parent
subsidiaries WOFEs
Other
subsidiaries
(RMB in thousands)
Eliminating
adjustments
Consolidated
total
Cash flows from operating
activities:
Net cash (used in) provided
by transactions with
external parties
Net cash (used in) provided
by transactions with
internal companies
Cash flows from investing
7,339
3,822 (12,794 )
139,385
—
137,752
7,339
98,715 (12,794 )
44,492
—
137,752
—
(94,893 )
—
94,893
—
—
activities:
227,321
(16,214 ) (34,333 ) (1,006,158 )
701,822
(127,562 )
Net cash provided by (used in)
transactions with external
parties
Net cash provided by (used in)
transactions with internal
companies
Cash flows from financing
917,101
(16,214 ) (34,333 )
(994,116 )
—
(127,562 )
(689,780 )
—
—
(12,042 )
701,822
—
activities:
(321,712 )
43,032 (52,476 ) 1,012,607
(701,822 )
(20,371 )
Net cash used in transactions
with external parties
(321,712 )
—
—
301,341
—
(20,371 )
Net cash provided by (used in)
transactions with internal
companies
—
43,032 (52,476 )
711,266
(701,822 )
—
For the year ended December 31, 2021
Parent
Consolidated
VIE and its
subsidiaries WOFEs
Other
subsidiaries
(RMB in thousands)
Eliminating
adjustments
Consolidated
total
Cash flows from operating
activities:
Net cash (used in) provided
by transactions with
external parties
Net cash (used in) provided
by transactions with
internal companies
Cash flows from investing
(784 )
32,674
(7,013 )
101,321
—
126,198
(784 )
48,923
(7,013 )
85,072
—
126,198
—
(16,249 )
—
16,249
—
—
activities:
201,339
(73,430 ) (283,323 )
261,650
344,163
450,399
Net cash provided by (used in)
transactions with external
parties
43,757
Net cash provided by (used in)
transactions with internal
companies
157,582
— (283,323 )
689,965
—
450,399
(73,430 )
—
(428,315 )
344,163
—
- 7 -
Cash flows from financing
activities:
(242,518 )
— 501,745
(175,362 )
(344,163 )
(260,298 )
Net cash used in transactions
with external parties
(242,518 )
—
—
(17,780 )
—
(260,298 )
Net cash provided by (used in)
transactions with internal
companies
—
— 501,745
(157,582 )
(344,163 )
—
Filing Procedures Required from the PRC Authorities for Offering Securities to Foreign Investors
Under applicable laws of mainland China, we and our mainland China subsidiaries may be required to
complete certain filing procedures with the China Securities Regulatory Commission, or the CSRC, in connection
with future offering and listing in an overseas market, including our follow-on offerings, issuance of convertible
bonds, offshore relisting after going-private transactions, and other equivalent offering activities. If we fail to
complete such filing procedures for any future offshore offering or listing, including our follow-on offerings,
issuance of convertible bonds, offshore relisting after going-private transactions, and other equivalent offering
activities, we may face sanctions by the CSRC or other mainland China regulatory authorities, which may include
fines and penalties on our operations in mainland China, limitations on our operating privileges in mainland China,
restrictions on or delays to our future financing transactions offshore, or other actions that could have a material
and adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as
the trading price of our ADSs. In addition, we are required to file a report to the CSRC after the occurrence and
public disclosure of certain material corporate events, including but not limited to, change of control and voluntary
or mandatory delisting. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks
Related to Doing Business in China—The approval of and filing with the CSRC or other government authorities
may be required in connection with our follow-on offshore offerings and capital raising activities under the laws
of mainland China, and, if required, we cannot predict whether or for how long we will be able to obtain such
approval or complete such filing.”
Summary of Risk Factors
Investing in the ADSs involves a high degree of risk. You should carefully consider the risks described under
“Item 3. Key Information—D. Risk Factors” and other information contained in this annual report on Form 20-F,
before you decide whether to purchase the ADSs. Below please find a summary of the principal risks and
uncertainties we face, organized under relevant headings:
Risks Related to Our Business and Industry
● We may not be successful in implementing our new strategic initiatives, which may have an adverse
impact on our business and financial results.
●
●
If and when our contracts with insurance companies are suspended or changed, our business and
operating results will be materially and adversely affected.
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.
● 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 may be unsuccessful in identifying suitable acquisition candidates, completing acquisitions,
integrating acquired companies or the acquired companies may not perform to our expectations, which
could adversely affect our growth.
- 8 -
● 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.
● Our operating structure may make it difficult to respond quickly to operational or financial problems,
which could negatively affect our financial results.
● Any significant failure in our information technology systems, cyber-attacks, any failure to protect the
confidential information of our customers or other security breaches may disrupt our business, loss of
customers, damage our reputation, result in potential liability and adversely affect our results of
operations and financial condition.
● Our business is subject to insurance company partner concentration risks arising from dependence on a
single or limited number of insurance company partners.
Risks Related to Our Corporate Structure
● Fanhua Inc. is a Cayman Islands holding company primarily operating in China through its subsidiaries
and contractual arrangements with Xinbao Investment and Fanhua RONS Technologies. Investors in the
ADSs thus are not purchasing, and may never directly hold, all equity interests in the consolidated VIEs.
There are substantial uncertainties regarding the interpretation and application of current and future PRC
laws, regulations, and rules relating to such agreements that establish the VIE structure for the majority
of our and the consolidated VIEs’ operations in China, including potential future actions by the PRC
government, which could affect the enforceability of our contractual arrangements with Xinbao
Investment and Fanhua RONS Technologies and, consequently, significantly affect the financial
condition and results of operations of Fanhua Inc. If the PRC government finds such agreements non-
compliant with relevant PRC laws, regulations, and rules, or if these laws, regulations, and rules or the
interpretation thereof change in the future, we could be subject to severe penalties or be forced to
relinquish our interests in Xinbao Investment and Fanhua RONS Technologies or forfeit our rights under
the contractual arrangements;
● The PRC government has significant authority to exert influence on the China operations of an offshore
holding company, such as us. Therefore, investors in the ADSs and the business of us and the
consolidated VIEs face potential uncertainty from the PRC government’s policy. Changes in China’s
economic, political or social conditions, or government policies could materially and adversely affect
our and the consolidated VIE’s business, financial condition, and results of operations;
● Any failure by the VIEs or their respective shareholders to perform their obligations under our
Contractual Arrangements with them would have an adverse effect on our business.
● We rely on contractual arrangements to conduct a small part of our China operations, which may not be
as effective in providing operational control as direct ownership; and
Risks Related to Doing Business in China
● The approval of and filing with the CSRC or other government authorities may be required in connection
with our follow-on offshore offerings and capital raising activities under the laws of mainland China,
and, if required, we cannot predict whether or for how long we will be able to obtain such approval or
complete such filing.
● Uncertainties in the PRC legal system and the interpretation and enforcement of PRC laws and
regulations could limit the legal protections available to you and us, significantly limit or completely
hinder our ability to offer or continue to offer our ADSs, cause significant disruption to our and the
consolidated VIE’s business operations, and severely damage our and the consolidated VIEs’ reputation,
which would materially and adversely affect our and the consolidated VIEs’ financial condition and
results of operations and cause our ADSs to significantly decline in value or become worthless. In
addition, rules and regulations in China can change quickly with little advance notice, therefore, our
assertions and beliefs of the risks imposed by the Chinese legal and regulatory system cannot be certain.
● 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.
- 9 -
● 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.
● PRC regulations relating to the establishment of offshore special purpose companies by PRC residents
and employee stock options granted by overseas-listed companies may increase our administrative
burden, restrict our overseas and cross-border investment activity, or otherwise adversely affect us. If
our shareholders who are PRC residents, or our PRC employees who are granted or exercise stock
options, fail to make any required registrations or filings under such regulations, we may be unable to
distribute profits and may become subject to liability under PRC laws. We may also face regulatory
uncertainties that could restrict our ability to adopt additional equity compensation plans for our directors
and employees and other parties under PRC law.
Risks Related to Our ADSs
● The Accelerating Holding Foreign Companies Accountable Act, which, if enacted, would reduce the
time period before our ADSs may be prohibited from trading or delisted. The delisting of our ADSs, or
the threat of their being delisted, may materially and adversely affect the value of your investment.
Additionally, the inability of the PCAOB to conduct adequate inspections deprives our investors with
the benefits of such inspections.
● We may need additional capital, and the sale of additional ADSs or other equity securities could result
in additional dilution to our 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.
● You may have to rely primarily on price appreciation of our ADSs for any return on your investment.
● 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.
● 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.
Risks Related to PCAOB Inspections
On December 16, 2021, the PCAOB issued a report notifying the Commission of its determinations (the
“PCAOB Determinations”) that they are unable to inspect or investigate completely PCAOB-registered public
accounting firms headquartered in mainland China and in Hong Kong. The report sets forth lists identifying the
registered public accounting firms headquartered in mainland China and Hong Kong, respectively, that the
PCAOB is unable to inspect or investigate completely. Our financial statements contained in this annual report on
Form 20-F for the fiscal year ended December 31, 2022 have been audited by Deloitte, an independent registered
public accounting firm that is headquartered in Mainland China and is on such lists. On May 26, 2022, we have
been conclusively identified by the Commission as a Commission-Identified Issuer under the Holding Foreign
Company Accountable Act, or the HFCA Act. If, in the future, we have been identified by the Commission for
three consecutive years as an issuer whose registered public accounting firm is determined by the PCAOB that it
is unable to inspect or investigate completely because of a position taken by one or more authorities in China, the
Commission may prohibit our shares or ADSs from being traded on a national securities exchange or in the “over-
the-counter” trading market in the United States. Additionally, on December 29, 2022, the Consolidated
Appropriations Act, 2023 was signed into law, which, among others, amended the HFCA Act to reduce the number
of consecutive years an issuer can be identified as a Commission-Identified Issuer before the SEC must impose
an initial trading prohibition on the issuer’s securities from three years to two. Therefore, once an issuer is
identified as a Commission-Identified Issuer for two consecutive years, the SEC is required under the HFCA Act
to prohibit the trading of the issuer’s securities on a national securities exchange and in the over-the-counter
market. On December 15, 2022, the PCAOB issued a report that vacated its December 16, 2021 determination
and removed mainland China and Hong Kong from the list of jurisdictions where it is unable to inspect or
- 10 -
investigate completely registered public accounting firms. Therefore, our auditor is currently able to be fully
inspected and investigated by the PCAOB. Accordingly, until such time as the PCAOB issues any new
determination, we are at no risk of having our securities subject to a trading prohibition under the HFCA Act.
Each year, the PCAOB will determine whether it can inspect and investigate completely audit firms in mainland
China and Hong Kong, among other jurisdictions. If the PCAOB determines in the future that it no longer has full
access to inspect and investigate completely accounting firms in mainland China and Hong Kong and we use an
accounting firm headquartered in one of these jurisdictions to issue an audit report on our financial statements
filed with the SEC, we would be identified as a Commission-Identified Issuer following the filing of the annual
report on Form 20-F for the relevant fiscal year. In accordance with the HFCA Act, our securities would be
prohibited from being traded on a national securities exchange or in the over-the-counter trading market in the
United States if we are identified as a Commission-Identified Issuer for two consecutive years in the future.
Furthermore, we and our investors may be deprived of the benefits of such PCAOB inspections. The inability of
the PCAOB to conduct inspections of auditors in China 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 of China that are subject to the PCAOB inspections, which could cause investors and potential
investors in our securities to lose confidence in the audit procedures and reported financial information and the
quality of our financial statements. If we fail to meet the new listing standards specified in the HFCA Act, we
could face possible delisting from the Nasdaq, cessation of trading in the “over-the-counter” market, deregistration
from the Commission and/or other risks, which may materially and adversely affect, or effectively terminate, our
ADSs trading in the United States.
A. [Reserved]
B. Capitalization and Indebtedness
Not Applicable.
C. Reasons for the Offer and Use of Proceeds
Not Applicable.
D. Risk Factors
Risks Related to Our Business and Industry
We may not be successful in implementing our new strategic initiatives, which may have an adverse impact on
our business and financial results.
In late 2020, we launched new strategic initiatives with focus on (i) building a career-based and professional
insurance advisor team with profound insurance knowledge and capabilities to provide family financial asset
allocation services to the emerging middle-class and mass-affluent individuals and families and empowering all
independent agents and agencies in China to become more efficient and professionalized; (ii) developing digital
toolkits and enhancing digital operation capabilities to empower independent agents and increase agent
productivity and (iii) offering an open platform to all independent agents and agencies whereby they can have
access to compliance support, industry leading IT infrastructure, digital technologies, better products and service
offerings, and the library of resources and knowhow to improve their training and skillsets to strengthen their
competitiveness in the market. There is no assurance that we will be able to implement these strategic initiatives
in accordance with our expectations, which may result in an adverse impact on our business and financial results.
If and when our contracts with insurance companies are suspended or changed, our business and operating
results will be materially and adversely affected.
We primarily act as agents for insurance companies in distributing their products to retail customers. We also
provide claims adjusting services principally to insurance companies. Our relationships with the insurance
companies are governed by agreements between us and the insurance companies. We have entered into strategic
partnership agreements with most of our major insurance company partners for the distribution of life, property
and casualty insurance products and the provision of claims adjusting services at the corporate headquarters level.
While this approach allows us to obtain more favorable terms from insurance companies by combining the sales
volumes and service fees of all of our subsidiaries and branches operating insurance agency and claims adjusting
- 11 -
businesses, it also means that the termination of a major contract could have a material adverse effect on our
business. Under the framework of the headquarter-to-headquarter agreements, our subsidiaries and branches
operating insurance agency and claims adjusting businesses generally also enter into contracts at a local level with
the respective provincial, city and district branches of the insurance companies. Generally, each branch of these
insurance companies has independent authority to enter into contracts with our relevant subsidiaries and branches,
and the termination of a contract with one branch has no significant effect on our contracts with the other branches.
See “Item 4. Information on the Company—B. Business Overview—Insurance Company Partners.” These
contracts establish, among other things, the scope of our authority, the pricing of the insurance products we
distribute and our fee rates. These contracts typically have a term of one year, and certain contracts can be
terminated by the insurance companies with little advance notice. Moreover, before or upon expiration of a
contract, the insurance company that is a party to that contract may agree to renew it only with changes in material
terms, including the amount of commissions and fees we receive, which could reduce our revenues to be generated
from that contract.
For the year ended December 31, 2022, our top five insurance company partners were Sinatay Life Insurance
Co., Ltd., or Sinatay, Greatwall Life Insurance Co., Ltd., or Greatwall, Huaxia Life Insurance Co., Ltd., or Huaxia,
Aeon Life Insurance Co., Ltd., or Aeon, and Ping An Property & Casualty Insurance Company of China, or Ping
An by net revenues. Among these top five partners, only Sinatay accounted for more than 10% of our total net
revenues individually in 2022, with Sinatay accounting for 19.6%, Greatwall accounting for 9.6%, Huaxia
accounting for 9.0%, Aeon accounting for 8.4% and Ping An accounting for 6.8%, 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.
A substantial portion of our sales of insurance products are conducted through our individual sales agents.
Some of these sales agents are significantly more productive than others in generating sales. In recent years, some
entrepreneurial management staff or senior sales agents of major insurance companies in China have chosen to
leave their employers or principals and become independent agents. We refer to these individuals as
entrepreneurial agents. An entrepreneurial agent is usually able to assemble and lead a team of sales agents. We
have been actively recruiting and will continue to recruit entrepreneurial agents to join our distribution and service
network as our sales agents. Entrepreneurial agents have been instrumental to the development of our life
insurance business. In addition, we rely primarily 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, 2022, we had 141,088 registered sales agents and 2,170 claims adjustors. Out of the
registered sales agents, 60,942 were performing agents, who are defined as sales agents that have sold at least one
insurance policy in 2022, and among these performing agents, 26,344 of them sold at least one life insurance
policy in 2022. If we are unable to attract and retain the core group of highly productive sales agents, particularly
entrepreneurial agents, and qualified claims adjustors, our business could be materially and adversely affected.
Competition for sales personnel and claims adjustors from insurance companies and other insurance
intermediaries may also force us to increase the compensation of our sales agents, and claims adjustors, which
would increase operating costs and reduce our profitability.
If our digitalization initiatives are not successful, our business and results of operations may be materially and
adversely affected.
We have devoted significant efforts to developing and managing our online platforms and developing digital
technologies to empower our business operations. In 2012, we launched Baowang (“保网”) (www.baoxian.com),
an online insurance distribution platform operated through its application, WeChat public account and mini
program], which aggregates more than 300 insurance products in partnership with over 30 insurers. Its insurance
products cover from accident insurance, indemnity medical insurance, travel insurance, homeowner insurance,
and a limited number of internet-specific long term regular life insurance products. In August 2014, we unveiled
eHuzhu (“e 互助”) (www.ehuzhu.com), an online mutual aid platform that provides risk-protection programs on
a mutual commitment basis among program members. In September 2017, we launched Lan Zhanggui (“懒掌
柜”), a mobile internet application and WeChat mini program, which provides end-to-end sales support services
to our sales agents. In 2020, we announced an initiative to empower our operation by utilizing digital technologies
such as artificial intelligence and big data to gain more customer insight, match sales leads with the most suitable
sales agents to maximize their productivity and help customers find the products that suit their different needs
- 12 -
throughout different stages of their lives. We have launched several digital toolkits including Fanhua RONS
Assistant Digital Operating Platform(“泛华榕数助理”), or RONS DOP to empower our agents in online customer
engagement, and Fanhua RONS Guanjia (“泛华榕数管家”), a comprehensive digital customer service platform.
See detailed description about our online platforms and digital toolkits in “Item 4. Information on the Company—
B. Business Overview”. The success of our strategies 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, RONS DOP, Fanhua RONS Guanjia as effective tools by sales agents;
● public concerns over security of e-commerce transactions, privacy 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;
●
increased competition from third-party insurance technology companies;
●
●
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.
Our digitalization efforts may not be successful or yield the benefits that we anticipate. As a result, our
business and results of operations may be materially and adversely affected.
Regulations on online insurance distribution are evolving rapidly. If we are unable to adapt to regulatory
changes and keep compliant, our business and results of operations may be materially and adversely affected.
Since online insurance distribution has emerged only recently in China and is evolving rapidly, the CBIRC
may promulgate and implement new rules and regulations to govern this sector from time to time. On December
7, 2020, the CBIRC promulgated the Measures for the Supervision of the Internet Insurance Business, or the
Measures, which became effective on February 1, 2021 and replaces the Interim Measures for the Regulation of
Internet Insurance Business. The Measures provides clarity on the qualifications for entities to operate online
insurance business in China and sets higher requirements on entities which intend to engage in online insurance
business. For example, the Measures in effect requires that any insurance institution which conducts internet
business through its self-operated online platform to directly own the domain name instead of through its
subsidiary, both the insurance institution and its self-operated online platform shall make Internet Content
Provider (“ICP”) filing and the insurance institutions engaged in online insurance business shall have IT systems
that are certified as at least Safety Level III Computer Information Systems. We operate our online insurance
distribution business through Baowang (www.baoxian.com), which accounted for 5.0% of our total net revenues
in 2022. Shenzhen Baowang previously owned the domain name of Baowang and held a Value-added
Telecommunication Business Operation Permit for ICP services, or ICP license. To remain compliant with the
requirements of the Measures, in September 2020, Shenzhen Baowang transferred the domain name of
www.baoxian.com to its direct parent company, Fanhua RONS which holds a national insurance service operating
license. Fanhua RONS has obtained an ICP license in August 2022. Baowang’s system has been certified as Safety
Level III Computer Information System for three consecutive years. As advised by our PRC counsel, we have
obtained the necessary approvals and licenses, and our operations meet the qualification requirements of the
Measures.
In addition, we provide our insurance information and transaction processing services through mobile apps
and mini programs such as “Lan Zhanggui”, “RONS DOP” and Fanhua RONS Guanjia. According to the
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Provisions on the Administration of Mobile Internet Application Information Services (the “App Provisions”)
issued by the CAC on June 28, 2016, which was most recently amended on June 14, 2022, and became effective
on August 1, 2022, except for providing internet news information service, any owner or operator providing other
internet information services through a mobile internet application, or an “app,” must obtain the relevant
qualification(s) as required by the relevant laws and regulations. The App Provisions, however, do not further
clarify the scope of “information services,” nor do they specify what “relevant qualification(s)” that a mobile app
owner or operator must obtain. In practice, operational activities of a company conducted through an app are
subject to the supervision of the local counterparts of the Information Communications Administration, which has
different polices on the operational activities conducted through websites and those through mobile apps. In many
cases, companies providing information services through standalone mobile apps without any web-based online
services are not required to obtain ICP licenses. However, the interpretation and enforcement of such laws and
regulations are subject to substantial discretion of the local authorities. We cannot rule out the possibility that the
local counterparts of the Information Communications Administration would take the view that our current
information services and transaction processing services provided through mobile apps would require an ICP
license or that, without such license, we would be prohibited from rendering such services.
If we are unable to adapt to any new changes to the regulation governing online insurance business and remain
fully compliant, the business operation of Baowang and our mobile applications and mini programs could be
suspended, which may adversely impact our business results of operation.
There are uncertainties with regard to how the changing laws, regulations and regulatory requirements would
apply to our business. We cannot assure you that our operations will remain fully compliant with the changes in
and further development of regulations applicable to us or we will be able to obtain the necessary approvals and
licenses as required in a timely manner.
Any failure to successfully identify the risks as part of our expansion into the online and mobile insurance
distribution business may have a material adverse impact on our growth, business prospects and results of
operations, which could lead to a decline in the price of our ADSs.
All of our personnel engaging in insurance agency, or claims adjusting activities are required under relevant
PRC regulations to register with the CBIRC’s Insurance Intermediaries Regulatory Information System. If
our sales personnel fail to finish practice registration, our business may be materially and adversely affected.
All of our personnel who engage in insurance agency and claims adjusting activities are required under
relevant PRC regulations to be registered with the CBIRC’s Insurance Intermediary Regulatory Information
System, or the IIRIS, through the insurance company or insurance intermediary company to which he or she
belongs. See “Item 4. Information on the Company—B. Business Overview—Regulation.” In addition, under the
relevant PRC regulations, such as the Provisions on the Supervision and Administration of Insurance Agents
issued on November 12, 2020 and Provisions on the Supervision of Insurance Claims Adjusting Firms issued by
the CBIRC in February 2018, an insurance agency or claims adjusting firm that retains a personnel who has not
been registered with the IIRIS through the insurance agency or claims adjusting firm to engage in insurance
intermediary activities may be subject to rectification request, warning and fines up to RMB10,000 per
intermediary by the CBIRC. If a substantial portion of our sales force were found to have not been properly
registered with the IIRIS, our business may be adversely affected. Moreover, we may be subject to fines and other
administrative proceedings for the failure by our sales agents or sales representatives to register with the CBIRC.
Such fines or administrative proceedings could adversely affect our business, financial condition and results of
operations.
Material changes in the regulatory environment could change the competitive landscape of our industry or
require us to change the way we do business. The administration, interpretation and enforcement of the laws
and regulations currently applicable to us could change rapidly. If we fail to comply with applicable laws and
regulations, we may be subject to civil and criminal penalties or lose the ability to conduct our business.
We operate in a highly regulated industry. The laws and regulations applicable to us are evolving and may
change rapidly, which could change the competitive environment of our industry significantly and cause us to
lose some or all of our competitive advantages. In recent years, the CBIRC and its predecessor have increasingly
tightened regulations and supervision of the Chinese insurance market. For example, on April 2, 2019, the CBIRC
issued a Notice to Rectify the Irregularities in the Insurance Intermediary Market in 2019 and subsequently on
May 26, 2020, the CBIRC issued similar guidelines requiring all insurance companies and insurance
intermediaries to conduct self-check on various practices in violation of relevant regulations. In March 2023, the
CBIRC issued a Notice to Self-check and Rectify Irregularities in Internet-based Marketing and Publicity by
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Insurance Institutions and Insurance Sales Personnel, requiring all insurance institutions and sales personnel to
self-check and rectify irregular marketing activities on the internet starting from April 3, 2023. Insurance
institutions are required to complete the rectification by June 15, 2023 and report the results to the CBIRC by June
30, 2023.
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.
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, the appropriate level of
regulation, proper categorization, cooperation among different government agencies and promoting innovation.
Not only may the laws and regulations applicable to us change rapidly, but it may also 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, require us to change or terminate
some of our operations or business, or disqualify us from providing services to insurance companies or other
customers; and, thus have a materially 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, which may adversely affect our business operations.
For example, on November 5, 2020, China Insurance Industry Association and China Medical Doctor
Association jointly published Definition Framework 2020, announcing changes to the definition of critical
illnesses, or CI, which will be adopted after a transition period ending January 31, 2021. After January 31, 2021,
all critical illness products based on the previous definition framework will not be sold in China. Major changes
to the CI definition framework include, among others, (i) setting the upper limit for insurance benefits for mild
illness at no more than 30% of total insured amount; (ii) expanding the types of illnesses covered from 25 types
to 28 types of critical illnesses and three types of mild illness; (iii) exclusion of cancer that is in situ from the
scope of CI coverage; and (iv) categorizing thyroid cancer at different stages into critical illness category and mild
illness category. The expected cessation of the critical illness products under the previous CI definition framework
has resulted in strong growth in our sales of critical illness policies in January 2021 followed by a drop afterwards.
On October 12, 2021, the CBIRC promulgated the Notice on Further Regulation of Matters Relating to the
Internet Life Insurance Business of Insurance Institutions, which, among others, raised the qualification
requirements for insurance companies and insurance intermediaries to engage in Internet life insurance business
nationwide, limited products that could be sold on the Internet nationwide to accident, health, term life, 10-year
(or longer) traditional life, and 10-year (or longer) annuities and capped the preset expense ratio to be no higher
than 35% for one-year life insurance and first year preset expense ratio no higher than 60% with average expense
ratio no higher than 25% for over-one-year life insurance. Incumbent companies have until the end of 2021 to
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comply with the new regulations. Subsequently, many insurance companies which could not meet the qualification
requirements have stopped selling life insurance products online before Jan 1, 2022. As our online insurance
business operated through Baowang is subject to this regulation, the disruption in internet life insurance product
supply and the cap on expense ratio have adversely impacted and may continue to impact Baowang which
contributed to 5.0% of our total net revenues in 2022.
Any future change in regulatory requirements may make our products less attractive to consumers or disrupt
product supply, and our business results of operations could fluctuate significantly and be adversely affected.
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 (1) ancillary insurance
agencies to take video and audio-recording, or double-recording for the sales of all insurance products that they
facilitate and (2) other insurance distribution channels to take double-recording for the sales of investment-linked
insurance products and for the sale of life insurance products with a payment period of more than one year to the
elderly of over 60 years old. On June 11, 2019, the 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 the sales of all long-term personal insurance products in Jiangsu Province starting from October 1, 2019.
Similar rules have also been implemented in a few other regions, including Ningbo, Zhejiang Province, certain
parts of Shandong since mid-2020 and Shanghai since early 2020. In June 2021, the CBIRC promulgated the
Measures on Retrospective Management of Insurance Sales Behaviors for public consultation which requires that
retrospective management must be conducted for face-to-face sales by sales agents of all life insurance products
with a payment period of over one-year or less than one-year but with renewal obligation, and that insurance
institutions must establish sound insurance sales retrospective management working mechanism and designated
retrospective management information system. Retrospective management specially refers to the recording and
preservation of the key insurance sales processes and sales behaviors by means of double recording, sales page
management and operation tracking record to ensure future replay of the sales behaviors, search of important
information and accountability of insurance institutions.
As a significant portion of our insurance products are personal life insurance products with a payment period
of over one year and are distributed through our individual sales agents, the sales processes of our sales agents to
customers are subject to double recording requirements. As the double recording process can be complicated and
time-consuming, our sales activities in those regions that have previously implemented such rules have been
adversely impacted. If similar rules are implemented nationwide, our sales activities can be materially impacted,
and our compliance cost may be increased, as a result of which our business and results of operations may be
adversely affected.
On January 12, 2021, the CBIRC promulgated Measures on The Supervision of Informatization of Insurance
Intermediary Institutions, or the Informatization Measures, requiring insurance intermediary institutions to
establish proper information system and provide specific requirements on the security system, security level
protection certification, data security, personal information protection, terminal security and training. Insurance
intermediary companies must comply with the Information Security Measures to engage in insurance intermediary
business. Insurance intermediaries should conduct self-examination of informatization work in accordance with
the Informatization Measures, and complete rectification within one year from the date of implementation of the
Informatization Measures. We have completed self-examination and rectification and believe we have met the
requirements of the Informatization Measures. However, if more stringent requirements are implemented in the
future, our compliance cost may increase which may adversely impact our operation results.
Our mutual-aid platform eHuzhu currently is not subject to any license requirement or any other supervision
by the CBIRC because the mutual aid plans offered on the platform are not technically insurance. If the CBIRC
determines to include mutual aid platform into its supervision in the future, our compliance cost could be increased,
and if we are unable to meet the qualification requirement to obtain a proper license, the operation of eHuzhu
could be disrupted. In 2021, a few internet giant-backed mutual aid platforms voluntarily chose to shut down
operations. As of the date of this filing, eHuzhu hasn’t received any requirement from the CBIRC or other
regulatory authority to terminate operations. If the CBIRC determines eHuzhu’s operation is not compliant with
current regulations, eHuzhu would be required to terminate its operation, which could harm the interests of the
members of eHuzhu and damage our reputation.
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On April 15, 2022, the CBIRC issued the Second Draft Measures for the Supervision of Life Insurance Sales
Behavior for public consultation, or the Draft Measure on Life Insurance Sales Behavior, which provides for a
comprehensive management on the pre-sale, mid-sale and after-sale behaviors of life insurance distribution of
insurance companies, insurance intermediaries and insurance salespeople, with requirements focusing on, among
others, (i) establishment of a tiered management mechanism for insurance sales practitioners based on their
qualifications and sales abilities before December 31, 2023 for new recruits and before December 31, 2024 for
existing sales practitioners; (ii) classification of life insurance products by product types, complexity, risk level
and affordability ; (iii) pre-sales product suitability assessment on the policyholders; (iv) restriction on compulsory
bundled-sales of insurance products with healthcare and elderly-care services; (v) restriction on inclusion of self-
insured policies in sales agents performance assessment and (v) establishment of a compliance management
department independent from sales departments dedicated to the review and supervision of the sales behaviors of
the sales practitioners of the insurance companies or insurance intermediaries. Some of the requirements, if
implemented, may incur additional compliance costs for us. In addition, the Draft Measure on Life Insurance Sales
Behavior caps the total commission rate at the pre-set surcharge ratio of life insurance products, which may reduce
our commission revenues and adversely affect our financial results.
We may be unsuccessful in identifying suitable acquisition candidates, completing acquisitions, integrating
acquired companies or the acquired companies may not perform to our expectations, which could adversely
affect our growth.
Our growth strategy partially includes the acquisition of other insurance intermediaries. We expect a
substantial portion of our future growth to come from acquisitions of high-quality independent insurance agencies,
brokerages and claims adjusting firms. 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. In addition, we compete with other entities to acquire high-quality independent
insurance intermediaries. Many of our competitors may have substantially greater financial resources than we do
and 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.
Even if we succeed in acquiring other insurance intermediaries, our ability to integrate an acquired entity and
its operations is subject to a number of factors. These factors include difficulties in the integration of acquired
operations and retention of personnel, especially the sales agents who are not employees of the acquired company,
entry into unfamiliar markets, unanticipated problems or legal liabilities, and tax and accounting issues. The need
to address these factors may divert management’s attention from other aspects of our business and materially and
adversely affect our business prospects. In addition, costs associated with integrating newly acquired companies
could negatively affect our operating margins.
Furthermore, the acquired companies may not perform to our expectations for various reasons, including
legislative or regulatory changes that affect the insurance products in which a company specializes, the loss of
key clients after the acquisition closes, general economic factors that impact a company in a direct way and the
cultural incompatibility of an acquired company’s management team with us. If an acquired company can not be
operated at the same profitability level as our existing operations, the acquisition would have a negative impact
on our operating margin. Our inability to successfully integrate an acquired entity or its failure to perform to our
expectations may materially and adversely affect our business, prospects, results of operations and financial
condition.
Competition in our industry is intense and, if we are unable to compete effectively 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 fragmented and competitive, and we expect
competition to persist and intensify as more internet giants and other online insurance intermediaries and foreign-
invested insurance intermediary companies 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
- 17 -
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 life and health insurance, property and casualty insurance and claims adjusting businesses
and derive revenues primarily from commissions and fees paid by the insurance companies whose policies our
customers purchase and to whom we provide claims adjusting services. Our commission and fee rates are set by
insurance companies and are based on the premiums that the insurance companies charge or the amount recovered
by insurance companies. Commission and fee rates and premiums can change based on the prevailing economic,
regulatory, taxation-related and competitive factors that affect insurance companies. For example, the Draft
Measure on the Life Insurance Sales Behaviors sets a cap on total commissions rate of life insurance products at
the pre-set surcharge ratio of the life insurance product. These factors, which are not within our control, include
the ability of insurance companies to place new business, underwriting and non-underwriting profits of insurance
companies, consumer demand for insurance products, the availability of comparable products from other
insurance companies at a lower cost, the availability of alternative insurance products such as government benefits
and self-insurance plans, as well as the tax deductibility of commissions and fees and the consumers themselves.
In addition, premium rates for certain insurance products, such as the mandatory automobile liability insurance
that each automobile owner in the PRC is legally required to purchase, are tightly regulated by CBIRC.
Because we do not determine, and cannot predict, the timing or extent of premium or commission and fee
rate changes, we cannot predict the effect any of these changes may have on our operations. Any decrease in
premiums or commission and fee rates may significantly affect our profitability. In addition, our budget for future
acquisitions, capital expenditures and other expenditures may be disrupted by unexpected decreases in revenues
caused by decreases in premiums or commission and fee rates, thereby adversely affecting our operations.
Quarterly and annual variations in our commission and fee revenue may unexpectedly impact our results of
operations.
Our commission and fee revenue are subject to both quarterly and annual fluctuations as a result of the
seasonality of our business, the timing of policy renewals and the net effect of new and lost business. Life
insurance commission revenue is usually the highest in the first quarter and lowest in the fourth quarter of any
given year as much of the jumpstart sales activities of life insurance companies occur 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. Started in 2021, we also record estimated renewal commission revenue for long-term
policy based on the expected renewal rate as well as the possibility of achieving performance targets. This, in a
way, mitigates some degree of seasonality issue. Apart from the outbreak of epidemic and the recognition of
estimated renewal commissions, some other factors that cause the quarterly and annual variations are not within
our control. Specifically, regulatory changes to product design may result in cessation of products from time to
time and cause quarterly fluctuation in the results of our operations. In addition, consumer demand for insurance
products can influence the timing of renewals, new business and lost business, which generally includes policies
that are not renewed, and cancellations. As a result, you may not be able to rely on quarterly or annual comparisons
of our operating results as an indication of our future performance.
Our operating structure may make it difficult to respond quickly to operational or financial problems, which
could negatively affect our financial results.
We currently operate primarily through our wholly-owned or majority-owned insurance agencies and claims
adjusting firms and their branches and to a smaller extent through our consolidated VIEs located in 31 provinces
in China. These companies report their financial results to our corporate headquarters monthly. If these companies
delay either reporting results or informing corporate headquarters of negative business developments such as
losses of relationships with insurance companies, regulatory inquiries or any other negative events, we may not
be able to take action to remedy the situation in a timely fashion. This in turn could have a negative effect on our
financial results. In addition, if one of these companies were to report inaccurate financial information, we might
not learn of the inaccuracies on a timely basis and be able to take corrective measures promptly, which could
negatively affect our ability to report our financial results.
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Our future success depends on the continuing efforts of our senior management team and other key personnel,
and our business may be harmed if we lose their services.
Our future success depends heavily upon the continuing services of the members of our senior management
team and other key personnel, in particular, Mr. Yinan Hu, or Mr. Hu, our chairman of the board of directors and
chief executive officer, Mr. Peng Ge, or, Mr. Ge, our chief financial officer, Mr. Lichong Liu, our chief operating
officer and vice president and Mr. Jun Li, our chief digital officer and vice president. If one or more of our senior
executives or other key personnel, are unable or unwilling to continue in their present positions, we may not be
able to replace them easily, or at all. As such, our business may be disrupted and our financial condition and results
of operations may be materially and adversely affected. Competition for senior management and key personnel in
our industry is intense because of a number of factors including the limited pool of qualified candidates. We may
not be able to retain the services of our senior executives or key personnel, or attract and retain high-quality senior
executives or key personnel in the future. As is customary in the PRC, we do not have insurance coverage for the
loss of our senior management team or other key personnel.
In addition, if any member of our senior management team or any of our other key personnel joins a
competitor or forms a competing company, we may lose customers, sensitive trade information, key professionals
and staff members. Each of our executive officers and key employees has entered into an employment agreement
with us which contains confidentiality and non-competition provisions. These agreements generally have an initial
term of three years, and are automatically extended for successive one-year terms unless terminated earlier
pursuant to the terms of the agreement. See “Item 6. Directors, Senior Management and Employees—A. Directors
and Senior Management—Employment Agreements” for a more detailed description of the key terms of these
employment agreements. If any disputes arise between any of our senior executives or key personnel and us, we
cannot assure you of the extent to which any of these agreements may be enforced.
Salesperson and employee misconduct is difficult to detect and deter and could harm our reputation or lead to
regulatory sanctions or litigation costs.
Salesperson and employee misconduct could result in violations of law by us, regulatory sanctions, litigation
or serious reputational or financial harm. Misconduct could include:
● making misrepresentations when marketing or selling insurance to customers;
● hindering insurance applicants from making full and accurate mandatory disclosures or inducing
applicants to make misrepresentations;
● hiding or falsifying material information in relation to insurance contracts;
●
fabricating or altering insurance contracts without authorization from relevant parties, selling false
policies, or providing false documents on behalf of the applicants;
●
falsifying insurance agency business or fraudulently returning insurance policies to obtain commissions;
●
colluding with applicants, insureds, or beneficiaries to obtain insurance benefits;
●
engaging in false claims; or
● otherwise not complying with laws and regulations or our control policies or procedures.
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.
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In order to improve our return on capital, we may from time to time, upon board approval, invest a certain
portion of our cash in financial products, such as trust products, with terms of half a year to two years. These
products may involve various risks, including default risks, interest risks, and other risks. We cannot guarantee
these investments will yield the returns we anticipate and we could suffer financial loss resulting from the purchase
of these financial products.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to
accurately report our financial results or prevent fraud.
We are subject to reporting obligations under U.S. securities laws. Pursuant to Section 404 of the Sarbanes-
Oxley Act of 2002 and the related rules adopted by the Securities and Exchange Commission, or the SEC, every
public company is required to include a management report on the company’s internal controls over financial
reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s
internal controls over financial reporting. In addition, an independent registered public accounting firm must attest
to and report on the effectiveness of the company’s internal controls over financial reporting.
As required by Section 404 of the Sarbanes-Oxley Act and related rules as promulgated by the SEC, our
management assessed the effectiveness of the internal control over financial reporting as of December 31, 2022
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, 2022. If we fail to achieve and maintain an effective internal control
environment for our financial reporting, we may not be able to conclude on an ongoing basis that we have effective
internal control over financial reporting in accordance with the Sarbanes-Oxley Act of 2002, which could result
in inaccuracies in our consolidated financial statements and could also impair our ability to comply with applicable
financial reporting requirements and make related regulatory filings on a timely basis. As a result, our business,
financial condition, results of operations and prospects, as well as the trading price of our ADSs, may be materially
and adversely affected. Moreover, if we are not able to conclude that we have effective internal control over
financial reporting, investors may lose confidence in the reliability of our financial statements, which would
negatively impact the trading price of our ADSs. Our reporting obligations as a public company, including our
efforts to comply with Section 404 of the Sarbanes-Oxley Act, will continue to place a significant strain on our
management, operational and financial resources and systems for the foreseeable future.
We may face legal action by former employers or principals of entrepreneurial agents who join our distribution
and service network.
Competition for productive sales agents is intense within the Chinese insurance industry. When an
entrepreneurial agent leaves his or her employer or principal to join our distribution and service network as our
sales agent, we may face legal action by his or her former employer or principal of the entrepreneurial agent on
the ground of unfair competition or breach of contract. As of the date of this annual report, there has been no such
action filed or threatened against us. We cannot assure you that this will not happen in the future. Any such legal
actions, regardless of merit, could be expensive and time-consuming and could divert resources and management’s
attention from the operation of our business. If we were found liable in such a legal action, we might be required
to pay substantial damages to the former employer or principal of the entrepreneurial agent, and our business
reputation might be harmed. Moreover, the filing of such a legal action may discourage potential entrepreneurial
agents from leaving their employers or principals, thus reducing the number of entrepreneurial agents we can
recruit and potentially harming our growth prospects.
If we are required to write down goodwill and investment in affiliates, our financial condition and results may
be materially and adversely affected.
When we acquire a business, the amount of the purchase price that is allocated to goodwill is determined by
the excess of the fair value of purchase price and any controlling interest over the net identifiable tangible assets
acquired. As of December 31, 2022, goodwill represented RMB110.0 million (US$15.9 million), or 6.8% of our
total shareholders’ equity. Our management performs impairment assessments annually and we did not recognize
any impairment loss between 2016 and 2022. Under current accounting standards, if we determine that goodwill
is impaired, we will be required to write down the value of such assets and recognize corresponding impairment
charges.
- 20 -
Prior to June 28, 2022, we accounted for our 18.5% of equity interests in CNFinance Holdings Limited
(“CNFinance”) using the equity method. We review our equity method investment periodically to determine
whether a decline in fair value to an amount below the carrying value is other-than-temporary. As of March 31,
2022, the fair value of the investment in CNFinance as measured by its closing market price was below the
carrying value although the investment in CNFinance generated positive equity income. Based on management’s
evaluation, it was concluded that the decline in fair value of our investment in CNFinance below its carrying value
was deemed to be other-than-temporary. Accordingly, a provision of an impairment of RMB78.3 million
(US$12.3 million) on investment in CNFinance was recognized in the first quarter of 2022. On June 28, 2022, we
completed distribution of 252,995,600 ordinary shares of CNFinance to the Company’s shareholders in proportion
to their then respective shareholdings in the Company as of the record date on June 9, 2022. Following the
distribution, Fanhua’s equity stake in CNFinance decreased from approximately 18.5% to approximately 0.01%
and we ceased to recognize share of income of CNFinance.
Any future write-down related to such goodwill and equity method investments may materially and adversely
affect our shareholders’ equity and financial results.
Preparing and forecasting our financial results requires us to make judgments and estimates which may differ
materially from actual results.
Given the evolving regulatory and competitive environment and the inherent limitations in predicting the
future, forecasts of our revenues, operating income, net income and other financial and operating data may differ
materially from actual results. Such discrepancies could cause a decline in the trading price of our stock. In
addition, the preparation of the consolidated financial statements in conformity with U.S. GAAP requires
management to make a number of estimates and assumptions relating to the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reported period. Our management base their
estimates on historical experience and various other factors which are believed to be reasonable under the
circumstances, and the results of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Significant accounting estimates reflected in our
consolidated financial statements included estimates of allowance for doubtful receivables and estimates
associated with equity-method investment impairment assessments. Actual results could differ from those
estimates, which could negatively affect our stock price.
Any significant failure in our information technology systems could have a material adverse effect on our
business and profitability.
Our business is highly dependent on the ability of our information technology systems to timely process a
large number of transactions across different markets and products at a time when transaction processes have
become increasingly complex and the volume of such transactions is growing rapidly. The proper functioning of
our financial control, accounting, customer database, customer service and other data processing systems, together
with the communication systems of our various subsidiaries, branches and our main offices in Guangzhou, is
critical to our business and our ability to compete effectively. Our business activities could be materially disrupted
in the event of a partial or complete failure of any of these primary information technology or communication
systems, which could be caused by, among other things, software malfunction, computer virus attacks or
conversion errors due to system upgrading. In addition, a prolonged failure of our information technology system
could damage our reputation and materially and adversely affect our future prospects and profitability.
A computer system failure, cyber-attacks, any failure to protect the confidential information of our customers
or other security breaches may disrupt our business, loss of customers, damage our reputation, result in
potential liability and adversely affect our results of operations and financial condition.
We use computer systems to store, retrieve, evaluate and utilize customer and company data and information.
Our business is highly dependent on our ability to access these systems to perform necessary business functions
such as selling insurance products, providing customer support, policy management and claims assistance.
Although we have designed and implemented a variety of security measures and backup plans to prevent or limit
the effect of failure, our computer systems may be vulnerable to disruptions as a result of natural disasters, man-
made disasters, criminal activities, pandemics or other events beyond our control. In addition, our computer
systems may be subject to computer viruses or other malicious codes, unauthorized access, cyber-attacks or other
computer-related penetrations. The failure of our computer systems for any reason could disrupt our operations
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and may adversely affect our business, results of operations and financial condition. Although we have not
experienced such a computer system failure or security breach in the past, we cannot assure you that we will not
encounter a failure or security breach in the future.
Our customer database holds confidential information concerning our customers. We may be unable to
prevent third parties, such as hackers or criminal organizations, from stealing information provided by our
customers to us. Confidential information of our customers may also be misappropriated or inadvertently disclosed
through employee misconduct or mistake. We may also in the future be required to disclose to government
authorities certain confidential information concerning our customers. In addition, many of our customers pay for
our insurance services through third-party online payment services. In such transactions, maintaining complete
security during the transmission of confidential information, such as personal information, is essential to
maintaining consumer confidence. We have limited influence over the security measures of third-party online
payment service providers. In addition, our third-party merchants may violate their confidentiality obligations and
disclose information about our customers. Any compromise of our security or third-party service providers’
security could have a material adverse effect on our reputation, business, prospects, financial condition and results
of operations.
Though we have not experienced any material cybersecurity incidents in the past, if our database were
compromised by outside sources or if we are accused of failing to protect the confidential information of our
customers, we may be forced to expend significant financial and managerial resources in remedying the situation,
defending against these accusations and we may face potential liability. Any negative publicity, especially
concerning breaches in our cybersecurity systems, may adversely affect our public image and reputation. Though
we take proactive measures to protect against these risks and we believe that our efforts in this area are sufficient
for our business, we cannot be certain that such measures will prove effective against all cybersecurity risks. In
addition, any perception by the public that online commerce is becoming increasingly unsafe or that the privacy
of customer information is vulnerable to attack could inhibit the growth of online services generally, which in turn
may reduce the number of our customers.
Our business is subject to insurance company partner concentration risks arising from dependence on a single
or limited number of insurance company partners.
We derive a significant portion of net revenues from distributing insurance products supplied by our important
insurance company partners. Among the top five of our insurance company partners, Sinatay accounted for 19.6%
of our total net revenues in 2022.
Because of this concentration in the supply of the insurance products we distribute, our business and
operations would be negatively affected if we experience a partial or complete loss of any of these insurance
company partners. In addition, any significant adverse change in our relationship with any of these insurance
company partners could result in loss of revenue, increased costs and distribution delays that could harm our
business and customer relationships. In addition, this concentration can exacerbate our exposure to risks associated
with the termination by key insurance company partners of our agreements or any adverse change in the terms of
such agreements, which could have an adverse impact on our revenues and profitability.
If we are unable to respond in a timely and cost-effective manner to rapid technological change in the
insurance intermediary industry, it may result in a material adverse effect.
The insurance industry is increasingly influenced by rapid technological change, frequent new product and
service introductions and evolving industry standards. For example, the insurance intermediary industry has
increased the use of the Internet to communicate benefits and related information to consumers and to facilitate
information exchange, transactions and training. We believe that our future success will depend on our ability to
anticipate and adapt to technological changes and to offer additional products and services that meet evolving
standards on a timely and cost-effective manner. We may not be able to successfully identify new product and
service opportunities or develop and introduce these opportunities in a timely and cost-effective manner. In
addition, new products and services that our competitors develop or introduce may render our products and
services uncompetitive. As a result, if we are not able to respond or adapt to technological changes that may affect
our industry in the future, our business and results of operations could be materially and adversely affected.
We face risks related to health epidemics, including the COVID-19 outbreak, severe weather conditions and
other catastrophes, which could materially and adversely affect our business.
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Our business could be materially and adversely affected by the outbreak of health epidemics including
COVID-19, severe weather conditions or other catastrophes. The outbreak of the COVID-19 and the measures to
contain its spread has from time to time disrupted our operations and adversely affected our business financial
condition and results of operations. In late 2022, there were surges of COVID-19 cases in many cities in mainland
China, which severely affected our sales activities towards the end of 2022. Mainland China began to modify its
zero-COVID policy at the end of 2022, and most of the travel restrictions and quarantine requirements were lifted
in December. However, we are unable to predict the continuing duration and extent of the COVID-19 pandemic
as well as evolving measures to contain it. Even if the direct impact of COVID-19 gradually recedes, the pandemic
will have a lingering, long-term effect on business activities and consumption behavior. There is no assurance that
we will be able to adjust our business operations to adapt to these changes and the increasingly complex
environment in which we operate.
Any occurrence of other adverse public health developments or severe weather conditions may also
significantly disrupt our staffing and otherwise reduce the activity level of our work force, thus causing a material
and adverse effect on our business operations.
We may be at risk of securities class action litigation.
Historically, securities class action litigation has often been brought against a company following periods of
instability in the market price of its securities. If we face such litigation, it could result in substantial costs and a
diversion of management’s attention and resources, which could harm our business.
Recently, U.S. public companies that have substantially all of their operations in China, have been the subject
of intense scrutiny, criticism and negative publicity by some investors, financial commentators and regulatory
agencies. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting
irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance
policies or a lack of adherence thereto and, in some cases, allegations of fraud. As a result of the scrutiny, criticism
and negative publicity, the publicly traded stocks of many U.S.-listed Chinese companies have sharply decreased
in value and, in some cases, have become virtually worthless. Some of these companies are now subject to
shareholder lawsuits and SEC enforcement actions and are conducting or subject to internal and external
investigations into the allegations. We had been targeted by short selling reports in the past and became subject
to class action lawsuits which were subsequently dismissed or settled. Shortselling firms or others may in the
future publish additional short seller reports with respect to our business, officers, directors and shareholders, and
we may become subject to other unfavorable allegations, which might cause further fluctuations in the trading
price of our ADSs. Such volatility in our share price could subject us to increased risk of securities class action
lawsuits or derivative actions.
Any future class action lawsuit against us, whether or not successful, could harm our reputation and restrict
our ability to raise capital. In addition, if a claim is successfully made against us, we may be required to pay
significant damages, which could have a material adverse effect on our financial condition and results of
operations. Even if such allegations are ultimately proven to be groundless, the allegations or the process of
dealing with them could severely impact our business operations and stockholder’s equity, and any investment in
our ADSs could be greatly reduced.
We may be subject, from time to time, to adverse actions taken by other parties, including lawsuits and negative
reports and regulatory proceedings, which may divert resources and the time and attention of our management
and may otherwise adversely affect us.
From time to time, we may become a party to litigations incidental to the operation of our business, including
class action lawsuits and disputes with other third parties. Litigation usually requires a significant amount of
management time and effort, which may adversely affect our business by diverting management’s focus from the
needs of our business and the development of strategic opportunities.
We cannot predict the outcome of these lawsuits. Regardless of the outcome, these lawsuits, and any other
litigation that may be brought against us or our current or former directors and officers, could be time-consuming,
result in significant expenses and divert the attention and resources of our management and other key employees.
An unfavorable outcome in any of these matters could also exceed coverage provided under applicable insurance
policies, which is limited. Any such unfavorable outcome could have a material effect on our business, financial
condition, results of operations and cash flows. Further, we could be required to pay damages or additional
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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
Fanhua Inc. is a Cayman Islands holding company operating in China primarily through its subsidiaries and
a small part of its business through contractual arrangements with Xinbao Investment and Fanhua RONS
Technologies. Investors in the ADSs thus are not purchasing, and may never directly hold, all equity interests
in the consolidated VIEs. There are substantial uncertainties regarding the interpretation and application of
current and future PRC laws, regulations, and rules relating to such agreements that establish the VIE
structure for our consolidated VIEs’ operations in China, including potential future actions by the PRC
government, which could affect the enforceability of our contractual arrangements with Xinbao Investment
and Fanhua RONS Technologies and, consequently, adversely affect the financial condition and results of
operations of Fanhua Inc. If the PRC government finds such agreements non-compliant with relevant PRC
laws, regulations, and rules, or if these laws, regulations, and rules or the interpretation thereof change in the
future, we could be subject to severe penalties or be forced to relinquish part of our interests in Xinbao
Investment and Fanhua RONS Technologies or forfeit our rights under the contractual arrangements.
We are a company incorporated under the laws of the Cayman Islands, and Fanhua Group Company, our
wholly-owned PRC subsidiary, is considered a foreign-invested enterprise. We operate our online insurance
distribution business, which accounted for 5% of our total net revenues in 2022, through Baoxian.com or Baowang.
Previously, the domain name of Baowang was owned by Shenzhen Baowang E-commerce Co., Ltd., or Shenzhen
Baowang, while its direct parent company Fanhua RONS Insurance Sales & Service Co. Ltd. (formerly known as
Fanhua Century Insurance Sales & Service Co., Ltd.) or Fanhua RONS, one wholly-owned subsidiary of Xinbao
Investment, owns a national insurance service operating license. To keep compliance with the Measures on the
Supervision of Internet Insurance Business, or the Measures, which became effective on February 1, 2021 which
requires any insurance institution that intends to engage in internet insurance business to directly own the online
platform instead of through its subsidiary, we determined to register Fanhua RONS as the owner of baoxian.com
and apply for a new Value-added Telecommunication Business Operation Permit for ICP services, or an ICP
license for Fanhua RONS, although the Measures only requires the online platform owner to make ICP filing. As
the applicant for an ICP license may be subject to foreign investment restriction, we commenced a restructuring
to re-establish the VIE structure for our online insurance business which was completed in December 2021,
pursuant to which our direct equity interests in Xinbao Investment was reduced from 100% to 49% and the
remaining 51% is nominally held by an employee of the Company on behalf of the Company. Concurrently,
Fanhua Group Company, entered into contractual arrangements with Xinbao Investment and the individual
nominee shareholder, pursuant to which, we are able to: (i) exercise effective control over Xinbao Investment and
its subsidiaries; (ii) have an exclusive option to purchase part of the equity interests in Xinbao Investment when
and to the extent permitted by PRC law; and (iii) receive all of the economic benefits from the consolidated VIEs
in consideration for the services provided by our subsidiaries in China. The Contractual Arrangements allow us
to be the primary beneficiary of the consolidated VIE and to consolidate the Consolidated VIE’s results of
operations into our financial statements.
In preparation for the application of an ICP license for Fanhua RONS Technologies, on June 24, 2022, our
wholly owned subsidiary Fanlian Investment transferred all of the equity interests in Fanhua RONS Technologies
to Mr. Peng Ge, our chief financial officer to hold the shares of Fanhua RONS Technologies nominally on behalf
of the Company. Concurrently, Fanlian Investment entered into contractual arrangements with Fanhua RONS
Technologies and Mr. Ge. The contractual arrangements are substantially similar to those among Fanhua Group
Company, Xinbao Investment and its individual nominee shareholder. Fanhua RONS Technologies have obtained
the ICP license on December 8, 2022.
- 24 -
If the Contractual Arrangements that establish the structure for operating our and the consolidated VIEs’
business in the PRC are found to be in violation of any existing or any PRC laws or regulations in the future, or
the PRC government finds that we, or the consolidated VIEs fails to obtain or maintain any of the required permits
or approvals, the relevant PRC regulatory authorities, including the MIIT, MOFCOM and STA, would have broad
discretion in dealing with such violations, including:
●
revoking the business and operating licenses;
● discontinuing or restricting the operations;
●
●
●
●
●
imposing fines or confiscating any of the income from us and the consolidated VIEs that they deem to
have been obtained through illegal operations;
requiring us to restructure our and the consolidated VIEs’ operations in such a way as to compel us to
establish new entities, re-apply for the necessary licenses or relocate our and the consolidated VIEs’
business, staff and assets;
imposing additional conditions or requirements with which we and the consolidated VIEs may not be
able to comply;
restricting or prohibiting the use of proceeds from the initial public offering or other financing activities
to finance our and the consolidated VIEs’ business and operations in the PRC; or
taking other regulatory or enforcement actions that could be harmful to our and the consolidated VIEs’
business.
Any of these actions could cause significant disruption or result in a material change to our and the
consolidated VIEs’ business operations, and may materially and adversely affect our and the consolidated VIEs’
business, financial condition and results of operations. In addition, it is unclear what impact the PRC government
actions would have on us and on our ability to consolidate the financial results of Xinbao Investment and Fanhua
RONS Techologies and their subsidiaries in our consolidated financial statements, if the PRC governmental
authorities find the consolidated VIEs’ legal structure and Contractual Arrangements to be in violation of PRC
laws, rules and regulations. If any of these penalties results in our inability to direct the activities of Xinbao
Investment and Fanhua RONS Techologies or their subsidiaries that most significantly impact its economic
performance and/or our failure to receive the economic benefits from Xinbao Investment and Fanhua RONS
Techologies or their subsidiaries, we may not be able to consolidate Xinbao Investment and Fanhua RONS
Techologies and/or their subsidiaries into our consolidated financial statements in accordance with U.S. GAAP.
If we are unable to claim our right to control the assets of the consolidated VIEs, the ADSs may decline in value
or become worthless.
The PRC government has significant authority to exert influence on the China operations of an offshore
holding company, such as us. Therefore, investors in the ADSs and our and the consolidated VIEs’ business
face potential uncertainty from the PRC government’s policy. Changes in China’s economic, political or
social conditions, or government policies could materially and adversely affect our and the consolidated
VIEs’ business, financial condition, and results of operations.
Substantially all of our and the consolidated VIEs’ operations are located in China. The PRC government has
significant authority to exert influence on the China operations of an offshore holding company, such as us.
Despite economic reforms and measures implemented by the PRC government, the PRC government continues
to play a significant role in regulating industrial development, allocation of natural and other resources, production,
pricing and management of currency, and there can be no assurance that the PRC government will continue to
pursue a policy of economic reform or that the direction of reform will continue to be market friendly.
Our and the consolidated VIEs’ ability to successfully expand business operations in the PRC depends on a
number of factors, including macro-economic and other market conditions. Demand for our and the consolidated
VIEs’ services and our and the consolidated VIEs’ business, financial condition and results of operations may be
materially and adversely affected by the following factors:
● political instability or changes in social conditions of the PRC;
- 25 -
●
changes in laws, regulations, and administrative directives or the interpretation thereof;
● measures which may be introduced to control inflation or deflation; and
●
changes in the rate or method of taxation.
These factors are affected by a number of variables which are beyond our and the consolidated VIEs’ control.
We and the consolidated VIEs are subject to extensive and evolving legal development, non-compliance with
which, or changes in which, may materially and adversely affect our and the consolidated VIEs’ business and
prospects, and may result in a material change in our and the consolidated VIEs’ operations and/or the value
of our ADSs or could significantly limit or completely hinder our and the consolidated VIEs’ ability to offer or
continue to offer securities to investors and cause the value of our securities to significantly decline or be
worthless.
PRC companies are subject to various PRC laws, regulations and government policies and the relevant laws,
regulations and policies continue to evolve. Recently, the PRC government is enhancing supervision over
companies seeking listings overseas and some specific business or activities such as the use of variable interest
entities and data security or anti-monopoly. The PRC government may adopt new measures that may affect our
and the consolidated VIEs’ operations, or may exert more oversight and control over offerings conducted outside
of China and foreign investment in China-based companies, and we and the consolidated VIEs may be subject to
challenges brought by these new laws, regulations and policies. However, since these laws, regulations and
policies are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws,
regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve
uncertainties. Furthermore, as we and the consolidated VIEs may be subject to additional, yet undetermined, laws
and regulations, compliance may require us to obtain additional permits and licenses, complete or update
registrations with relevant regulatory authorities, adjust our and the consolidated VIEs’ business operations, as
well as allocate additional resources to monitor developments in the relevant regulatory environment. However,
under the stringent regulatory environment, it may take much more time for the relevant regulatory authorities to
approve new applications for permits and licenses, and complete or update registrations and we cannot assure you
that we and the consolidated VIEs will be able to comply with these laws and regulations in a timely manner or
at all. The failure to comply with these laws and regulations may delay, or possibly prevent, us to conduct business,
accept foreign investments, or listing overseas.
The occurrence of any of these events may materially and adversely affect our and the consolidated VIEs’
business and prospects and may result in a material change in our and the consolidated VIEs’ operations and/or
the value of our ADSs or could significantly limit or completely hinder our and the consolidated VIEs’ ability to
offer or continue to offer securities to investors. In addition, if any of changes causes us unable to direct the
activities of the consolidated VIEs or lose the right to receive their economic benefits, we may not be able to
consolidate the VIEs into our consolidated financial statements in accordance with U.S. GAAP, which could cause
the value of our ADSs to significantly decline or become worthless.
It is unclear whether we and the consolidated VIEs will be subject to the oversight of the Cyberspace
Administration of China and how such oversight may impact us. Our and the consolidated VIEs’ business
could be interrupted or we and the consolidated VIEs could be subject to liabilities which may materially and
adversely affect the results of our and the consolidated VIEs’ operation and the value of your investment.
Pursuant to the PRC Cybersecurity Law and the Measures for Cybersecurity Censorship, if a critical
information infrastructure operator that intends to purchase internet products and services and data processing
operators (collectively, the “operators”) engaging in data processing activities that affect or may affect national
security must be subject to the cybersecurity review. According to the Regulations for Safe Protection of Critical
Information Infrastructure, or the Safe Protection Regulations, which took effect on September 1, 2021, critical
information infrastructure refers to important network infrastructure and information systems in public
telecommunications, information services, energy sources, transportation and other critical industries and domains,
in which any destruction or data leakage will have severe impact on national security, the nation’s welfare, the
people’s living and public interests. As of the date hereof, we and the consolidated VIEs have not received any
notice from such authorities identifying us as a critical information infrastructure operator or requiring us to going
through cybersecurity review by the CAC.
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On December 28, 2021, the CAC, NDRC, MIIT, the MPS, the Ministry of National Security, the MOF, the
MOFCOM, the PBOC, the National Radio and Television Administration, the CSRC, the National Administration
of State Secrets Protection and the State Cryptography Administration jointly released the Measures for
Cybersecurity Review Measures, or the Cybersecurity Review Measures, which took effect on February 15, 2022.
According to the Cybersecurity Review Measures, the scope of cybersecurity reviews is extended to data
processing operators engaging in data processing activities that affect or may affect national security. The
Cybersecurity Review Measures further requires that any operator applying for listing on a foreign exchange must
go through cybersecurity review if it possesses personal information of more than one million users. According
to the Cybersecurity Review Measures, a cybersecurity review assesses potential national security risks that may
be brought about by any procurement, data processing, or overseas listing. The review focuses on several factors,
including, among others, (i) the risk of theft, leakage, corruption, illegal use or export of any core or important
data, or a large amount of personal information, and (ii) the risk of any critical information infrastructure, core or
important data, or a large amount of personal information being affected, controlled or maliciously exploited by
a foreign government after a company is listed overseas.
Our PRC counsel is of the view that there is a relatively low likelihood that we and the consolidated VIEs
will be subject to the cybersecurity review by the CAC for a future offering of our securities to foreign investors,
given that: (i) we and the consolidated VIEs have not been recognized as critical information infrastructure
operators; (ii) data processed in our and the consolidated VIEs’ business do not have an impact or potential impact
on national security; and (iii) the Cybersecurity Review Measures require operators of online platforms that hold
personal information of more than one million users to file a cybersecurity review with the Cybersecurity Review
Office when they go public abroad. On February 17, 2023, the CSRC released the Trial Administrative Measures
of Overseas Securities Offering and Listing by Domestic Companies and five supporting guidelines, or
collectively, the Filing Rules, which came into effect on March 31, 2023, pursuant to the new rules, China-based
issuers that seek to offer, list their securities or refinancing in an overseas market, are required to fulfill relevant
filing procedure and report relevant information to the CSRC, and other pre-procedure of relevant regulatory
authorities before filing to CSRC, including but not limited to CAC. However, there remains uncertainty as to
how the Cybersecurity Review Measures will be interpreted and whether the PRC regulatory agencies, including
the CAC and the CSRC, may adopt new laws, regulations, rules, or detailed implementation and interpretation
related to the Cybersecurity Review Measures and the Filing Rules. If any such new laws, regulations, rules, or
implementation and interpretation comes into effect, we and the consolidated VIE will take all reasonable
measures and actions to comply and minimize the adverse effect of such laws on us.
We cannot assure you that PRC regulatory agencies, including the CAC, would take the same view as we do,
and there is no assurance that we and the consolidated VIEs can fully or timely comply with such laws. In the
event that we and the consolidated VIEs are subject to any mandatory cybersecurity review and other specific
actions required by the CAC, we and the consolidated VIE face uncertainty as to whether any clearance or other
required actions can be timely completed, or at all. Given such uncertainty, we and the consolidated VIEs may be
further required to suspend our and the consolidated VIEs’ relevant business, shut down our and the consolidated
VIE’s website, or face other penalties, which could materially and adversely affect our and the consolidated VIEs’
business, financial condition, and results of operations, and/or the value of our ADSs or could significantly limit
or completely hinder our and the consolidated VIEs’ ability to offer or continue to offer securities to investors. In
addition, if any of these events causes us unable to direct the activities of the consolidated VIEs or lose the right
to receive their economic benefits, we may not be able to consolidate the VIEs into our consolidated financial
statements in accordance with U.S. GAAP, which could cause the value of our ADSs to significantly decline or
become worthless.
On November 14, 2021, the CAC published the Regulations on the Cyber Data Security (Draft for Comments
until December 13, 2021), which further regulate the internet data processing activities and emphasize on the
supervision and management of network data security, and further stipulate the obligations of internet platform
operators, such as to establish a system for disclosure of platform rules, privacy policies and algorithmic strategies
related to data. Specifically, the draft regulations require data processors to, among others, (i) adopt immediate
remediation measures when they discover that network products and services they use or provide have security
defects and vulnerabilities, or threaten national security or endanger public interest, and (ii) follow a series of
detailed requirements with respect to processing personal information, management of important data and
proposed overseas transfer of data. The following activities shall apply for cybersecurity review: (i) merger,
reorganization or division of internet platform operators that have acquired a large number of data resources
related to national security, economic development or public interests affects or may affect national security; (ii)
listing abroad of data processors processing over one million users’ personal information; (iii) listing in Hong
Kong which affects or may affect national security; or (iv) other data processing activities that affect or may affect
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national security.The draft measures also require data processors that handle important data or are seeking to be
listed overseas to complete an annual data security self-assessment or entrust a data security service institution to
do so, and file a data security assessment report of previous year to the local branch of applicable regulators before
January 31 each year. Such annual assessment, as required by the draft regulations, would encompass areas
including but not limited to the status of important data processing, data security risks identified and the
rectification measures adopted, the effectiveness of data protection measures, the implementation of national data
security laws and regulations, data security incidents that occurred and how they were resolved, and a security
assessment with respect to sharing and provision of important data overseas. As of the date hereof, the draft
regulations have been released for public comment only and have not been formally adopted. The final provisions,
interpretation, implementation and the timeline for its adoption are subject to changes and uncertainties.
As there remain uncertainties regarding the interpretation and implementation of such regulatory guidance,
we cannot assure you that we will be able to comply with new regulatory requirements relating to our future
overseas capital raising activities, and may be subject to more stringent requirements with respect to matters
including data privacy and cross-border investigation and enforcement of legal claims. In the event that we and
the consolidated VIEs are subject to any mandatory cybersecurity review and other specific actions required by
the CAC, we and the consolidated VIEs face uncertainty as to whether any clearance or other required actions can
be timely completed, or at all. Given such uncertainty, we and the consolidated VIEs may be further required to
suspend our and the consolidated VIEs’ relevant business, shut down our and the consolidated VIEs’ website, or
face other penalties, which could materially and adversely affect our and the consolidated VIEs’ business,
financial condition, and results of operations, and/or the value of our ADSs or could significantly limit or
completely hinder our and the consolidated VIEs’ ability to offer or continue to offer securities to investors. In
addition, if any of these events causes us unable to direct the activities of the consolidated VIEs or lose the right
to receive their economic benefits, we may not be able to consolidate the VIEs into our consolidated financial
statements in accordance with U.S. GAAP, which could cause the value of our ADSs to significantly decline or
become worthless.
The PRC government’s oversight over our and the consolidated VIEs’ business operations could result in a
material adverse change in our and the consolidated VIEs’ operations and the value of our ADSs.
We conduct our business in China primarily through our PRC subsidiaries, including Fanhua Group Company
and its subsidiaries in which we hold equity ownership interests, and the contractual arrangements with the
consolidated VIEs. Our and the consolidated VIEs’ operations in China are governed by PRC laws and regulations.
The PRC government has significant oversight over the conduct of our and the consolidated VIEs’ business, and
it regulates and may intervene our and the consolidated VIEs’ operations at any time, which could result in a
material adverse change in our and the consolidated VIEs’ operation and/or the value of our ADSs. Also, the PRC
government has recently indicated an intent to exert more oversight over offerings that are conducted overseas
and/or foreign investment in China-based issuers like us. Any such action could significantly limit or completely
hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to
significantly decline or be worthless. In addition, implementation of industry-wide regulations directly targeting
our and the consolidated VIEs’ operations could cause the value of our securities to significantly decline.
Therefore, investors of us and the consolidated VIEs and our and the consolidated VIEs’ business face potential
uncertainty from actions taken by the PRC government.
Any failure by the VIEs or their respective shareholders to perform their obligations under our Contractual
Arrangements with them would have a material adverse effect on our business.
We have entered into a series of Contractual Arrangements with Xinbao Investment and Fanhua RONS
Technologies, our consolidated VIEs and the shareholders of Xinbao Investment and Fanhua RONS Technologies,
respectively. For a description of these Contractual Arrangements, see “Item 4. Information on the Company—C.
Organizational Structure.” If our consolidated VIEs or the shareholder of Xinbao Investment and Fanhua RONS
Technologies fail to perform their respective obligations under the Contractual Arrangements, we may incur
substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal
remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages,
which we cannot assure you that it will be effective under PRC laws. For example, if the shareholders of Xinbao
Investment and Fanhua RONS Technologies were to refuse to transfer their equity interests in Xinbao Investment
and Fanhua RONS Technologies to us or our designee when we exercise the purchase option pursuant to these
Contractual Arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal
actions to compel them to perform their contractual obligations.
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All the agreements under our Contractual Arrangements are governed by PRC laws and provide for the
resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in
accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The
legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result,
uncertainties in the PRC legal system could limit our ability to enforce these Contractual Arrangements.
Meanwhile, there are very few precedents and little formal guidance as to how Contractual Arrangements in the
context of a variable interest entity should be interpreted or enforced under PRC laws. There remain significant
uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition,
under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court unless such
rulings are revoked or determined unenforceable by a competent court. If the losing parties fail to carry out the
arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards
in PRC courts through arbitration award recognition proceedings, which would require additional expenses and
delay. In the event that we are unable to enforce these Contractual Arrangements, or if we suffer significant delay
or other obstacles in the process of enforcing these Contractual Arrangements, we may not be able to exert
effective control over Xinbao Investment and Fanhua RONS Technologies and their subsidiaries, and our ability
to conduct our business may be negatively affected. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Doing Business in China—Uncertainties in the PRC legal system and the interpretation and
enforcement of PRC laws and regulations could limit the legal protections available to you and us, significantly
limit or completely hinder our ability to offer or continue to offer our ADSs, cause significant disruption to our
and the consolidated VIEs’ business operations, and severely damage our and the consolidated VIEs’ reputation,
which would materially and adversely affect our and the consolidated VIEs’ financial condition and results of
operations and cause our ADSs to significantly decline in value or become worthless. In addition, rules and
regulations in China can change quickly with little advance notice, therefore, our assertions and beliefs of the risks
imposed by the Chinese legal and regulatory system cannot be certain.”
We rely on contractual arrangements to conduct a small part of our China operations, which may not be as
effective in providing operational control as direct ownership.
Although we have obtained direct equity ownership in almost all of our insurance intermediary operating
companies, we have relied on and expect to continue to rely on contractual arrangements with Xinbao Investment
Fanhua RONS Technologies and their individual nominee shareholder to operate a small part of our business in
China. These contractual arrangements may not be as effective as direct ownership in providing us with control
over our consolidated VIEs, and these contractual arrangements have not been tested in a court of law. For a
description of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational
Structure.” These contractual arrangements may not be as effective in providing us with control over the VIEs as
direct ownership.
If we had direct controlling ownership of our consolidated VIEs, we would be able to exercise our rights as
a controlling shareholder to effect changes in the board of directors of these entities, which in turn could effect
changes, subject to any applicable fiduciary obligations, at the management level. However, under the current
contractual arrangements, as a legal matter, if our consolidated VIEs and their shareholders fail to perform their
obligations under these contractual arrangements, we may have to incur substantial costs and expend significant
resources to enforce such arrangements and rely on legal remedies under PRC law, including seeking specific
performance or injunctive relief and claiming damages, which may not be effective. For example, if the
shareholders of our consolidated VIEs were to refuse to transfer their equity interest in such entities to us or our
designee when we exercise the call option pursuant to these contractual arrangements, or if they were otherwise
to act in bad faith toward us, then we may have to take legal action to compel them to fulfill their contractual
obligations.
All of our contractual arrangements with Xinbao Investment and Fanhua RONS Technologies and their
individual nominee shareholders are governed by PRC law and provide for the resolution of disputes through
arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any
disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC may bear
significant difference from those of other jurisdictions, such as the United States. As a result, uncertainties in the
PRC legal system could limit our ability to enforce these contractual arrangements. In the event we are unable to
enforce these contractual arrangements, we may not be able to exert effective control over the VIEs, and our
ability to conduct our business may be negatively affected.
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The individual shareholders of Xinbao Investment and Fanhua RONS Technologies, our consolidated VIEs,
may have potential conflicts of interest with us, which may materially and adversely affect our business and
financial condition.
As of March 31, 2023, Mr. Peng Ge, held 100% of the equity interests in Fanhua RONS Technologies and
Mr. Shuangping Jiang, held 51% of the equity interests in Xinbao Investment with the remaining 49% held by our
wholly-owned PRC subsidiary Fanhua Group Company. Conflicts of interest may arise between the dual roles of
Mr. Ge and Mr. Jiang as shareholders of Fanhua RONS Technologies and Xinbao Investment respectively and as
officers of our company. We do not have existing arrangements to address these potential conflicts of interest and
cannot assure you that when conflicts arise, Mr. Ge and Mr. Jiang will act in the best interest of our company or
that conflicts will be resolved in our favor.
Contractual arrangements we have entered into with Xinbao Investment and Fanhua RONS Technologies may
be subject to scrutiny by the PRC tax authorities. A finding that we owe additional taxes could substantially
reduce our consolidated net income and the value of your investment.
Under PRC laws and regulations, arrangements and transactions among related parties may be subject to audit
or challenged by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax
authorities determine that the contractual arrangements between us and the VIEs are not on an arm’s-length basis
and that we adjusted the income of our consolidated VIEs in the form of a transfer pricing adjustment. Particularly,
the State Administration of Taxation issued a Public Notice, or Public Notice 16, on March 18, 2015, to further
regulate and strengthen the transfer pricing administration on outbound payments by a PRC enterprise to its
overseas related parties. In addition to emphasizing that outbound payments by a PRC enterprise to its overseas
related parties must comply with arm’s-length principles, Public Notice 16 specifies certain circumstances
whereby such payments are not deductible for the purpose of the enterprise income tax of the PRC enterprise,
including payments to an overseas related party which does not undertake any function, bear any risk or have any
substantial operation or activities, payments for services which do not enable the PRC enterprise to obtain direct
or indirect economic benefits, or for services that are unrelated to the functions and risks borne by the PRC
enterprise, or relate to the protection of the investment interests of the direct or indirect investor of the PRC
enterprise, or for services that have already been purchased from a third party or undertaken by the PRC enterprise
itself, and royalties paid to an overseas related party which only owns the legal rights of the intangible assets but
has no contribution to the creation of such intangible assets. Although we believe all our related party transactions,
including all payments by our PRC subsidiaries and consolidated VIEs to our non-PRC entities, are made on an
arm’s-length basis and our estimates are reasonable, the ultimate decisions by the relevant tax authorities may
differ from the amounts recorded in our financial statements and may materially adversely affect our financial
results in the period or periods for which such determination is made. A transfer pricing adjustment could, among
other things, result in a reduction, for PRC tax purposes, of expense deductions recorded by our consolidated VIEs,
which could in turn increase their respective tax liabilities. Moreover, the PRC tax authorities may impose
penalties on our consolidated VIEs for underpayment of taxes. Our consolidated net income may be materially
and adversely affected by the occurrence of any of the foregoing.
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 primarily through our PRC
subsidiaries and to a small part through our consolidated VIEs. In order to provide additional funding to our PRC
subsidiaries and consolidated VIEs, we may make loans to our PRC subsidiaries and consolidated VIEs, or we
may make additional capital contributions to our PRC subsidiaries and consolidated VIEs.
Any loans we make to any of our directly-held PRC subsidiaries (which are treated as foreign-invested
enterprises under PRC law), namely, Fanhua Zhonglian Enterprise Image Planning (Shenzhen) Co., Ltd., or
Zhonglian Enterprise, and Fanhua Xinlian Information Technology Consulting (Shenzhen) Co., Ltd., or Xinlian
Information, cannot exceed statutory limits and must be registered with the State Administration of Foreign
Exchange, or the SAFE, or its local counterparts. Under applicable PRC law, the amount of a foreign-invested
enterprise’s registered capital represents shareholders’ equity investments over a defined period of time, and the
foreign-invested enterprise’s total investment represents the total of the company’s registered capital plus
permitted loans. The registered capital/total investment ratio cannot be lower than the minimum statutory
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requirement and the excess of the total investment over the registered capital represents the maximum amount of
borrowings that a foreign-invested enterprise is permitted to have under PRC law. Our directly-held PRC
subsidiaries were allowed to incur a total of HK300 million (US$38.2 million) in foreign debts as of March 31,
2023. 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) or to any of our consolidated VIEs, 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 materially and adversely affect our liquidity and our ability to fund and expand
our business.
On August 29, 2008, SAFE promulgated Circular 142, a notice regulating the conversion by a foreign-
invested company of its capital contribution in foreign currency into RMB. The notice requires that the capital of
a foreign-invested company settled in RMB converted from foreign currencies shall be used only for purposes
within the business scope as approved by the authorities in charge of foreign investment or by other government
authorities and as registered with the State Administration for Industry and Commerce and, unless set forth in the
business scope or in other regulations, may not be used for equity investments within the PRC. In addition, SAFE
strengthened its oversight of the flow and use of the capital of a foreign-invested company settled in RMB
converted from foreign currencies. The use of such RMB capital may not be changed without SAFE’s approval,
and may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations
of Circular 142 will result in severe penalties, including heavy fines. As a result, Circular 142 may significantly
limit our ability to provide additional funding to our PRC subsidiaries through our directly-held PRC subsidiaries
in the PRC, which may adversely affect our ability to expand our business.
However, on June 9, 2016, SAFE promulgated Circular 16, a notice on reforming and standardizing the
administrative provisions on capital account foreign exchange settlement, which became effective on June 9, 2016.
The new notice states that domestic enterprises (including Chinese-funded enterprises and foreign-invested
enterprises, excluding financial institutions) shall be allowed to settle their foreign exchange capitals on a
discretionary basis. The discretionary settlement by a foreign-invested enterprise of its foreign exchange capital
shall mean that the foreign-invested enterprise may, according to its actual business needs, settle with a bank the
portion of the foreign exchange capital in its capital account for which the application of discretionary settlement
has been specified by relevant policies (including capitals in foreign currencies, external debts, funds repatriated
from overseas listing, etc.). For the time being, foreign-invested enterprises are allowed to settle 100% of their
foreign exchange capitals on a discretionary basis. The SAFE may adjust the foregoing percentage as appropriate
according to balance of payments situations. As a result, Circular 16 will relax the limitation of our ability to
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provide additional funding to our PRC subsidiaries through our directly-held PRC subsidiaries in the PRC and
consolidated VIEs.
Risks Related to Doing Business in China
The approval of and filing with the CSRC or other PRC government authorities may be required in connection
with our future offshore offerings, capital raising activities and aquisitions or other trading arrangements of
domestic enterprises conducted by China-based issuers, and also may be required to go through cybersecurity
review under the new laws and the draft laws and regulations of mainland China, and, if required, we cannot
predict whether or for how long we will be able to obtain such approval or complete such filing or other
regulatory procedures.
On August 8, 2006, MOFCOM, joined by the CSRC, the State-owned Assets Supervision and
Administration Commission of the State Council, the SAT, the State Administration for Industry and Commerce,
and SAFE, jointly promulgated regulations entitled the Provisions Regarding Mergers and Acquisitions of
Domestic Entities by Foreign Investors (the “M&A Rules”), which took effect as of September 8, 2006, and as
amended on June 22, 2009.On September 21, 2006, the CSRC published on its official website a notice specifying
the documents and materials that are required to be submitted for obtaining CSRC approval. The M&A Rules
requires an overseas special purpose vehicle formed for listing purposes through acquisitions of mainland China
domestic companies and controlled by mainland China companies or individuals to obtain the approval of the
CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange.
The interpretation and application of the regulations remain unclear, and our offshore offerings may ultimately
require approval of the CSRC. If the CSRC approval is required, it is uncertain whether we can or how long it
will take us to obtain the approval and, even if we obtain such CSRC approval, the approval could be rescinded.
Any failure to obtain or delay in obtaining the CSRC approval for any of our offshore offerings, or a rescission of
such approval is obtained by us, would subject us to sanctions imposed by the CSRC or other PRC regulatory
authorities, which could include fines and penalties on our operations in mainland China, and other forms of
sanctions that may materially and adversely affect our business, financial condition, and results of operations.
The new rules for the filing-based administration of overseas securities offerings and listings by Chinese
domestic companies released on February 17, 2023, or New Filing Rules, establish a new filing-based regime to
regulate overseas offerings and listings by domestic companies. According to the New Filing Rules, (i) an overseas
offering and listing by a domestic company, whether directly or indirectly, shall be filed with the CSRC; and (ii)
the issuer or its affiliated domestic company, as the case may be, shall file with the CSRC for its initial public
offering, follow-on offering, issuance of convertible bonds, offshore relisting after go-private transactions and
other equivalent offing activities. In addition, after a domestic company has offered and listed securities in an
overseas markets, it is required to file a report to the CSRC after the occurrence and public disclosure of certain
material corporate events, including but not limited to, change of control and voluntary or mandatory delisting.
According to the New Filing Rules, the Company shall be deemed to be a domestic enterprise indirectly listed
overseas. However, from March 31, 2023, enterprises that have been listed overseas shall constitute existing
enterprises and are not required to conduct the overseas listing filing procedure immediately, but shall carry out
filing procedures as required if they conduct future offshore offerings or capital raising activities or are involved
in other circumstances that require filing with the CSRC.
On February 24, 2023, the CSRC, together with other relevant government authorities, issued the Provisions
on Strengthening Confidentiality and Archives Administration of Overseas Securities Offering and Listing by
Domestic Companies, or the Archives Rules, which became effective on March 31, 2023. According to the
Archives Rules, domestic mainland China companies, whether offering and listing securities overseas directly or
indirectly, must strictly abide the applicable laws and regulations when providing or publicly disclosing, either
directly or through their overseas listed entities, documents and materials to securities services providers such as
securities companies and accounting firms or overseas regulators in the process of their overseas offering and
listing. If such documents or materials contain any state secrets or government authorities work secrets, domestic
companies must obtain the approval from competent governmental authorities according to the applicable laws,
and file with the secrecy administrative department at the same level with the approving governmental authority.
Furthermore, the Archives Rules also provides that securities companies and securities service providers shall also
fulfill the applicable legal procedures when providing overseas regulatory institutions and other relevant
institutions and individuals with documents or materials containing any state secrets or government authorities
work secrets or other documents or materials that, if divulged, will jeopardize national security or public
interest. For more details of the New Filing Rules, please refer to “Item 4. Information on the Company—B.
Business Overview—Regulations—Regulations Relating to Overseas Listing.”
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In addition, we cannot assure you that any new rules or regulations promulgated in the future will not impose
additional requirements on us. If it is determined in the future that approval and filing from the CSRC or other
regulatory authorities or other procedures, are required for our offshore offerings or capital raising activities, it is
uncertain whether we can or how long it will take us to obtain such approval or complete such filing procedures
and any such approval or filing could be rescinded or rejected. In addition, there are uncertainties with regard to
whether any report filed with the CSRC after the occurrence of certain material corporate events will be subject
to any further action from the CSRC. Any failure to obtain or delay in obtaining such approval or completing such
filing procedures for our offshore, offerings, capital raising activities or certain material corporate events, or a
rescission of any such approval or filing if obtained by us, would subject us to sanctions by the CSRC or other
PRC regulatory authorities for failure to seek CSRC approval or filing or other government authorization for our
offshore offerings, capital raising activities or certain material corporate events. These regulatory authorities may
impose fines and penalties on our operations in mainland China, limit our operating privileges in mainland China,
delay or restrict the repatriation of the proceeds from our offshore offerings into mainland China or take other
actions that could materially and adversely affect our business, financial condition, results of operations, and
prospects, as well as the trading price of our listed securities. The CSRC or other PRC regulatory authorities also
may take actions requiring us, or making it advisable for us, to halt our offshore offerings or capital raising
activities before settlement and delivery and further actions of the shares offered or take any actions regarding our
material corporate events. Consequently, if investors engage in market trading or other activities in anticipation
of and prior to settlement and delivery, they do so at the risk that settlement, delivery and further actions may not
occur. In addition, if the CSRC or other regulatory authorities later promulgate new rules or explanations requiring
that we obtain their approvals or accomplish the required filing or other regulatory procedures for our prior
offshore offerings or capital raising activities, we may be unable to obtain a waiver of such approval requirements,
if and when procedures are established to obtain such a waiver. Any uncertainties or negative publicity regarding
such approval requirement could materially and adversely affect our business, prospects, financial condition,
reputation, and the trading price of our listed securities.
Uncertainties in the PRC legal system and the interpretation and enforcement of PRC laws and regulations
could limit the legal protections available to you and us, significantly limit or completely hinder our ability to
offer or continue to offer our ADSs, cause significant disruption to our and the consolidated VIE’s business
operations, and severely damage our and the consolidated VIEs’ reputation, which would materially and
adversely affect our and the consolidated VIEs’ financial condition and results of operations and cause our
ADSs to significantly decline in value or become worthless. In addition, rules and regulations in China can
change quickly with little advance notice, therefore, our assertions and beliefs of the risks imposed by the
Chinese legal and regulatory system cannot be certain.
The PRC legal system is based on written statutes and prior court decisions have limited value as precedents.
Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the
interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws,
regulations and rules involves uncertainties. In addition, rules and regulations in China can change quickly with
little advance notice, therefore, our assertions and beliefs of the risks imposed by the Chinese legal and regulatory
system cannot be certain.
In particular, PRC laws and regulations concerning the insurance industry are developing and evolving.
Although we have taken measures to comply with the laws and regulations that are applicable to our business
operations, and avoid conducting any non-compliant activities under the applicable laws and regulations, such as
illegal fund-raising, forming capital pool or providing guarantee to investors, the PRC government authority may
promulgate new laws and regulations regulating the insurance industry in the future. We cannot assure you that
our practice would not be deemed to violate any new PRC laws or regulations relating to insurance. Moreover,
developments in the insurance industry may lead to changes in PRC laws, regulations and policies or in the
interpretation and application of existing laws, regulations and policies that may limit or restrict insurance agency
and brokerage services like us, which could materially and adversely affect our business and operations.
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights.
However, since PRC administrative and court authorities have significant discretion in interpreting and
implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative
and court proceedings and the level of legal protection we enjoy than in more developed legal systems.
Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are
not published in a timely manner or at all) that may have a retroactive effect. As a result, we may not be aware of
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our violation of these policies and rules until sometime after the violation. Such uncertainties, including
uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural
rights, could limit the legal protections available to you and us, significantly limit or completely hinder our ability
to offer or continue to offer our ADSs, cause significant disruption to our and the consolidated VIEs’ business
operations, and severely damage our and the consolidated VIEs’ reputation, which would materially and adversely
affect our and the consolidated VIEs’ financial condition and results of operations and cause our ADSs to
significantly decline in value or become worthless.
A downturn in the Chinese or global economy 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. 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. Economic growth in China has been slowing
in the past few years. 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.
In addition, the global financial markets have experienced significant disruptions between 2008 and 2009,
and the United States, Europe and other economies have experienced periods of recessions. The recovery from
the economic downturns of 2008 and 2009 has been uneven and is facing new challenges, including the high
inflation in the US which creates additional global economic uncertainty. There is considerable uncertainty over
the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial
authorities of some of the world’s leading economies, including the United States and China. There have also
been concerns about the economic effect of the geo-political tensions in the relationship between China and the
United States. Economic conditions in China are sensitive to global economic conditions. Any prolonged
slowdown in the global or Chinese economy may have a negative impact on our business, results of operations
and financial condition. Additionally, continued turbulence in the international markets may adversely affect our
ability to access the capital markets to meet liquidity needs.
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and the
remittance of currency out of China. Under existing PRC foreign exchange regulations, payments of current
account items, including profit distributions, interest payments and expenditures from trade-related transactions,
can be made in foreign currencies without prior approval from the SAFE by complying with certain procedural
requirements. However, approval from appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans
denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to
foreign currencies for current account transactions. Under our current corporate structure, the primary source of
our income at the holding company level is dividend payments from our PRC subsidiaries. Shortages in the
availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency
to pay dividends or other payments to us, or otherwise satisfy their foreign-currency-denominated obligations. If
the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency
needs, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our
ADSs.
The PRC Enterprise Income Tax Law may increase the enterprise income tax rate applicable to some of our
PRC subsidiaries, which could have a material adverse effect on our result of operations.
According to the PRC Enterprise Income Tax Law, or the EIT Law, which became effective on January 1,
2008, which was subsequently amended on February 24, 2017 and December 29, 2018, as further clarified by
subsequent tax regulations implementing the EIT Law, foreign-invested enterprises and domestic enterprises are
subject to enterprise income tax, or EIT, at a uniform rate of 25%, unless otherwise provided.
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
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Ministry of Finance, General Administration of Customs, China and State Administration for Taxation, enterprises
located in the western China regions that fall into the encouraged industries are entitled to 15% EIT preferential
tax treatment from January 1, 2011 to December 31, 2020. The preferential tax treatment is subsequently extended
to December 31, 2030, according to No. 23 Announcement Concerning the Extension of the EIT Policies for
Enterprises Located in Western China issued by the Ministry of Finance on April 23, 2020. The preferential tax
rates enjoyed by some of our PRC subsidiaries incorporated in such regions, will increase to the uniform 25% EIT
rate after 2030. An increase in the EIT rates for those entities pursuant to the EIT Law could result in an increase
in our effective tax rate, which could materially and adversely affect our results of operations.
Our global income or the dividends we receive from our PRC subsidiaries may be subject to PRC tax under the
EIT Law, which could have a material adverse effect on our results of operations.
Under the EIT Law, an enterprise established outside of the PRC with “de facto management bodies” within
the PRC is considered a resident enterprise and will be subject to the EIT at the rate of 25% on its worldwide
income. The Implementation Rules of the EIT Law, or the Implementation Rules, define the term “de facto
management bodies” as “establishments that carry out substantial and overall management and control over the
manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.” If we are deemed
a resident enterprise, we may be subject to the EIT at 25% on our global income, except that the dividends we
receive from our PRC subsidiary will be exempt from the EIT. If we are considered a resident enterprise and earn
income other than dividends from our PRC subsidiaries, a 25% EIT on our global income could significantly
increase our tax burden and materially and adversely affect our cash flow and profitability.
PR 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 will rely principally on dividends from our subsidiaries in China and
service, license and other fees paid to our subsidiaries by our consolidated VIEs for our cash requirements,
including any debt we may incur. Current PRC regulations permit our PRC subsidiaries to pay dividends to us
only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and
regulations. In addition, according to the PRC Company Law, each of our PRC subsidiaries is required to set aside
at least 10% of its after-tax profits each year as reported in its PRC statutory financial statements, if any, to fund
a statutory reserve until such reserve reaches 50% of its registered capital. In addition, each of our PRC
subsidiaries that are considered foreign-invested enterprises is required to further set aside a portion of its after-
tax profits as reported in its PRC statutory financial statements to fund the employee welfare fund at the discretion
of its board. In addition, according to the Regulation on the Supervision of Insurance Agents, our insurance agency
subsidiaries are required to either procure professional liability insurance with minimum compensation for each
accident under the one-year professional liability insurance policy no less than RMB1 million, and accumulative
compensation under the one-year insurance policy no less than RMB10 million and the total core business revenue
of the professional insurance agency company in the previous year, or make a contribution to deposit which shall
represent 5% of its registered capital. These reserves are not distributable as cash dividends.
As of December 31, 2022, the aggregate undistributed earnings of the Group’s subsidiaries and VIEs in the
PRC that are available for distribution were RMB1.4 billion (US$202.9 million). Furthermore, if our subsidiaries
in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability
to pay dividends or make other payments to us. Any limitation on the ability of our subsidiaries to distribute
dividends or other payments to us could materially and adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our businesses, pay dividends, or otherwise fund and conduct our business.
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents and
employee stock options granted by overseas-listed companies may increase our administrative burden, restrict
our overseas and cross-border investment activity, or otherwise adversely affect us. If our shareholders who
are PRC residents, or our PRC employees who are granted or exercise stock options, fail to make any required
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registrations or filings under such regulations, we may be unable to distribute profits and may become subject
to liability under PRC laws. We may also face regulatory uncertainties that could restrict our ability to adopt
additional equity compensation plans for our directors and employees and other parties under PRC law.
On October 21, 2005, the SAFE issued a Notice on Relevant Issues Concerning Foreign Exchange
Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose
Vehicles, generally known in China as SAFE Circular 75, requiring PRC residents to register with the local SAFE
branch before establishing or controlling any company outside of China, referred to in the notice as an “offshore
special purpose company,” for the purpose of raising capital backed by assets or equities of PRC companies. PRC
residents that are shareholders of offshore special purpose companies established before November 1, 2005 were
required to register with the local SAFE branch before March 31, 2006. On July 4, 2014, the SAFE issued the
Notice on the Administration of Foreign Exchange Involved in Overseas Investment, Financing and Return on
Investment Conducted by PRC Residents via Special-Purpose Companies, or SAFE Circular 37, simultaneously
repealing SAFE Circular 75. SAFE Circular 37 also requires PRC residents to register with relevant Foreign
Exchange Bureau for foreign exchange registration of overseas investment before making a contribution to a
special purpose company, or SPC, with legitimate holdings of domestic or overseas assets or interests. See “Item
4. Information on the Company—B. Business Overview—Regulation—Regulations on Foreign Exchange—
Foreign Exchange Registration of Offshore Investment by PRC Residents.”
We have requested our beneficial owners who to our knowledge are PRC residents to make the necessary
applications, filings and amendments as required under SAFE Circular 37 and other related rules. We attempt to
comply, and attempt to ensure that our beneficial owners who are subject to these rules comply with the relevant
requirements. However, we cannot assure you that all of our beneficial owners who are PRC residents will comply
with our request to make or obtain any applicable registrations or comply with other requirements under SAFE
Circular 37 or other related rules. The failure of these beneficial owners to timely amend their SAFE registrations
pursuant to SAFE Circular 37 or the failure of future beneficial owners of our company who are PRC residents to
comply with the registration procedures set forth in SAFE Circular 37 may subject such beneficial owners to fines
and legal sanctions and may also limit our ability to contribute capital into our PRC subsidiaries, limit our PRC
subsidiaries’ ability to distribute dividends to our company or otherwise adversely affect our business.
On December 25, 2006, the People’s Bank of China, or the PBOC, promulgated the Measures for the
Administration of Individual Foreign Exchange, and on January 5, 2007, the SAFE further promulgated
implementation rules for those measures. We refer to these regulations collectively as the Individual Foreign
Exchange Rules. The Individual Foreign Exchange Rules became effective on February 1, 2007. According to
these regulations, PRC citizens who are granted shares or share options by a company listed on an overseas stock
market according to its employee share option or share incentive plan are required, through the PRC subsidiary
of such overseas listed company or any other qualified PRC agent, to register with the SAFE and to complete
certain other procedures related to the share option or other share incentive plan. Foreign exchange income
received from the sale of shares or dividends distributed by the overseas listed company may be remitted into a
foreign currency account of such PRC citizen or be exchanged into Renminbi. Our PRC citizen employees who
have been granted share options became subject to the Individual Foreign Exchange Rules upon the listing of our
ADSs on the Nasdaq.
On February 15, 2012, SAFE promulgated the Notice of the State Administration of Foreign Exchange on
Issues Related to Foreign Exchange Administration in Domestic Individuals’ Participation in Equity Incentive
Plans of Companies Listed Abroad, or the No. 7 Notice, which supersedes the Operation Rules on Foreign
Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option
Plan of Overseas-Listed Company, or the Stock Option Rule, in its entirety and immediately became effective
upon circulation. No. 7 Notice covers all forms of equity compensation plans including employee stock ownership
plans, employee stock option plans and other equity compensation plans permitted by relevant laws and
regulations. According to the No. 7 Notice, all participants of such plans who are PRC citizens shall register with
and obtain approvals from SAFE prior to their participation in the equity incentive plan of an overseas listed
company. Domestic individuals, which include any directors, supervisors, senior managerial personnel or other
employees of a domestic company who are PRC citizens (including citizens of Hong Kong, Macau 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 an 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
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employees who are subject to the No. 7 Notice fail to comply with these regulations, we may be subject to fines
and legal sanctions, which will depend on how the SAFE interprets, applies and enforces Circular 7. See “Item 4.
Information on the Company—B. Business Overview—Regulation—Regulations on Foreign Exchange—SAFE
Regulations on Employee Share Options.”
Fluctuation in the value of the RMB may have a material adverse effect on your investment.
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among
other things, changes in political and economic conditions. With the development of the foreign exchange market
and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in
the future announce further changes to the exchange rate system and we cannot assure you that the Renminbi will
not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how
market forces or PRC or United States government policy may impact the exchange rate between the RMB and
the U.S. dollar in the future.
Our revenues and costs are mostly denominated in RMB, and a significant portion of our financial assets are
also denominated in RMB. We rely on dividends and other fees paid to us by our subsidiaries in China. Any
significant appreciation or depreciation of the RMB against the U.S. dollar may affect our cash flows, revenues,
earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For
example, a further appreciation of the RMB against the U.S. dollar would make any new RMB-denominated
investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into RMB for
such purposes. An appreciation of the RMB against the U.S. dollar would also result in foreign currency
translation losses for financial reporting purposes when we translate our U.S. dollar-denominated financial assets
into the RMB, as the RMB is our reporting currency. Conversely, a significant depreciation of the RMB against
the U.S. dollar may significantly reduce the U.S. dollar equivalent of our reported earnings, and may adversely
affect the price of our ADSs.
Certain PRC regulations could also make it more difficult for us to pursue growth through acquisitions.
Among other things, Provisions on the Mergers and Acquisitions of Domestic Enterprises by Foreign Investor,
or the M&A Rule, also established additional procedures and requirements that could make merger and acquisition
activities by foreign investors more time-consuming and complex, including requirements in some instances that
the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor
takes control of a PRC domestic enterprise. In the future, we may grow our business in part by directly acquiring
complementary businesses. Complying with the requirements of the new regulations to complete such transactions
could be time consuming, and any required approval processes, including obtaining approval from the Ministry
of Commerce, may prevent us from completing such transactions on a timely basis, or at all, which could affect
our ability to expand our business or maintain our market share.
Risks Related to Our ADSs
If the PCAOB determines in the future that it no longer has full access to inspect and investigate completely
accounting firms in mainland China and Hong Kong, we and our investors may be deprived with the benefits
of such inspections, which could cause investors and potential investors in the ADSs to lose confidence in the
audit procedures and reported financial information and the quality of our financial statements.
Our auditor, the independent registered public accounting firm that issues the audit report included in our
annual report filed with the Securities and Exchange Commission, as an auditor of companies that are traded
publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant
to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional
standards.
On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB
was unable to inspect or investigate completely registered public accounting firms headquartered in mainland
China and Hong Kong, including our auditor.
This lack of PCAOB inspections of audit work of any auditors performed in China before 2022, including
that performed by Deloitte has made 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 of China
that are subject to the PCAOB inspections.
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On December 15, 2022, the PCAOB issued a report that vacated its December 16, 2021 determination and
removed mainland China and Hong Kong from the list of jurisdictions where it is unable to inspect or investigate
completely registered public accounting firms. However, if the PCAOB determines in the future that it no longer
has full access to inspect and investigate completely accounting firms in mainland China and Hong Kong, and we
use an accounting firm headquartered in one of these jurisdictions to issue an audit report on our financial
statements filed with the SEC, we and investors in our ADSs would be deprived of the benefits of such PCAOB
inspections, which could cause investors and potential investors in the ADSs to lose confidence in the audit
procedures and reported financial information and the quality of our financial statements.
Our ADSs may be prohibited from trading in the United States under the HFCA Act in the future if the PCAOB
is unable to inspect or investigate completely auditors located in China. The delisting of the ADSs, or the threat
of their being delisted, may materially and adversely affect the value of your investment.
On December 18, 2020, the former U.S. president signed into law the Holding Foreign Companies
Accountable Act, or the HFCA Act. In essence, the HFCA Act requires the SEC to prohibit foreign companies
from listing securities on U.S. securities exchanges if a company retains a foreign accounting firm that cannot be
inspected by the PCAOB for three consecutive years, beginning in 2021. On December 2, 2021, the SEC finalized
rules implementing the submission and disclosure requirements in the HFCA Act which would go into effect 30
days after publication in the Federal Registrar.
In addition, on June 22, 2021, the U.S. Senate passed a bill which would reduce the number of consecutive
non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two. On
February 4, 2022, the U.S. House of Representatives passed a bill which contained, among other things, an
identical provision. On December 29, 2022, the U. S. president signed the Consolidated Appropriations Act, 2023,
which, among other things, amended the HFCA Act to reduce the number of consecutive non-inspection years
required for triggering the prohibitions under the HFCA Act from three years to two. Therefore, pursuant to the
HFCA Act, if the SEC determines that we have filed audit reports issued by a registered public accounting firm
that has not been subject to inspections by the PCAOB for two consecutive years, the SEC will prohibit our shares
or ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the
United States.
On December 16, 2021, the PCAOB issued the PCAOB Determinations that they were unable to inspect or
investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong
Kong. The report sets forth lists identifying the registered public accounting firms headquartered in mainland
China and Hong Kong, respectively, that the PCAOB was unable to inspect or investigate completely, and our
auditor, Deloitte, was on such lists.
On August 26, 2022, the PCAOB signed a Statement of Protocol with the CSRC and Ministry of Finance,
taking the first step toward opening access for the PCAOB to inspect and investigate registered public accounting
firms headquartered in mainland China and Hong Kong completely, consistent with U.S. law. On December 15,
2022, the PCAOB announced that it has secured complete access to inspect and investigate completely PCAOB-
registered public accounting firms headquartered in mainland China and Hong Kong. The PCAOB also vacated
its previous determinations issued in December 2021. Therefore, our auditor is currently able to be fully inspected
and investigated by the PCAOB. Accordingly, until such time as the PCAOB issues any new determination, we
are at no risk of having our securities subject to a trading prohibition under the HFCA Act.
Each year, the PCAOB will determine whether it can inspect and investigate completely audit firms in
mainland China and Hong Kong, among other jurisdictions. If the PCAOB determines in the future that it no
longer has full access to inspect and investigate completely accounting firms in mainland China and Hong Kong
and we use an accounting firm headquartered in one of these jurisdictions to issue an audit report on our financial
statements filed with the SEC, we would be identified as a Commission-Identified Issuer following the filing of
the annual report on Form 20-F for the relevant fiscal year. In accordance with the HFCA Act, our securities
would be prohibited from being traded on a national securities exchange or in the over-the-counter trading market
in the United States if we are identified as a Commission-Identified Issuer for two consecutive years in the future.
If our shares and ADSs are prohibited from trading in the United States, there is no certainty that we will be able
to list on a non-U.S. exchange or that a market for our shares will develop outside of the United States. The
prospect and implications of possible regulation on this subject, in addition to the prevailing requirements of the
HFCA Act, are uncertain. Such uncertainty could cause the market price of our ADSs to be materially and
adversely affected, and our securities could be delisted or prohibited from being traded “over-the-counter” earlier
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than would be required by the HFCA Act as it currently provides. If our securities are unable to be listed on
another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase
our ADSs when you wish to do so, and the risk and uncertainty associated with a potential delisting would have
a negative impact on the price of our ADSs. Also, such a prohibition would significantly affect our ability to raise
capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial
condition, and prospects.
The trading price of our ADSs may be volatile.
The trading price of our ADSs may be volatile and could fluctuate widely due to factors beyond our control.
This may happen because of broad market and industry factors, like the performance and fluctuation in the market
prices or the underperformance or deteriorating financial results of other listed companies based in China. The
securities of some of these companies have experienced significant volatility since their initial public offerings,
including, in some cases, substantial price declines in the trading prices of their securities. The trading
performances of other Chinese companies’ securities after their offerings, may affect the attitudes of investors
toward Chinese companies listed in the United States, which consequently may impact the trading performance
of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about
inadequate corporate governance practices or fraudulent accounting, corporate structure or matters of other
Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general,
including us, regardless of whether we have conducted any inappropriate activities. U.S. government’s recent
policies concerning Chinese companies listed in the U.S. may also cause great uncertainty in the listing status of
companies like us and result in fluctuation in the trading rice of our ADSs. In addition, securities markets may
from time to time experience significant price and volume fluctuations that are not related to our operating
performance, which may have a material and adverse effect on the trading price of our ADSs.
In addition to the above factors, the price and trading volume of our ADSs may be highly volatile due to
multiple factors, including the following:
●
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.
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We believe that our current cash and cash equivalents and anticipated cash flow from operations will be
sufficient to meet our anticipated cash needs for the foreseeable future. We may, however, require additional cash
resources due to changed business conditions or other future developments, including any investments or
acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may
seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities
could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased
debt service obligations and could result in operating and financing covenants that would restrict our operations.
We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
Substantial future sales or perceived potential sales of our ordinary shares, ADSs or other equity securities in
the public market could cause the price of our ADSs to decline.
Additional sales of our ADSs in the public market, or the perception that these sales could occur, could cause
the market price of our ADSs to decline. If any existing shareholder or shareholders sell a substantial amount of
ordinary shares in the form of ADSs, the market price of our ADSs could decline. In addition, we may issue
additional ordinary shares as considerations for future acquisitions. If we do so, your ownership interests in our
company would be diluted and this in turn could have an adverse effect on the price of our ADSs.
Our corporate actions are substantially controlled by our officers, directors and principal shareholders.
As of March 31, 2023, our executive officers and directors beneficially owned approximately 24.9% of our
outstanding shares. These shareholders could exert substantial influence over matters requiring approval by our
shareholders, including electing directors and approving mergers or other business combination transactions, and
they may not act in the best interests of other noncontrolling shareholders. This concentration of our share
ownership also may discourage, delay or prevent a change in control of our company, which could deprive our
shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might
reduce the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders.
We cannot guarantee that any share repurchase plan will be fully consummated or that any share repurchase
plan will enhance long-term shareholder value, and share repurchases could increase the volatility of the
trading price of the ADSs and could diminish our cash reserves.
On December 20, 2022, our board of directors announced a share repurchase program which authorized us
to repurchase up to US$20 million of our American depositary shares (“ADS”) from time to time. As of March
31, 2023, we had repurchased an aggregate of 72,465 ADSs, at an average price of approximately US$7.85 per
ADS for a total amount of approximately US$0.6 million under this share repurchase program.
Our board of directors also has the discretion to authorize additional share repurchase plans in the future. The
share repurchase plans do not obligate us to repurchase any specific dollar amount or to acquire any specific
number of ADSs and/or shares. We cannot guarantee that any share repurchase plan will enhance long-term
shareholder value. The share repurchase plans could increase the volatility of the trading price of the ADSs and
may be suspended or terminated at any time. Furthermore, share repurchases could diminish our cash reserves.
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
with the “deposit agreements”). Under the deposit agreements, the holders of our ADSs may vote only by giving
voting instructions to the depositary. Upon receipt of the voting instructions from the holders of our ADSs, the
depositary will vote the underlying ordinary shares represented by their ADSs in accordance with these
instructions. The holders of our ADSs will not be able to directly exercise their right to vote with respect to the
underlying ordinary shares unless they withdraw such shares and become the registered holder of such shares
prior to the record date for the general meeting. Under our amended and restated memorandum and articles of
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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 attached to the shares represented by the ADSs. If no
instructions are received by the depositary on or before a date established by the depositary, the depositary shall
deem the holders to have instructed it to give a discretionary proxy to a person designated by us to exercise their
voting rights. You may not receive voting materials in time to instruct the depositary to vote, and it is possible
that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the
opportunity to exercise a right to vote.
Right of holders of our ADSs to participate in any future rights offerings may be limited, which may cause
dilution to their holdings.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities.
However, we cannot make rights available to holders of our ADSs in the United States unless we register both the
rights and the securities to which the rights relate under the Securities Act or an exemption from the registration
requirements is available. Under the deposit agreements, the depositary will not make rights available to holders
of our ADSs unless both the rights and the underlying securities to be distributed to ADS holders are either
registered under the Securities Act or exempt from registration under the Securities Act. We are under no
obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such
a registration statement to be declared effective and we may not be able to establish a necessary exemption from
registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights
offerings and may experience dilution in their holdings.
Holders of our restricted ADSs may be subject to limitations on transfer of their ADSs.
Restricted ADSs are transferable on the books of the depositary. However, the depositary may close its
transfer books at any time or from time to time when it deems expedient in connection with the performance of
its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of restricted ADSs
generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems
it advisable to do so because of any requirement of law or of any government or governmental body, or under any
provision of the deposit agreements, or for any other reason.
Certain judgments obtained against us by our shareholders may not be enforceable.
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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 jurisdictions 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.
Our articles of association contain anti-takeover provisions that could discourage a third party from acquiring
us, which could limit our shareholders’ opportunity to sell their shares, including ordinary shares represented
by our ADSs, at a premium.
Our amended and restated memorandum and articles of association contain provisions which have the
potential to limit the ability of others to acquire control of our company or cause us to engage in change-of-control
transactions. These provisions have the effect of depriving our shareholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our
company in a tender offer or similar transaction. For example, our board of directors has the authority, without
further action by our shareholders, to issue preferred shares in one or more series and to fix their designations,
powers, preferences, privileges and other rights, including dividend rights, conversion rights, voting rights, terms
of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our
ordinary shares, in the form of ADS or otherwise, at such time and on such terms as they may think appropriate.
In the event these preferred shares have better voting rights than our ordinary shares, in the form of ADSs or
otherwise, they could be issued quickly with terms calculated to delay or prevent a change in control of our
company or make removal of management more difficult. If our board of directors decides to issue preferred
shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and
ADSs may be materially and adversely affected.
You may have to rely primarily on price appreciation of our ADSs for any return on your investment.
Our board of directors has discretion as to whether to distribute dividends, subject to applicable laws.
Although our board of directors has announced a policy to declare and pay dividends on a quarterly basis, the
amount and form of future dividends will depend on, among other things, our future results of operations and cash
flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries,
our financial condition, contractual restrictions and other factors deemed relevant by our board of directors.
Accordingly, the return on your investment in our ADSs will likely depend primarily upon any future price
appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value or even maintain the price
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at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may
even lose your entire investment in our ADSs.
As a foreign private issuer, we are exempt from certain disclosure requirements under the Exchange Act, which
may afford less protection to our shareholders than they would enjoy if we were a domestic U.S. company.
As a foreign private issuer, we are exempt from, among other things, the rules prescribing the furnishing and
content of proxy statements under the Exchange Act. In addition, our executive officers, directors and principal
shareholders are exempt from the reporting and short-swing profit and recovery provisions contained in Section
16 of the Exchange Act. We are also not required under the Exchange Act to file periodic reports and financial
statements with the SEC as frequently or as promptly as domestic U.S. companies with securities registered under
the Exchange Act although we have voluntarily filed and will continue to file periodic reports and financial
statements. As a result, our shareholders may be afforded less protection than they would under the Exchange Act
rules applicable to domestic U.S. companies.
You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S.
federal courts may be limited, because we are incorporated under Cayman Islands law, conduct substantially
all of our operations in China and the majority of our officers reside outside the United States.
We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China through
our subsidiaries in China. Most of our officers reside outside the United States and some or all of the assets of
those persons are located outside of the United States. The legal system in Cayman, the PRC or other relevant
jurisdictions may not afford our shareholders the same level of protection as the legal system in the United States
would. For instance, the Securities Laws of the PRC regulates only security issuances and trading outside of the
PRC to the extent that such issuance and trading disrupts domestic markets and negatively affects the interest of
domestic investors in the PRC. As such, investors in the United States may not be able to file a lawsuit under the
Securities Law in the PRC. Even if you are successful in bringing an action in the PRC, shareholder claims that
are common in the United States, including class action suits securities law and fraud claims, may be difficult or
impossible to pursue as a matter of law or practicality in the PRC. As a result, it may be difficult or impossible
for you to bring an action against us or against these individuals in the Cayman Islands or in China in the event
that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are
successful in bringing an action of this kind outside the Cayman Islands or China, the laws of the Cayman Islands
and of China may render you unable to effect service of process upon, or to enforce a judgment against our assets
or the assets of our directors and officers.
The SEC, U.S. Department of Justice, or the DOJ, and other relevant regulatory authorities in the United
States play vital roles in enforcing laws and regulations that protect securities investors. These U.S. authorities
may face significant legal and other obstacles to obtaining information needed for investigations or litigation.
Further, these U.S. authorities may have substantial difficulties in bringing and enforcing actions against non-U.S.
companies and non-U.S. persons, including company directors and officers, which will further limit protections
available to our shareholders. According to the Securities Laws of the PRC, without the approval of securities
regulators and other actors within the Chinese government, no entity or individual in China may provide
documents and information relating to securities business activities to overseas regulators. In addition, local
authorities in Cayman, the PRC or other relevant jurisdictions often are constrained in their ability to assist U.S.
authorities and overseas investors more generally. There are also legal or other obstacles to seeking access to
funds in a foreign country.
There is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, although
a judgment obtained in the federal or state courts of the United States courts will be recognized and enforced in
the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying
dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided
such judgment: (a) is given by a foreign court of competent jurisdiction, (b) imposes on the judgment debtor a
liability to pay a liquidated sum for which the judgment has been given, (c) is final, (d) is not in respect of taxes,
a fine, or a penalty, and (d) was not obtained in a manner and is not of a kind the enforcement of which is contrary
to natural justice or the public policy of the Cayman Islands. However, the Cayman Islands courts are unlikely to
enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law
if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments
that are penal or punitive in nature. A Cayman Islands court may stay enforcement proceedings if concurrent
proceedings are being brought elsewhere. A judgment of a court of another jurisdiction may be reciprocally
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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 Act (As Revised) (the “Companies Act”) 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 duties of our directors to us under Cayman Islands law are to a large extent governed by the common
law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited
judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not
binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our
directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial
precedents in the United States. In particular, 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 stood 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.
Based on the market price of our ADSs, the value of our assets, and the composition of our income and assets,
we believe that we were a passive foreign investment company, or PFIC, for United States federal income tax
purposes for our taxable year ended December 31, 2022, however there can be no assurance to this regard.. We
believe we were also 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 years. A non-United States corporation will be a PFIC for United States
federal income tax purposes for any taxable year if, applying applicable look-through rules, either (1) at least 75%
of 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.
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. The determination of whether we will be a PFIC for
any taxable year may also 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. Unless the market price of
our ADSs increases or we reduce the amount of cash, short term investments and other passive assets we hold
sufficiently from current levels, we are likely to remain a PFIC for future taxable years. The U.S. Internal Revenue
Service, or the IRS, does not issue rulings with respect to PFIC status, and we cannot assure you that the IRS, or
a court, will agree with any determination we make.
Because we believe we were a PFIC for the taxable year ended December 31, 2022 (and 2017 and prior
years), United States Holders (as defined in “Item 10. Additional Information — E. Taxation — United States
Federal Income Taxation”) of our ADSs or ordinary shares generally will be subject to special and adverse tax
rules with respect to any “excess distribution” received from us and any gain from a sale or other disposition of
the ADSs or ordinary shares. See “Item 10. Additional Information — E. Taxation — United States Federal
Income Taxation — Passive Foreign Investment Company.”
Item 4. Information on the Company
A. History and Development of the Company
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We started our operation in 1999 through Guangzhou Nanyun Car Rental Services Co., Ltd. and Guangdong
Nanfeng Automobile Association Co., Ltd. In 2001, we formed China United Financial Services Holdings Limited,
or China United Financial Services, a British Virgin Islands company, as the offshore holding company of our
PRC subsidiaries. In June 2004, CISG Holdings Ltd., or CISG Holdings was incorporated in British Virgin Islands
and became our holding company through share exchanges with China United Financial Services.
In anticipation of our initial public offering, we incorporated CNinsure Inc. in the Cayman Islands in April
2007. After a series of restructuring transactions, CNinsure Inc. became the ultimate holding company of our
group. On December 6, 2016, our shareholders approved the change of our company name from CNinsure Inc. to
Fanhua Inc.
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 connection with the name change on December 6, 2016,
our ticker symbol was simultaneously changed to “FANH”.
In October 2012, we obtained license approval from the then CIRC to establish an insurance sales service
group company and commenced a series of restructuring, which resulted in Fanhua Insurance Sales Service Group
Company Limited (previously known as Shenzhen Nanfeng Investment Co., Ltd.), or Fanhua Group Company,
our wholly-owned subsidiary in the PRC, becoming the onshore holding company of our PRC operating entities.
As a result, we currently conduct our business in China primarily through Fanhua Group Company and its
subsidiaries and a small part of our business through the consolidated VIEs in China. We also own a 4.5% equity
interest in Puyi Inc. (NASDAQ: PUYI), a leading third-party wealth management service provider in China.
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 in 2006 and began to offer claims adjusting services in
2008. In 2010, we established an insurance brokerage business unit to expand our product offerings from retail to
commercial lines. In 2017, we divested our P&C insurance agency operations and our insurance brokerage
segment to strategically focus on life insurance distribution.
We were approved by our board of directors in May 2022 and completed on June 28, 2022 a distribution of
shares of CNFinance Holdings Limited (“CNFinance”) to the Company’s shareholders on a pro rata basis. Fanhua
shareholders received 4.71 CNFinance ordinary shares for each 20 outstanding Fanhua ordinary shares held as of
June 9, 2022, or 0.2355 CNFinance ADSs for each Fanhua ADS, held as of the close of business on June 9, 2022
set by the depositary for the Fanhua ADSs. We distributed a total of 252,995,600 CNFinance ordinary shares to
holders of our ordinary shares in this manner, which include a total of 156,097,200 CNFinance ordinary shares
distributed in the form of 7,804,860 CNFinance ADSs to our ADS holders through our depositary bank. Following
the completion of the distribution, our equity stake in CNFinance decreased from approximately 18.5% to
approximately 0.01%.
Our principal executive offices are located at 60/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.
Capital Expenditure
Our capital expenditures have been used primarily to construct, upgrade and maintain our online platforms
and enhance trainings. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital
Resources.”
B. Business Overview
Overview
Driven by our cutting-edge digital technologies and professional expertise in the insurance industry, we are
the leading independent insurance intermediary group in China, focusing on providing insurance-oriented family
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asset allocation services that covers customers’ full lifecycle and one-stop service platform for individual sales
agents and independent insurance intermediaries.
With strategic focus on long-term life insurance products, we offer a broad range of insurance product
offerings primarily through a network of 141,088 registered sales agents across China as of December 31, 2022.
We also provide claims adjusting services through 2,170 in-house claims adjustors. Our extensive offline network
enable us to facilitate sales of complex insurance products and offer reliable after-sales services nationwide to our
customers, serving as a substantial entry barrier to China’s insurance agency industry.
We are devoted to offering all the capabilities that our sales agents need to help them run their best practice.
Specifically, we provide a professional support system to empower agents to grow more specialized and
professional. Our self-developed digital tools such as Lan Zhanggui, Fanhua RONS Digital Operating Platform
(DOP) and Fanhua Guanjia, offer end-to-end business process management, as well data and analytic capabilities
to enable our agents to manage all critical aspects of their business more efficiently, and to improve their
productivity and service capability.
We also operate Baowang (www.baoxian.com), an online insurance platform that provides customers with a
one-stop insurance shopping experience from policy comparison, live consultation, policy placement, to claims
settlement. A variety of critical illness, term life, accident, medical, travel and homeowner insurance products are
available on the platform.
Since late 2021, to diversify our service offerings to our customers, we start to offer insurance trust
consulting/referral service through our business partners, and healthcare and elderly care services through our
healthcare management division.
Our vision is to transform from a solely sales-oriented insurance agency to become an industry-level
infrastructure platform provider driven by digital technology and professional expertise. We intend to build an
open platform to enable various users on the platform, including independent insurance agents and insurance sales
organizations, to run the most successful businesses, by offering them a unified compliance service, IT system,
digital solutions, diversified product and service offerings, professional training support, capital flow support and
capitalization paths.
With a rapidly aging society and the rise of the middle-class in China, there is burgeoning demand for elderly
care and legacy management among Chinese consumers which provides tremendous growth opportunities in
China’s life insurance market over the long run despite industry headwinds in recent years. In addition, 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, while China’s life insurance intermediary channel is experiencing structural
changes towards professionalization, digitalization, decentralization and comprehensive financial services. With
strong brand recognition, established relationships with major insurance companies, an extensive distribution and
sales network and cutting-edge technology, we intend to take advantage of the opportunities resulting from the
growth and transformation of the insurance agency industry in China to increase our market share by
professionalizing our sales force, enhancing digital capabilities and opening up our platform to more market
participations.
Digital Technologies
Technological developments and the growth of digital technologies mobile internet access have significantly
changed the way we operate our business. We develop digital toolkits to enable more efficient agent and customer
engagement which includes the following:
● Lan Zhanggui - an all-in-one insurance sales and service platform that we develop for our sales agents,
which allows them to manage their book of insurance business on their fingertips, covering all aspects
of the business process from insurance product purchase, team management, agent recruitment, customer
engagement, customer service to e-learning. The platform offers substantially all of our insurance
products including long-term life and health insurance, accident insurance, travel insurance, and standard
medical insurance products. It is available in mobile application and WeChat official account versions
and accessible through Fanhua WeCom.
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● Fanhua RONS Assistant Digital Operating Platform, or RONS DOP —it is a digital marketing
platform that we launched in June 2021 for our agents, aiming at empowering them in customer
acquisition and relationship maintenance. It provides agents with various educational content in the form
of daily news, articles, posters, videos which can be circulated to potential customers through social
media, aiming at enhancing customers’ insurance awareness and deepening their understanding of
insurance products. It also enables agents to gain better insights into customer needs through behavior
tracking and automated tagging. In addition, it provides convenient access to Fanhua RONS
livestreaming platform for resourceful online training courses. The platform is accessible through
WeChat public account and Fanhua’s Lan Zhanggui and WeCom.
● Fanhua RONS Guanjia –– it is a customer service platform that we launched in June 2021 to directly
connect with our customers, through which they can access various insurance services including policy
inquiry, policy custody, asset custody, risk assessment, and claims settlement assistance. Service
representatives will also be available to customers for exclusive services on a one-on-one basis. The
platform is accessible primarily through its WeChat official account and Lan Zhanggui.
● Fanhua WeCom – Launched in June 2021, other than various office supporting solutions, it enables our
agents to directly interact with their existing and potential customers in highly efficient manner, with
easy access to various supportive tools including knowledge bank, FAQ scripts, and a wide variety of
marketing materials.
As of March 31, 2023, we, through Fanhua Group Company and contractual arrangements, controlled thirteen
insurance intermediary companies in the PRC, of which nine were insurance agencies including two with national
operating licenses, two were insurance brokerage firms and two were insurance claims adjusting firms. We also
operated one e-commerce insurance platform, one healthcare management company one online mutual aid
platform. In addition, as of March 31, 2023, we owned 4.5% of the equity interests in Puyi Inc. (NASDAQ: PUYI),
a leading third-party wealth management services provider focusing on mass affluent and emerging middle-class
population.
Online Mutual Aid Platform
In line with our commitment to be socially responsible, in 2014, we launched an online mutual aid platform
called eHuzhu (www.ehuzhu.com). The platform provides people with access to alternative risk-protection
programs at more affordable costs, especially for the lower-income group. eHuzhu primarily offers programs that
provide mutual aid for cancer and accidental death. Users join as members with a small amount of deposits which
will be used to evenly contribute to the medical costs or death benefits of the claimants, in exchange for benefits
contributed by the rest of the members when in need. As of March 31, 2023, eHuzhu had over 1.7 million paying
members, assisting 11,862 families to raise over RMB1.3 billion funds to get through tough times. The platform
is accessible primarily through its WeChat official account.
In addition, eHuzhu organized a variety of public charity activities focusing on care for breast cancer, veterans
and COVID-19 patients, book donations for children and so on. eHuzhu has also set up “Mutual Aid Villages”
across the country to lower the medical burden of people in poverty-stricken areas.
In order to create more value for its members, in 2022, eHuzhu added medical and health services on its
platform, through which its members can access a variety of services including health consultation, medical
treatment assistance and medicine delivery.
Acquisitions
On January 3, 2023, we entered into definitive agreements with the existing shareholders of Zhongrong Smart
Finance Information Technology Co., Ltd. (“Zhongrong”), a leading managing general agency for life insurance
distribution in China, to acquire 57.73% of the equity interests of Zhongrong. As of March 31, 2023, we have
acquired 53.44% of the equity interests of Zhongrong with a capital contribution of RMB122.7 million to
Zhongrong. Zhongrong is currently in the process of repurchasing its shares from certain of its existing
shareholders which will result in our shareholding in Zhongrong ultimately increasing to 57.73%.
On February 6, 2023 and February 8, 2023, respectively, we entered into definitive agreements with the
existing shareholders of Jilin Zhongji Shi’An Insurance Agency Co., Ltd (“Zhongji”) and Wuhan Taiping Online
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Insurance Agency Co., Ltd. (“Taiping”) to acquire 51% of the equity interests of Zhongji and Taiping, respectively.
As of March 31, 2023, the acquisitions of Zhongji and Taiping have been completed.
In connection with the acquisitions, we issued 61,853,580 ordinary shares, 9,107,140 ordinary shares and
13,660,720 ordinary shares of the Company to the existing shareholders of Zhongrong SF, Taiping Online and
Zhongji, respectively. The considerations are adjustable based on the achievement of such performance targets by
the acquired entities from 2023 to 2025 and are subject to a lock-up period of three years. The lock-up will be
released in two batches after 2025.
Segment Information
As of December 31, 2022, we operated two segments: (1) the insurance agency segment, which mainly
consists of providing agency services for distributing life insurance products and P&C insurance products on
behalf of insurance companies, and (2) the claims adjusting segment, which consists of providing pre-underwriting
survey services, claims adjusting services, disposal of residual value services, loading and unloading supervision
services, and consulting services.
Insurance Agency Segment
Our insurance agency segment accounted for 86.0% and 85.4% of our net revenues in 2021 and 2022,
respectively. Revenue from this segment is derived from two broad categories of insurance products: (i) life and
health insurance products, and (ii) property and casualty 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 80.4% of our net revenues in 2022. 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 Whole Life Insurance. The individual whole life insurance products we distribute provide
insurance coverage for the insured person’s entire life in exchange for the periodic payment of fixed
premiums over a pre-determined period, generally ranging from five to 20 years, or until the insured
reaches a certain age. The face amount plus accumulated interest is paid upon the death of the insured.
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 payments 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 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.
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In return, the insured makes periodic payments 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 2022 were primarily underwritten by Sinatay, Greatwall, Huaxia,
Aeon, and Evergrande.
Property and Casualty Insurance Products
Our property and casualty insurance business accounted for 5.0% of our net revenues in 2022, primarily
representing insurance products we distributed through Baowang. Our main property and casualty insurance
product in terms of net revenues contribution in 2022 is individual accident insurance and indemnity medical
insurance which we distribute through Baowang. We also offer lifestyle insurance such as travel insurance,
homeowner insurance, and other innovative products on Baowang. In addition, we have started to offer certain
long-term life and health insurance products specifically designed for internet distribution channels since 2019.
Net revenues generated from such long-term insurance products were included in the net revenues of our life
insurance agency segment. The major insurance products we offer or facilitate to individual customers through
Baowang 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.
●
Indemnity medical insurance. The indemnity medical insurance products we facilitate typically have a
one-year term and provide conditional reimbursement for medical and surgical expenses during the
coverage period. These products typically require only a single premium payment for each coverage
period. Because most of these medical insurance products we distribute are underwritten by property and
casualty insurance companies, we classify indemnity medical products as property and casualty insurance
products.
We primarily partnered with Zhong An Online Property and Casualty Insurance Company Limited, or Zhong
An, Ping An Property and Casualty Insurance Company Limited, or Ping An, Ping An Health Insurance Company
Limited, China Pacific Property and Casualty Insurance Company Limited, or China Pacific, JD Alliance Property
and Casualty Insurance Company Limited for the distribution of property and casualty insurance products in 2022.
Claims Adjusting Segment
Total net revenues derived from our claims adjusting segment accounted for 14.6% of our total net revenues
in 2022. 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
- 49 -
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, Ant Insurance Agency Co., Ltd.,
Shanghai Nuanwa Technology Co., Ltd., an affiliate of Zhong An and China Life Property and Casualty Insurance
Co. Ltd in 2022.
Others
We also provide referral of certain insurance trust, health care and senior care services as value-added services
to our customers to cater to the needs of the aging population in China.
As competition intensifies and the insurance market becomes more mature in China, we believe there will be
a further division of labor in the insurance intermediary sector. We expect that more insurance companies will
choose to outsource claims adjusting functions to professional service providers while they focus on the core
aspects of their business, including product development and asset and risk management. We believe we are well-
positioned to capture such outsourcing opportunities.
Seasonality
See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Factors Affecting Our
Results of Operations—Seasonality.”
Distribution and Service Network and Marketing
We have an offline distribution and service network that, as of March 31, 2023, consisted of one insurance
sales and service group, nine insurance agencies including two with national operating licenses, and two insurance
brokerage firms, two claims adjusting firms, with 124,682 registered independent sales agents, and 2,063 in-house
claims adjustors. Our distribution and service network consisted of 672 sales outlets in 24 provinces and 92 claims
services outlets in 31 provinces.
The following table sets forth additional information concerning our distribution and service network as of
March 31, 2023, broken down by provinces:
Province
Shandong
- 50 -
Number
of
Sales and
Service
Outlets
128
Number
of
Sales
Agents
21,105
Number
of
In-house
Adjustors
79
Hebei
Sichuan
Guangdong
Hunan
Zhejiang
Anhui
Jiangsu
Fujian
Henan
Liaoning
Hubei
Inner Mongolia
Guangxi
Chongqing
Shaanxi
Yunan
Tianjin
Shanxi
Beijing
Jiangxi
Shanghai
Heilongjiang
Hainan
Jilin
Gansu
Guizhou
Ningxia
Qinghai
Tibet
Xinjiang
Total
87
69
58
52
49
37
34
31
29
22
19
18
16
16
12
11
10
8
6
6
6
2
2
2
1
1
1
1
1
1
15,373
5,093
9,386
3,650
4,862
6,498
11,329
3,303
9,991
7,199
1,681
5,923
11,027
1,235
1,718
968
1,412
983
1,080
270
39
557
-
-
-
-
-
-
-
-
736 124,682
35
88
423
31
145
36
192
59
58
68
96
21
85
22
93
26
22
35
120
75
66
21
16
16
34
53
41
2
-
5
2063
We market and sell long-term personal lines of life and health insurance products and property and casualty
insurance products to customers mainly through both independent sales agents, most of whom are not our
employees, and insurance advisors who are our employees. We also market and sell certain critical illness, term
life, 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.
Customers
We sell life and health insurance products including critical illness, annuity insurance, whole life insurance
and term life insurance and endowment insurance primarily to individual customers as well as property and
casualty insurance products including individual accident insurance, homeowner insurance products, liability
insurance and travel insurance. Customers for the life and health insurance products we distribute are primarily
individuals under 50 years of age. For the year ended December 31, 2022, 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, 2022, we had accumulated approximately 12.0 million individual customers, of which
over 2.0 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 and Others
- 51 -
As of March 31, 2023, we had established business relationships with 139 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 43 life insurance companies, 9 health and pension insurance companies and 21
property and casualty insurance companies, most of which were signed at the corporate headquarter level as of
March 31, 2023. For the provision of claims adjusting services, we also had business relationship with 104
insurance companies, and 286 other institutions including third party insurance intermediaries, logistics
companies, construction companies and marine and cargo companies as of March 31, 2023.
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. 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, nationwide network of sales professionals enabled by digital tools,
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 choices 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, extensive offline sales and service network which
enables us to offer online and offline integrated services to customers also differentiate us from internet-
based professional insurance intermediaries. We believe that we can compete effectively with these
business entities because we offer customers access to a broad range of insurance products underwritten
by multiple insurance companies and 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. We believe that we can compete
effectively with other major insurance claims adjusting firms because we offer our customers a diversified range
of claims adjusting services covering medical insurance, property insurance, auto insurance, marine and cargo
insurance, and personal injury and accident insurance and are able to leverage the business relationships we have
developed with insurance companies through the distribution of property and casualty insurance products.
Intellectual Property
- 52 -
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, 2023, we had 87 registered trademarks in China,
including our corporate logo. Our main website is www.fanhuaholdings.com.
Risk Management
Proactive risk management and a strong risk culture are essential to our long-term success. As a Nasdaq-listed
company, we are subject to the requirements of U.S. Sarbanes-Oxley Act (SOX) of 2002, specifically sections
302 and 404. Accordingly, we have established a comprehensive internal control and risk management structure
that enables us to identify and analyze risks early and take appropriate action.
Proactive risk management and a strong risk culture are essential to our long-term success. As a Nasdaq-listed
company, we are subject to the requirements of U.S. Sarbanes-Oxley Act (SOX) of 2002, specifically sections
302 and 404. Accordingly, we have established a comprehensive internal control and risk management structure
that enables us to identify and analyze risks early and take appropriate action.
The Board of Directors is the highest decision-making body for corporate risk management and is responsible
for the effectiveness of overall risk management efforts. The Audit Committee under the Board of Directors is
established to fully assess the major risks faced by the Company and supervise the effectiveness of the
implementation of the Company’s risk management system.
We established a risk management and internal audit department which works independently from our
operations and directly reports to the Audit Committee. The department holds the primary responsibility of
monitoring and supervising risk management of the Company’s business operation in compliance with the
requirements of SOX.
● Assisting the management in identifying, measuring and managing risks in daily business activities and
periodically reporting to the full board of directors, the Audit Committee and executive suite potential
risks facing the Company;
● Supervising the establishment of standard operating processes by various functional departments and
business units and conducting risk assessment and internal tests to carry out independent and un-biased
checks and evaluation on the appropriateness, compliance and effectiveness of the Company’s business
operations and internal control; and
● Monitoring
the
improvement plans on control weakness and providing
recommendations on enhancing risk management capabilities in compliance with Sarbanes-Oxley
requirements.
implementation of
In order to foster the awareness of compliance among all employees and establish a sustainable and effective
compliance mechanism, Fanhua Group Company issued a compliance accountability policy Fanhua Insurance
Sales Group Compliance Accountability System which sets forth the responsibilities for keeping in compliance
with relevant laws and regulations by staff at various levels and the accountability for non-compliance. It also
puts forth the process of reporting potential risks when identified to take further actions.
The Compliance Department of the Fanhua Group Comany lead the efforts to monitor and coordinate the
implementation of the Compliance Accountability Policy while our functional departments and subsidiaries holds
the primary responsibility for risk control and compliance of our business operations. When a risk event occurs,
functional departments or subsidiaries shall immediately report it to the Compliance Department to open a case
for investigation and management. The functional departments or subsidiaries shall inspect the progress of risk
events and implementation of improvement plans each month, and report progress to the Compliance Department.
Regulation
- 53 -
Regulations of the Insurance Industry
The insurance industry in the PRC is highly regulated. Between 1998 and March 2018, CIRC was the
regulatory authority responsible for the supervision of the Chinese insurance industry. In March 2018, the CBIRC,
was established as the result of the merger between CIRC and CBRC, replacing CIRC as the regulatory authority
for the supervision of the Chinese insurance industry. Insurance activities undertaken within the PRC are primarily
governed by the Insurance Law and the related rules and regulations.
Initial Development of Regulatory Framework
The Chinese Insurance Law was enacted in 1995. The original insurance law, which we refer to as the 1995
Insurance Law, provided the initial framework for regulating the domestic insurance industry. Among the steps
taken under the 1995 Insurance Law were the following:
● Licensing of insurance companies and insurance intermediaries, such as agencies and brokerages. The
1995 Insurance Law established requirements for minimum registered capital levels, form of
organization, qualification of senior management and adequacy of the information systems for insurance
companies and insurance agencies and brokerages.
● Separation of property and casualty insurance businesses and life insurance businesses. The 1995
Insurance Law classified insurance between property, casualty, liability and credit insurance businesses,
on the one hand, and life, accident and health insurance businesses on the other, and prohibited insurance
companies from engaging in both types of businesses.
● Regulation of market conduct by participants. The 1995 Insurance Law prohibited fraudulent and other
unlawful conduct by insurance companies, agencies and brokerages.
● Substantive regulation of insurance products. The 1995 Insurance Law gave insurance regulators the
authority to approve the basic policy terms and premium rates for major insurance products.
● Financial condition and performance of insurance companies. The 1995 Insurance Law established
reserve and solvency standards for insurance companies, imposed restrictions on investment powers and
established mandatory reinsurance requirements, and put in place a reporting regime to facilitate
monitoring by insurance regulators.
● Supervisory and enforcement powers of the principal regulatory authority. The principal regulatory
authority, then the PBOC, was given broad powers under the 1995 Insurance Law to regulate the
insurance industry.
Establishment of the CIRC and 2002 Amendments to the Insurance Law
China’s insurance regulatory regime was further strengthened with the establishment of the CIRC in 1998.
The CIRC was given the mandate to implement reform in the insurance industry, minimize insolvency risk for
Chinese insurers and promote the development of the insurance market.
The 1995 Insurance Law was amended in 2002 and the amended insurance law, which we refer to as the 2002
Insurance Law, became effective on January 1, 2003. The major amendments to the 1995 Insurance Law include:
● Authorizing the CIRC to be the insurance supervisory and regulatory body nationwide. The 2002
Insurance Law expressly grants the CIRC the authority to supervise and administer the insurance industry
nationwide.
● Expanding the permitted scope of business of property and casualty insurers. Under the 2002 Insurance
Law, property and casualty insurance companies may engage in the short-term health insurance and
accident insurance businesses upon the CIRC’s approval.
- 54 -
● Providing additional guidelines for the relationship between insurance companies and insurance agents.
The 2002 Insurance Law requires an insurance company to enter into an agent agreement with each
insurance agent that will act as an agent for that insurance company. The agent agreement sets forth the
rights and obligations of the parties to the agreement as well as other matters pursuant to law. An
insurance company is responsible for the acts of its agents when the acts are within the scope authorized
by the insurance company.
● Relaxing restrictions on the use of funds by insurance companies. Under the 2002 Insurance Law, an
insurance company may use its funds to make equity investments in insurance-related enterprises, such
as asset management companies.
● Allowing greater freedom for insurance companies to develop insurance products. The 2002 Insurance
Law allowed insurance companies to set their own policy terms and premium rates, subject to the
approval of, or a filing with, the CIRC.
2009 Amendments to the Insurance Law
The 2002 Insurance Law was amended again in 2009 and the amended insurance law, which we refer to as
the 2009 Insurance Law, became effective on October 1, 2009. The major amendments to the 2009 Insurance Law
include:
● Strengthening protection of the insured’s interests. The 2009 Insurance Law added a variety of clauses
such as incontestable clause, abstained and estoppels clause, common disaster clause and amending
immunity clause, claims-settlement prescription clause, reasons for claims rejection and contract
modification clause.
● Strengthening supervision on the qualification of the shareholders of the insurance companies and setting
forth specific qualification requirements for the major shareholders, directors, supervisors and senior
managers of insurance companies.
● Expanding the business scope of insurers and further relaxing restriction on the use of fund by insurers.
● Strengthening supervision on solvency of insurers with stricter measures.
● Tightening regulations governing the administration of insurance intermediary companies, especially
those relating to behaviors of insurance agents.
According to the 2009 Insurance Law, the minimum registered capital required to establish an insurance
agency or insurance brokerage as a company must comply with the PRC Company Law. The registered capital or
the capital contribution of insurance agencies or insurance brokerages must be paid-up capital in cash. The 2009
Insurance Law also sets forth some specific qualification requirements for insurance agency and brokerage
practitioners. The senior managers of insurance agencies or insurance brokerages must meet specific qualification
requirements, and their appointments are subject to approval of the CIRC. Personnel of an insurance agency or
insurance brokerage engaging in the sales of insurance products must meet the qualification requirements set by
the CIRC and obtain a qualification certificate issued by the CIRC. Under the 2009 Insurance Law, the parties to
an insurance transaction may engage insurance adjusting firms or other independent appraisal firms that are
established in accordance with applicable laws, or persons who possess the requisite professional expertise, to
conduct assessment and adjustment of the insured subject matters. Additionally, the 2009 Insurance Law specifies
additional legal obligations for insurance agencies and brokerages.
2014 Amendments to the Insurance Law
The 2002 Insurance Law was amended again in 2014 and the amended insurance law, which we refer to as
the 2014 Insurance Law, became effective on August 31, 2014. The major amendments of the 2014 Insurance
Law include:
● Relaxing restrictions on actuaries. The 2014 Insurance Law no longer requires Insurance companies shall
employ actuaries recognized by the insurance regulatory authority under the State Council. However, an
insurance company shall also engage professionals, and establish an actuarial reporting system and a
compliance reporting system as before.
- 55 -
2015 Amendments to the Insurance Law
The 2014 Insurance Law was amended again in 2015 and the amended insurance law, which we refer to as
the 2015 Insurance Law, became effective on April 24, 2015. The major amendments of the 2015 Insurance Law
include:
● Eliminating the requirement for an insurance agent or broker to obtain a qualification certificate issued
by the CIRC before providing any insurance agency or brokerage services.
● Relaxing the requirement for the establishment or other significant corporate events of an insurance
agency or brokerage firm. For example, an insurance agency or brokerage firm is allowed to apply for a
business permit from the CIRC and a business license from the local AIC simultaneously under the 2015
Insurance Law, while an insurance agency or brokerage firm had to apply for and receive a business
permit issued by the CIRC before it could apply for a business license from and register with the relevant
local AIC under the 2014 Insurance Law. Prior approval by the CIRC is no longer required for the
divesture or mergers of insurance agencies or brokerage firms, the change of their organizational form,
or the establishment or winding-up of a branch by an insurance agency or brokerage firm.
The CIRC and the CBIRC
The CBIRC, which was formed by the merger of China Banking Regulatory Commission (“CBRC”) and
CIRC in March, 2018, inherits the authority of CIRC, has extensive authority to supervise insurance companies
and insurance intermediaries operating in the PRC, including the power to:
● promulgate regulations applicable to the Chinese insurance industry;
●
investigate insurance companies and insurance intermediaries;
●
establish investment regulations;
●
approve policy terms and premium rates for certain insurance products;
●
●
set the standards for measuring the financial soundness of insurance companies and insurance
intermediaries;
require insurance companies and insurance intermediaries to submit reports concerning their business
operations and condition of assets;
● order the suspension of all or part of an insurance company or an insurance intermediary’s business;
●
●
approve the establishment, change and dissolution of an insurance company, an insurance intermediary
or their branches;
review and approve the appointment of senior managers of an insurance company, an insurance
intermediary or their branches; and
● punish insurance companies or intermediaries for improper behaviors or misconducts.
Regulation of Insurance Agents
The principal regulation governing insurance agents is the Provisions on the Supervision and Administration
of Insurance Agents, or the PSAIA, issued by the CBIRC on November 12, 2020 and effective on January 1, 2021,
replacing the Provision on the Supervision and Administration of Professional Insurance Agencies issued by the
CIRC on September 25, 2009 and amended on April 7, 2013, the Measures on the Supervision and Administration
of Insurance Salespersons issued on January 6, 2013 and the Interim Measures on the Administration of Ancillary-
Business Insurance Agency issued on August 4, 2000.
- 56 -
The term of “insurance agent” refers to an entity or an individual entrusted by insurance companies to handle
insurance business by and within the authorization of, and which collects commissions from insurance companies,
and includes a professional insurance agency, ancillary-business insurance agency and individual insurance sales
agent which refers to a captive insurance agent of an insurance company.
The practitioner of an insurance agency refers to an individual engaged in the sales of insurance products or
loss assessment and claims settlement services for a professional insurance agency or ancillary-business insurance
agency.
To engage in insurance agency business, a professional insurance agency shall obtain an insurance agency
business permit issued by the CBIRC, after obtaining a business license, and satisfy the requirements prescribed
by the PSAIA or other relevant regulations on shareholder and management qualification, capital contribution,
articles of association, corporate governance and internal control procedures with viable business model and sound
business and financial information system. An insurance agency may take any of the following forms: (i) a limited
liability company; or (ii) a joint stock limited company. The name of a professional insurance agency shall contain
the words “insurance agency”.
The minimum registered capital for establishing a nationwide professional insurance agency is RMB50
million and that for a regional professional insurance agency is RMB20 million. The registered capital of a
professional insurance agency must be paid-in monetary capital. To operate outside of its registration place, a
nationwide professional insurance agency shall set up local provincial branches first before setting up additional
sub-branches and sales offices.
Professional insurance agencies shall, within 5 days from the date of occurrence of any of the following
circumstances, report to the CBIRC through the supervision information system and make public disclosure: (i)
change of name, domicile or business address; (ii) change of shareholders, registered capital or the form of
organization; (iii) change of name or capital contribution of a shareholder; (iv) amendments to the articles of
association; (v) equity investment in, or establishment of offshore insurance institutions or non-operating
institutions; (vi) division, merger, dissolution, or termination of insurance agency business activities of branches;
(vii) change of the principal person-in-charge of a sub-branch; (viii) administrative punishment, civil punishment
or pending investigation of suspected illegal crime; or (ix) other reportable events prescribed by the insurance
regulatory body under the State Council.
A professional insurance agency may engage in all or part of the following businesses: (i) selling insurance
products on behalf of insurance companies; (ii) collecting insurance premium on behalf of insurance companies;
(iii) insurance-related loss survey and claims settlement on behalf of insurance companies; or (iv) other relevant
businesses stipulated by the insurance regulatory body under the State Council. Insurance agents shall not engage
in insurance agency business beyond the business scope and business area of the insurance companies for which
they act as agents.
A professional insurance agency and its sales practitioners and individual insurance agents are not allowed to
sell non-insurance financial products, except for non-insurance financial products approved by relevant financial
regulatory authorities provided that all necessary qualification requirements are being met.
A professional insurance agency shall, within 20 days upon obtaining business permits, procure professional
liability insurance or make contributions to security deposits. Minimum compensation for each accident under the
one-year professional liability insurance policy shall be no less than RMB1 million, and accumulative
compensation under the one-year insurance policy shall be no less than RMB10 million and the total core business
revenue of the professional insurance agency company in the previous year. If a professional agency intends to
pay deposit, the deposit shall be paid at 5% of its registered capital and when it increases its registered capital, the
amount of the deposit shall be increased proportionately.
The senior managers of a professional insurance agency must meet specific qualification requirements in
educational background and relevant industry working experience set forth in the PSAIA.
An insurance agent shall perform sales practicing register with the CRIBC’s Insurance Intermediaries
Regulatory Information System for its individual insurance agent or sales practitioner. Each individual insurance
agent or sales practitioner of an insurance agency can only be allowed to register with one institution.
- 57 -
Specific information disclosure requirements are also provided in the PSAIA. For example, it is required that
a professional insurance agency or its branches shall place its business license and copies of permit in a prominent
position in its domicile or business site. Insurance agents shall make full disclosure of all relevant information of
insurance products to policyholders and make a clear representation of the clauses in the insurance contract
including liability, liability reduction or exemption, cancellation and other expense deductions, cash value,
cooling-off period and etc.
Regulation of Insurance Brokerages
The principal regulation governing insurance brokerages is the Provisions on the Supervision and
Administration of Insurance Brokers, or the POSAIB, promulgated by the CIRC on February 1, 2018 and effective
May 1, 2018, replacing the Provisions on the Supervision of Insurance Brokerages issued on September 25, 2009,
as amended on April 27, 2013, and the Measures on the Supervision and Administration of Insurance Brokers and
Insurance Claims Adjustors issued by the CIRC on January 6, 2013.
The term of “insurance broker” refers to an entity which, representing the interests of insurance applicants,
acts as an intermediary between insurance applicants and insurance companies for entering into insurance
contracts, and collects commissions for the provision of such brokering services. The term of “insurance brokerage
practitioner” refers to a person affiliated with an insurance broker who drafts insurance application proposals or
handles 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.
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.
- 58 -
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 qualifications 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 a 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-thirds of its partners should be claims adjustors who have at least three years’ working experience in
claims adjustment and have no record of administrative penalties in relation to claims adjustment activities in the
past three years. A claims adjusting firm in the form of a company must have at least eight claims adjustors and
two shareholders among which at least two-thirds are claims adjustors who have at 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.
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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 POSAICA.
An insurance claims adjustment practitioner must join an insurance claims adjusting firm in order to conduct
insurance claims adjustment activities. The insurance claims adjusting firm to which he or she belongs must
register his or her information with the CIRC’s Insurance Intermediary Supervision Information System or IISIS.
One person can only conduct insurance adjustment activities for one insurance claims adjusting firm and can only
be registered with the IISIS through one insurance claims adjusting firm.
At least two insurance claims adjustment practitioners must be appointed to undertake each case of insurance
claims adjustment businesses and the claims adjustment report shall be signed by at least two insurance claims
adjustment practitioners engaged in the claims adjustment activities and chopped by the claims adjusting firm to
which he or she belongs.
Regulation of Insurance Intermediary Service Group Companies
The principal regulation governing insurance intermediary groups is the Provisional Measures for
Supervision and Administration of the Insurance Intermediary Service Group Companies (for Trial
Implementation) issued by the CIRC on September 22, 2011 with immediate effect. According to the regulation,
the term “insurance intermediary service group company” refers to a professional insurance intermediary company
that is established in accordance with applicable laws and regulations and with the approval of the CIRC that
exercises sole or shared control of, or is able to exert major influence over, at least two subsidiaries that are
professional insurance intermediary companies primarily engaged in the insurance intermediary business.
An insurance intermediary service group company must have:
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●
a registered capital of at least RMB100 million;
● 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;
● business premises and office equipment which are suitable for the development of the businesses; and
● other conditions stipulated by laws, administrative regulations and the CIRC.
The name of an insurance intermediary service group must contain the words “Group” or “Holding.” Its
principal business must be equity investment, management and provision of supporting services. An insurance
intermediary service group company shall, submit a written report to the CIRC and its local counterparts at the
place of registration within five working days after the date of occurrence of the following: (i) changing its
registered name or address; (ii) changing its registered capital; (iii) changing its equity structure by more than 5%
or shareholders holding more than 5% of shares; (iv) changing its articles of association; (v) establishing, acquiring,
merging or closing its subsidiary; (vi) engaging in related party transactions between member companies; (vii)
disincorporating; (viii) significantly changing its business scope; or (ix) making a major strategic investment,
suffering a significant investment loss or experiencing other material events or emergencies that affect or may
affect the business management, financial status or risk control of the group. Senior managers of an insurance
intermediary service group company must meet specific qualification requirements and appointment of the senior
managers of an insurance intermediary service group company is subject to review and approval by the CIRC.
Content Related to Insurance Industry in the Legal Documents of China’s Accession to the WTO
According to the Circular of the CIRC on Distributing the Content Related to Insurance Industry in the Legal
Documents of China’s Accession to the World Trade Organization, or WTO, for the life insurance sector, within
three years of China’s accession to the WTO on December 11, 2001, geographical restrictions were to be lifted,
equity joint venture companies allowed to provide health insurance, group insurance, and pension/annuity services
to Chinese citizens and foreign citizens, and for there to be no other restrictions except those on the proportion of
foreign investment (no more than 50%) and establishment conditions. For the non-life insurance sector, within
three years of China’s accession, the geographical restrictions were to be lifted and no restrictions allowed other
than establishment conditions. For the insurance brokerage sector, within five years of China’s accession, the
establishment of wholly foreign-funded subsidiary companies was to be allowed, and no restriction other than
establishment conditions and restrictions on business scope.
Content Related to Insurance Industry in the Closer Economic Partnership Arrangements
Under CEPA Supplement IV signed in June and July 2007 and CEPA Supplement VIII signed in December
2011, local insurance agencies in Hong Kong and Macau 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 Macau for over
10 years;
● 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 three years before application, there has been no serious misconduct or record of disciplinary
action; and
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● The applicant must have set up a representative office in mainland China for over one year
Regulations on Internet Insurance
The principal regulation governing the operation of internet insurance business is the Measures for the
Supervision of the Internet Insurance Business, or the Measures, promulgated on December 7, 2020 and effective
on February 1, 2021, replacing the Interim Measures for the Supervision of the Internet Insurance Business, or the
Interim Measures, issued on July 22, 2015 and effective on October 1, 2015.
According to the Measures, the term of “internet insurance business” refers to the business of concluding
insurance contracts and providing insurance services by insurance institutions with internet technologies.
Insurance institutions refer to insurance companies and insurance intermediaries which include insurance agents
(except individual insurance agents), insurance brokerage firms and insurance claims adjusting firms. Insurance
agents (except individual insurance agents) refer to professional insurance agencies, bancassurance-related
ancillary insurance agencies and internet companies that have obtained licenses for engaging in insurance agency
business in accordance with applicable laws and regulations. Non-insurance institutions are not allowed to conduct
internet insurance business, including but not limited to, providing insurance product consultancy services,
providing insurance product comparison, price quotation and price comparison services, designing insurance plans
for the insureds and handling insurance application formalities on behalf of the insureds and collecting premiums
by proxy.
A self-operated internet platform refers to an internet platform established by insurance institutions for
conducting insurance business, by which insurance institutions can operate business independently and have full
access to the data on the platform. The internet insurance business of an insurance institution shall be operated
and managed by its headquarter with standardized and centralized business platform, business procedures and
management system.
To carry out internet insurance business, an insurance institution shall meet the following requirements,
among others: (i) making ICP filing in the case of operating a mobile application or website; (ii) maintaining
independent information management system and core business system to support its internet insurance business
operation; (iii) equipped with a comprehensive working mechanism for network security monitoring, information
alert, emergency management, and cybersecurity protection measures for border protection, intrusion detection,
data protection and disaster recovery; (vi) equipped with certified Safety Level-III Computer Information System
for a self-operated online platform that can facilitate insurance sales and application and no lower than Safety
level-II Computer Information System for self-operated online platforms without insurance sales and application
functions; (v) having designated department and personnel for managing the internet insurance business; (vi)
maintaining sound management system and operating procedures; (vii) having a sound Internet insurance business
management system and operating rules; (viii) when an insurance company carries out Internet insurance sales, it
shall comply with the relevant regulations of the CBIRC on solvency, supervision and evaluation of consumer
rights and interests protection, etc.; (ix) professional insurance intermediaries shall be national institutions, and
their business areas shall not be limited to the provinces (autonomous regions, municipalities directly under the
Central Government, cities separately listed on the State plan) where the head office’s business license is
registered, and comply with the relevant provisions of the CBIRC on the classified supervision of insurance
professional intermediary institutions; (x) other conditions prescribed by the Bancassurance Regulatory
Commission.
Insurance institutions shall carefully evaluate their own risk management and control capacity and customer
service capacity, and rationally determine and choose insurance products and the scope of sales activities suitable
for internet operations.
Insurance institutions engaging in internet insurance business shall establish official website and set up
internet insurance column for information disclosure.
The Measures also specifies requirements on disclosure of information such as information regarding
insurance products sold on the internet, the qualification of the insurance institutions operating the internet
insurance business, contact methods for local support and compliant provides guidelines for the operations of the
insurance institutions that engage in internet insurance business.
Regulation on Internet Life Insurance
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The Notice on Further Regulation of Matters Relating to the Internet Life Insurance Business of Insurance
Institutions, or the Notice, was issued on October 12, 2021, effective immediately. According to the Notice,
internet life insurance business refers to the business activities of insurance companies to launch and sell internet
life insurance products, conclude insurance contracts and provide insurance services by setting up self-operated
network platforms or entrusting insurance intermediaries on their self-operated network platforms.
Insurance companies that meet relevant requirements of this Notice can conduct internet life insurance
business without branches nationwide. If an insurance company entrusts an insurance intermediary to carry out
internet life insurance business, the insurance intermediary should be a national institution. Where internet and
offline distributions are both involved in a life insurance business, internet life insurance products shall not be
sold, and the business area shall not be extended to areas without branches.
In order to carry out internet life insurance business, insurers (excluding internet insurance companies) shall
meet the following conditions: (i) the comprehensive solvency ratio shall reach 120% and the core solvency ratio
shall be no less than 75% for four consecutive quarters; (ii) the comprehensive risk rating shall be Class B or
above for four consecutive quarters; (iii) the liability reserve adequacy ratio shall be higher than 100% for four
consecutive quarters; (iv) the corporate governance level shall be C (qualified) or above; and (v) other conditions
stipulated by the CBIRC.
Internet life insurance products are limited to accident insurance, health insurance (excluding long-term care
insurance), term life insurance, life insurance with a coverage period of more than 10 years (excluding term life
insurance), annuity insurance with a coverage period of more than 10 years, and other life insurance products
stipulated by the CBIRC. Internet life insurance products that do not meet the requirements shall not be sold online,
and their sales webpages shall not be publicly displayed on the internet or directly linked to from other webpages.
An insurance company applying for approval or distributing a newly approved life insurance with a payment
period of more than 10 years (excluding term life insurance) and annuity insurance products with a coverage
period of more than 10 years must meet the following conditions: (i) the comprehensive solvency ratio shall
exceed 150% and the core solvency ratio shall be no less than 100% for four consecutive quarters; (ii) the
comprehensive solvency margin shall exceed RMB3 billion for four consecutive quarters; (iii) the comprehensive
risk rating shall be above Class A for four consecutive quarters (or six quarters within two years); (iv) no major
administrative penalty imposed on the internet insurance business in the previous year; (v) the corporate
governance level shall be B (good) or above; and (vi) other conditions stipulated by the CBIRC.
Insurance intermediaries selling life insurance with a payment period of more than 10 years (excluding term
life insurance) and annuity insurance products with a coverage period of more than 10 years shall meet the
following conditions: (i) experience in internet life insurance business for more than three years; (ii) complete
sales management, policy management and customer service systems, as well as a safe, efficient and real-time
internet payment and settlement system and process; (iii) no major administrative penalty imposed on the internet
insurance business in the previous year; and (iv) other conditions stipulated by the CBIRC.
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.
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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. 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.”
SAFE Regulations on Employee Share Options
On December 25, 2006, the PBOC promulgated the “Measures for the Administration of Individual Foreign
Exchange,” and on January 5, 2007, the SAFE further promulgated the implementation rules on those measures.
Both became effective on February 1, 2007. According to the implementation rules, PRC citizens who are granted
shares or share options by a company listed on an overseas stock market according to its employee share option
or share incentive plan are required, through the PRC subsidiary of such overseas listed company or any other
qualified PRC agent, to register with the SAFE and to complete certain other procedures related to the share option
or other share incentive plan. Foreign exchange income received from the sale of shares or dividends distributed
by the overseas listed company may be remitted into a foreign currency account of such PRC citizen or be
exchanged into Renminbi. Our PRC citizen employees who have been granted share options are subject to the
Individual Foreign Exchange Rules.
On March 28, 2007, SAFE promulgated the Operating Rules for Administration of Foreign Exchange in
Domestic Individuals’ Participation in Employee Stock Ownership Plans and Stock Option plans of Companies
Listed Abroad, or the Operating Rules. Stock Option Rule. On February 15, 2012, SAFE promulgated the No. 7
Notice, which supersedes the Stock Option Rule in its entirety and immediately became effective upon circulation.
According to the No. 7 Notice, domestic individuals, which include any directors, supervisors, senior managerial
personnel or other employees of a domestic company who are Chinese citizens (including citizens of Hong Kong,
Macau 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
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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.
Foreign Investment Security Review Measures
On December 19, 2020, the NDRC and MOFCOM promulgated the Foreign Investment Security Review
Measures, which took effect on January 18, 2021. Under the Foreign Investment Security Review Measures,
investments in military, national defense-related areas or in locations in proximity to military facilities, or
investments that would result in acquiring the actual control of assets in certain key sectors, such as critical
agricultural products, energy and resources, equipment manufacturing, infrastructure, transport, cultural products
and services, IT, internet products and services, financial services and technology sectors, are required to be
approved by designated governmental authorities in advance. Although the term “investment through other means”
is not clearly defined under the Foreign Investment Security Review Measures, we cannot rule out the possibility
that control through contractual arrangement may be regarded as a form of actual control and therefore require
approval from the competent governmental authority. As the Foreign Investment Security Review Measures were
recently promulgated, there are great uncertainties with respect to its interpretation and implementation.
Accordingly, there are substantial uncertainties as to whether our VIE structure may be deemed as a method of
foreign investment in the future.
Regulation on Information Security
The Standing Committee of the National People’s Congress promulgated the Cybersecurity Law of the
PRC, or the Cybersecurity Law, which became effective on June 1, 2017, to protect cyberspace security and order.
Pursuant to the Cybersecurity Law, any individual or organization using the network must comply with the
constitution and the applicable laws, follow the public order and respect social moralities, and must not endanger
cybersecurity, or engage in activities by making use of the network that endanger the national security, honor and
interests; incite subversion of state power; overthrow the socialist system; incite secession, undermining national
unity, terrorism and extremism promotion, ethnic hatred and discrimination; spread violence and disseminate
pornographic information, fabricating and spreading false information that disturbs economic and social order; or
infringe on the fame, privacy, intellectual property and other legitimate rights and interests of others. The
Cybersecurity Law sets forth various security protection obligations for network operators, which are defined as
“owners and administrators of networks and network service providers,” including, among others, complying with
a series of requirements of tiered cyber protection systems; verifying users’ real identity; localizing the personal
information and important data gathered and produced by key information infrastructure operators during
operations within the PRC; and providing assistance and support to government authorities where necessary for
protecting national security and investigating crimes.
On December 28, 2021, the Cyberspace Administration of China, or the CAC, the NDRC, the MIIT, and
several other administrations jointly promulgated the Cybersecurity Review Measures, which took effect on
February 15, 2022. The Cybersecurity Review Measures replaces its previous version promulgated on April 13,
2020. According to the Cybersecurity Review Measures, (i) when the purchase of network products and services
by a critical information infrastructures operator or the data processing activities conducted by a network platform
operator affect or may affect national security, a cybersecurity review shall be conducted pursuant to the
Cybersecurity Review Measures. The aforesaid operators shall file for a cybersecurity review with Cybersecurity
Review Office under the CAC if their behavior affects or may affect national security; (ii) an application for
cybersecurity review shall be made by an issuer who is a network platform operator holding personal information
of more than one million users before such issuer applies to list its securities on a foreign stock exchange; and (iii)
the relevant PRC governmental authorities may initiate cybersecurity review if such governmental authorities
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determine that the issuer’s network products or services, or data processing activities affect or may affect national
security. Cybersecurity reviews focus on assessing the following national security risks factors associated with
relevant objects or circumstances: (i) the risk of illegal control, interference or destruction of critical information
infrastructure, arising from the purchase and utilization of network products and services; (ii) the harm on the
business continuity of critical information infrastructure incurring from a disruption of network products and
services supply; (iii) the safety, openness, transparency, diversity of sources of network products and services; the
reliability of suppliers; and the risk of supply disruption due to political, diplomatic, trade and other reasons; (iv)
the level of compliance with the PRC laws, administrative regulations and ministry rules of the suppliers of
network products and services; (v) the risk of core data, important data or a large amount of personal information
being stolen, leaked, destroyed, and illegally used or illegally exited the country; (vi) the risk of critical
information infrastructure, core data, important data or a large amount of personal information being affected,
controlled, or maliciously used by foreign governments and the network information security risk in relation to
listing abroad; and (vii) other factors that may harm critical information infrastructure, cyber security and/or data
security.
The Administrative Provisions on the Account Information of Internet Users, which was promulgated by the
CAC on June 27, 2022 and became effective on August 1, 2022, sets out guidelines on the administration of the
account information of internet users. Internet-based information service providers shall perform their
responsibilities as the administrative subjects of the account information of internet users, have in place
professionals and technical capacity appropriate to the scale of services, and establish, improve and strictly
implement the authentication of real identity information, verification of account information, security of
information content, ecological governance, emergency responses, protection of personal information and other
management systems.
On July 7, 2022, the CAC promulgated the Data Outbound Transfer Security Assessment Measures, or the
Security Assessment Measures, which became effective on September 1, 2022. The Security Assessment
Measures provide that, among others, data processors shall apply to competent authorities for security assessment
when (i) the data processors transferring important data abroad; (ii) a CIIO and personal information processor
that has processed personal information of more than one million people, transferring personal information abroad;
(iii) a data processor who has provided personal information of one hundred thousand individuals or sensitive
personal information of ten thousands individuals to overseas recipients, in each case as calculated cumulatively,
since January 1 of the previous year; and (iv) other circumstances where the security assessment of data cross-
border transfer is required as prescribed by the CAC.
To comply with these laws and regulations, we have adopted security policies and measures to to strengthen
our defense against security threats and protect our cyber system and customer information, thereby ensuring
security and continuity of our services. We also provide regular training to ensure that our employees understand
that information security is everyone’s responsibility.
Regulation on Internet Privacy
Pursuant to the Administrative Provisions on Mobile Internet Applications Information Services, effective on
August 1, 2016 and amended on June 14, 2022 and effective on August 1, 2022, owners or operators of mobile
applications that provide information services shall obtain the relevant qualifications prescribed by laws and
regulations, strictly implement their information content administrator responsibilities and carry out certain duties,
including to authenticate the real identity information of users, establish and complete information content
inspection and management mechanisms, perform the data security protection obligations and regulate personal
information processing activities. On May 8, 2017, the Supreme People’s Court and the Supreme People’s
Procuratorate released the Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate
on Several Issues Concerning the Application of Law in the Handling of Criminal Cases Involving Infringement
of Citizens’ Personal Information, which clarifies several concepts regarding the crime of “infringement of
citizens’ personal information” stipulated by Article 253A of the Criminal Law of the People’s Republic of China,
including “citizen’s personal information,” “provision” and “unlawful acquisition of citizens’ personal
information.” Also, it specifies the standards for determining the “serious circumstances” and “particularly serious
circumstances” of this crime.
On June 10, 2021, the Data Security Law was promulgated by the Standing Committee of the National
People’s Congress and became effective on September 1, 2021. The Data Security Law mainly sets forth specific
provisions regarding establishing basic systems for data security management, including a hierarchical data
classification management system, risk assessment system, monitoring and early warning system, and emergency
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disposal system. In addition, it clarifies the data security protection obligations of organizations and individuals
carrying out data activities and implementing data security protection responsibility.
On August 20, 2021, the Personal Information Protection Law was promulgated by the Standing Committee
of the National People’s Congress and became effective on November 1, 2021. The Personal Information
Protection Law provides for various requirements on personal information protection, including the legal basis
for data collection and processing, requirements on data localization and cross-border data transfer, requirements
for consent of personal data collection and processing, and requirements on processing sensitive personal
information. The Personal Information Protection Law also provides that the customers shall be entitled to opt out
of the information recommendation or commercial marketing to individuals conducted by means of automated
decision-making, or to be provided simultaneously with options not specific to individuals’ characteristics.
To comply with these laws and regulations, we collect and use personal information and data from our
customers with their prior consent, and have established information security systems to protect customers’
privacy. There are uncertainties with respect to the interpretation and implementation of these data security laws
and regulations, so our data-related measures may be subject to additional compliance requirements and regulatory
burdens, and we may be required to make further adjustments to our business practices to comply with the
interpretation and implementation of such laws.
Regulations on Dividend Distribution
Before January 1, 2020, 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.
With the Foreign Investment Law becoming effective on January 1, 2020, the Sino-foreign Equity Joint
Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-
invested Enterprise Law, together with their implementation rules and ancillary regulations are no longer
applicable. The Foreign Investment Law and its implementation rule, named as Implementing Regulations of the
Foreign Investment Law of the People’s Republic of China, or the Implementing Regulations, does not specify
the rules of dividend distribution of wholly foreign-owned companies, however, article 31 of the Foreign
Investment Law states that the organizational form, organizational structure and their activities of a foreign-
invested enterprise shall be governed by the provisions of the PRC Company Law, PRC Partnership Enterprise
Law and other relevant laws, article 46 of the Implementing Regulations states that after the organizational forms,
organizational structures, etc. of existing Foreign-invested Enterprises have been adjusted pursuant to the law,
existing parties to Sino-foreign equity or cooperative joint ventures may continue to handle relevant matters
according to the method of equity or interest transfer, the method of income distribution, the method of surplus
assets distribution, etc. agreed in the relevant contracts. Therefore, relevant PRC laws such as PRC Company Law
may apply to the dividend distribution of Foreign-owned companies, and the methods of dividend distribution
stated in the current articles of association of the foreign-owned companies may still be applicable.
Regulation on Overseas Listing
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On August 8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce, the State Assets
Supervision and Administration Commission, the State Administration for Taxation, the State Administration for
Industry and Commerce, the CSRC and the SAFE, jointly adopted the Provisions on Foreign Investors’ Merger
with and Acquisition of Domestic Enterprises, or the Order No. 10 (2006) which became effective on September
8, 2006 and was amended on June 22, 2009. The Order No. 10 (2006) purports, among other things, to require
offshore SPVs, formed for overseas listing purposes and controlled by PRC companies or individuals, to obtain
the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange. On September
21, 2006, the CSRC published a notice on its official website specifying documents and materials required to be
submitted to it by SPVs seeking CSRC approval of their overseas listings.
On February 17, 2023, the CSRC released the Trial Administrative Measures of Overseas Securities Offering
and Listing by Domestic Companies, or the Overseas Listing Trial Measures and five supporting guidelines, which
came into effect on March 31, 2023. According to the Overseas Listing Trial Measures, (1) domestic companies
that seek to offer or list securities overseas, both directly and indirectly, should fulfill the filing procedure and
report relevant information to the CSRC; (2) if the issuer meets both of the following conditions, the overseas
offering and listing shall be determined as an indirect overseas offering and listing by a domestic company: (i) the
total assets, net assets, revenues or profits of the domestic operating entity of the issuer in the most recent
accounting year account for more than 50% of the corresponding figure in the issuer’s audited consolidated
financial statements for the same period; (ii) the senior managers in charge of business operation and management
of the issuer are mostly Chinese citizens or have domicile in China, and its main places of business are located in
China or main business activities are conducted in China; and (3) where a domestic company seeks to indirectly
offer and list securities in an overseas market, the issuer shall designate a major domestic operating entity, which
shall, as the filing entity, fulfil the due filing and reporting obligations with the CSRC, and where an issuer makes
an application for listing in an overseas market, the issuer shall submit filings with the CSRC within three business
days after such application is submitted.
Simultaneously, the CSRC issued the Notice on the Administrative Arrangements for the Filing of Overseas
Offering and Listing by Domestic Companies, which, among others, clarifies that the domestic companies that
have already been listed overseas on or before the effective date of the Overseas Listing Trial Measures (i.e.,
March 31, 2023) shall be deemed as existing issuers, or the Existing Issuers. Existing Issuers are not required to
complete the filling procedures, and they shall be required to file with the CSRC when subsequent matters such
as refinancing are involved.
According to the Overseas Listing Trial Measures, an overseas listed company shall file with the CSRC within
three business days after the completion of its subsequent securities offering on the same market, and an overseas
listed company shall file with the CSRC within three business days after its application of offering and listing on
a different market. If an overseas listed company purchases PRC domestic assets through a single or multiple
acquisitions, share swaps, shares transfers or other means, and such purchase constitutes direct or indirect listing
of PRC domestic assets, a filing with the CSRC is also required. In addition, an overseas listed company is required
to report to the CSRC the occurrence of any of the following material events within three business days after the
occurrence and announcement thereof: (i) a change of control of the listed company; (ii) the investigation, sanction
or other measures undertaken by any foreign securities regulatory agencies or relevant competent authorities in
respect of the listed company; (iii) a change of listing status or transfer of listing segment; and (iv) the voluntary
or mandatory delisting of the listed company. If an issuer’s main business undergoes material change and is
therefore beyond the scope of business stated in the filing, such issuer shall submit to the CSRC an ad hoc report
and relevant legal opinion issued by a domestic law firm within three business days after occurrence of the change.
Our PRC legal counsel, Hai Run Law Firm, has advised us that, should we seek to (i) offer or list subsequent
securities on U.S. stock exchanges, (ii) offer or list securities on other overseas stock exchange, or (iii) purchase
PRC domestic assets through a single or multiple acquisitions, share swaps, shares transfers or other means, and
such purchase constitutes direct or indirect listing of PRC domestic assets, we are required to file with the CSRC.
However, our PRC legal counsel has further advised us that there are substantial uncertainties as to how the M&A
Rules and Overseas Listing Trial Measures will be interpreted or implemented in the context of an overseas
offering, and its opinions summarized above are subject to any new laws, rules and regulations or detailed
implementations and interpretations in any form relating to the M&A Rules and Overseas Listing Trial Measures.
On February 24, 2023, the Provisions on Strengthening the Confidentiality and Archives Administration of
Overseas Securities Issuance and Listing by Domestic Enterprises was promulgated, or the Provision on
Confidentiality, which became effective on March 31, 2023. Pursuant to the Provision on Confidentiality, where
a domestic enterprise publicly discloses or provides documents and materials involving state secrets and working
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secrets of state organs, or Relevant Documents and Materials, to the relevant securities companies, securities
service institutions, overseas regulatory authorities and other entities and individuals, or provides or publicly
discloses Relevant Documents and Materials through its overseas listing subjects, it shall report to the competent
department with the examination and approval authority for approval in accordance with the law, and submit to
the secrecy administration department of the same level for filing. Where a domestic enterprises provides
accounting archives or copies of such archives to entities and individuals such as securities companies, securities
service institutions and overseas regulatory authorities, it shall complete the corresponding procedures pursuant
to relevant rules of the State. The working materials formed within the territory of the PRC by the securities
companies and securities service institutions that provide corresponding services for the overseas issuance and
listing of domestic enterprises shall be kept within the territory of the PRC, and outbound transfers of such
materials shall go through approval procedures in accordance with relevant rules of the State.
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.
Based on the advice of our PRC counsel, we did not seek CSRC’s approval for our initial public offering.
Any requirement to obtain prior CSRC approval and a failure to obtain this approval, if required, could have a
material adverse effect on our business, operating results, reputation and trading price of our ADSs.
Regulations on Tax
PRC Enterprise Income Tax
The PRC EIT is calculated based on the taxable income determined under the PRC accounting standards and
regulations, as well as the EIT law. On March 16, 2007, the National People’s Congress of China enacted the EIT
Law, a new EIT law which became effective on January 1, 2008, which was subsequently amended on March 16,
2007, February 24, 2017 and December 29, 2018. On December 6, 2007, the State Council promulgated the
Implementation Rules which also became effective on January 1, 2008. On December 26, 2007, the State Council
issued the Notice on Implementation of Enterprise Income Tax Transition Preferential Policy under the EIT Law,
or the Transition Preferential Policy Circular, which became effective simultaneously with the EIT Law. The EIT
Law imposes a uniform EIT rate of 25% on all domestic enterprises and foreign-invested enterprises unless they
qualify under certain exceptions. Under the EIT Law, as further clarified by the Implementation Rules, the
Transition Preferential Policy Circular and other related regulations, enterprises that were established and already
enjoyed preferential tax treatments before March 16, 2007 will continue to enjoy them in the following manners:
(i) in the case of preferential tax rates, for a five-year period starting from January 1, 2008, during which the tax
rate will gradually increase to 25%; or (ii) in the case of preferential tax exemption or reduction for a specified
term, until the expiration of such term. However, if such an enterprise has not enjoyed the preferential treatments
yet because of its failure to make a profit, its term for preferential treatment will be deemed to start from 2008.
See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PRC Enterprise
Income Tax Law may increase the enterprise income tax rate applicable to some of our PRC subsidiaries which
could have a material adverse effect on our result of operations.”
Under the New Income Tax law, enterprises are classified as either resident or non-resident. A resident
enterprise refers to one that is incorporated under the PRC law or under the law of a jurisdiction outside the PRC
with its “de facto management organization” located within the PRC. Non-resident enterprise refers to one that is
incorporated under the law of a jurisdiction outside the PRC with its “de facto management organization” located
also outside the PRC, but which has either set up institutions or establishments in the PRC or has income
originating from the PRC without setting up any institution or establishment in the PRC. Under the New Enterprise
Income Tax, Implementation Regulation, or the New EIT Implementation Regulations, “de facto management
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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
clarifying matters such as resident status determination. Due to the present uncertainties resulting from the limited
PRC tax guidance on this issue and because substantially all of our operations and all of our senior management
are located within China, we may be considered a PRC resident enterprise for EIT purposes, in which case: (i) we
would be subject to the PRC EIT at the rate of 25% on our worldwide income; and (ii) dividends income received
by us from our PRC subsidiaries, however, would be exempt from the PRC withholding tax since such income is
exempted under the EIT Law for a PRC resident enterprise recipient. See “Item 3. Key Information—D. Risk
Factors—Risks Related to Doing Business in China—Our global income or the dividends we receive from our
PRC subsidiaries may be subject to PRC tax under the EIT Law, which could have a material adverse effect on
our results of operations.”
PRC Business Tax and VAT
Taxpayers providing taxable services in China are required to pay a business tax at a normal tax rate of 5%
of their revenues, unless otherwise provided. According to the Announcement on the VAT Reform Pilot Program
of the Transportation and Selected Modern Service Sectors issued by the State Tax Bureau in July 2012, the
transportation and some selected modern service sectors, including research and development and technical
services, information technology services, cultural creative services, logistics support services, tangible personal
property leasing services, and assurance and consulting service sectors, should pay value-added tax instead of
business tax based on a predetermined timetable (hereinafter referred to as the “VAT Reform”), effective
September 1, 2012 for entities in Beijing and November 1, 2012 for entities in Guangdong. The VAT Reform
expanded nation-wide from August 1, 2013.
In March 2016, during the fourth session of the 12th National People’s Congress, it was announced that the
VAT reform will be fully rolled out and extended to all industries including construction, real estate, financial
services and lifestyle services. Subsequently, the SAT and Ministry of Finance jointly issued a Notice on Preparing
for the Full Implementation of the VAT Reform (Cai Shui [2016] No. 36). Accordingly, we started to pay value-
added tax instead of business tax from May 1, 2016.
Dividend Withholding Tax
Under the PRC tax laws effective prior to January 1, 2008, dividends paid to foreign investors by foreign-
invested enterprises are exempt from PRC withholding tax. Pursuant to the EIT Law and the Implementation
Rules, dividends generated after January 1, 2008 and distributed to us by our PRC subsidiaries through our BVI
subsidiary are subject to a 10% withholding tax, provided that we are determined by the relevant PRC tax
authorities to be a “non-resident enterprise” under the EIT Law. Pursuant to the Avoidance of Double Taxation
Arrangement, which became effective on January 1, 2007, which was subsequently amended on January 30, 2008,
May 27, 2010, April 1, 2015 and July 19, 2019, dividends from our PRC subsidiaries paid to us through our Hong
Kong wholly-owned subsidiary CNinsure Holdings Ltd. are subject to a withholding tax at a rate of 5%. However,
as described above, we may be considered a PRC resident enterprise for EIT purposes, in which case dividends
received by us from our PRC subsidiary would be exempt from the PRC withholding tax because such income is
exempted under the EIT Law for a PRC resident enterprise recipient. In July 2018, CNinsure Holdings Ltd. was
determined by Hong Kong Taxation Bureau to be a Hong Kong resident enterprise and completed the application
and filing process for enjoying the tax treaty in PRC Taxation Bureau therefore we have applied 5% withholding
tax rate for the dividends paid by our PRC subsidiaries since then. As there remains uncertainty regarding the
interpretation and implementation of the EIT Law and the Implementation Rules, it is uncertain whether any
dividends to be distributed by us, if we are deemed a PRC resident enterprise, to our non-PRC shareholders and
ADS holders would be subject to any PRC withholding tax. See “Item 3. Key Information—D. Risk Factors—
Risks Related to Doing Business in China—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.”
C. Organizational Structure
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Corporate Structure
As of March 31, 2023, we, through Fanhua Group Company, have controlling equity ownership in one
insurance sales services company with a national operating license, one managing general agency with brokerage
license, five regional insurance agencies, two insurance claims adjusting firms and one healthcare management
service company which also operates an online mutual aid platform. In addition, through contractual arrangements,
we control one insurance sales services company with a national operating license to operate online insurance
distribution business, two regional insurance agencies and one brokerage firm. We also own 4.5% equity interest
of Puyi Inc..
Fanhua Group Company and its direct and indirect subsidiaries and our consolidated VIEs hold the licenses
and permits necessary to conduct our insurance intermediary business and internet insurance distribution business
in China.
Major Changes in our 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
VIEs and their shareholders. We relied on contractual arrangements to control and receive economic benefits from
our then-existing VIEs. In October 2011, we commenced a restructuring of our company. Through a series of
equity transfers, we had obtained direct controlling or significant 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.
In October 2015, we, through our wholly-owned subsidiary Meidiya Investment entered into act-in-concert
agreements with 5 equity interest holders of Fanhua Insurance Surveyors & Loss Adjustors Company Limited, or
FHISLA and controls 69.0% of voting interests in aggregate. The act-in-concert agreements were effective from
October 26, 2015 and will remain effective for as long as FHISLA is in operation, until and only when all
contracting parties agree to cease the agreement. Per the act-in-concert agreements, all the disagreements will
ultimately be determined by Meidiya Investment, the shareholder of the highest shareholding amongst the act-in-
concert group in FHISLA. Accordingly, we control 69.0% of voting rights in aggregate, which exceeds two-thirds
of the voting requirement to pass all resolutions in shareholder meetings of FHISLA.
To remain compliant with the regulatory requirements for conducting online insurance business through
Baoxian.com, we commenced a restructuring of our online operations in 2021. As a result of the restructuring,
Fanhua Group Company’s direct equity interests in Xinbao Investment, which directly owns 100% of Fanhua
RONS, the licensed operating entity of Baoxian.com, was reduced from 100% to 49% and the remaining 51%
equity interests were owned by an individual who is nominally holding the shares on behalf of Fanhua.
Concurrently, Fanhua Group Company entered into contractual arrangements with Xinbao Investment and its
individual nominee shareholder to control and receive economic benefits from the consolidated VIEs.
On June 24, 2022, our wholly owned subsidiary Fanlian Investment transferred all of the equity interests in
Fanhua RONS Technologies to Mr. Peng Ge, our chief financial officer to hold the shares of Fanhua RONS
Technologies nominally on behalf of the Company. Concurrently, Fanlian Investment entered into contractual
arrangements with Fanhua RONS Technologies and Mr. Ge. The contractual arrangements are substantially
similar to those among Fanhua Group Company, Xinbao Investment and its individual nominee shareholder.
As a result, we currently conduct our insurance agency and claims adjusting business in China primarily
through our wholly-owned subsidiary Fanhua Group Company, and its subsidiaries and a small part of our
business through our consolidated VIEs in China.
The following diagram illustrates the corporate structure of us and the consolidated VIEs, including the names,
places of incorporation and the proportion of ownership interests in our and the consolidated VIEs’ significant
subsidiaries and their respective subsidiaries as of March 31, 2023:
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The diagram above omits the names of subsidiaries that are immaterial individually and in the aggregate. For
a complete list of our subsidiaries as of March 31, 2023, see Exhibit 8.1 to this annual report.
The following is a summary of the key terms of our contractual arrangements with our consolidated VIEs
Xinbao Investment, Fanhua RONS Technologies and their respective subsidiaries, and with their respective
individual nominee shareholders.
Agreements that Provide Us Effective Control over Xinbao Investment and Fanhua RONS Technologies
Loan Agreement.
Xinbao Investment. On December 6, 2021, Mr. Shuangping Jiang, the shareholder of Xinbao Investment,
entered into a loan agreement with Fanhua Group Company, or the Fanhua Group Company Loan. The principal
loan amounts extended by Fanhua Group Company to Mr. Shuangping Jiang is RMB4.1 million, equal to his
capital contributions to Xinbao Investment.
The term of the loan agreement is for ten years, which cannot be automatically extended but may be extended
upon written agreement of the parties. If the loan is not extended, then upon its expiration and subject to then
applicable PRC laws, the loan can be repaid only with the proceeds from a transfer of the individual shareholder’s
equity interests in Xinbao Investment to Fanhua Group Company or another person or entity designated by Fanhua
Group Company. Fanhua Group Company may accelerate the loan repayment upon certain events, including if
the individual shareholder resigns or is dismissed from employment by us or if Fanhua Group Company exercises
its option to purchase the shareholder’s equity interests in Xinbao Investment pursuant to the exclusive purchase
option agreements described below.
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The loan agreement contains a number of covenants that restrict the actions the individual shareholder can
take or cause Xinbao Investment to take, and also require the individual shareholder to take or cause Xinbao
Investment to take specific actions. For example, the individual shareholders must:
● not transfer, pledge or otherwise dispose of or encumber his equity interests in Xinbao Investment, except
for equity pledge for the benefit of Fanhua Group Company, without the prior written consent of Fanhua
Group Company;
● not take any action that will have a material impact on the assets, business and liabilities of Xinbao
Investment without the prior written consent of Fanhua Group Company;
● not vote for, or execute any resolution to approve, the sale, transfer, mortgage, or disposal of, or the
creation of any encumbrance on, any legal or beneficial interests in the equity of Xinbao Investment,
except to Fanhua Group Company or its designee, without the prior written consent of Fanhua Group
Company;
● not vote for, or execute any resolutions to approve, any merger or consolidation with any person, or any
acquisition of or investment in any person by Xinbao Investment without the prior written consent of
Fanhua Group Company;
● vote to elect the director candidates nominated by Fanhua Group Company;
●
cause Xinbao Investment not to supplement, amend or modify its articles of association in any manner,
increase or decrease its registered capital or change the capital structure in any way without the prior
written consent of Fanhua Group Company; and
●
cause Xinbao Investment not to execute any contract with a value exceeding RMB100,000, except in the
ordinary course of business, without the prior written consent of Fanhua Group Company.
Fanhua RONS Technologies. The individual shareholder of Fanhua RONS Technologies, being Mr. Peng
Ge, who is our chief financial officer, entered into a loan agreement on July 1, 2022 with our subsidiary Fanlian
Investment, or the Fanlian Loan, for a zero interest loan from Fanlian Investment. The principal amount lent to
Mr. Ge is RMB20.0 million (US$2.9 million). The terms of the Fanlian Loan are similar to those of the Fanhua
Group Company Loans described above.
Equity Pledge Agreement.
Xinbao Investment. Mr. Shuangping Jiang entered into an equity pledge agreement on December 6, 2021,
pledging his equity interest in Xinbao Investment to Fanhua Group Company to secure his obligations under the
loan agreement. Mr. Jiang also agreed not to transfer or create any encumbrances adverse to Fanhua Group
Company on his equity interests in Xinbao Investment. During the term of the equity pledge agreement, Fanhua
Group Company is entitled to all the dividends declared on the pledged equity interests. The equity pledge
agreement will expire when the individual shareholder fully performs his obligations under the loan agreement.
The equity pledge was recorded on the shareholder’ register of Xinbao Investment, and registered with the relevant
local administration of industry and commerce.
Fanhua RONS Technologies. Mr. Peng Ge, entered into an equity pledge agreement on July 1, 2022,
pledging his equity interests in Fanhua RONS Technologies to Fanlian Investment to secure his obligations under
the Fanlian Loan. Terms of the equity pledge agreement is substantially similar to equity pledge agreements for
Xinbao Investment.
Power of Attorney.
Xinbao Investment. Mr. Jiang executed powers of attorney on December 6, 2021, each appointing a person
designated by Fanhua Group Company as his attorney-in-fact on all matters requiring shareholder approval.
Further, if Fanhua Group Company designates the shareholder to attend a shareholder’s meeting of Xinbao
Investment, the individual shareholder agrees to vote his shares as instructed by Fanhua Group Company. The
term of the power of attorney is for ten years.
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Fanhua RONS Technologies. Mr. Peng Ge, the individual shareholders of Fanhua RONS Technologies,
executed powers of attorney on July 1, 2022 appointing a person designated by Fanlian Investment as his attorney-
in-fact on all matters requiring shareholder approval. Further, if Fanlian Investment designates the shareholder to
attend a shareholder’s meeting of Fanhua RONS Technologies, the individual shareholder agrees to vote his shares
as instructed by Fanlian Investment. The term of the power of attorney is for ten years.
Agreement that Provides Us the Option to Purchase the Equity Interests in Xinbao Investment
Exclusive Purchase Option Agreement.
Xinbao Investment. Mr. Jiang entered into an exclusive purchase option agreement on December 6, 2021 to
irrevocably grant Fanhua Group Company an exclusive option to purchase all of his equity interests in Xinbao
Investment, when and to the extent permitted by PRC law. The purchase price will be the minimum price permitted
under applicable PRC law.
Fanhua RONS Technologies. Mr. Ge entered into an exclusive purchase option agreement on July 1, 2022
to irrevocably grant Fanlian Investment an exclusive option to purchase all of his equity interests in Fanhua RONS
Technologies, when and to the extent permitted by PRC law. The purchase price will be the minimum price
permitted under applicable PRC law.
Agreements that Transfer Economic Benefits to Us
Technology Consulting and Service Agreement. Pursuant to technology service agreements between (i)
Fanhua Group Company, and (ii) Xinbao Investment and each of its subsidiaries, Fanhua Group Company agreed
to provide Xinbao and its subsidiaries with training services and consulting and other services relating to IT
platform and internal control compliance. In exchange, Xinbao and its subsidiaries agree to pay a quarterly fee
calculated primarily based on a percentage of their revenues, which is currently waved until further written notice
by Fanhua Group Company. Each of these agreements has a term of one year and will be automatically renewed
for one-year term.
Consulting and Service Agreement. Pursuant to the consulting and service agreements entered into between
(i) Fanlian Investment, and (ii) Fanhua RONS Technologies and each of its subsidiaries, Fanlian Investment
agreed to provide financial and tax consulting services to Fanhua RONS Technologies and each of its subsidiaries
in exchange for fees payable quarterly calculated as a percentage of revenues of Fanhua RONS Technologies and
each of its subsidiaries. Each of these agreements has an initial term of one year and will be automatically renewed
for one-year term. The fee is currently waved by Fanlian Investment until further written notice by Fanlian
Investment.
Because of our contractual arrangements with Xinbao Investment, Fanhua RONS Technologies and their
subsidiaries and their individual nominee shareholders, we are the primary beneficiary of Xinbao Investment and
Fanhua RONS Technologies and their subsidiaries and we consolidate them into our consolidated financial
statements. For the year ended December 31, 2022, aggregate revenues derived from these consolidated VIEs
amounted to 5.1% of our total consolidated net revenues, based on our corporate structure as of December 31,
2022. As of December 31, 2022, the assets of our consolidated VIEs accounted for an aggregate of 3.3% of our
consolidated total assets.
The cash flows that have occurred between our subsidiaries and our consolidated VIEs are summarized as
the following:
The cash flows occurred between our subsidiaries and the consolidated VIEs included the following: (1) cash
received by the VIEs from our subsidiaries as inter-company advances amounted to RMB43.0 million for the year
ended December 31, 2022; and (2) commissions received offset by technology services paid by our subsidiaries
to the VIEs amounted to RMB94.9 million for the year ended December 31, 2022.
Due to the restriction on foreign investment in the internet industry, we expect to continue to rely on
contractual arrangements to control and receive economic benefits from our current consolidated VIEs.
In the opinion of Hai Run Law Firm, our PRC legal counsel:
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● both the direct and indirect controlling equity ownership structures of our subsidiaries and our
●
consolidated VIEs in China have complied with all existing PRC laws and regulations
the contractual arrangements among our PRC subsidiaries, Xinbao Investment, Fanhua RONS
Technologies, their subsidiaries, and their individual shareholders governed by PRC law are valid,
binding and enforceable, and will not result in any violation of PRC laws or regulations currently in
effect; and
●
the business operations of our PRC subsidiaries and our consolidated VIEs 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, such contractual arrangements may not be as effective
as direct ownership in providing operational control. 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 agreements establishing the structure for operating
our online operations do 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—Fanhua Inc. is a Cayman
Islands holding company operating in China primarily through its subsidiaries and a small part of its business
through contractual arrangements with Xinbao Investment and Fanhua RONS Technologies. Investors in the
ADSs thus are not purchasing, and may never directly hold, all equity interests in the consolidated VIEs. There
are substantial uncertainties regarding the interpretation and application of current and future PRC laws,
regulations, and rules relating to such agreements that establish the VIE structure for our consolidated VIEs’
operations in China, including potential future actions by the PRC government, which could affect the
enforceability of our contractual arrangements with Xinbao Investment and Fanhua RONS Technologies and,
consequently, adversely affect the financial condition and results of operations of Fanhua Inc. If the PRC
government finds such agreements non-compliant with relevant PRC laws, regulations, and rules, or if these laws,
regulations, and rules or the interpretation thereof change in the future, we could be subject to severe penalties or
be forced to relinquish part of our interests in Xinbao Investment and Fanhua RONS Technologies or forfeit our
rights under the contractual arrangements.” 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 headquarter is located in Guangzhou, China, where we leased approximately 2,828.8 square meters of
office space as of December 31, 2022. Office space leased by our subsidiaries and consolidated VIEs, including
certain space used and paid by sales teams, was approximately 162,087.9 square meters as of December 31, 2022.
In 2022, our total rental expenses were RMB98.8 million (US$14.3million).
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 contain 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 2020 items and year-over-year comparisons
between 2021 and 2020 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, 2021, that was filed
with the Securities and Exchange Commission on April 29, 2022.
A. Operating Results
Factors Affecting Our Results of Operations
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As an insurance intermediary in China, our financial condition and results of operations are affected by a
variety of factors, including:
● business relationship with important insurance company partners;
●
total premium payments to Chinese insurance companies;
●
the extent to which insurance companies in the PRC outsource the distribution of their products and
claims adjusting functions;
● premium rate levels and commission and fee rates;
●
the size and productivity of our sales force;
●
commission rates for individual sales agents;
● product and service mix;
●
share-based compensation expenses;
●
seasonality; and
●
Impact on our business and financial results due to the COVID-19 pandemic;
● Successful implementation of our professionalization, digitalization and open platform strategy
Business Relationship with Important Insurance Company Partners
We derive significant revenue from our important insurance company partners. Among these top five of our
insurance company partners, Sinatay accounted for 19.6% of our total net revenues in 2022. 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 2012 and 2022, total
insurance premiums increased from RMB1.5 trillion to RMB4.9 trillion, representing a compound annual growth
rate, or CAGR, of 12.3%, according to the CBIRC. Although the growth has slowed down significantly from 2020
to 2022 due to economic uncertainty, the impact of COVID-19, tightening regulation and industry transformation,
among others, we believe that certain macroeconomic and demographic factors, such as increasing per capita GDP,
and an aging population and people’s increasing awareness of insurance protection, have contributed to and will
continue to drive the growth of the Chinese insurance industry in the long term.
We derive our revenue primarily from commissions and fees paid by insurance companies, typically
calculated as a percentage of premiums paid by our customers to the insurance companies. Accordingly, industry-
wide premium growth will have a positive impact on us. Any downturn in the Chinese insurance industry, whether
caused by a general slowdown of the PRC economy or otherwise, may adversely affect our financial condition
and results of operations.
The Extent to Which Insurance Companies in the PRC Outsource the Distribution of their Products and
Claims Adjusting Functions
Historically, insurance companies in the PRC have relied primarily on their exclusive individual sales agents
and direct sales force to sell their products. However, in recent years, as a result of increased competition,
consumers’ demand for more choices and regulatory focus on long term protection-oriented life insurance
products, more and more insurance companies gradually expanded their distribution channels to include insurance
intermediaries such as commercial banks, postal offices, professional insurance agencies and professional
insurance brokerages. In addition, because of the increasingly high cost of establishing and maintaining
distribution networks of their own, more and more medium-size insurance companies have chosen to rely
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primarily on insurance intermediaries to distribute their products while they focus on other aspects of their
business.
As insurance companies in the PRC become more accustomed to outsourcing the distribution of their products
to insurance intermediaries, they may allow insurance intermediaries to distribute a wider variety of insurance
products and may provide more monetary incentives to more productive and effective insurance intermediaries.
These and other similar measures designed to boost sales through insurance intermediaries can have a positive
impact on our financial condition and results of operations. Similarly, as competition intensifies and the insurance
market becomes more mature in China, we expect that more insurance companies will choose to outsource claims
adjusting functions to professional service providers such as our affiliated claims adjusting firms while they focus
on the core aspects of their business, including product development and asset and risk management.
Premium Rate Levels and Commission and Fee Rates
Because the commissions and fees we receive from insurance companies for the distribution of insurance
products are generally calculated as a percentage of premiums paid by our customers to the insurance companies,
our revenue and results of operations are affected by premium rate levels and commission and fee rates. Premium
rate levels and commission and fee rates can change based on the prevailing economic conditions, competitive
and regulatory landscape, and other factors that affect insurance companies. These other factors include the ability
of insurance companies to place new business, underwriting and non-underwriting profits of insurance companies,
consumer demand for insurance products, the availability of comparable products from other insurance companies
at a lower cost, and the tax deductibility of commissions and fees. In general, we can negotiate for better rates as
an incentive for generating a larger volume of business.
Since China’s entry into the WTO in December 2001, competition among insurance companies has
intensified as a result of a significant increase in the number of insurance companies and the existing insurance
companies’ expansion into new geographic markets. This competition has led to a gradual increase in the
commission and fee rates offered to insurance intermediaries, and such an increase has had a positive impact on
our results of operations.
The Size and Productivity of Our Sales Force
As a distributor of insurance products, we generate revenue primarily through our sales force who are
individual sales agents in our distribution and service network. Some entrepreneurial management staff or senior
sales agents of major insurance companies in China have chosen to leave their employers or principals and become
independent agents. We refer to these independent agents as “entrepreneurial agents.” An entrepreneurial agent is
usually able to assemble and lead a team of sales agents. We have been actively recruiting and will continue to
recruit entrepreneurial agents to join our distribution and service network as our sales agents. Entrepreneurial
agents have been instrumental to the development of our life insurance business. The size of our sales force, its
productivity, as measured by the average number of insurance products sold per performing sales agent that refers
to a sales agent who has sold at least one insurance policy, the average premium per product sold and the average
premiums generated per performing sales agent during any specified period, directly affect our revenue and results
of operations. In recent years, as the result of our efforts to streamline our sales force with more focus on better
performing sales agents as well as the adverse impact of the COVID-19 on the sales activities of our sales agents,
the size of our sales force has decreased substantially which had adversely affected our financial results. However,
we have embarked on a series of strategic initiatives to professionalize our sales force and recruit more productive
agents, which we expect to bring positive results on the number of our performing agents and their productivity
and as a result have positive impact on our financial performance within the next few years.
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
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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.
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 three to 25 years. For each of
such policies that we distribute, insurance companies will pay us a first-year commission and fee based on a
percentage of the first-year premiums, and subsequent commissions and fees based on smaller percentages of the
renewal premiums paid by the insured throughout the renewal term of the policy. Therefore, once we distribute a
life and health insurance policy with a periodic payment schedule, it can bring us a steady flow of commission
and fee revenue throughout the renewal term as long as the insured fulfills his or her premium payment
commitment and continuously renews the policy.
Because of the recurring nature of commissions derived from long term life and health insurance business,
and the higher gross margin of our life insurance business than that of our property and casualty insurance business,
we intend to continue our focus on distributing more long-term life and health insurance products, which we
believe will have a positive impact on our revenue and gross margin in the long term.
The property and casualty insurance policies we distribute primarily consist of individual accident insurance,
indemnity medical insurance, travel insurance, and homeowner insurance that we distribute through Baoxian.com.
Because the insurance products that we distribute through Baoxian.com are mostly underwritten by property and
casualty insurance companies, we classify them as property and casualty insurance products. These property and
casualty insurance policies we distribute are typically for a one-year term, with a single premium payable at the
beginning of the term. As a result, the insured has to purchase new policies through us every year. Accordingly,
we receive a single commission or fee for each property and casualty policy we distribute.
Claims Adjusting Segment
The fees we receive for our claims adjusting services are calculated based on the types of insurance products
involved. For services provided in connection with property and casualty insurance (other than marine cargo
insurance and automobile insurance), our fees are calculated as a percentage of the recovered amount from
insurance companies plus travel expenses. For services provided in connection with marine cargo insurance, our
fees are charged primarily on an hourly basis and, in some cases, as a percentage of the amount recovered from
insurance companies. For services provided in connection with auto insurance, individual accident insurance and
health insurance, our fees are generally fixed and the amounts collected are based on the types of services provided.
In some cases, our fees are charged based on the number of claims adjustors involved in providing the services.
We pay our in-house claims adjustors a base salary plus a commission calculated based on a small percentage of
the service fees we receive from insurance companies or the insured. The claims adjusting business has become
and likely will continue to be a steady source of our net revenues. The operating margin of our claims adjusting
segment are generally lower than those of our insurance agency segment although its gross margin is relatively
higher. We expect 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.
See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Factors Affecting Our
Results of Operations——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 incentives to employees, directors and consultants and promote the success of
our business, we adopted share incentive plans in 2007 and 2022. 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,
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consisting of certain key employees and independent sales agent team leaders, to invest in the Company by
purchasing a total of 280,000,000 ordinary shares of the Company, representing 14 million of the Company’s
ADSs at the subscription price of US$27.38 per ADS. Accordingly, we recognized share-based compensation
expenses in 2019. In 2020, RMB0.4 million of cumulative cost recognized in prior periods related to the 521 Plan
was reversed as the performance target was not probable to be met. In December 2020, the 521 Plan was canceled
without any replacement awards. In 2021, no share-based compensation expenses were incurred. On August 12,
2022, our board of directors adopted a new share incentive plan under which we have reserved 161,143,768
ordinary shares for issuance, which was approximately 15% of our outstanding ordinary shares as of June 30,
2022. Simultaneously, our board of directors approved the grant of options to purchase an aggregate of 4,000,000
ordinary shares to independent directors pursuant to the 2022 Share Incentive Plan (the “2022 Option 1”).
Accordingly, we recognized share-based compensation expenses of RMB461,000 in 2022. In February 2023, our
board of directors approved the grant options to purchase an aggregate of 13,680,000 ordinary shares to certain
top agents. See “Item 6. Directors, Senior Management and Employees—B. Compensation—Share Incentives—
2022 Share Incentive Plan.” We expect share-based compensation expenses to be a significant component of our
operating expenses in the near future.
Seasonality
Our quarterly results of operations are affected by seasonal variations caused by business mix, insurance
companies’ business practices and consumer demand. For life insurance business, much of the jumpstart sales
activities of life insurance companies occur during the first quarter of a year, while business activities slow down
in the fourth quarter of a year as life insurance companies focus on the preparation for the jumpstart sales season
of the coming year by preparing to launch new products, making marketing plans and organizing training. During
the jumpstart sales season, life insurance companies will offer incentives that are more attractive to insurance
intermediaries and sales agents to boost sales. Accordingly, our commission and fee revenue derived from life
insurance business is generally the highest in the first quarter of a year and the lowest in the fourth quarter of a
year. For property and casualty insurance products that we distribute on Baoxian.com, there was no obvious
seasonal fluctuation.
Impact on our business and financial results due to the COVID-19 pandemic
In 2022, the PRC government adopted a dynamic zero-case policy to contain the periodic resurgences of the
COVID-19 pandemic which has largely been effective. However, our business was negatively impacted, primarily
because (i) consumers’ consumption confidence for non-necessity products or services was adversely affected due
to increased uncertainty in China’s economic outlook; and (ii) offline activities related to customer engagement,
agent recruitment and training were disrupted from time to time as a result of the social-distancing measures
imposed in regions where there were new coronavirus cases.
In addition, the business operation of our non-consolidated affiliated investees has also been adversely
impacted by the COVID-19 outbreak which had affected the fair value of our investment in affiliates.
Successful implementation of our professionalization, digitalization and open platform strategy
In late 2020, we launched new strategic initiatives to upgrade our sales organization by developing high-
caliber, productive and professional insurance advisor teams in economically developed cities in China. We also
intend to build an integrated digital platform utilizing artificial intelligence, big data and cloud computing to
optimize the use of data to provide the most appropriate products for existing and potential customers and increase
agent productivity. In addition, we intend to build an open platform to share our advantages in technology, system,
contractual relationship, and nationwide network with various industry participants to help them monetize their
existing customer resources and to strengthen our value proposition to the market. We expect these new strategic
initiatives to be new engines to drive our long-term growth. There is no assurance that we will be able to implement
important strategic initiatives in accordance with our expectations, which may result in an adverse impact on our
business and financial results.
Key Performance Indicators
As of December 31, 2021 and 2022, we operated two segments: (1) the insurance agency segment, which
mainly consisted of providing agency services for distributing life insurance products and P&C insurance products
on behalf of insurance companies, and (2) the claims adjusting segment, which consists of providing pre-
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underwriting survey services, claims adjusting services, disposal of residual value services, loading and unloading
supervision services, and consulting services.
Operating segments are defined as components of an enterprise about which separate financial information is
available and evaluated regularly by our chief operating decision maker in deciding how to allocate resources and
in assessing performance.
Net Revenues
Our revenues are net of PRC tax surcharges and value-added tax incurred. In 2021 and 2022, we generated
net revenues of RMB3,271.1 million (US$513.3 million) and RMB2,781.6 million (US$403.3 million),
respectively. We derive net revenues from the following sources:
●
Insurance agency segment: commissions paid by insurance companies for the distribution of (i) life and
health insurance products, and (ii) commoditized property and casualty products sold through
Baoxian.com, which accounted for 86.0% and 85.4% of our net revenues for 2021 and 2022,
respectively;
● Claims adjusting segment: commissions and fees primarily paid by the insurance companies for the
provision of claims adjusting services, which accounted for 14.0% and 14.6% of our net revenues for
2021 and 2022, respectively;
The following table sets forth our total net revenues earned from each of our reporting segments both in
absolute amounts and as percentages of total net revenues, for the periods indicated:
Agency
Life insurance business
P&C insurance business
Claims adjusting
Total net revenues
Year Ended December 31,
2021
RMB
%
RMB
2022
US$
%
(in thousands except percentages)
2,811,936
2,679,720
132,216
459,178
3,271,114
86.0 2,376,851 344,611
81.9 2,237,312 324,380
20,231
4.1 139,539
14.0 404,763
58,685
100.0 2,781,614 403,296
85.4
80.4
5.0
14.6
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
2021 to 2022 in both absolute amount and as a percentage of our total net revenues.
Net revenues generated from distribution of long-term life and health insurance products have become our
primary source of revenue. We began distributing individual life and health insurance products in 2006. Net
revenues generated from distribution of life and health insurance products decreased from 2021 to 2022, both in
absolute amounts and as a percentage of our net revenues primarily due to the impact of COVID-19. The decrease
was mainly due to (i) high base in the first quarter of 2021 as a result of the strong sales of critical illness products
prior to the transition to the new critical illness definition framework and (ii) the decrease in the weighted average
renewal commission rate of renewal premium collected, and to a lesser extent, due to the change in the product
mix. We expect our life insurance business to grow and bring in significant revenue that will continue to represent
a high percentage of our total net revenues in the next several years. We believe this growth will be driven by a
number of factors including stronger demand for traditional life and health insurance products as a result of the
aging population and the Chinese consumers’ increasing awareness of the benefits of insurance.
Net revenues generated from distribution of property and casualty insurance products increased from 2021 to
2022 in absolute amounts of our net revenues, primarily due to the contribution from a newly acquired brokerage
firm. We expect our net revenues to be derived from distribution of property and casualty insurance products to
remain stable in 2022.
We began providing claims adjusting services in 2008. Net revenues from our claims adjusting segment
decreased from 2021 to 2022, primarily due to the impact of COVID-19. 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.
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The commissions and fees we receive from the distribution of insurance products are based on a percentage
of the premiums paid by the insured. Commission and fee rates generally depend on the type of insurance products,
the particular insurance company and the region in which the insurance products are sold. We typically receive
payment of the commissions and fees from insurance companies for insurance products on a monthly basis. Some
of the fees are paid to us annually or semi-annually in the form of additional performance bonuses after we achieve
specified premium volume or policy renewal goals as agreed upon between the insurance companies and us.
We are compensated primarily by insurance companies for our claims adjusting services. The fees we receive
for our claims adjusting services depend on the types of insurance products involved. For services provided in
connection with marine cargo insurance, our fees are charged primarily on an hourly basis and, in some cases, as
a percentage of the amount recovered from insurance companies. For claims adjusting services related to auto
insurance, individual accident insurance and health insurance, our fees are generally fixed on a per claim basis, or
in some cases, on a per head basis. These fees are typically paid to us on a quarterly basis. For services provided
in connection with other property and casualty insurance, our fees are calculated as a percentage of the recovered
amount from insurance companies plus travel expenses. We typically receive payment for these fees on a semi-
annual or annual basis.
Operating Costs and Expenses
Our operating costs and expenses consist of costs incurred in connection with the distribution of insurance
products and the provision of claims adjusting services, selling expenses and general and administrative expenses.
The following table sets forth the components of our operating costs and expenses, both in absolute amounts and
as percentages of our net revenues, for the periods indicated.
Year Ended December 31,
2021
RMB
%
RMB
2022
US$
%
(in thousands except percentages)
3,271,114
(2,115,167 )
(306,463 )
(547,579 )
(2,969,209 )
100.0 2,781,614 403,296
(64.7 ) (1,795,603 ) (260,338 )
(39,539 )
(9.4 )
(16.7 )
(78,964 )
(90.8 ) (2,612,939 ) (378,841 )
(272,706 )
(544,630 )
100.0
(64.6 )
(9.8 )
(19.6 )
(94.0 )
Total net revenues
Operating costs
Selling expenses
General and administrative expenses
Total operating costs and expenses
Operating Costs
We incur costs primarily in connection with the distributions of insurance products and the provision of claims
adjusting services. Our operating costs decreased from 2021 to 2022, which was in line with the decrease in
revenue during the same period. We rely mainly on individual sales agents and to a much lesser degree, on
Baoxian.com for the distributions of insurance products. For claims adjusting services, we rely mainly on our in-
house claims adjustors. Operating costs incurred as a percentage of net revenues decreased from 2021 to 2022,
primarily due to the slower growth of our renewal life insurance business and the decrease in volume-based
commission from new life insurance business. We anticipate that our operating costs as a percentage of our total
net revenues to remain stable.
Selling Expenses
Our selling expenses primarily consist of:
●
salaries and employment benefits for employees who work in back office below the provincial
management level;
● office rental, telecommunications and office supply expenses incurred in connection with sales activities;
and
●
advertising and marketing expenses.
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Selling expenses in 2022 were RMB272.7 million (US$39.5 million) , representing a decrease of 11.0% from
RMB306.5 million in 2021. The decrease was due to decreased sales events and rental costs of our sales outlets,
partially offset by increased headcount in our Yuntong branches. We expect that our selling expenses will increase
as we grow in size, and we also intend to spend more on marketing and advertising to enhance our brand
recognition and promote our online platforms.
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.
General and administrative expenses were RMB544.6 million (US$79.0 million) for 2022, representing a
decrease of 0.5% from RMB547.6 million in 2021. The decrease was mainly due to cost savings from office
expenses, partially offset by increased headcount in our IT center. We expect that our general and administrative
expenses will increase as we hire additional administrative personnel, pay higher labor costs and incur additional
costs in connection with the expansion of our business, and our efforts to invest in digital capabilities and develop
our online insurance platforms.
Share-based compensation expenses
In 2021, no share-based compensation expenses were incurred. On August 12, 2022, our board of directors
adopted a new share incentive plan under which we have reserved 161,143,768 ordinary shares for issuance, which
was approximately 15% of our outstanding ordinary shares as of June 30, 2022. Simultaneously, our board of
directors approved the grant of options to purchase an aggregate of 4,000,000 ordinary shares to independent
directors pursuant to the 2022 Share Incentive Plan (the “2022 Option 1”). Accordingly, we recognized share-
based compensation expenses of RMB0.5 million in 2022. In February 2023, our board of directors approved the
grant options to purchase an aggregate of 13,680,000 ordinary shares to certain top agents. See “Item 6. Directors,
Senior Management and Employees—B. Compensation—Share Incentives—2022 Share Incentive Plan.” We
expect share-based compensation expenses to be a significant component of our operating expenses in the near
future.
Taxation
We and each of our subsidiaries file separate income tax returns.
The Cayman Islands, the British Virgin Islands and Hong Kong
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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, 2021 and 2022. Payment of
dividends is not subject to withholding tax in Hong Kong.
PRC
EIT
According to the PRC Enterprise Income Tax Law, which became effective on January 1, 2008 and was
subsequently amended on March 16, 2007, February 24, 2017 and December 29, 2018, as further clarified by
subsequent tax regulations implementing the EIT law, foreign invested enterprises and domestic enterprises are
subject to enterprise income tax, or EIT, at a uniform rate of 25%.
Pursuant to the relevant laws and regulations in the PRC, Shenzhen Huazhong United Technology Co., Ltd.,
or Shenzhen Huazhong, our wholly-owned subsidiary, was recognized as a software company and thus exempted
from PRC Income Tax for two years starting from its first profit-making year, followed by a 50% reduction for
the next three years. For Shenzhen Huazhong, 2017 was the first profit-making year and accordingly it has made
a 12.5% tax provision for its profits for the years ended December 31, 2021. Its tax holiday expired in 2021.
Pursuant to the Circular on Issues Regarding Tax-related Preferential Policies for Further Implementation of
Western Development Strategy jointly issued by the State Ministry of Finance, General Administration of
Customs, China and State Administration for Taxation, enterprises located in the western China regions that fall
into the encouraged industries are entitled to 15% EIT preferential tax treatment from January 1, 2011 to December
31, 2020. The preferential tax treatment is extended to December 31, 2030, pursuant to No. 23 Announcement
Concerning the Extension of the EIT Policies for Enterprises Located in Western China issued by the Ministry of
Finance on April 23, 2020. In September 2018, our wholly-owned subsidiary, Fanhua Lianxing Insurance Sales
Co., Ltd. (“Lianxing”), which is the holding vehicle of our life insurance operations, was relocated to Tianfu New
Area, Sichuan province, PRC. Subsequently, Lianxing will enjoy 15% EIT tax rate instead of a unified 25% from
September 1, 2018 to December 31, 2030. Tibet Zhuli Investment Co. Ltd. (“Tibet Zhuli”), our wholly-owned
subsidiary, was entitled to a preferential tax rate of 9% for the period from 2015 to 2020, and 15% for 2021 as it
was established with approval in Tibet, PRC, before January 1, 2018. Tibet Zhuli was not entitled to the tax
holiday in 2022.
Pursuant to the Circular on Inclusive Tax Relief Policies for Small Low-Profit Enterprises (“SLPEs”), or
Circular [2019] No. 13, jointly issued by the State Ministry of Finance and State Administration for Taxation in
January 2019, an SLPE is entitled to a preferential tax rate of 20% with a 75% reduction on its annual taxable
income for the portion not exceeding RMB1 million and a 50% reduction for the portion between RMB1 million
to RMB3 million. Further to the Circular [2019] No. 13, Announcement on Preferential Tax Policies for SLPEs
and Individually-owned Businesses (“IOBs”) was jointly issued by the State Ministry of Finance and State
Administration for Taxation in April 2021, which provides SLPEs and IOBs an additional 50% reduction on
annual taxable income for the portion not exceeding RMB1 million. Pursuant to the Circular on Inclusive Tax
Relief Policies for Small Low-Profit Enterprises (“SLPEs”), or Circular [2022] No. 13, jointly issued by the State
Ministry of Finance and State Administration for Taxation in March 2022, an SLPE is entitled to a preferential
tax rate of 20% with a 75% reduction on its annual taxable income for the portion between RMB1 million to
RMB3 million. Accordingly, Shenzhen Baowang E-commerce Co., Ltd., the wholly-owned subsidiary of one of
the VIEs enjoyed a preferential tax rate of 20% with a 75% reduction on their annual taxable income from January
1, 2019 to December 31, 2022. Shenzhen Fanhua Training Co., Ltd. a subsidiary of our claims adjusting segment,
enjoy a preferential tax rate of 20% with 75% on their annual taxable income from January 1, 2019 to December
31, 2020 and an 87.5% reduction on their annual taxable income from January 1, 2021 to December 31, 2022.
Shanghai Fanhua Teamhead Insurance Surveyors & Loss Adjustors Co., Ltd., enjoyed a preferential tax rate of
20% with a 87.5% reduction on its annual taxable income for the portion not exceeding RMB1 million and a 50%
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reduction for the portion between RMB1 million to RMB3 million from January 1 2020 to December 31, 2021,
and enjoyed a preferential tax rate of 20% with a 87.5% reduction on its annual taxable income for the portion not
exceeding RMB1 million and a 75% reduction for the portion between RMB1 million to RMB3 million for the
fiscal year of 2022. Suzhou Feibao Smart Service Consulting Co., Ltd. (previously known as Suzhou Junzhou
Healthcare Management Co., Ltd.) is currently entitled to a tax exemption as it has not yet achieved profitability.
Business Tax and VAT
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.
Results of Operations
The following table sets forth our net revenues, operating costs and expenses and income from operations by
reportable segments for the periods indicated.
We are currently operating under two reporting operating segments: (1) insurance agency, and (2) claims
adjusting.
For the Year Ended December 31,
2021 to
2022
Percentage
Change
2022
%
RMB
US$
2021
RMB
(in thousands except percentages)
2,811,936
2,679,720
132,216
459,178
3,271,114
(15.5 ) 2,376,851 344,611
(16.5 ) 2,237,312 324,380
5.5 139,539
20,231
58,685
(11.9 ) 404,763
(15.0 ) 2,781,614 403,296
(1,835,825 )
(1,742,640 )
(93,185 )
(279,342 )
(2,115,167 )
(306,463 )
(547,579 )
(16.8 ) (1,527,572 ) (221,477 )
(17.6 ) (1,436,606 ) (208,288 )
(13,189 )
(2.4 )
(90,966 )
(4.0 ) (268,031 )
(38,861 )
(15.1 ) (1,795,603 ) (260,338 )
(39,539 )
(11.0 ) (272,706 )
(78,964 )
(0.5 ) (544,630 )
- 84 -
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 from operations
Insurance agency
Claims adjusting
Other
Income from operations
Other income, net:
Investment income
Interest income
Others, net
Income from operations before income taxes and share
(2,969,209 )
393,492
16,829
(108,416 )
301,905
(12.0 ) (2,612,939 ) (378,841 )
(21.5 ) 308,657
N/A
(11,856 )
18.6 (128,126 )
(44.1 ) 168,675
44,751
(1,720 )
(18,576 )
24,455
32,898
2,971
33,314
(45.9 )
360.2
N/A
17,809
13,674
(3,823 )
2,582
1,983
(554 )
of income and impairment of affiliates, net
Income tax expense
Share of income and impairment of affiliates, net
Net income
Less: Net income attributable to the noncontrolling
interests
Net income attributable to the Company’s
shareholders
371,088
(90,574 )
(20,573 )
259,941
(47.1 ) 196,335
(41,016 )
(54.7 )
(69,596 )
238.3
85,723
(67.0 )
28,466
(5,947 )
(10,090 )
12,429
8,952
N/A
(14,549 )
(2,109 )
250,989
(60.0 ) 100,272
14,538
- 85 -
Year ended December 31, 2022 Compared to Year Ended December 31, 2021
Net Revenues
Our total net revenues decreased by 15.0% from RMB3, 271.1 million in 2021 to RMB2,781.6 million
(US$403.3 million) in 2022.
● Net revenues from our insurance agency segment decreased by 15.5% from RMB2,811.9 million in 2021
to RMB2,376.8 million (US$344.6 million) in 2022. The decrease was primarily due to a decline in net
revenues derived from life insurance business, from RMB2,679.7 million in 2021 to RMB2,237.3 million
(US$324.4 million) in 2022, while net revenues derived from the P&C insurance business were
RMB139.5 million (US$20.2million) for 2022, which remained relatively stable compared with
RMB132.2 million in 2021.
● The decrease in net revenues generated from the life insurance agency business was partially offset by
the revenue recognized related to variable consideration estimates amounting to RMB245.7 million.
Excluding the estimated amount, the decrease in net revenues was mainly due to changes in product mix,
despite an increase in total life insurance GWP. The decrease was mainly due to (i) high base in the first
quarter of 2021 as a result of the strong sales of critical illness products prior to the transition to the new
critical illness definition framework and (ii) the decrease in the weighted average renewal commission
rate of renewal premium collected, and to a lesser extent, due to the change in the product mix. In 2022,
total life insurance GWP increased by 10.2% year-over-year to RMB12,409.0 million, of which FYP
increased by 2.0% year-over-year to RMB 2,556.9 million and renewal premiums increased by 12.6%
year-over-year to RMB9,852.1 million.
Revenues for the P&C insurance business were mainly derived from commissions generated for internet-
based insurance products sold on Baowang, including medical insurance, accident insurance, travel
insurance and homeowner insurance products. Net revenues generated from the P&C insurance business
accounted for 5.0% of our total net revenues in 2022.
● Net revenues from our claims adjusting segment decreased by 11.8% from RMB459.2 million in 2021
to RMB404.8 million (US$58.7 million) for 2022. The decrease was due to the disruption to our claims
adjusting business as a result of the lockdowns in response to the COVID-19 outbreaks in multiple areas
in China and contraction of our medical-insurance related claims adjusting business. Revenues
generated from the claims adjusting business accounted for 14.6% of our total net revenues in 2022.
Operating Costs and Expenses
Operating costs and expenses decreased by 12.0% from RMB2,969.2 million in 2021 to RMB2,612.9 million
(US$378.8 million)for 2022.
Operating Costs. Our operating costs decreased by 15.1% from RMB2,115.2 million in 2021 to RMB1,795.6
million (US$260.3 million) in 2022, primarily because of the decrease in operating cost in life insurance business.
● Operating costs for our insurance agency segment decreased by 16.8% from RMB1,835.8 million in
2021 to RMB1,527.6 million (US$221.5 million) in 2022, primarily due to a decrease of 17.6% in costs
for the life insurance agency business from RMB1,742.6 million in 2021 to RMB1,436.6 million
(US$208.3 million) in 2022, which was mainly due to decline in revenue generated from our life
business, and a decrease of 2.4% in costs for the property and casualty insurance agency business from
RMB93.2 million in 2021 to RMB91.0 million (US$13.2 million) in 2022, 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 decreased by 4.0% from RMB279.3 million in 2021 to
RMB268.0 million (US$38.9 million) in 2022, largely in line with the decrease in costs for the claims
adjusting business.
- 86 -
Selling Expenses. Our selling expenses decreased by 11.0% from RMB306.5 million in 2021 to RMB272.7
million (US$39.5 million) in 2022, primarily attributable to decreased sales events and rental costs of our sales
outlets, partially offset by increased headcount in our Yuntong branches.
General and Administrative Expenses. Our general and administrative expenses decreased by 0.5% from
RMB547.6 million in 2021 to RMB544.6 million (US$79.0 million) in 2022, primarily due to the cost savings
from office expenses, partially offset by increased headcount in our IT center
Income from Operations
As a result of the foregoing factors, we recorded an operating income of RMB168.7 million (US$24.5 million)
for 2022, decreased by 44.1% from RMB301.9 million in 2021.
●
Income from operations for our agency insurance segment decreased by 21.6% from RMB393.5
million in 2021 to RMB308.7 million (US$44.8 million) in 2022, which was primarily due to the
decrease of life insurance business.
● Operations loss for our claims adjusting segment was RMB11.9 million (US$1.7million) in 2022, as
compared to operating income of RMB16.8 million in 2021.
● Other loss from operations represented operating loss incurred by the headquarters, which was not
allocated to each business segment. Operating loss incurred by the headquarters increased by 18.2% from
RMB108.4million in 2021 to RMB128.1 million (US$18.6million) in 2022, mainly due to increased
expenditures for the execution of the Professionalization, Digitalization and Open Platform strategy.
Other Income
Investment Income. Investment income represents income received from short-term investments in interbank
deposits. Our investment income decreased by 45.9% from RMB32.9 million in 2021 to RMB17.8 million
(US$2.6 million) in 2022. The decrease in yields from short-term investments in financial products was mainly
due to decrease in investable cash primarily due to dividend payments and share buyback.
Interest Income. Our interest income increased by from RMB3.0 million in 2021 to RMB13.7million (US$2.0
million) in 2022.
Income Tax Expense
Our income tax expense decreased by 54.7% from RMB90.6 million in 2021 to RMB41.0 million (US$5.9
million) in 2022. The effective tax rate for 2022 was 20.9% compared with 24.4% in 2021.
Share of Income of Affiliates, net of Impairment
Our share of income of affiliates, net of impairment was a loss of RMB69.6 million(US$10.1 million) for
2022, as compared to the share of income of affiliates, net of impairment of a loss of RMB20.6 million in 2021.
The share of income and impairment of affiliates included (i) an other-than-temporary impairment loss of
RMB78.3 million (US$11.3 million) on investment in CNFinance, reflecting a write-down to the fair value of the
investment as measured by its closing market price on March 31, 2022, compared to the impairment loss of
RMB29.3 million in 2021, and (ii) share of income from CNFinance of RMB11.3million (US$1.6 million) for
2022, compared to share of income from CNFinance of RMB12.0 million in 2021.
Net Income Attributable to the Non-controlling Interests
The net loss attributable to the non-controlling interests was RMB14.5 million (US$2.1 million) in 2022, as
compared to the net income attributable to the non-controlling interests of RMB9.0 million in 2021, primarily due
to the decrease in profits from our subsidiaries operating claims adjusting business in which we currently own
44.7% equity interests.
- 87 -
Net Income Attributable to the Company’s Shareholders
As a result of the foregoing factors, our net income attributable to our shareholders decreased by 60.0% from
RMB251.0 million in 2021 to RMB100.3 million (US$14.5 million) in 2022.
Foreign Currency
We have foreign currency bank deposits which are primarily denominated in U.S. dollars. The exchange rate
between U.S. dollar and RMB has declined from an average of RMB8.2264 per U.S. dollar in July 2005 to
RMB6.8972 per U.S. dollar in December 2022. The fluctuation of the exchange rate between the RMB and U.S.
dollar and HK dollar resulted in a foreign currency translation gain of RMB3.7 million (US$0.5 million) in 2022,
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, 2022, we had RMB567.5 million (US$82.3 million) in cash and cash equivalents, and RMB347.8 million
(US$50.4 million) in short-term investments. Our cash and cash equivalents consist of cash on hand and bank
deposits and our short term investments consisting of short-term, highly liquid investments that are readily
convertible to known amounts of cash, and have an insignificant risk of changes in value related to changes in
interest rates. Our principal uses of cash have been to fund dividend distribution, maintenance and development
of online and digital platforms including Lan Zhanggui, Baoxian.com, eHuzhu, Fanhua RONS DOP, Fanhua
RONS Guanjia, Fanhua WeCom, investment to digitalize our mid-office and back-office functions, establishment
of new branches and sales outlets, working capital requirements, automobiles and office equipment purchases,
office renovation and rental deposits.
We expect to require cash to fund our ongoing business needs, particularly acquisitions of quality insurance
intermediary companies which we expect to fund in stock payment and cash to a lesser degree, further expansion
of our distribution and service network with the focus on developing a more professional sales force in major
cities and the development of digital capabilities. We also intend to spend more on marketing and advertising
to enhance our brand recognition and promote our online platforms.
We believe that our current cash and cash equivalents and anticipated cash flow from operations will be
sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures,
for at least the next 12 months. We may, however, require additional cash due to changing business conditions or
other future developments, including any investments or acquisitions we may decide to pursue. If our existing
cash is insufficient to meet our requirements, we may seek to sell additional equity securities, debt securities or
borrow from lending institutions. Financing may be unavailable in the amounts we need or on terms acceptable
to us, if at all. The sale of additional equity securities, including convertible debt securities, would dilute our
earnings per share. The incurrence of debt would divert cash for working capital and capital expenditures to service
debt obligations and could result in operating and financial covenants that restrict our operations and our ability
to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required,
our business operations and prospects may suffer.
The following table sets forth a summary of our cash flows for the periods indicated:
Year Ended December 31,
Net cash generated from operating activities
Net cash generated from (used in) investing activities
- 88 -
2022
US$
2021
RMB
RMB
(in thousands)
126,198 137,752
450,399 (127,562 )
19,972
(18,495 )
(20,371 )
(260,298 )
Net cash used in from financing activities
Net increase (decrease) in cash and cash equivalents and restricted cash 316,299
(10,181 )
Cash and cash equivalents and restricted cash at the beginning of the year 350,098 656,522
656,522 648,211
Cash and cash equivalents and restricted cash at the end of the year
(2,954 )
(1,477 )
95,187
93,981
Operating Activities
Net cash generated from operating activities amounted to RMB137.8million (US$20.0 million) for the year
ended December 31, 2022, primarily attributable to (i) a net income of RMB85.7 million (US$12.4 million), (ii)
adjustments of depreciation expense of RMB19.5 million (US$2.8 million), non-cash operating lease expense of
RMB90.4 million (US$13.1 million), provision for allowance for credit losses on financial assets of RMB30.7
million (US$4.5 million), share of income of affiliates, net of impairment of RMB69.6 million (US$10.1 million)
and investment income of RMB10.9 million (US$1.6 million), which were non-cash items and, (iii) increases of
contract assets of RMB204.2 million (US$29.6 million), accrued commissions of RMB127.6 million (US$18.5
million) and accounts payable of RMB22.1 million (US$3.2 million), offset by decrease of other current asset of
RMB8.6 million (US$1.3 million), other receivables of RMB37.3 million (US$5.4 million) insurance premium
payables of RMB7.4 million (US$1.1 million) related to property and casualty insurance business contributed by
channel vendors of Baowang, other payables and accrued expenses of RMB16.3million (US$2.4 million), accrued
payroll of RMB15.8 million (US$2.3 million), other tax liability of RMB36.6 million (US$5.3 million) and lease
liability of RMB88.6 million (US$12.8 million).
Net cash generated from operating activities amounted to RMB126.2 million for the year ended December
31, 2021, primarily attributable to (i) a net income of RMB259.9 million (ii) adjustments of depreciation expense
of RMB18.3 million, non-cash operating lease expense of RMB101.4 million, and investment income of RMB3.2
million, which were non-cash items and, (iii) increases of accounts receivable of RMB5.5 million, contract assets
of RMB257.2 million, other receivables of RMB31.1 million, accrued commissions of RMB139.7 million and
accrued payroll of RMB6.3 million, offset by (i) decrease of accounts payable of RMB37.1 million, (ii) decrease
of insurance premium payables of RMB1.4 million related to property and casualty insurance business contributed
by channel vendors of Baowang, (iii) decrease of income tax payable of RMB15.9million, and (iv) decrease of
lease liability of RMB101.2 million.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2022 was RMB127.6 million (US$18.5
million), primarily attributable to cash used to purchase short-term investment products of RMB2,550.3 million
(US$369.8 million), prepayment for purchase of short-term investments of RMB540.0 million (US$78.3 million),
cash lent to third parties of RMB205.8 million(US$29.8 million), purchase of property, plant and equipment of
RMB77.7 million (US$11.3 million) and payment for business acquisition of RMB21.6 million(US$3.1 million),
offset by proceeds from the disposal of short-term investments of RMB3,239.6 million (US$469.7 million) that
matured and repayment of loan receivables from a third party of RMB24.5 million(US$3.6 million).
Net cash generated from investing activities for the year ended December 31, 2021 was RMB450.4 million,
primarily attributable to proceeds from the disposal of short-term investments of RMB8,646.5 million that
matured offset by cash used to purchase short-term investment products of RMB8,184.4 million and purchase of
property, plant and equipment of RMB30.8 million.
Financing Activities
Net cash used in financing activities was RMB20.4 million (US$3.0 million) for the year ended December
31, 2022, attributable to settlement of dividend payable payments totaling RMB52.1 million (US$7.5 million),
partially offset by proceeds from bank and other borrowings of RMB35.7million(US$5.2 million).
Net cash used in financing activities was RMB260.3 million for the year ended December 31, 2021,
attributable to dividend payments totaling RMB242.5 million.
Material cash requirements
Our material cash requirements as of December 31, 2022 and any subsequent interim period primarily include
our capital expenditures, operating lease obligations and tax liabilities.
- 89 -
We incurred capital expenditures of RMB15.3 million, RMB30.8 million and RMB77.7 million (US$11.3
million) for the years ended December 31, 2020, 2021 and 2022, respectively. Our capital expenditures have been
used primarily to construct our IT infrastructure and online platforms, and to purchase automobiles and office
equipment for newly-established sales outlets. We estimate that our cash commitments including our capital
expenditures will increase substantially in the following two or three years as we pursue selective acquisitions of
quality insurance intermediaries companies in combination of stock payments and cash to accelerate the expansion
of our open platform and we increase investments to enhance the professional skills of our existing sales force
through training and digital empowerment, maintain and upgrade our IT infrastructure and digital platforms and
enhance digital operation capabilities. We anticipate funding our future capital expenditures primarily with net
cash flows from financing and operating activities.
Our operating lease obligations consist of undiscounted minimum lease payment included in the measurement
of operating lease liabilities under the lease agreements for our office premises. Our leasing expense was
RMB106.6 million, RMB114.6 million and RMB98.8 million (US$14.3 million) in 2020, 2021 and 2022,
respectively. The majority of our operating lease commitments are related to our office lease agreements in China.
We had uncertain tax liabilities of RMB36.6 million (US$5.3 million) for 2022. 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 discussed above. Other than the contractual obligations and
commercial commitments discussed 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, 2022.
As of December 31, 2021 and 2022, total outstanding of balance short-term loans amounted to nil and
RMB35,679, respectively, which consisted of RMB denominated borrowings made by the Company’s
subsidiaries from financial institutions in mainland China and were repayable within one year.
Holding Company Structure
We are a holding company with no material operations of our own. We conduct our operations through our
subsidiaries and our consolidated VIEs, Xinbao Investment, Fanhua RONS Technologies and their affiliates 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 and service fees paid by our consolidated VIEs. If our subsidiaries or consolidated VIEs 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 and consolidated VIEs in China is required to set aside at least 10% of its after-tax profits
as reported in the PRC statutory financial statements each year, if any, to fund a statutory reserve until such reserve
reach 50% of its registered capital, and before the Foreign Investment Law becomes effective on January 1, 2020,
our wholly-owned subsidiaries had to set aside a portion of its after-tax profits to fund the employee welfare fund
at the discretion of its board. Although the statutory reserves can be used, among other ways, to increase the
registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve
funds are not distributable as cash dividends except in the event of liquidation of the companies. Furthermore, the
EIT Law that took effect on January 1, 2008 has eliminated the exemption of EIT on dividends derived by foreign
investors from foreign-invested enterprises and imposes on foreign-invested enterprises an obligation to withhold
tax on dividends distributed by such foreign-invested enterprises. As of December 31, 2022, our restricted net
asset was RMB1,461.2 million (US$211.9 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, 2022, we had aggregate undistributed earnings of
approximately RMB1,399.7 million (US$202.9 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, 2022 to December 31, 2022 that are reasonably likely to
- 90 -
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. Critical Accounting Policies and Estimates
We prepare financial statements in accordance with U.S. GAAP, which requires us to make judgments,
estimates and assumptions that affect the reported amounts of our assets and liabilities and the disclosure of our
contingent assets and liabilities at the end of each fiscal period, as well as the reported amounts of revenues and
expenses during each fiscal period. We continually evaluate these judgments and estimates based on our own
historical experience, knowledge and assessment of current business and other conditions, our expectations
regarding the future based on available information and assumptions that we believe to be reasonable. This forms
our basis for making judgments about matters that are not readily apparent from other sources. Since the use of
estimates is an integral component of the financial reporting process, our actual results could differ from those
estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
The selection of critical accounting policies, the judgments and other uncertainties affecting the 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. The following descriptions of critical accounting
estimates should be read in conjunction with our consolidated financial statements and other disclosures included
in this annual report. For further information, see Note 2 to our consolidated financial statements in this annual
report.
Revenue Recognition
Revenue is recognized when control of promised goods or services is transferred to our customers in an
amount of consideration to which an entity expects to be entitled to in exchange for those goods or services.
We derive agency revenue by serving as a sales agent to distribute various life insurance and P&C insurance
products on behalf of the insurance companies by which we are entitled to receive initial commission from the
insurance companies based on the premium paid by the policyholders for the related insurance policy sold. For
life insurance agency, we are also entitled to subsequent renewal commission and compensation, and renewal
performance bonus (collectively referred to as “renewal commissions”) which represent variable considerations
and are contingent on future renewals of initial policies or we achieve our performance target as such life insurance
products are long-term products.
When estimating the variable consideration, we use the expected value method based on accumulated
historical data and experiences. We also consider constraints when determining the estimated variable
consideration, which we refer to as “estimated constrained values”.
For years prior to 2021, revenue related to the variable consideration is recorded when it is probable that a
significant reversal in the amount of cumulative revenue recognized will not occur, i.e., when a policyholder pays
the renewal premium to the insurance company, and the policy is renewed because we were not able to conclude
a significant reversal to the estimated variable consideration is not probable, considering factors such as a) we
have limited history of selling our current life insurance products with our current customers, such that our past
experience in outdated products is of little predictive value in renewal(s) rate estimate; b) the occurrence of
renewal is outside of our control and the estimate of renewal premium rates is complex and requires significant
assumptions; and c) the contingency lasts across a long period of time.
We perform ongoing evaluation of the appropriateness of the constraint applied, and consider the sufficiency
of evidence that would suggest that the long-term expectation underlying the assumptions has changed. Starting
from January 1, 2021, we believe that we have already accumulated sufficient historical data and experiences at
a confidence level that through which we can utilize to make a reasonable estimate of variable considerations of
the portfolio of contracts. The estimated renewal commissions are contingent on future renewals of initial policies
or achievement of certain performance targets. Given the material uncertainty around the subsequent renewal of
the insurance policies, the estimated renewal commissions expected to be collected are recognized as revenue
only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized
will not occur when the uncertainty is subsequently resolved. With the passage of time and accumulation of
historical experiences and data, the judgment and assumptions are to be continuously re-evaluated and adjusted
as needed when more information becomes available.
- 91 -
The following describes how we apply the expected value method and our key considerations and judgments
under the expected value method:
● Determining portfolio of contracts: We set up portfolios segregated by renewal term of the underlying
policies which we refer to as a “batch” under the expected value method, by grouping long-term life
insurance policies into batches of policies with various renewal terms.
● Accumulating historical data and experiences: We believe that accumulating sufficient renewal years’
data for new products sold as the basis for the estimate is necessary for making a reasonable estimate
that is representative and comparable to those policies sold in subsequent periods. On-going
accumulation of historical renewal data and experiences represents the growth of our confidence for
making a reasonable estimate without a significant subsequent reversal in revenue recognized.
● Estimating variability for each variable renewal consideration: For each of the variable renewal
commissions, there is only one underlying variability (i.e., the renewal rates for each of the subsequent
years of the policy period which is contingent on policyholders’ renewal). Given the payment term for
each of the renewal commissions is different, we thus separately estimate the future renewal rates of
batches of policies based on accumulated historical renewal information.
● Considering constraints on estimates: In estimating the variable consideration, we evaluated the
following factors that could increase the likelihood or magnitude of a reversal:
- we have limited history of selling our current life insurance products and co-operating with our
current customers, such that our confidence for making a reasonable estimate of future renewal(s)
of long-term life insurance policies is limited;
-
-
the occurrence of renewal is outside our control and the estimate of renewal rates is complex and
requires significant judgment;
the estimate of variable consideration associated with policy renewals has a broad range of possible
consideration amounts; and
-
the contingency is not expected to be resolved for a long period of time
Along with the accumulation of historical renewal data and experiences, we re-evaluate the
appropriateness of the constraint applied on an on-going basis and adjust the constraint accordingly when
we observe more evidence that would suggest that the long-term expectation underlying the assumptions
has changed. Accordingly, the constraint applied to the total estimated renewal commissions we expect
to receive for all sold long-term life insurance products decreased from 86% as of December 31, 2021 to
69% as of December 31, 2022.
● Ongoing reassessment of the estimated constrained values: We continue to reassess the estimated
constrained values at the end of each reporting period on a quarterly basis, including continuing to review
and evaluate the reasonableness of the applied assumptions by comparing the original estimated
constrained values with the actual renewal commissions collected to monitor and determine whether any
changes to the assumptions are needed.
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 publicly 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.
- 92 -
The fair values of the investments in equity investees are determined based on valuation techniques using the
best information available, including but not limited to such as quoted prices for the investments or similar
investments in active markets, the investees’ current and expected future performance, industry trend and
projected revenue growth rates and profit margin, forecasted cash flows based on discounted rates and terminal
growth rates, etc.
Recent Accounting Pronouncements
No recently issued accounting pronouncements not yet adopted that may potentially impact our financial
position and results of operations.
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
Yinan Hu
Age
Peng Ge
Lichong Liu
Jun Li
Yunxiang Tang
Stephen Markscheid
Allen Warren Lueth
Mengbo Yin
57
51
50
49
77
69
54
67
Position/Title
Chief Executive Officer and Chairman of the Board of
Directors
Chief Financial Officer and Director
Chief Operating Officer and Vice President
Chief Digital Officer and Vice President
Independent Director
Independent Director
Independent Director
Independent Director
Mr. Yinan Hu is our co-founder and has been our chairman of the board of directors and chief executive
officer since December 2021 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. Peng Ge has been our chief financial officer since April 2008 and has been our director since December
2016. From 2005 to April 2008, he served as the general manager of the finance and accounting department and
vice president of our company. From August 2007 to September 2008, he was also a director of our company.
From 1999 to 2005, Mr. Ge headed our Beijing operations. From 1994 to 1999, Mr. Ge was a financial manager
at a subsidiary of China National Native Produce and Animal By-Products Import & Export Corporation. Mr. Ge
received his bachelor’s degree in international accounting and his MBA degree from the University of
International Business and Economics in China.
Mr. Lichong Liu has been our chief operating officer since March 2022 and has served as chairman of Fanhua
Group Company since January 2022. Mr. Lichong Liu joined Fanhua in 2006, and has previously served in various
leadership positions including chief executive officer of Fanhua Group Company, vice president of Fanhua’s life
insurance unit, and general manager of Fanhua Hebei and Shandong agency branches. Prior to that, he had served
as general manager of the sub-branches of Pingan Life Insurance Co., Ltd., Taikang Life Insurance Co., Ltd. and
New China Life Insurance Co., Ltd. and held managerial roles in the provincial branches of these companies. Mr.
Liu holds a bachelor’s degree of Finance from Renmin University of China and a master’s degree of Advanced
Business Administration from the Business School of The Hong Kong University of Science and Technology.
Mr. Jun Li has been our chief digital officer since March 2022 and has been the vice president of Fanhua
Group Company since January 2022. Mr. Li joined Fanhua in 2008, and has previously served as chief technology
officer of Fanhua Insurance Sales Service Group Company Limited and Baowang, the company’s online insurance
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distribution platform, general manager of Fanhua’s Information Technology Department and director of Fanhua’s
Information Center. Prior to joining Fanhua, he had served as head of technology development in China Life
Insurance Co., Ltd. and Aviva-COFCO Life Insurance Co., Ltd. Mr. Li holds a master’s degree of Computer
Application from Wuhan University, and certificates for Senior Engineer, System Analyst, and Certified Database
Tuning Expert.
Mr. Yunxiang Tang, a senior economist, has been our independent director since May 2012. Mr. Tang served
as general manager of the People’s Insurance Company (Group) of China Limited, or the PICC and chairman of
the Board of Directors of PICC P&C, PICC Asset Management Company Limited, PICC Life Insurance Company
Limited and PICC Health Insurance Company Limited from 2000 to 2007. He was the president of Insurance
Association of China from 2001 to 2003 and vice chairman of the CIRC from 1998 to 2000. Prior to that, he
served in different senior leadership roles in the financial regulatory authorities, including head of the PBOC
Guangdong Branch and chief of State Administration of Foreign Exchange, Guangdong Branch and assistant
governor of the PBOC.
Mr. Stephen Markscheid has been our independent director since August 2007. Mr. Markscheid is managing
partner of Aerion Capital, a family office. He is a member of the board of directors of Jinko Solar, Inc., UGE Inc.,
Monterey Capital Acquisition, and Four Leaf Acquisition, which are public companies listed in U.S. and
Kingwisoft Technology Group Limited, a public company listed in Hong Kong. He is also a trustee emeritus of
Princeton-in-Asia, a nonprofit social service organization affiliated with Princeton University. He was a member
of the board of directors of a number of other listed companies, including TKK Symphony Acquisition
Corporation (currently named Glory Star New Media Group Holdings Limited), Ener-Core, Inc., China Ming
Yang Wind Power Group and ChinaCast Education Corporation. He acted as a director and interim chief executive
officer and chief financial officer of Fellazo Inc. in 2020. From 2014 to 2017, he was a partner of Wilton Partners,
a Shanghai-based boutique investment bank. From 2007 to 2011, he was the chief executive officer of Synergenz
BioScience, Inc., a genomics company based in Hong Kong. Prior to that, Mr. Markscheid was the chief executive
officer of HuaMei Capital Company, Inc., a Sino-U.S. investment advisory firm from 2006 to 2007. From 1998
to 2006, Mr. Markscheid worked for GE Capital. During his time with GE Capital, he led GE Capital’s business
development activities in China and Asia Pacific, primarily acquisitions and direct investments. Prior to joining
GE, Mr. Markscheid worked with the Boston Consulting Group throughout Asia from 1994 to 1997. Prior to that,
Mr. Markscheid had been a commercial banker for ten years in London, Chicago, New York, Hong Kong and
Beijing with Chase Manhattan Bank and First National Bank of Chicago. Prior to that, he worked with the US-
China Business Council in Washington D.C. and Beijing. Mr. Markscheid received his bachelor’s degree in East
Asian studies from Princeton University, a master’s degree in international affairs and economics from the School
of Advanced International Studies at Johns Hopkins University, and an MBA degree from Columbia University.
Mr. Allen Lueth has been our independent director since August 2007. Mr. Lueth is currently a member of
the board of directors of Greatview Aseptic Packaging Company Limited, a company listed in Hong Kong. Since
February 2021, Mr. Lueth has served as CEO of Great Leap Brewery, a company engaged in the brewing and
selling of beer in the PRC through third-party sales and its restaurants. From September 2019 to February 2021
Mr. Lueth served as the president and chief financial officer of International Institute of Education Group, a
company mainly engaged in language education in the PRC. From 2017 to 2019 and 2010 to 2017, Mr. Lueth
served as a chief financial officer for Asia-Pacific region and a vice president of finance for the PRC region for
Cardinal Health, a Fortune 500 company engaged in the healthcare industry, respectively. From 2005 to 2010, Mr.
Lueth served as a vice president of finance and strategy for the PRC region for Zuellig Pharma China, which was
then acquired by Cardinal Health in 2010. Mr. Lueth worked for GE Capital from 1998 to 2004 in a variety of
roles, including chief financial officer and chief executive officer for the Taiwan operations, and the representative
for China. Earlier, he served with Coopers & Lybrand as an auditor. Mr. Lueth obtained his certificate as a certified
public accountant in 1991 and a certified management accountant in 1994. Mr. Lueth received his bachelor of
science in accounting degree from the University of Minnesota and an MBA degree from the J.L. Kellogg School
of Management.
Dr. Mengbo Yin has been our independent director since September 2008. He is currently a PhD advisor at
Southwestern University of Finance and Economics in China, where he also serves as head of the university’s
postgraduate department. Previously, he was the dean of the university’s school of finance from 1996 to 2007.
Professor Yin received his master’s and PhD degrees in finance from Southwestern University of Finance and
Economics in China.
Employment Agreements
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Each of our executive officers has entered into an employment agreement with us. Under these agreements,
each of our executive officers is employed for a specified time period. We may terminate the employment for
cause, at any time, without notice or remuneration, for certain acts of the employee, including but not limited to a
conviction or plea of guilty to a felony, negligence or dishonesty to our detriment, failure to perform the agreed-
to duties after a reasonable opportunity to cure the failure and failure to achieve the performance measures
specified in the employment agreement. An executive officer may terminate his employment at any time with
one-month prior written notice if there is a material reduction in his authority, duties and responsibilities or in his
annual salary before the next annual salary review. Furthermore, we may terminate an executive officer’s
employment at any time without cause upon two-month advance written notice. In the event of a termination
without cause by us, we will provide the executive officer a lump-sum severance payment in the amount of
RMB0.5 million, unless otherwise specifically required by applicable law.
Each executive officer has agreed to hold, both during and after the employment agreement expires or is
earlier terminated, in strict confidence and not to use, except as required in the performance of his duties in
connection with the employment, any confidential information, trade secrets and know-how of our company or
the confidential information of any third-party, including our consolidated VIE 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 2022, the aggregate cash compensation, including reimbursement of expenses, to our executive officers
which include executive directors was approximately RMB4.9 million (US$0.7 million), and the aggregate cash
compensation to our non-executive directors was approximately RMB1.8 million (US$0.3 million). We did not
set aside or accrue any amounts to provide pension, retirement or similar benefits for our executive officers and
directors except for statutory social security payment.
Share Incentives
2007 Share Incentive Plan
In order 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, a share
incentive plan was adopted by our board of directors and shareholders in 2007, as amended and restated in
December 2008. 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.
As of March 31, 2023, all of the options under 2007 Share Incentive Plan had been exercised or forfeited, of
which options to purchase 35,806,518 ordinary shares were cash exercised and collectively held by two employee
shareholding vehicles on behalf of employees who beneficially own the shares.
2022 Share Incentive Plan
On August 12, 2022, our board of directors adopted a share incentive plan under which we have reserved
161,143,768 ordinary shares for issuance, which was approximately 15% of our outstanding ordinary shares as of
June 30, 2022.
Simultaneously, our board of directors approved the grant of options to purchase an aggregate of 4,000,000
ordinary shares to independent directors pursuant to the 2022 Share Incentive Plan (the “2022 Option 1”). The
exercise price of these options is US$0.2305 per ordinary share, equal to the closing price of our ADS on the
Nasdaq Global Select Market one day prior to the grant date (after adjusting for the 20 ordinary shares to 1 ADS
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ratio). The options are scheduled to vest over a four-year period starting from August 31, 2023, subject to their
continued service with us.
On February 6, 2023, our board of directors approved the grant options to purchase an aggregate of
13,680,000 ordinary shares to certain top agents who have met the requirements for Million Dollar Round Table
Membership, pursuant to the 2022 Share Incentive Plan (the “2022 Option 2”). The exercise price of these options
is US$0.05 per ordinary share. The options are scheduled to vest over a two-year period starting from March 31,
2024, subject to the achievement of certain key performance indicators by the option holders and their continued
service with us.
The following paragraphs describe the principal terms of 2022 Share Incentive Plan as currently in effect.
Types of Awards.
The types of awards we may grant under our 2022 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 2022 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 2022 Share Incentive Plan will be evidenced by an award
agreement that will set forth the terms, conditions and limitations for each award. In addition, in the case of options,
the award agreement may also specify whether the option constitutes an ISO or a non-qualifying share option.
Acceleration of Awards upon Corporate Transactions. The outstanding awards will accelerate upon
occurrence of a change-of-control corporate transaction where the successor entity does not assume our
outstanding awards under the 2007 Share Incentive Plan. In such event, each outstanding award will become fully
vested and immediately exercisable, and the transfer restrictions on the awards will be released and any forfeiture
provisions will terminate immediately before the date of the change-of-control transaction. If the successor entity
assumes our outstanding awards and later terminates the grantee’s service without cause within 12 months of the
change-of-control transaction, the outstanding awards will automatically become fully vested and exercisable.
Exercise Price and Term of Awards. The exercise price per share subject to an option will be determined by
the plan administrator and set forth in the award agreement which may be a fixed or variable price related to the
fair market value of our ordinary shares; provided, however, that no options may be granted to an individual
subject to taxation in the United States at less than the fair market value on the date of grant. To the extent not
prohibited by applicable laws or any exchange rule, a downward adjustment of the exercise prices of any
outstanding options may be made in the absolute discretion of the plan administrator and will be effective without
the approval of our shareholders or the approval of the affected participants. If we grant an ISO to an employee
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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 2022
Share Incentive Plan. Amendments to the 2022 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 2022 Share Incentive Plan
or to extend the term of an option beyond ten years. Unless terminated earlier, the 2022 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, 2023, options to purchase 17,680,000 ordinary shares of the Company were outstanding.
The following table summarizes, as of March 31, 2023, the outstanding options that we granted to our directors
and to other individuals as a group.
Name
Yunxiang Tang
Stephen Markscheid
Allen Warren Lueth
Mengbo Yin
Exercise Price
(Per
Ordinary
Options
Outstanding
Share)( US$) Grant Date
1,600,000
0.2305
800,000
0.2305
800,000
0.2305
800,000
0.2305
Expiration
Date
August 12,
2032
August 12,
2032
August 12,
2032
August 12,
2032
February 6,
2033
August 12,
2022
August 12,
2022
August 12,
2022
August 12,
2022
February 6,
2023
Other individuals as a group
13,680,000
0.05
C. Board Practices
Board of Directors
Our board of directors consists of six directors. Under our currently effective amended and restated
memorandum and articles of association, a director is not required to hold any shares in our company by way of
qualification. A director may vote with respect to any contract, proposed contract or arrangement in which he is
materially interested. The directors may exercise all the powers of our company to borrow money, mortgage its
undertaking, property and uncalled capital, and issue debentures or other securities whenever money is borrowed
or as security for any obligation of our company or of any third-party. The directors may receive such
remuneration as our board of directors may determine from time to time. There is no age limit requirement for
directors.
The Board conducts self-assessment of its performance annually in compliance with corporate governance
requirements, which encompasses the directors’ involvement in business operations, the effectiveness of board
oversight, board composition, board culture, management of major issues, and processes of board operation.
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 2022, our board of directors met in person
or passed resolutions by unanimous written consent six times. In addition, our independent directors held
executive sessions without the presence of non-independent directors or members of management twice during
2022. We have no specific policy with respect to director attendance at our annual general meetings of
shareholders.
We have a diverse board consisting of members from a wide variety of backgrounds, expertise, skills, and
experiences. The members of the board consisted of industry professionals with insurance and financial
backgrounds including one independent director who has worked in financial risk assessment.
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The membership of our Board currently does not include women. But we are in the process of actively seeking
female directors to refresh the composition of our Board, and adding new independent members to further
strengthen the Board’s expertise and skill set and to introduce fresh perspectives.
Committees of the Board of Directors
We have established four committees under the board of directors: the audit committee, the compensation
committee, the corporate governance and nominating committee and financial reporting and disclosure committee
and have adopted a charter for each of the committees. Each committee’s members and functions are described
below.
Audit Committee. Our audit committee consists of Allen Lueth (chairman), Stephen Markscheid and Mengbo
Yin, all of whom satisfy the “independence” requirements of Rule 5605 of the Nasdaq Listing Rules and Rule
10A-3 under the Securities Exchange Act of 1934. The audit committee oversees our accounting and financial
reporting processes and the audits of the financial statements of our company. The audit committee is responsible
for, among other things:
●
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 2022, our audit committee held meetings or passed resolutions by unanimous written consent four times.
Compensation Committee. Our compensation committee consists of Stephen Markscheid (chairman), Allen
Lueth and Yunxiang Tang, all of whom satisfy the “independence” requirements of Rule 5605 of the Nasdaq
Listing Rules. Our compensation committee assists the board of directors in reviewing and approving the
compensation structure of our directors and executive officers, including all forms of compensation to be provided
to our directors and executive officers. Our chief executive officer may not be present at any committee meeting
during which his compensation is deliberated. The compensation committee is responsible for, among other things:
●
●
●
●
reviewing and recommending to the board with respect to the total compensation package for our chief
executive officer;
approving and overseeing the total compensation package for our executives other than the chief
executive officer;
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.
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In 2022, 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 2022, our corporate governance and nominating committee held meetings or passed resolutions by
unanimous written consent twice.
Financial Reporting and Disclosure Committee. Our financial reporting and disclosure committee consists
of Peng Ge (chairman), Allen Lueth, and two of our non-executive employees including our financial controller
and our internal legal counsel. The financial reporting and disclosure committee assist our CEO and CFO
(collectively, the “Senior Officers”) in fulfilling their responsibility to oversee the accuracy, completeness and
timeliness of our public reporting and disclosure. The financial reporting and disclosure committee is responsible
for, among other things:
●
●
●
reviewing and, as necessary, helping revise our controls and procedures that are designed to ensure that:
(i) information required to be disclosed by us to the SEC and other information that our company publicly
discloses is recorded, processed, summarized and reported accurately and on a timely basis; and (ii)
information is accumulated and communicated to management, including the Senior Officers, as
appropriate to allow timely decisions regarding such reporting and disclosure (collectively, the
“Reporting and Disclosure Controls and Procedures”);
assisting in documenting and monitoring the integrity and effectiveness of our Reporting and Disclosure
Controls and Procedures; and
reviewing the Company’s: (i) periodic and current reports, proxy statements, information statements,
registration statements and any other information filed with or furnished to the SEC; (ii) press releases
containing financial information, earnings guidance, information about material acquisitions or
dispositions or other information material to the Company’s securityholders; (iii) correspondence
broadly disseminated to securityholders; (iv) other relevant communications or presentations
(collectively, the “Reporting and Disclosure Statements”); and (v) unusual and complex transactions,
new accounting standard adoption and disclosure, new SEC reporting requirements.
In 2022, our financial reporting and disclosure committee held meetings by unanimous written consent twice.
Duties of Directors
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Under Cayman Islands law, our directors owe fiduciary duties to our company, including a duty of loyalty, a
duty to act honestly, and a duty to act in what they consider in good faith to be in our best interests. Our directors
must also exercise their powers only for a proper purpose. Our directors also owe a duty to our company to act
with skill and care. It was previously considered that a director need not exhibit in the performance of his or her
duties a greater degree of skill than may reasonably be expected from a person of his or her knowledge and
experience. However, English and Commonwealth courts have moved towards an objective standard with regard
to the required skill and care and these authorities are likely to be followed in the Cayman Islands. 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. Our company has the right to seek damages if
a duty owed by our directors is breached. In certain limited circumstances, it may be possible for our shareholders
to bring a derivative action on behalf of our company if a duty owed by our directors to our company is breached.
Terms of Directors and Executive Officers
All directors hold office until their successors have been duly elected and qualified. Outside of certain
specified circumstances, including resigning, becoming bankrupt or being of unsound mind or being absent from
board meetings without special leave of absence for six consecutive months and the board of directors resolves
that his office be vacated, a director may only be removed by a special resolution of the shareholders. Officers are
elected by and serve at the discretion of the board of directors. We do not have contracts in place with any of our
directors providing for benefits upon termination of employment. For the period during which the directors and
executives have served in the office, please see “Item 6. Directors, Senior Management and Employees—A.
Directors and Senior Management.”
Board Diversity
Board Diversity Matrix (As of March 31, 2023)
Country of Principal Executive Offices:
Foreign Private Issuer
Disclosure Prohibited Under Home Country Law
Total Number of Directors
Part I: Gender Identity
Directors
Part II: Demographic Background
Underrepresented Individual in Home Country
Jurisdiction
LGBTQ+
Did Not Disclose Demographic Background
D. Employees
Employees, Sales Agents and Training
China
Yes
No
6
Non-
Binary
Did Not Disclose
Gender
Female
Male
0
6
-
-
-
-
-
We had 4,926, 5,785 and 5,328 employees as of December 31, 2020, 2021 and 2022, 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, 2022:
Management
Administrative staff
Financial and accounting staff
Professional claims adjustors
Information technology staff
Total
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Number
of
Employees
583
2,308
197
1,950
200
5,238
% of
Total
11.1
44.1
3.8
37.2
3.8
100.0
The following table sets forth the number of our employees by gender as of December 31, 2022:
Management
Other staff
Total
Female Male
170
1,911
2,081
413
2,744
3,157
The following table sets forth the number of our employees by age as of December 31, 2022:
< 30 years old
30-40 years old
> 40 years old
Total
Persons
1,765
2,568
905
5,238
% of
Total
33.7
49.0
17.3
100.0
As of December 31, 2020, 2021 and 2022, we had 362,580, 284,053 and 141,088 registered sales agents
respectively. A majority of these sales agents are independent sales agents who are not our employees and are
only compensated by commissions. We have contractual relationships with these sales agents. Our insurance
advisors are our employees and are compensated by both base salaries and commissions. We primarily distribute
life insurance policies with a periodic premium payment schedule. For the sale of each of such life insurance
policy, we pay the sales agent who has generated the sale periodic commissions based on a percentage of the
commissions and fees we receive from the insurance companies for the sale and renewal of that policy, generally
up to the first five years of the premium payment period, and retain all commissions and fees we continue to
receive from insurance companies for the rest of the premium payment period. For the sale of each life insurance
policy with a single premium payment schedule or property and casualty insurance policy, we pay the sales agent
who has generated the sale a single commission based on a percentage of the commission and fee we receive from
insurance companies for the sale of that policy.
For our traditional sales force, 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. As to our Yuntong branches, our insurance advisors are organized in two layers consisting of
one senior financial advisor leading several junior financial advisors.
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 training 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 various
insurance products and develop skills to build and manage their own sales teams. Online training courses are also
available on Lan Zhanggui and Fanhua RONS Livestreaming Platform, which enable sales agents to attend the
courses anytime anywhere. We have also established an open source lecturer platform which allows insurance
veterans to upload self-developed courses and viewable on fee basis. As part of our efforts to professionalize our
sales force, we will allocate more resources to enhance training. With the data insight gained through digital
technologies, agents will be categorized into different levels based on various criteria including their qualification,
capabilities and productivity and targeted training courses will be provided to help improve their professional
skills and productivity.
We believe in our employees’ potential and provide training and development opportunities intended to
maximize their performance and professional growth. To ensure that new employees integrate into our culture
and their daily work, we provide a robust new-hire experience, as well as extensive ongoing training for existing
employees to acquaint them with our business. We require all of our employees to complete courses in key
regulatory areas, such as insider trading and anti-money laundering compliance, and we offer professional
development opportunities through training sessions and cross-departmental workshops, resulting in over 140,000
completed courses and workshops and approximately 134,000 development hours for our employees. In addition,
we have mentorship programs that pair newer employees with more experienced professionals, giving mentees
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access to experience, expertise, and guidance. Finally, to help employees determine the next steps in their careers,
we have a Career Growth Portal that provides employees with tools, resources, training courses and assessments
as they chart their career paths.
We need employees well-equipped with professional knowledge to support our frontline sales agents and
provide our clients with best quality of services. To maximize their performance and professional growth, we
provide ample training opportunities through our well-established training platform e-learning system and
“Fanhua Academy” available through Lan Zhanggui. Various courses were delivered by a large team of internal
lecturers which include the Group’s senior management, department heads and senior employees with deep
experience in various areas of our operations and external courses to acquaint them with our business and unlease
their potential. To maintain training standards, we evaluate our lecturers and present awards for outstanding
performance on an annual basis.
E. Share Ownership
We currently do not have specific stock ownership requirements for our CEO and other members of our
management. The following table sets forth information with respect to the beneficial ownership of our shares, as
of March 31, 2023, 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, 2023, there were 1,157,463,924 ordinary shares outstanding. Beneficial ownership is
determined in accordance with the rules and regulations of the SEC.
Directors and Executive Officers:
Yinan Hu(2)
Peng Ge(3)
Lichong Liu(4)
Jun Li
Stephen Markscheid
Allen Warren Lueth
Mengbo Yin
All Directors and Executive Officers as a Group
Principal Shareholders:
Sea Synergy Limited(5)
Ordinary Shares
Beneficially Owned(1)
Number
%
210,400,770
53,562,260
23,119,600
*
*
*
*
290,305,670
18.2 %
4.6 %
2.0 %
*
*
*
*
25.1 %
189,698,110
16.4 %
* Less than 1% of our total outstanding ordinary shares.
† Except for our independent directors, the business address of our directors and executive officers is c/o 60/F,
Pearl River Tower, No. 15 West Zhujiang Road, Guangzhou, Guangdong 510623, People’s Republic of
China.
(1) Percentage of beneficial ownership of each director and executive officer is based on 1,157,463,924 ordinary
shares outstanding as of March 31, 2023.
(2) Includes (i) 10,041,200 ordinary shares in the form of ADSs directly held by Mr. Hu, (ii) 189,698,110
ordinary shares of our company directly held by Sea Synergy Limited, or Sea Synergy, and (iii) 10,661,460
ordinary shares of our company held through Kingsford Resources Ltd., or Kingsford Resources. 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. Kingsford Resources is a shareholding vehicle that
we established to hold shares of the Company on behalf of certain executive officers. Mr. Hu directly holds
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27.2% of the equity interests of Kingsford Resources which directly holds 39,252,100 ordinary shares of the
Issuer.
(3) Includes (i) 48,562,260 ordinary share held by Green Ease, which is 100% held by High Rank Investments
Limited, or High Rank and (ii) 5,000,000 ordinary shares held through Kingsford Resources. 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 High Rank. Mr. Ge directly holds 12.7%
of the equity interests of Kingsford Resources.
(4) Includes (i) 22,787,600 ordinary share held through Kingsford Resources; and (ii) 332,000 ordinary shares in
the form of ADSs directly held by Mr. Liu. Mr. Liu directly holds 58.1% of the equity interests of Kingsford
Resources.
(5) Includes 189,698,110 ordinary shares of the Company directly held by Sea Synergy. The registered address
of Sea Synergy is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.
None of our existing shareholders have different voting rights from other shareholders. We are not aware of
any arrangement that may, at a subsequent date, result in a change of control of our company. As of March 31,
2023, 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 57.3% 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
Proposed Going Private Transaction
On December 16, 2021, our board of directors received a preliminary non-binding proposal letter from a
consortium led by Mr. Yinan Hu, our founder, chairman and CEO, proposing to acquire all of the outstanding
ordinary shares of the Company not already owned by the consortium for $9.8 per ADS, or $0.49 per ordinary
share in a going private transaction. On December 19, 2022, Mr. Hu withdrew the preliminary non-binding going
private proposal, effective immediately.
Transactions with Puyi Inc.
On December 28, 2020, we entered into a framework strategic partnership agreement, or the Agreement, with
Puyi Enterprise Management Advisory Co., Ltd., or Puyi Enterprise, an affiliate of Puyi Inc., pursuant to which,
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.
Pursuant to the framework agreement, starting from January 2021, Puyi Enterprise has been providing referral
and marketing services of our insurance products to their clients when their clients have such needs while our
agents will be responsible for handling the purchasing procedures and other services. In 2022, we incurred a total
of RMB13.5 million commission cost and RMB7.0 million training cost to Puyi Enterprise and the balance of
accounts payable as of December 31, 2022 was RMB5.0 million.
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.
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Share Options
Please refer to “Item 6. Directors, Senior Management and Employees—B. Compensation.”
C. Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
See “Item 18. Financial Statements.”
Legal and Regulatory Proceedings
We are currently not a party to any material litigation or legal proceeding that may have a material adverse
impact on our business or operations. However, we are and may continue to be subject to various claims and legal
actions arising in the ordinary course of business. In addition, the CBIRC may make inquiries and conduct
examinations concerning our compliance with PRC laws and regulations from time to time. These administrative
proceedings have resulted in administrative sanctions, including fines of RMB1.0 million in aggregate in 2022,
which were not material to us. While we cannot predict the outcome of any pending or future examination, we do
not believe that any pending legal matter will have a material adverse effect on our business, financial condition
or results of operations. However, we cannot assure you that any future regulatory proceeding will not have an
adverse outcome, which could have a material adverse effect on our operating results or cash flows.
Dividend Policy
Our board of directors has discretion as to whether to distribute dividends, subject to certain restrictions under
Cayman Islands law, namely that our company may only pay dividends out of profits or share premium account,
and provided always that in no circumstances may a dividend be paid unless, immediately following the date on
which it is to be paid, our company will be able to pay its debts as they fall due in the ordinary course of business.
In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the
amount recommended by our directors. The timing, amount and form of dividends, if any, will depend on, among
other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of
distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and
other factors deemed relevant by our board of directors.
On February 28, 2017, our board of directors approved a cash dividend policy, which provided for an annual
cash dividend to shareholders of no less than 30% of our net income attributable to shareholders in the previous
fiscal year. On April 20, 2017, our board of directors declared an annual cash dividend of US$0.006 per ordinary
share, or US$0.12 per ADS, payable on or around May 18, 2017 to shareholders of record on May 8, 2017.
On September 18, 2017, our board of directors modified the dividend policy to adopt a quarterly payment
schedule in lieu of an annual dividend, with the dividend payout ratio of no less than 50% of net operating income
attributable to the Company’s shareholders instead of no less than 30% under the annual dividend policy
previously announced on April 20, 2017. The following table summarizes the quarterly dividend payments since
the announcement of the quarterly dividend policy.
Declaration Date
November 20, 2017
March 9, 2018
May 12, 2018
August 18, 2018
Quarterly Dividend
(Per Ordinary
Share)
( US$)
Quarterly
Dividend
(Per
ADS)
( US$)
Record Date
December 8,
2017
Payable Date
December 22,
2017
0.20
0.20 March 26, 2018 April 10, 2018
June 11, 2018
0.25
September 19,
2018
June 4, 2018
September 5,
2018
0.25
0.01
0.01
0.0125
0.0125
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November 17, 2018
March 18, 2019
May 22, 2019
August 20, 2019
November 20, 2019
March 18, 2020
May 26, 2020
August 24, 2020
November 24, 2020
March 22, 2021
May 27, 2021
August 23, 2021
November 23, 2021
March 28, 2022
0.0125
0.0125
0.0150
0.0150
0.0150
0.0150
0.0125
0.0125
0.0125
0.0125
0.0075
0.0075
0.0075
0.0075
December 5,
2018
December 20,
2018
0.25
0.25 March 21, 2019 April 3, 2019
June 20, 2019
0.30
September 19,
2019
December 19,
2019
June 6, 2019
September 4,
2019
December 5,
2019
0.30
0.30
0.30 April 2, 2020
0.25 June 10, 2020
September 8,
2020
December 9,
2020
0.25
April 16, 2020
June 24, 2020
September 22,
2020
December 23,
2020
0.25
0.25 March 31, 2021 April 15, 2021
June 25, 2021
0.15 June 11, 2021
September 23,
September 7,
2021
2021
December 22,
December 8,
2021
2021
0.15
0.15 April 12, 2022 April 26, 2022
0.15
On May 26, 2022, in lieu of cash dividend, our board of directors approved the distribution of 252,995,600
ordinary shares of CNFinance to the Company’s shareholders of record as of the close of business on June 9, 2022.
The Company’s shareholders of record received 4.71 ordinary shares of CNFinance for each 20 issued and
outstanding ordinary shares of the Company, or 0.2355 ADSs of CNFinance for each ADS of the Company. The
distribution was completed on June 28, 2022, after which our equity stake in CNFinance decreased from
approximately 18.5% to approximately 0.01%.
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
and service fees from our consolidated VIEs 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 and consolidated VIEs 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 and consolidated VIEs 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.”
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
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B. Plan of Distribution
Not applicable.
C. Markets
Our ADSs, each representing 20 ordinary shares, are 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 Act 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 Act or as the same may be
revised from time to time, or any other law of the Cayman Islands.
Board of Directors
See “Item 6. Directors, Senior Management and Employees—C. Board Practices—Board of Directors.”
Ordinary Shares
General. Our authorized share capital consists of 10,000,000,000 ordinary shares, with a par value of
US$0.001 each. All of our issued and outstanding ordinary shares are fully paid and non-assessable. Certificates
representing the ordinary shares are issued in registered form. Our shareholders who are nonresidents of the
Cayman Islands may freely hold and vote their shares.
Dividend Rights. The holders of our ordinary shares are entitled to such dividends as may be declared by our
board of directors subject to the Companies Act.
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 a general meeting shall have
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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 a larger amount than our existing shares, and canceling any
shares which have not been taken or agreed to be taken.
Transfer of Shares. Subject to the restrictions of our articles of association, as applicable, any of our
shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or
common form or any other form approved by our board.
Liquidation. On a return of capital on winding up or otherwise (other than on conversion, redemption or
purchase of shares), assets available for distribution among the holders of ordinary shares may be distributed
among the holders of the ordinary shares as determined by the liquidator, subject to sanction of an ordinary
resolution of our company.
Calls on Shares and Forfeiture of Shares. Our board of directors may from time to time make calls upon
shareholders for any amounts unpaid on their shares in a notice served to such shareholders at least 14 days prior
to the specified time of payment. The shares that have been called upon and remain unpaid on the specified time
are subject to forfeiture.
Redemption, Repurchase and Surrender of Shares. Subject to the provisions of the Companies Act 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 Act 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 Act,
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. If at any time the share capital is divided into different classes of shares, the
rights attached to any class of shares (unless otherwise provided by the terms of issue of the shares of that class)
may, subject to our articles of association, be varied or abrogated 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 register of members or our corporate records (other than our memorandum
and articles of association, special resolutions, and our register of mortgages and charges). However, we make
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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.
PRC Taxation
Under the former PRC Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises,
any dividends payable by foreign-invested enterprises to non-PRC investors were exempt from any PRC
withholding tax. In addition, any interest or dividends payable, or distributions made, by us to holders or beneficial
owners of our ADSs or ordinary shares would not have been subject to any PRC tax, provided that such holders
or beneficial owners, including individuals and enterprises, were not deemed to be PRC residents under the PRC
tax law and had not become subject to PRC tax.
Under the EIT Law, which took effect as of January 1, 2008, which was subsequently amended on March 16,
2007, February 24, 2017 and December 29, 2018, enterprises established under the laws of non-PRC jurisdictions
but whose “de facto management body” is located in China are considered “resident enterprises” for PRC tax
purposes. Under the implementation regulations issued by the State Council relating to the new law, “de facto
management bodies” are defined as the bodies that have material and overall management control over the
business, personnel, accounts and properties of an enterprise. On April 22, 2009, SAT, issued SAT Circular 82,
which provides certain specific criteria for determining whether the “de facto management body” of a PRC-
controlled enterprise that is incorporated offshore is located in China. In addition, the SAT issued a bulletin on
July 27, 2011 providing more guidance on the implementation of Circular 82 and clarifying 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
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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 an 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 enterprises income tax if such interest, premium or gains are regarded as income derived
from sources within the PRC. Under the EIT Law, a “non-resident enterprise” means an enterprise established
under the laws of a jurisdiction other than the PRC and whose actual administrative organization is not in the PRC
but has established offices or premises in the PRC, or which has not established any offices or premises in the
PRC but has obtained incomes derived from sources within the PRC.
The EIT Law provides that enterprises established outside of China whose “de facto management bodies” are
located in China are considered “resident enterprises” and are therefore subject to PRC enterprise income tax at
the rate of 25% with respect to their income sourced from both within and outside of China. The Implementing
Regulation defines the term “de facto management body” as a management body that exercises substantial and
overall control and management over the production and operations, personnel, accounting and properties of an
enterprise. Circular 82 provides certain specific criteria for determining whether the “de facto management body”
of a Chinese-controlled offshore-incorporated enterprise is located in China. The Resident Enterprise
Administrative Measures provide clarification for resident status determination and competent tax authorities.
However, Circular 82 and the Resident Enterprise Administrative Measures apply only to offshore enterprises
controlled by PRC enterprises, not those invested in or controlled by PRC individuals, like our company. Currently
there are no further detailed rules or precedents applicable to us regarding the procedures and specific criteria for
determining “de facto management body” for a 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
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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 considerations to a United
States Holder (as defined below), 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 differing interpretations or changes, which could apply
retroactively or significantly affect the tax considerations described below. We have not sought any ruling from
the IRS with respect to the statements made or the conclusions reached in the following discussion and there can
be no assurance that the IRS or a court will agree with our statements or conclusions. In addition, this summary
of the United States federal income tax considerations does not discuss the Medicare Tax on net investment
income, any tax considerations arising under the United States federal non-income tax laws (such as estate or gift
tax), or the laws of any state, local, or non-United States taxing jurisdiction.
This discussion applies only to a United States Holder (as defined below) that holds ADSs or ordinary shares
as “capital assets” for United States federal income tax purposes (generally, property held for investment). The
discussion neither addresses the tax considerations to any particular investor nor describes all aspects of the tax
considerations 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;
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● 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 flow-through entity for United States federal
income tax purposes) holds our ADSs or ordinary shares, the tax treatment of a partner in the partnership generally
will depend upon the status of the partner and the activities of the partnership. A partnership or a partner in a
partnership holding our ADSs or ordinary shares should consult its tax advisors regarding the tax consequences
of investing in and holding our ADSs or ordinary shares.
The following discussion is for informational purposes only and is not a substitute for careful tax planning
and advice. Investors should consult their tax advisors with respect to the application of the United States federal
income tax laws to their particular situations, as well as any tax consequences arising under the federal estate or
gift tax laws or the laws of any state, local or non-Untied 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.
●
●
●
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. The remainder of this discussion assumes that a
United States Holder of our ADSs will be treated in this manner. 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 believe we were a passive foreign investment company (“PFIC”) for United States federal income tax purposes
for our taxable year ending December 31, 2022, however there can be no assurance to this regard. We believe we
were also 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 years.
A non-United States corporation such as ourselves will be treated as a PFIC for United States federal income
tax purposes for any taxable year if, applying applicable look-through rules, either:
●
at least 75% of 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.
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For this purpose, passive income generally includes dividends, interest, royalties and rents (other than certain
royalties and rents derived in the active conduct of a trade or business and not derived from a related person). We
will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of
any other corporation in which we own, directly or indirectly, at least 25% by value of the stock. Although the
law in this regard is unclear, we treat the 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.
The composition of our income and assets will be affected by the market price of our ADSs and how, and
how quickly, we spend our liquid assets and the cash we generate from our operations and raise in any offering.
Unless the market price of our ADSs increases or we reduce the amount of cash, short term investments and other
passive assets we hold sufficiently from current levels, we believe that we are likely to remain a PFIC for future
taxable years. However, 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 the IRS will not take a contrary position.
Changes in the composition of our income and assets may cause us to cease 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 increases, we may cease to be a PFIC because our
liquid assets and cash (which are for this purpose considered assets that produce passive income) may then
represent a smaller 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 non-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 2022, 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
an 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
if we are and then cease to be a PFIC and such an election becomes available to you.
If we are a PFIC for any taxable year (as we believe we were for 2022, 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
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●
the amount of the excess distribution or recognized gain allocated to each other taxable year will be
subject to the highest tax rate in effect for individuals or corporations, as applicable, for each such year
and the resulting tax will be subject to the interest charge generally applicable to underpayments of tax.
If we are a PFIC for any taxable year (as we believe we were for 2022, 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 2022, 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 “Item. 10 Additional Information—E. Taxation—United States Federal Income Taxation—
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 2022, 2017 and prior years), a United States Holder that
makes the mark-to-market election may continue to be subject to the tax and interest charges under the general
PFIC rules with respect to such United States Holder’s indirect interest in any investments held by us that are
treated as an equity interest in a PFIC for United States federal income tax purposes.
In certain circumstances, a United States shareholder in a PFIC may avoid the adverse tax and interest-charge
regime described above by making a “qualified electing fund” election to include in income its share of the
corporation’s income on a current basis. However, you may make a qualified electing fund election with respect
to your ADSs or ordinary shares only if we agree to furnish you annually with a PFIC annual information statement
as specified in the applicable Treasury Regulations. We do not intend to prepare or provide the information that
would enable you to make a qualified electing fund election.
A United States Holder that holds our ADSs or ordinary shares in any year in which we are a PFIC (as we
believe we were for 2022, 2017 and prior years) will be required to file an annual report containing such
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information as the United States Treasury Department may require. You are strongly urged to consult your tax
advisors regarding the impact of our being a PFIC in 2022 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—E. Taxation—PRC
Taxation”), then we may be eligible for the benefits of the income tax treaty between the United States and the
PRC. If we are eligible for such benefits, then dividends that we pay on our ordinary shares, regardless of whether
such shares are represented by ADSs, would, subject to applicable limitations, be eligible for the reduced rates of
taxation.
Even if dividends would be treated as paid by a qualified foreign corporation, a non-corporate United States
Holder will not be eligible for reduced rates of taxation if it does not hold our ADSs or ordinary shares for more
than 60 days during the 121-day period beginning 60 days before the ex-dividend date or if the United States
Holder elects to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code. In
addition, the rate reduction will not apply to dividends of a qualified foreign corporation if the non-corporate
United States Holder receiving the dividend is obligated to make related payments with respect to positions in
substantially similar or related property.
You should consult your tax advisors regarding the availability of the lower tax rates applicable to qualified
dividend income for any dividends that we pay with respect to the ADSs or ordinary shares, as well as the effect
of any change in applicable law after the date of this annual report on Form 20-F.
Any PRC or other non-United States withholding taxes imposed on dividends paid to you with respect to the
ADSs or ordinary shares generally will be treated as foreign taxes eligible for credit against your United States
federal income tax liability, subject to the various limitations and disallowance rules that apply to foreign tax
credits generally. For purposes of calculating the foreign tax credit, dividends paid to you with respect to the ADSs
or ordinary shares will be treated as income from sources outside the United States and generally will constitute
passive category income. The rules relating to the determination of the foreign tax credit are complex and recently
issued Treasury Regulations have introduced additional requirements and limitations to the foreign tax credit rules.
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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 “Item 10. Additional Information—E. Taxation—United States Federal
Income 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—E. 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.
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.
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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
website 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’ meetings 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, 2023, 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, and interest expenses incurred by short-
term borrowing. 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.
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
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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$6.2
million and HK dollar-denominated financial assets amounting to HK$5.3 million as of December 31, 2022. A
10% appreciation of the RMB against the U.S. dollar and HK dollar would have resulted in a decrease of RMB4.7
million (US$0.7 million) in the value of our U.S. dollar-denominated and HK dollar-denominated financial assets.
Conversely, if we decide to convert our RMB denominated cash amounts into U.S. dollars amounts or other
currencies amounts for the purpose of making payments for dividends on our ordinary shares or ADSs or for other
business purposes, appreciation of the U.S. dollar or other currencies against the RMB would have a negative
effect on the U.S. dollar or other currencies amount available to us.
Item 12. Description of Securities Other than Equity Securities
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Fees Payable by ADS Holders
We have appointed J.P. Morgan as our depositary. A copy of our Form of Deposit Agreement with J.P.
Morgan was filed with the SEC as an exhibit to our Form F-6 registration statement initially filed on October 17,
2007 and amended on December 7, 2016 and November 28, 2017, or the Deposit Agreement. Pursuant to the
Deposit Agreement, holders of our ADSs may have to pay to J.P. Morgan, either directly or indirectly, fees or
charges up to the amounts set forth in the table below.
Category
(a) Depositing or
substituting the
underlying
shares
Depositary Actions
Each person to whom American depositary receipts
(“ADRs”) are issued against deposits of shares, including
deposits and issuances in respect of:
Associated Fees
US$5.00 for each 100
ADSs (or portion thereof)
evidenced by the new
ADRs delivered
● Share distributions, stock split, rights, merger
(b) Receiving or
distributing
dividends
(c) Selling or
exercising rights
(d) Withdrawing an
underlying
security
● Exchange of securities or any other transaction or event
or other distribution affecting the ADSs or the Deposited
Securities
Distribution of dividends
US$0.02 or less per ADS
Distribution or sale of securities, the fee being in an
amount equal to the fee for the execution and delivery of
ADSs which would have been charged as a result of the
deposit of such securities
Acceptance of ADRs surrendered for withdrawal of
deposited securities
US$5.00 for each 100
ADSs (or portion thereof)
US$5.00 for each 100
ADSs (or portion thereof)
evidenced by the ADRs
surrendered
(e) Transferring,
Transfers, combining or grouping of depositary receipts
US$1.50 per ADS
splitting or
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grouping
receipts
(f) General
● Other services performed by the depositary in
depositary
services,
particularly
those charged
on an annual
basis.
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 depositary in connection with the
conversion of foreign currency into U.S. dollars (which
are paid out of such foreign currency)
● Any other charge payable by depositary or its agents
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, 2021 and 2022,
the depositary reimbursed US$1.1 million and US$2.6 million, respectively. For the years ended December 31,
2021 and 2022, 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
- 118 -
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, 2022, 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 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, 2022
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, 2022, based on the criteria established in “Internal Control—Integrated Framework
(2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
- 119 -
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, 2022, 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, 2022, 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 as of and for the year ended December 31, 2022,
of the Company and our report dated April 25, 2023, 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 and the financial statements.
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. 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 Certified Public Accountants LLP
Shenzhen, the People’s Republic of China
April 25, 2023
Changes in Internal Control over Financial Reporting
- 120 -
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 except for the changes implemented
by management in controls over the process to estimate variable renewal commissions in relation to long-term
life insurance products and the change in control owner of certain control activities due to change to management,
there has been no such change during the period covered by this annual report on Form 20-F.
Item 16A. Audit Committee Financial Expert
Our board of directors has determined that Allen Lueth, an independent director (under the standards set forth
in Rule 5605 of the Nasdaq Listing Rules and Rule 10A-3 under the Exchange Act) and member of our audit
committee, is an audit committee financial expert.
Item 16B. Code of Ethics
Our board of directors adopted a code of business conduct and ethics that applies to our directors, officers
and employees. We have posted a copy of our code of business conduct and ethics on our investor relations website
at http://ir.fanhuaholdings.com/governance.cfm.
Item 16C. Principal Accountant Fees and Services
On August 25, 2021, we engaged Deloitte Touche Tohmatsu Certified Public Accountants LLP (“Deloitte”)
as our independent registered public accounting firm, and dismissed Deloitte Touche Tohmatsu (“Deloitte Hong
Kong”). See also “Item 16F. Change in Registrant’s Certifying Accountant.” The following table sets forth the
aggregate fees by categories specified below in connection with certain professional services rendered by Deloitte
Hong Kong and Deloitte (PCAOB No. 1113) for the periods indicated.
Audit fees(1)
Audit-related fees(2)
Tax fees(3)
All other fees(4)
For the Year Ended
December 31,
2021
2022
(US$ in thousands)
1,650.0
—
—
—
1,550.0
—
—
—
(1) “Audit fees” meant the aggregate fees billed and expected to be billed in each of the fiscal years listed for
professional services rendered by our independent registered public accounting firm for the audit of our
annual financial statements and review of quarterly financial statements included in our reports on Form 6-
K, services that are normally provided in connection with statutory and regulatory filings or engagements
for those fiscal years.
(2) “Audit-related fees” meant the aggregate fees billed in each of the fiscal years listed for assurance and related
services by our 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.
- 121 -
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On December 20, 2022, our board of directors announced a share repurchase program which authorized us
to repurchase up to US$20 million of its American depositary shares (“ADS”) from time to time. As of March 31,
2023 we had repurchased an aggregate of 72,465 ADSs (representing 1,449,300 ordinary shares) of the Company,
at an average price of approximately US$7.85 per ADS for a total amount of approximately US$0.6 million under
this share repurchase program.
The following table summarizes the shares repurchase activity for the periods indicated.
Period
December 20, 2022 to
December 31, 2022
Total
Total
Number of
ADSs
Purchased
Average Price
Paid
per ADSs
Total Number of ADSs
Purchased as Part of
Publicly Announced
Programs
Approximate Dollar
Value of ADSs that May
Yet Be Purchased under
the Program
72,465 US$ 7.8473
7.8473
72,465 US$
72,465 US$
72,465 US$
19,431,348.2
19,431,348.2
There were no other purchases of any class of registered equity securities of the Company by the Company
or, to our knowledge, by any affiliated purchaser.
Item 16F. Change in Registrant’s Certifying Accountant
On August 25, 2021, we engaged Deloitte as our independent registered public accounting firm, and
dismissed Deloitte Hong Kong. The change of our independent registered public accounting firm had been
approved by our board and the audit committee of our board, and the decision was not made due to any
disagreements between us and Deloitte Hong Kong.
The reports of Deloitte Hong Kong on our consolidated financial statements for the fiscal years ended
December 31, 2019 and 2020 did not contain an adverse opinion or a disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope or accounting principle.
During the fiscal years ended December 31, 2019 and 2020 and the subsequent interim period through August
25, 2021, there have been no (i) disagreements between us and Deloitte Hong Kong on any matter of accounting
principles or practices, financial statement disclosure, or audit scope or procedure, which disagreements if not
resolved to the satisfaction of Deloitte Hong Kong would have caused them to make reference thereto in their
reports on the consolidated financial statements for such years, or (ii) reportable events as defined in Item
16F(a)(1)(v) of the instructions to Form 20-F.
We have provided Deloitte Hong Kong with a copy of the disclosures here under this Item 16F and required
under Item 16F of Form 20-F and requested from Deloitte Hong Kong a letter addressed to the SEC indicating
whether it agrees with such disclosures. A copy of Deloitte Hong Kong’s letter dated April 29, 2022 was attached
as Exhibit 15.5 in our annual report on Form 20-F filed with the Commission on April 29, 2022.
During the fiscal years ended December 31, 2019 and 2020 and the subsequent interim period through August
25, 2021, neither we nor anyone on behalf of us has consulted with Deloitte regarding (i) the application of
accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that
might be rendered on our consolidated financial statements, and neither a written report nor oral advice was
provided to us that Deloitte concluded was an important factor considered by us in reaching a decision as to any
accounting, audit, or financial reporting issue, (ii) any matter that was the subject of a disagreement pursuant to
Item 16F(a)(1)(iv) of the instructions to Form 20-F, or (iii) any reportable event pursuant to Item 16F(a)(1)(v) of
the instructions to Form 20-F.
Item 16G. Corporate Governance
- 122 -
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 2021. 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.
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.
On August 12, 2022, our board of directors adopted a share incentive plan under which we have reserved
161,143,768 ordinary shares for issuance, which was approximately 15% of our issued and outstanding ordinary
shares as of June 30, 2022.
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. In relations to the 521 Plan
Transaction and the 2022 Share Incentive Plan mentioned above, Maples and Calder (Hong Kong) LLP, our
Cayman Island counsel, has provided letters 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 practices 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.
Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
In May 2022, we were conclusively listed by the SEC as a Commission-Identified Issuer under the HFCAA
following the filing of our annual report on Form 20-F for the fiscal year ended December 31, 2021. Our auditor,
a registered public accounting firm that the PCAOB was unable to inspect or investigate completely in 2021,
issued the audit report for us for the fiscal year ended December 31, 2021. On December 15, 2022, the PCAOB
announced that it has secured complete access to inspect and investigate completely PCAOB-registered public
accounting firms headquartered in mainland China and Hong Kong. The PCAOB also vacated its previous
determinations issued in December 2021. For this reason, we do not expect to be identified as a Commission-
Identified Issuer under the HFCAA after we file this annual report on Form 20-F.
As of the date of this annual report, to our knowledge, no governmental entities in the Cayman Islands own
any shares of Fanhua Inc. or the consolidated VIEs in China.
As of the date this annual report, Hongkong Chiho Limited, a company incorporated in Hong Kong, holds
0.3% of the total outstanding ordinary shares of Fanhua Inc. China’s state-owned legal persons indirectly own
- 123 -
100% of the equity interests in Hongkong Chiho Limited and in turn indirectly holds approximately 0.3% of the
total outstanding ordinary shares of Fanhua Inc. To our knowledge, no other governmental entities in China own
any shares of Fanhua Inc. or the consolidated VIEs as of the date of this annual report. The governmental entities
in China do not have a controlling financial interest in Fanhua Inc. or the consolidated VIEs as of the date of this
annual report.
As of the date of this annual report, to our knowledge, (i) none of the members of the board of directors of
Fanhua Inc. or our operating entities, including the consolidated VIEs, is an official of the Chinese Communist
Party, and (ii) none of the currently effective memorandum and articles of association (or equivalent organizing
document) of Fanhua Inc. or the consolidated VIEs contains any charter of the Chinese Communist Party.
Item 16J. Insider Trading Policies.
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 and VIEs are included at the end of
this annual report.
- 124 -
Item 19. Exhibits
Exhibit
Number
1.1
1.2
1.3
2.1
2.2
2.3
2.4
4.1
4.2
4.3
4.4
4.5†
4.6†
4.7†
4.8†
4.9†
4.10*
4.11*†
Exhibit
Number
Description of Document
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 (incorporated by reference to Exhibit 2.4 of our annual report on Form 20-
F (File No. 001-33768), filed with the Securities and Exchange Commission on April 29, 2022)
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)
English translation of Loan Agreement dated December 6, 2021 between Fanhua Insurance Sales and
Service Group Company Limited and Shuangping Jiang (incorporated by reference to Exhibit 4.6 of
our annual report on Form 20-F filed with the Commission on April 29, 2022)
English translation of Equity Pledge Contract dated December 6, 2021 among Fanhua Insurance Sales
and Service Group Company Limited, Shuangping Jiang and Shenzhen Xinbao Investment
Management Co., Ltd. (incorporated by reference to Exhibit 4.7 of our annual report on Form 20-F
filed with the Commission on April 29, 2022)
English translation of Exclusive Purchase Option Contract dated December 6, 2021 among Fanhua
Insurance Sales and Service Group Company Limited, Shuangping Jiang and Shenzhen Xinbao
Investment Management Co., Ltd. (incorporated by reference to Exhibit 4.8 of our annual report on
Form 20-F filed with the Commission on April 29, 2022)
English translation of Power of Attorney dated December 6, 2021 of Shuangping Jiang (incorporated
by reference to Exhibit 4.9 of our annual report on Form 20-F filed with the Commission on April
29, 2022)
English translation of Technology Consulting and Service Agreement dated March 1, 2022 between
Fanhua Insurance Sales and Service Group Company Limited and Shenzhen Xinbao Investment
Management Co., Ltd. (incorporated by reference to Exhibit 4.10 of our annual report on Form 20-F
filed with the Commission on April 29, 2022)
2022 Share Incentive Plan
English translation of Loan Agreement dated July 1, 2022 between Beijing Fanlian Investment Co.,
Ltd. and Peng Ge
Description of Document
- 125 -
4.12*†
4.13*†
4.14*†
4.15*
8.1*
11.1
12.1*
12.2*
13.1**
13.2**
15.1*
15.2*
15.3*
15.4*
15.5
15.6*
101*
104
English translation of Equity Pledge Contract dated July 1, 2022 among Beijing Fanlian Investment
Co., Ltd., Peng Ge and Fanhua RONS (Beijing) Technologies Co., Ltd.
English translation of Exclusive Purchase Option Contract dated July 1, 2022 among Beijing Fanlian
Investment Co., Ltd., Peng Ge and Fanhua RONS (Beijing) Technologies Co., Ltd.
English translation of Power of Attorney dated July 1, 2022 of Peng Ge
English translation of Form of Consulting and Service Agreement among Fanlian Investment Co.,
Ltd. and Fanhua RONS Technologies Co., Ltd. and each of its subsidiaries
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 Hai Run Law Firm
Consent of Deloitte Touche Tohmatsu Certified Public Accountants LLP
Consent of Deloitte Touche Tohmatsu
Letter from Deloitte Touche Tohmatsu to the Securities and Exchange Commission, dated April 29,
2022 (incorporated by reference to Exhibit 15.5 of our annual report on Form 20-F filed with the
Commission on April 29, 2022)
Submission under Item 16I(a) of Form 20-F in relation to the Holding Foreign Companies
Accountable Act
Financial information from Registrant for the year ended December 31, 2022 formatted in Inline
eXtensible Business Reporting Language (iXBRL):
(i) Consolidated Balance Sheets as of December 31, 2021 and 2022;
(ii) Consolidated Statements of Income and Comprehensive Income for the Years Ended December
31, 2020, 2021 and 2022;
(iii) Consolidated Statements of Shareholder’s Equity for the Years Ended December 31, 2020, 2021
and 2022;
(iv) Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2021 and 2022;
(v) Notes to Consolidated Financial Statements; and Schedule 1 — Condensed Financial Information
of Fanhua Inc.
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.
† Portions of this exhibit have been omitted in accordance with Instruction 4 to Item 19 of Form 20-F
- 126 -
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.
SIGNATURES
FANHUA INC.
By: /s/ Yinan Hu
Name: Yinan Hu
Title: Chief Executive Officer
Date: April 25, 2023
- 127 -
EXHIBIT 8.1
List of Subsidiaries and Affiliated Entities
(As of March 31, 2023)
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. Beijing Fanlian Investment Co., Ltd. (8)
9. Guangzhou Zhongqi Enterprise Management
Consulting Co., Ltd. (9)
10. Tibet Zhuli Investment Co. Ltd.(9)
11. Fanhua RONS (Beijing) Technology Co., Ltd.
(previously known as Litian Zhuoyue Software
(Beijing) Co., Ltd.) (10)
12. Ying Si Kang Information Technology (Shenzhen) Co.,
Ltd. (11)
13. Sichuan Yihe Investment Co., Ltd.(12)
14. Shenzhen Dianliang Information Technology Co., Ltd.
(13)
15. Fanhua RONS Service Co., Ltd. (13)
16. Fanhua Yuntong Enterprise Management Advisory
(Shenzhen) Co., Ltd. (Previously known as Shenzhen
Bangbang Auto Services Co., Ltd.) (7)
17. Guangdong Fanhua Bluecross Health Management
Co., Ltd (14)
- 128 -
Percentage
Attributable to
Our Company
100%
100%
Place of
Incorporation
BVI
Hong Kong
100%
BVI& Hong Kong
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
Subsidiaries and Affiliated Entities(1)
Insurance Agencies
18. Fanhua Lianxing Insurance Sales Co., Ltd. (15)
19. Jiangsu Fanhua Lianchuang Insurance Agency Co.,
Ltd. (14)
20. Zhejiang Fanhua Tongchuang Insurance Agency Co.,
Ltd. (14)
21. Liaoning Fanhua Gena Insurance Agency Co., Ltd. (14)
22. Shanghai Fanhua Guosheng Insurance Agency Co.,
Ltd. (14)
23. Hunan Fanhua Insurance Agency Co., Ltd. (16)
24. Zhongrong Smart Finance Information Technology
Co., Ltd. (17)
25. Beijing Smart Finance Insurance Brokerage Co.,
Ltd. (18)
26. Rong Hui Hui(Qingdao) Technologies Service Co.,
Ltd. (18)
27. Jilin Zhongji Shi’an Agency Co., Ltd. (19)
28. Wuhan Taiping Online Insurance Agency Co., Ltd.
(19)
29. Kafusi Insurance Brokerage Co., Ltd. (20)
30. Foshan Tuohua Insurance Agency Co., Ltd. (21)
Insurance Claims Adjusting Segment
31. Fanhua Insurance Surveyors & Loss Adjustors Co.,
Ltd. (22)
32. Shanghai Fanhua Teamhead Insurance Surveyors &
Loss Adjustors Co., Ltd. (23)
33. Shenzhen Fanhua Training Co., Ltd. (24)
34. Shenzhen Fanhua Software Technology Co., Ltd. (24)
35. Shenzhen Huazhong United Technology Co., Ltd. (25)
36. Suzhou Feibao Smart Service Consulting Co., Ltd.
(Previously known as Suzhou Junzhou Healthcare
Management Co. Ltd.) (26)
- 129 -
Percentage
Attributable to
Our Company
Place of
Incorporation
100%
100%
100%
100%
100%
77%
53.44%
53.44%
53.44%
51%
51%
100%
20%
44.7%
44.2%
44.7%
44.7%
44.7%
44.7%
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
PRC
Subsidiaries and Affiliated Entities(1)
Percentage
Attributable to
Our Company
Place of
Incorporation
37. Shenzhen Chetong Network Co., Ltd.(27)
14.9%
PRC
Affiliated Entities
1. Shenzhen Xinbao Investment Management Co., Ltd. (28)
2. Fanhua RONS Insurance Sales & Services Co., Ltd.
(Previously known as Fanhua Century Insurance Sales
& Service Co., Ltd.) (29)
3. Shenzhen Baowang E-commerce Co., Ltd. (30)
4. Puyi Inc.(31)
5. Shanghai Teamhead Automobile Surveyors Co., Ltd.
(32)
100%
100%
100%
4.5%
17.7%
6. Cheche Technology Inc.(33)
3.1645%
PRC
PRC
PRC
PRC
PRC
CI
- 130 -
(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) We beneficially own 100% of the equity interests in this company through contractual arrangement.
(11) 100% of the equity interests in this company are held directly by Fanhua RONS Technologies (Beijing) Co., Ltd..
(12) 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.
(13) 100% of the equity interests in these companies are held directly by Tibet Zhuli Investment Co., Ltd.
(14) 100% of the equity interests in each of these companies are held directly by Fanhua Lianxing Insurance Sales Co., Ltd.
(15) 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.
(16) 77% of the equity interests in this company are held directly by Fanhua Lianxing Insurance Sales Co., Ltd.
(17) 53.44% of the equity interests in this company are held directly by Fanhua Insurance Sales Group Co., Ltd.
(18) 100% of the equity interests in these companies are held directly by Zhongrong Smart Finance Information Technology Co. Ltd..
(19) We beneficially owned 51% of the equity interests in these companies through contractual arrangements.
(20) 76% of the equity interests in this company are held directly by Ying Si Kang Information Technology (Shenzhen) Co., Ltd. and the
remaining 26% of the equity interests held by Fanhua Insurance Sales Group Co., Ltd.
(21) 20% of the equity interests in the company are sheld directly by Fanhua Lianxing Insurance Sales Co., Ltd.
(22) 44.7% of the equity interests in the company are held directly by Guangdong Meidiya Investment Co., Ltd.
(23) 99% of the equity interests in this company are held directly by Fanhua Insurance Surveyors & Loss Adjustors Co., Ltd.
(24) 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.
(25) 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.
(26) 100% of the equity interests in the company are held directly by Shenzhen Huazhong United Technology Co., Ltd., in which we
beneficially own 44.7% of the equity interests.
(27) 33.39% of the equity interests in this company are held directly by Fanhua Insurance Surveyors & Loss Adjustors Co., Ltd., in which
we beneficially own 44.7% of the equity interests.
(28) We beneficially own 100% equity interests in this company, of which 49% of the equity interests are held directly by Fanhua
Insurance Sales Group Company Limited and the remaining 51% by a nominee individual shareholder.
(29) 100% of the equity interests in this company are held directly by Shenzhen Xinbao Investment Management Co., Ltd.
(30) 100% of the equity interests in this company are held directly by Fanhua RONS Insurance Sales & Service Co., Ltd.
(31) We directly own 4.5% of the equity interests in this company.
(32) 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.
(33) 3.1645% of the equity interests in this company are held directly by CISG Holdings Ltd.
Certification by Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 12.1
I, Yinan Hu, 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 officers 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 officers 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 25, 2023
By: /s/Yinan Hu
Name: Yinan Hu
Title: Chairman and Chief Executive Officer
Certification by 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 officers 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 officers 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 25, 2023
By: /s/Peng Ge
Name: Peng Ge
Title: Chief Financial Officer
Certification by 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, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Yinan Hu,
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 25, 2023
By: /s/Yinan Hu
Name: Yinan Hu
Title: Chairman and Chief Executive Officer
Certification by 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, 2021 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 25, 2023
By: /s/Peng Ge
Name: Peng Ge
Title: Chief Financial Officer
EXHIBIT 15.1
[Letterhead of Maples and Calder]
Our ref
Direct tel
Email
YCU/628018-000001/26353550V1
+852 3690 7529
Charmaine.chow@maples.com
Fanhua Inc.
60/F, Pearl River Tower
No. 15 West Zhujiang Road
Guangzhou, Guangdong 510623
People’s Republic of China
April 25, 2023
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, 2022, which will be filed with the United States Securities and Exchange Commission in
the month of April 2023.
We further consent to the incorporation by reference of the summary of our opinion under the heading “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, 2022, into the Company’s Registration
Statement on Form S-8 (No. 333-151271), dated May 30, 2008, pertaining to the Company’s Share Incentive Plan.
Yours faithfully
/s/ Maples and Calder (Hong Kong) LLP
Maples and Calder (Hong Kong) LLP
[Letterhead of Hai Run Law Firm]
EXHIBIT 15.2
April 25, 2023
To: Fanhua Inc.
60/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, 2022, which will be filed
with the Securities and Exchange Commission in April 2023.
Yours faithfully,
/s/ Hai Run Law Firm
Hai Run Law Firm
EXHIBIT 15.3
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-151271 on Form S-8 of our reports
dated April 25, 2023, 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, 2022.
/s/Deloitte Touche Tohmatsu Certified Public Accountants LLP
Shenzhen, the People’s Republic of China
April 25, 2023
Exhibit 15.4
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 report
dated April 28, 2021, relating to the financial statements of the Fanhua Inc., appearing in this Annual Report on Form
20-F for the year ended December 31, 2022.
/s/Deloitte Touche Tohmatsu
Certified Public Accountants
Hong Kong
April 25, 2023
Exhibit 15.6
April 25, 2023
VIA EDGAR
Office of Finance
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Fanhua Inc.
Submission under Item 16I(a) of Form 20-F
Dear Sir/Madam,
In compliance with the Holding Foreign Companies Accountable Act (the “HFCAA”),
Fanhua Inc. (the “Company”) is submitting via EDGAR the following information as required
under Item 16I(a) of Form 20-F.
On May 26, 2022, the Company was conclusively identified by the U.S. Securities and
Exchange Commission (the “SEC”) as a Commission-Identified Issuer pursuant to the HFCAA
because it filed an annual report on Form 20-F for the fiscal year ended December 31, 2021 with
the SEC on April 29, 2022 with an audit report issued by Deloitte Touche Tohmatsu Certified
Public Accountants LLP, a registered public accounting firm retained by the Company for the
preparation of the audit report on the Company’s financial statements included therein. Deloitte
Touche Tohmatsu Certified Public Accountants LLP is a registered public accounting firm
headquartered in mainland China, a jurisdiction where the Public Company Accounting Oversight
Board (the “PCAOB”) determined that it was unable to inspect or investigate registered public
accounting firms headquartered there until December 2022 when the PCAOB vacated its previous
determination. In response to Item 16I(a) of Form 20-F, the Company believes that the following
information establishes that it is not owned or controlled by a governmental entity in China.
To the Company’s knowledge and based on an examination of its register of members and
public filings made by its shareholders, including among others, the Schedule 13D/A filed jointly
by Sea Synergy Limited and Mr. Yinan Hu on December 23, 2022 and the Schedule 13G/A filed
by Bank of America Corporate Center on February 14, 2023, the Company respectfully submits
that it is not owned or controlled by a governmental entity in China as of the date of this
submission.
As of March 31, 2023, Mr. Yinan Hu, our chairman and chief executive officer, beneficially
owned 18.2% and Sea Synergy Limited beneficially owned 16.4% of the Company’s outstanding
ordinary shares, respectively. Sea Synergy Limited 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 Company held by Sea Synergy Limited. Based on an examination of the Company’s register
of members and public filings made by the Company’s shareholders, no other shareholder owned
more than 5% of the Company’s outstanding ordinary shares as of March 31, 2023.
As of the date hereof, Hongkong Chiho Limited, a company incorporated in Hong Kong,
holds 0.3% of the total outstanding ordinary shares of Fanhua Inc. China’s state-owned legal
persons indirectly own 100% of the equity interests in Hongkong Chiho Limited and in turn
indirectly hold approximately 0.3% of the total outstanding ordinary shares of Fanhua Inc. To our
knowledge, no other governmental entities in China possess, directly or indirectly, the power to
direct or cause the direction of the management and policies of the Company, whether through the
ownership of voting securities, by contract, or otherwise.
Should you have any questions or comments regarding the Company’s submission set forth
above, please do not hesitate to contact me, or you may contact our outside legal counsel, David
Zhang at david.zhang@kirkland.com or at + 852 3761 3318 (work) or +852 9124 8324 (cell), or
Steve Lin at steve.lin@kirkland.com or at +86 10 5737 9315 (work) or +86 186 1049 5593 (cell)
of Kirkland & Ellis. Thank you.
Very truly yours,
By:
/S/Yinan Hu
Name: Yinan Hu
Title: Chairman and Chief Executive Officer
cc:
David Zhang, Esq., Kirkland & Ellis
Steve Lin, Esq., Kirkland & Ellis
FANHUA INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm - Deloitte Touche Tohmatsu Certified Public
Accountants LLP (PCAOB No. 1113)
Report of Independent Registered Public Accounting Firm - Deloitte Touche Tohmatsu (PCAOB No.
1104)
Consolidated Balance Sheets as of December 31, 2021 and 2022
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2020,
2021 and 2022
F-2
F-5
F-6
F-9
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2020, 2021 and 2022
F-11
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2021 and 2022
Notes to the Consolidated Financial Statements
Schedule I—Condensed Financial Information of Fanhua Inc.
F-13
F-15
F-57
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Fanhua Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Fanhua Inc. and its subsidiaries (the
“Company”) as of December 31, 2022 and 2021, the related consolidated statements of income and comprehensive
income, shareholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2022, and
the related notes and schedule I (collectively referred to as the “financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and
2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31,
2022, in conformity with accounting principles generally accepted in the United States of America.
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 RMB329 million as of December 31, 2021, and its equity
earnings in CNFinance of RMB11 million for the year ended December 31, 2021. Those statements were audited by
other auditors whose report 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, 2022, 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 25, 2023, expressed an unqualified opinion on
the Company’s internal control over financial reporting.
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(u) to the financial statements.
Such United States dollar amounts are presented solely for the convenience of readers outside of People’s Republic
of China.
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 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
F-2
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.
Revenue recognition: Estimate of variable renewal commissions for long-term life insurance products and impact
on revenue recognized — Refer to Note 2(q) to the financial statements
Critical Audit Matter Description
The Company recognized agency revenues for the life insurance business of approximately RMB2,237.3 million
in 2022 of which RMB245.7 million relates to estimated variable renewal commissions for long-term life insurance
products. As described in Note 2(q) to its financial statements, the Company uses the expected value method and
considers constraints as well to estimate variable renewal commissions, which are contingent on future renewals of
initial policies or achievement of certain performance targets. Given the material uncertainty around the future renewal
of the insurance policies, the estimated renewal commissions expected to be collected are recognized as revenue only
to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not
occur when the uncertainty is subsequently resolved.
Auditing management’s determination of estimated variable renewal commissions was complex and highly
judgmental due to the complexity of the models used and the subjectivity required by the Company to estimate the
amount for future renewals of policies, calculate the amount of commission revenue that is probable of not being
reversed, and determine the timing and amount of any revenue adjustment that results from changes in the estimates
of previously recorded estimated renewal commissions. The Company utilizes statistical methodologies to estimate
renewal rate(s), which is a key driver when estimating the amount of future renewals of policies. To determine the
constraint to be applied to estimated renewal commissions, the Company evaluates historical experiences and data
and applies judgment. For the ongoing evaluation of assumptions, the Company also analyzes whether circumstances
have changed and considers any known or potential modifications to the inputs into estimated renewal commissions
model and the factors that can impact the amount of renewal commissions expected to be collected in future periods
such as commission rates, insurance products composition, renewal terms of insurance products and changes in
relevant laws and regulations. The judgment and assumptions are continuously re-evaluated and adjusted as needed
along with the accumulation of historical experiences and data when new information becomes available.
Given the significant judgment required to determine the amount of estimated variable renewal commissions,
performing audit procedures to evaluate the reasonableness of management’s assessment required a high degree of
auditor judgment 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 estimate of variable
renewal commissions for long-term life insurance products discussed above included the following, among others:
● We obtained an understanding, evaluated the design, and tested the operating effectiveness of the controls
over the Company’s process to estimate variable renewal commissions for long-term life insurance products.
● We engaged our internal actuarial specialists to assist in our evaluation of the appropriateness of the
methodology, including the determination of portfolio of contracts, and assumptions used by management to
estimate variable renewal commissions by benchmarking the methods and assumptions against general
market practice within the insurance industry.
● We tested the completeness and accuracy of the underlying data that served as the basis for our substantial
analytical procedures.
F-3
● We developed a range of independent estimates and comparing those to the renewal rate selected by
management for evaluating the reasonableness of management’s assumptions.
● We performed substantive analytical procedures by developing an independent expectation for comparison
to the Company’s estimate applying our own methods as well as assumptions with the Company’s data, and
evaluation of significant unexpected differences, if any.
● We performed retrospective review to compare the actual realized renewal commissions with the estimated
value that has been recognized as revenues.
/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP
Shenzhen, the People’s Republic of China
April 25, 2023
We have served as the Company’s auditor since 2021.
F-4
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 statement of income and comprehensive income, shareholders’
equity, and cash flows of Fanhua Inc. and its subsidiaries (the “Company”) for the year ended December 31, 2020,
and the related notes and schedule I (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, and the
results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting
principles generally accepted in the United States of America.
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 earnings in CNFinance of RMB18 million for the year ended December 31, 2020. This
statement was audited by other auditors whose report (which, as to 2020, 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.
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 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.
/s/ Deloitte Touche Tohmatsu
Certified Public Accountants
Hong Kong
April 28, 2021
We began serving as the Company’s auditor in 2007. In 2021 we became the predecessor auditor.
F-5
FANHUA INC.
Consolidated Balance Sheets
(In thousands, except for shares and per share data)
ASSETS:
Current assets:
Cash and cash equivalents
Restricted cash (including restricted cash of the consolidated VIEs and
2021
RMB
As of December 31,
2022
RMB
2022
US$
Note 2(u)
564,624 567,525
82,283
VIEs’ subsidiaries that can only be used to settle obligations of the VIEs
of RMB24,082 and RMB15,832 as of December 31, 2021 and 2022,
respectively)
76,303
59,957
8,693
Short term investments (including investments measured at fair value of
RMB857,682 and RMB331,228 as of December 31, 2021 and 2022,
respectively)
870,682 347,754
50,420
Accounts receivable, net of allowances of RMB27,934 and RMB15,361 as
of December 31, 2021 and 2022, respectively
390,332 393,600
57,066
Contract assets, net of allowances of RMB53 and nil as of December 31,
2021 and 2022, respectively
Other receivables, net
Other current assets, net
Total current assets
263,425 273,954
60,755 231,049
39,947 419,735
39,720
33,499
60,856
2,266,068 2,293,574 332,537
15,595
20,729
3,005
46,800
18,728
335,808
31,459
55,941
192,114 385,834
14,275
98,459
15,948
109,869 109,997
2,958
20,402
585
4,035
1,653
11,400
225,677 145,086
21,036
976,050 795,942 115,401
3,242,118 3,089,516 447,938
Non-current assets:
Restricted bank deposit – non-current (including restricted cash of the
consolidated VIEs and VIEs’ subsidiaries that can only be used to settle
obligations of the VIEs of RMB6,261 and RMB11,283 as of December
31, 2021 and 2022, respectively)
Contract assets - non-current, net of allowances of RMB38 and nil as of
December 31, 2021 and 2022, respectively
Property, plant, and equipment, net
Goodwill, net
Deferred tax assets
Investments in affiliates
Other non-current assets
Right of use assets
Total non-current assets
Total assets
F-6
FANHUA INC.
Consolidated Balance Sheets—(Continued)
(In thousands, except for shares and per share data)
2021
RMB
As of December 31,
2022
RMB
2022
US$
Note 2(u)
—
35,679
5,173
335,721 362,352
74,432
41,837
52,536
10,792
24,054
16,580
2,404
178,157 174,326
25,275
111,672
96,279
13,959
130,222 130,024
18,852
87,012
9,033
908,675 951,976 138,024
62,304
LIABILITIES AND EQUITY:
Current liabilities:
Short-term loan
Accounts payable (including accounts payable of the consolidated VIEs
and VIEs’ subsidiaries without recourse to the Company of RMB4,929
and RMB8,600 as of December 31, 2021 and 2022, respectively)
Accrued commissions
Insurance premium payables (including insurance premium payables of
the consolidated VIEs and VIEs’ subsidiaries without recourse to the
Company of RMB24,054 and RMB16,571 as of December 31, 2021
and 2022, respectively)
Other payables and accrued expenses (including other payables and
accrued expenses of the consolidated VIEs and VIEs’ subsidiaries
without recourse to the Company of RMB1,601 and RMB3,267 as of
December 31, 2021 and 2022, respectively)
Accrued payroll (including accrued payroll of the consolidated VIEs and
VIEs’ subsidiaries without recourse to the Company of RMB2,166 and
RMB10,941 as of December 31, 2021 and 2022, respectively)
Income taxes payable (including income taxes payable of the consolidated
VIEs and VIEs’ subsidiaries without recourse to the Company of
RMB6,617 and RMB7,509 as of December 31, 2021 and 2022,
respectively)
Current operating lease liability (including current operating lease liability
of the consolidated VIEs and VIEs’ subsidiaries without recourse to the
Company of RMB733 and RMB3,569 as of December 31, 2021 and
2022, respectively)
Total current liabilities
F-7
FANHUA INC.
Consolidated Balance Sheets—(Continued)
(In thousands, except for shares and per share data)
2021
RMB
As of December 31,
2022
RMB
2022
US$
Note 2(u)
97,869 192,917
27,970
36,647
73,213
73,716 102,455
5,313
14,855
10,756
128,283
74,190
373,081 406,209
58,894
1,281,756 1,358,185 196,918
Non-current liabilities:
Accrued commissions – non-current
Other tax liabilities (including other tax liability of the consolidated VIEs
and VIEs’ subsidiaries without recourse to the Company of nil and
RMB26,147 as of December 31, 2021 and 2022, respectively)
Deferred tax liabilities
Non-current operating lease liability (including non-current operating
lease liability of the consolidated VIEs and VIEs’ subsidiaries without
recourse to the Company of RMB553 and RMB1,386 as of December
31, 2021 and 2022, respectively)
Total non-current liabilities
Total liabilities
Commitments and contingencies
Equity:
Ordinary shares (Authorized shares:10,000,000,000 at US$0.001 each;
issued 1,073,891,784 and 1,074,291,784 shares, of which 1,073,891,784
and 1,072,842,484 shares were outstanding as of December 31, 2021
and 2022, respectively)
Treasury stock
Additional paid-in capital
Statutory reserves
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Noncontrolling interests
Total equity
Total liabilities and shareholders’ equity
8,089
—
—
1,173
8,091
(1 )
(10 )
67
461
557,221 559,520
81,123
1,311,715 1,087,984 157,743
(4,733 )
1,837,885 1,623,403 235,372
122,477 107,928
15,648
1,960,362 1,731,331 251,020
3,242,118 3,089,516 447,938
(39,140 )
(32,643 )
The accompanying notes are an integral part of the consolidated financial statements.
F-8
FANHUA INC.
Consolidated Statements of Income and Comprehensive Income
(In thousands, except for shares and per share data)
Year Ended December 31,
2020
RMB
2021
RMB
2022
RMB
2022
US$
Note 2(u)
2,834,997 2,811,936 2,376,851 344,611
2,703,584 2,679,720 2,237,312 324,380
20,231
58,685
3,268,145 3,271,114 2,781,614 403,296
139,539
404,763
131,413
433,148
132,216
459,178
(93,185 )
(279,342 )
(87,517 )
(260,121 )
(1,953,744 ) (1,835,825 ) (1,527,572 ) (221,477 )
(1,866,227 ) (1,742,640 ) (1,436,606 ) (208,288 )
(13,189 )
(38,861 )
(2,213,865 ) (2,115,167 ) (1,795,603 ) (260,338 )
(39,539 )
(78,964 )
(2,965,959 ) (2,969,209 ) (2,612,939 ) (378,841 )
24,455
(272,706 )
(544,630 )
(90,966 )
(268,031 )
(288,460 )
(463,634 )
(306,463 )
(547,579 )
168,675
302,186
301,905
34,789
13,420
11,907
32,898
2,971
33,314
17,809
13,674
(3,823 )
2,582
1,983
(554 )
362,302
(83,387 )
(2,738 )
276,177
7,923
268,254
371,088
(90,574 )
(20,573 )
259,941
8,952
250,989
196,335
(41,016 )
(69,596 )
85,723
(14,549 )
100,272
28,466
(5,947 )
(10,090 )
12,429
(2,109 )
14,538
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 related to the realized gain on available-
for-sale investments
Interest income
Others, net
Income before income taxes, share of income and
impairment of affiliates, net
Income tax expense
Share of income of affiliates, net of impairment
Net income
Less: net income attributable to the noncontrolling interests
Net income attributable to the Company’s shareholders
F-9
FANHUA INC.
Consolidated Statements of Income and Comprehensive Income—Continued
(In thousands, except for shares and per share data)
Net income per share:
Basic
Diluted:
Shares used in calculating net income per
share:
Basic:
Diluted
Net income
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
Unrealized net gains (loss) on available-for-sale
investments
Share of other comprehensive (loss) gain of
affiliates
Total comprehensive income
Less: Comprehensive income (loss) attributable to
Year Ended December 31,
2020
RMB
2021
RMB
2022
RMB
2022
US$
Note 2(u)
0.25
0.25
0.23
0.23
0.09
0.09
0.01
0.01
1,073,891,784 1,073,891,784 1,074,196,310 1,074,196,310
1,074,291,360 1,074,291,194 1,074,457,821 1,074,457,821
276,177
259,941
85,723
12,429
9,639
(9,116 )
3,728
23,811
6,252
(1,919 )
541
(278 )
(3,016 )
306,611
(1,281 )
255,796
4,688
92,220
680
13,372
the noncontrolling interests
7,923
8,952
(14,549 )
(2,109 )
Comprehensive income attributable to the
Company’s shareholders
298,688
246,844
106,769
15,481
The accompanying notes are an integral part of the consolidated financial statements.
F-10
Consolidated Statements of Shareholders’ Equity
(In thousands, except for shares and per share data)
FANHUA INC.
Share Capital
Additional
Treasury Stock
Accumulated
Other
Number of
Share
Amounts
Paid-in
Capital
Number of
Share
Amounts
Statutory
Reserves
Retained
Earnings
Comprehensive
Loss
Noncontrolling
Interests
Total
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
Balance as of January 1, 2020
1,252,367,264
9,235
393 178,475,480
(1,146 )
508,739 1,479,494
(65,429 )
113,182 2,044,468
—
—
—
—
—
(7,523 )
268,254
—
—
—
45,172
(45,172 )
—
(388,499 )
—
—
9,639
—
—
—
—
—
—
—
—
23,811
(3,016 )
—
(7,523 )
7,923
276,177
—
—
—
—
9,639
—
(393 )
—
—
(388,499 )
—
—
23,811
(3,016 )
553,911 1,306,554
(34,995 )
121,105 1,954,664
—
—
250,989
—
8,952
259,941
—
(9,116 )
3,310
(3,310 )
—
(242,518 )
—
—
—
—
(9,116 )
—
(7,580 )
(250,098 )
—
—
—
—
6,252
(1,281 )
—
—
6,252
(1,281 )
557,221 1,311,715
(39,140 )
122,477 1,960,362
Cumulative-effect adjustment to beginning
balance from adoption of ASU 2016-13
Net income
Foreign currency translation
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Cancellation of treasury shares
(178,475,480 )
(1,146 )
— (178,475,480 )
1,146
Share-based compensation (Note 2(o))
Provision for statutory reserves
Distribution of dividend
Unrealized net gains on available-for-sale
investments
Share of other comprehensive loss of affiliates
—
—
—
—
—
—
—
—
—
—
Balance as of December 31, 2020
1,073,891,784
8,089
Net income
Foreign currency translation
Provision for statutory reserves
Distribution of dividend
Unrealized net gains on available-for-sale
investments
Share of other comprehensive loss of affiliates
—
—
—
—
—
—
—
—
—
—
—
—
Balance as of December 31, 2021
1,073,891,784
8,089
(393 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
F-11
FANHUA INC.
Consolidated Statements of Shareholders’ Equity—(Continued)
(In thousands, except for shares and per share data)
Share Capital
Additional
Treasury Stock
Accumulated
Other
Number of
Share
Amounts
Paid-in
Capital
Number of
Share
Amounts
Statutory
Reserves
Retained
Earnings
Comprehensive
Loss
Noncontrolling
Interests
Total
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
100,272
—
(14,549 )
85,723
Net income (loss)
Foreign currency translation
Exercise of share options
Repurchase of ordinary shares from open market
Share-based compensation
Provision for statutory reserves
Cash dividend
Pro rata distribution of equity method investee’s
shares to shareholders (Note 8)
Unrealized net loss on available-for-sale
investments
Share of other comprehensive gain of affiliates
—
—
400,000
—
—
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
—
—
—
—
—
—
— 1,449,300
461
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(10 )
—
—
—
—
—
—
—
—
—
—
—
—
—
(3,974 )
—
2,299
(2,299 )
—
(52,069 )
—
(265,661 )
3,728
—
—
—
—
—
—
—
—
—
—
(1,919 )
4,688
—
—
—
—
—
—
3,728
2
(3,984 )
461
—
(52,069 )
—
(265,661 )
—
—
(1,919 )
4,688
Balance as of December 31, 2022
1,074,291,784
8,091
461 1,449,300
(10 )
559,520 1,087,984
(32,643 )
107,928 1,731,331
Balance as of December 31, 2022 in US$ (Note
2(u))
1,074,291,784
1,173
67 1,449,300
(1 )
81,123
157,743
(4,733 )
15,648
251,020
The accompanying notes are an integral part of the consolidated financial statements.
F-12
FANHUA INC.
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from 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
Provision for (reversal of) allowance for credit losses on
financial assets
Compensation expenses associated with stock options
Loss on disposal of property, plant and equipment
Investment income
Gain on disposal of subsidiaries
Share of income of affiliates, net of impairment
Deferred taxes
Interest accrued for other receivables (loan receivables)
Changes in operating assets and liabilities:
Accounts receivable
Contract assets
Insurance premium receivables
Other receivables
Other current assets
Other non-current assets
Accounts payable
Accrued commissions
Insurance premium payables
Other payables and accrued expenses
Accrued payroll
Income taxes payable
Lease liability
Other tax liabilities
Net cash generated from operating activities
Cash flows from 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 nil,
Year Ended December 31,
2020
RMB
2021
RMB
2022
RMB
2022
US$
Note 2(u)
276,177
259,941
85,723
12,429
17,658
281
95,423
18,342
45
101,448
19,473
—
90,419
2,823
—
13,109
18,837
(393 )
1,295
(14,321 )
—
2,738
15,778
—
157,844
(67,294 )
5,067
4,452
13,839
2,245
(5,496 )
—
17,520
(32,159 )
4,075
(9,269 )
(98,866 )
(3,131 )
402,300
(235 )
—
1,394
(3,171 )
(2,051 )
20,573
23,905
—
(5,528 )
(257,182 )
—
(31,066 )
1,201
2,284
(37,104 )
139,706
(1,367 )
(131 )
6,265
(15,880 )
(101,186 )
5,995
126,198
30,701
461
2,825
(10,963 )
—
69,596
27,845
(3,353 )
(1,491 )
(204,249 )
—
37,262
8,623
(51 )
22,099
127,643
(7,375 )
(16,264 )
(15,771 )
(262 )
(88,573 )
(36,566 )
137,752
4,451
67
410
(1,590 )
—
10,090
4,037
(486 )
(216 )
(29,613 )
—
5,402
1,250
(7 )
3,204
18,506
(1,068 )
(2,358 )
(2,286 )
(38 )
(12,842 )
(5,302 )
19,972
(7,947,662 ) (8,184,363 ) (2,550,300 ) (369,759 )
8,287,924 8,646,532 3,239,556 469,691
(11,272 )
551
(77,746 )
3,799
(15,250 )
324
(30,785 )
1,025
RMB2,040 and nil in 2020, 2021 and 2022, respectively
Cash lent to third parties
—
(90,000 )
960
—
—
(205,800 )
—
(29,838 )
F-13
FANHUA INC.
Consolidated Statements of Cash Flows—(Continued)
(In thousands)
Year Ended December 31,
Repayment of loan receivables from third parties
Prepayment for purchase of short-term investments
Payment for business acquisition, net of cash acquired
Others
Net cash generated from (used in) investing activities
Cash flows from financing activities:
Proceeds from bank borrowings
Repayment of refundable share rights deposits to the 521
Plan participants
Dividends paid
Dividend distributed to noncontrolling interest
Repurchase of ordinary shares from open market
Others
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents, and
2020
RMB
2021
RMB
2022
RMB
6,830
90,000
—
—
—
24,500
— (540,000 )
(21,571 )
—
—
10,200
325,336 450,399 (127,562 )
2022
US$
Note 2(u)
3,552
(78,293 )
(3,127 )
—
(18,495 )
—
—
35,679
5,173
(250,312 )
—
(388,499 ) (242,518 )
(7,580 )
—
(10,200 )
(638,811 ) (260,298 )
—
—
—
—
(52,069 )
—
(3,984 )
3
(20,371 )
—
(7,549 )
—
(578 )
—
(2,954 )
restricted cash
88,825 316,299
(10,181 )
(1,477 )
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 the end
265,605 350,098 656,522
95,187
(4,332 )
(9,875 )
1,870
271
of the year
350,098 656,522 648,211
93,981
Reconciliation in amounts on the consolidated balance
sheets:
Cash and cash equivalents at the end of the year
Restricted cash at the end of the year
Total of cash and cash equivalents and restricted cash at
245,428 564,624 567,525
80,686
104,670
91,898
82,283
11,698
the end of the year
350,098 656,522 648,211
93,981
Supplemental disclosure of cash flow information:
Income taxes paid
Supplemental disclosure of non-cash operating activity:
Effect on operating assets upon the adoption of ASU
79,063
74,323
47,029
6,819
2016-13 on January 1, 2020
7,523
—
—
—
Supplemental disclosure of non-cash investing activities:
Right-of-use assets obtained in exchange for lease
obligations, net of decrease of right-of-use assets for
early terminations
108,178 125,487
4,462
647
Supplemental disclosure of non-cash financing activities:
Dividend distribution in equity method investee’s shares
—
— 265,661
38,517
The accompanying notes are an integral part of the consolidated financial statements.
F-14
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 the consolidated
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 order to comply with the PRC laws and regulations which prohibit or restrict foreign control of companies
involved in provision of internet content and other restricted businesses, the Group operates certain of its businesses
which are subject to restrictions in the PRC through PRC domestic companies, whose equity interests are held by
certain individuals (“Nominee Shareholders”). The Group obtained control over these PRC domestic companies by
entering into a series of contractual arrangements with these PRC domestic companies and their respective Nominee
Shareholders. Management concluded that these PRC domestic companies are consolidated VIEs of the Group, of
which the Group is the primary beneficiary. As such, the Group consolidated the financial results of these PRC
domestic companies and their subsidiaries in the Group’s consolidated financial statements. See Note 10 for details.
(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 Group evaluates estimates, including those
related to the amounts of variable considerations of revenue contracts with respect to long-term life insurance products,
the allowance for credit losses of accounts receivable, contract assets, other receivables, fair values of certain debt and
equity investments, the useful lives of property, plant and equipment, impairment of long-lived assets, goodwill,
investments in affiliates and other long-term equity investments, and deferred tax valuation allowance among others.
The Group, based their estimates on historical experience and various other factors, believed to be reasonable under
the circumstances, that the results of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
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)
(c) Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash on hand, bank deposits and short-term, highly liquid investments, which
have original maturities of three months or less, and 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 the insureds and remits the premiums to
the appropriate insurance companies. Accordingly, as reported in the consolidated statements of balance sheets,
“premiums” are receivables from the insureds of RMB24,459 and RMB15,847 as of December 31, 2021 and 2022,
respectively. Unremitted net insurance premiums are held in a fiduciary capacity until disbursed by the Group. The
Group invests these unremitted funds only in cash accounts held for a short term, and reports such amounts as restricted
cash in the consolidated balance sheets. Also, restricted cash balance includes the entrustment deposit received from
the members of eHuzhu, an online mutual aid platform operated by the Group, which is to be used during the one-
year operating cycle and is therefore classified as a current asset. The balance for entrustment deposit was RMB51,844
and RMB44,110 as of December 31, 2021 and 2022, respectively. Further, restricted cash balance includes guarantee
deposit required by China Banking and Insurance Regulatory Commission (“CBIRC”) in order to protect insurance
premium appropriation by insurance agency which is restricted as to withdrawal for other than current operations.
Thus, the Group classified the balance for guarantee deposit as a non-current asset. The balance for guarantee was
RMB15,595 and RMB20,729 as of December 31, 2021 and 2022, respectively.
(d) Short Term Investments
All highly liquid investments with original maturities less than twelve months or investments that are expected to
be realized in cash during the next twelve months are classified as short-term investments. The Group accounts for
short-term debt investments in accordance with ASC Topic 320, Investments – Debt Securities (“ASC 320”). The
Company classifies the short-term investments in debt securities as held-to-maturity or available-for-sale, whose
classification determines the respective accounting methods stipulated by ASC 320. Dividend and interest income for
all categories of investments in securities are included in earnings. Any realized gains or losses on the sale of the short-
term investments are determined on a specific identification method, and such gains and losses are reflected in earnings
during the period in which gains or losses are realized.
Securities that the Group has the positive intent and ability to hold to maturity are classified as held-to-maturity
securities and stated at amortized cost less allowance for credit losses. The Group has no debt investments classified
as trading. The Group’s short term investments are mainly available-for-sale 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.
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)
(d) Short Term Investments (Continued)
The Group evaluates each individual available-for-sale debt securities periodically for impairment. For
investments where the Group does not intend to sell, the Group evaluates whether a decline in fair value is due to
deterioration in credit risk. Credit-related impairment losses, not to exceed the amount that fair value is less than the
amortized cost basis, are recognized through an allowance for credit losses on the consolidated balance sheet with
corresponding adjustment in the consolidated statements of income and comprehensive income. Subsequent increases
in fair value due to credit improvement are recognized through reversal of the credit loss and corresponding reduction
in the allowance for credit loss. Any decline in fair value that is non-credit related is recorded in accumulated other
comprehensive income as a component of shareholder’s equity. As of December 31, 2022, there were no investments
held by the Group that had been in continuous unrealized loss position.
No impairment loss on short term investments was identified for years ended December 31, 2020, 2021 and 2022,
respectively.
(e) Accounts Receivable and Contract Assets
Accounts receivable are recorded at the amount that the Group expects to collect and do not bear interest.
Accounts receivables represent fees receivable on agency and claims adjusting services primarily from insurance
companies.
The Group evaluates the collectability of its trade receivables and contract assets based on a combination of
factors. The Group generally does not require collateral on trade receivables and contract assets as the majority of the
Group’s customers are large, well-established insurance companies. The Group estimates allowances for expected
credit losses using relevant available information from internal and external sources, related to past events, the age of
the accounts receivable and contract assets balances, current conditions, and reasonable and supportable forecasts.
Credit loss expenses are assessed quarterly and included in general and administrative expense on the consolidated
statements of income and comprehensive income.
Accounts receivable and Contract Assets, net is analyzed as follows:
As of December 31,
2022
RMB
2021
RMB
418,266 408,961
455,630 659,788
(15,361 )
845,871 1,053,388
(28,025 )
Accounts receivable
Contract Assets (See Note 2(q))
Allowance for doubtful accounts
Accounts receivable and Contract Assets, net
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)
(e) Accounts Receivable and Contract Assets (Continued)
The following table summarizes the movement of the Group’s allowance for expected credit losses of accounts
receivable and contract assets:
Balance at the beginning of the year
Cumulative-effect adjustment upon adoption of ASU 2016-13
Current period provision (reversal of) for expected credit losses
Write-offs
Balance at the end of the year
(f) Property, Plant and Equipment
2020
RMB
2021
RMB
2022
RMB
20,495
7,436
4,831
(3,762 )
29,000
29,000
—
2,095
(3,070 )
28,025
28,025
—
(1,378 )
(11,286 )
15,361
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
Estimated
residual
value
0%
3-5
5-10
5
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
Selling expenses
General and administrative expenses
Depreciation expense
2020
RMB
2021
RMB
2022
RMB
199
7,350
10,109
17,658
791
5,778
11,773
18,342
822
5,106
13,545
19,473
(g) Business combinations and non-controlling interests
In determining whether a particular set of activities and assets is a business, the Group assesses whether the set
of assets and activities acquired includes, at a minimum, an input and substantive process and whether the acquired
set has the ability to produce outputs. The Group has an option to apply a ‘concentration test’ that permits a simplified
assessment of whether an acquired set of activities and assets is not a business. The optional concentration test is met
if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group
of similar identifiable assets.
F-18
Transactions in which the acquired is considered a business are accounted for as a business combination as
described below. Conversely, transactions not considered as business acquisition are accounted for as acquisition of
assets and liabilities. In such transactions, the cost of acquisition is allocated proportionately to the acquired
identifiable assets and liabilities, based on their proportionate fair value on the acquisition date. In an assets acquisition,
no goodwill is recognized, and no deferred taxes are recognized in respect of the temporary differences existing on
the acquisition date.
The Group accounts for its business combinations using the acquisition method of accounting in accordance with
ASC 805 “Business Combinations”. The cost of an acquisition is measured as the aggregate of the acquisition date
fair value of the assets transferred, liabilities incurred by the Group to the sellers and equity instruments issued.
Transaction costs directly attributable to the acquisition are expensed as incurred. Identifiable assets acquired and
liabilities assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of
any non-controlling interests. The excess of (i) the total costs of acquisition, fair value of the non-controlling interests
and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the
identifiable net assets of the acquiree, is recorded as goodwill.
For the Group’s majority-owned subsidiaries, VIEs and subsidiaries of VIEs, a non-controlling interest is
recognized to reflect the portion of their equity which is not attributable, directly or indirectly, to the Group.
Consolidated net income on the consolidated statements of income and comprehensive income includes the net income
attributable to non-controlling interests. The cumulative results of operations attributable to non-controlling interests,
are recorded as non-controlling interests on the Group’s consolidated balance sheets.
(h) 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 years ended December 31, 2021 and 2022.
The impairment test is performed as of year-end or if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying amount by comparing the fair value of a
reporting unit with its carrying value. If the fair value of the reporting unit exceeds its carrying amount, goodwill is
not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, an
impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value;
however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.
The impairment review is highly judgmental and involves the use of significant estimates and assumptions. These
estimates and assumptions have a significant impact on the amount of any impairment charge recorded. Estimates of
fair value are primarily determined by using discounted cash flows. Discounted cash flows method is dependent upon
assumptions of future sales trends, market conditions and cash flows of each reporting unit over several years. Actual
cash flows in the future may differ significantly from those previously forecasted. Other significant assumptions
include growth rates and the discount rate applicable to future cash flows.
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)
(h) Goodwill and Other Intangible Assets (Continued)
Goodwill and amortization of intangible assets (Continued)
In 2021 and 2022, management compared the carrying value of each reporting unit, inclusive of assigned goodwill,
to its respective fair value. The fair value of all reporting units was estimated by using the income approach. Based on
this quantitative test, it was determined that the fair value of each reporting unit tested exceeded its carrying amount
and, therefore, the management concluded that goodwill was not impaired as of December 31, 2021and 2022,
respectively.
Identifiable intangibles assets are required to be determined separately from goodwill based on their fair values.
In particular, an intangible asset acquired in a business combination should be recognized as an asset separate from
goodwill if it satisfies either the “contractual-legal” or “separability” criterion. Intangible assets with a finite economic
life are carried at cost less accumulated amortization. Amortization for identifiable intangible assets categorized as
customer relationships is computed using the accelerated method, while amortization for other identifiable intangible
assets is computed using the straight-line method over the intangible assets’ economic lives. Intangible assets with
indefinite economic lives are not amortized but carried at cost less any subsequent accumulated impairment losses. If
an intangible asset that is not being amortized is subsequently determined to have a finite economic life, it will be
tested for impairment and then amortized prospectively over its estimated remaining economic life and accounted for
in the same manner as other intangible assets that are subject to amortization. Intangible assets with indefinite
economic lives are tested for impairment annually or more frequently if events or changes in circumstances indicate
that they might be impaired.
The intangible assets, net consisted of trade names with a cost of RMB8,898 as of December 31, 2021 and 2022,
respectively. The trade names have an estimated useful life of 9.4 to 10 years and accumulated amortization of
RMB8,898 as of December 31, 2021and 2022, respectively. The residual balance is nil as of December 31, 2021 and
2022, respectively. Aggregate amortization expenses for intangible assets were RMB281, RMB44 and nil for the years
ended December 31, 2020, 2021 and 2022, 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. The Group
recognized no impairment losses on identifiable intangible assets with determinable useful lives in the years ended
December 31, 2020, 2021 and 2022.
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
F-20
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 a potential purchase quote from a
third party, if any. The Group recognized no impairment losses on its indefinite-lived intangible assets in the years
ended December 31, 2020, 2021 and 2022.
(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 publicly 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) Long-term Equity Investments
Other non-current assets mainly represent long-term equity investments accounted for under the measurement
alternative method.
Equity securities without readily determinable fair value
The Group has long-term investments in equity security of certain privately held companies which the Group
exerts no significant influence or a controlling interest. As a result of adoption of “Financial Instruments-Overall
(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”) in
January 1, 2019, equity securities without readily determinable fair values that do not qualify for the practical
expedient in ASC 820, Fair Value Measurements and Disclosure to estimate fair value using the net asset value per
share (or its equivalent) of the investment, are measured and recorded using a measurement alternative that measures
the securities at cost less impairment, if any, plus or minus changes resulting from qualifying observable price changes.
Significant judgments are required to determine whether observable price changes are orderly transactions and
identical or similar to an investment held by the Group.
During each reporting period, the Group makes a qualitative assessment considering impairment indicators to
separately evaluate whether each of its equity securities without readily determinable fair value is impaired.
Impairment indicators that the Group considers include, but are not limited to a significant deterioration in the earnings
performance, credit rating, asset quality, or business prospects of the investee, factors such as negative cash flows
from operations and working capital deficiencies that raise significant concerns about the investee’s ability to continue
as a going concern, current economic and market conditions and other specific information. If a qualitative assessment
indicates that the investment is impaired, the entity has to estimate the investment’s fair value in accordance with the
principles of ASC 820. If the fair value is less than the investment’s carrying value, the Group recognizes an
impairment loss in earnings equal to the difference between the carrying value and fair value.
The Group recorded an impairment of RMB10,929, nil and RMB20,110 during the years ended December 31,
2020, 2021 and 2022, respectively, in the consolidated statements of income and comprehensive income.
(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
F-21
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) 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.
(n) 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 records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in
which (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the
technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold,
the Group recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate
settlement with the related tax authority. The Group recognizes interest and penalties related to unrecognized tax
benefits, if any, on the income tax expense line in the accompanying consolidated statement of income and
comprehensive income. Accrued interest or penalties are included on the other tax liabilities line in the consolidated
balance sheets.
(o) Share-based Compensation
All forms of share-based payments to employees and nonemployees, including stock options and stock purchase
plans, are treated the same as any other form of compensation by recognizing the related cost in the consolidated
statements of income and comprehensive income. The Group recognizes compensation cost for an award with only
service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the
entire award, provided that the amount of compensation cost recognized at any date must at least equal to the portion
of the grant-date value of the award that is vested at that date. For awards with both service and performance conditions,
if each tranche has an independent performance condition for a specified period of service, the Group recognizes the
compensation cost of each tranche as a separate award on a straight-line basis; if each tranche has performance
conditions that are dependent of activities that occur in the prior service periods, the Group recognizes the
compensation cost on a straight-line basis over the requisite service period for each separately vesting portion of the
award as if the award was, in-substance, multiple awards. The Group has made an accounting policy election to
account for forfeitures when they occur for an award with only service conditions. For an award with a performance
condition, the Group continues to assess at each reporting period whether it is probable that the performance condition
will be achieved. No compensation cost is recognized for instruments that employees and nonemployees forfeit
because a service condition or a performance condition is not satisfied.
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)
(o) Share-based Compensation (Continued)
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
Consistent with the accounting requirement for employee share-based compensation, nonemployee share-based
compensation within the scope of Topic 718 are measured at grant-date fair value of the equity instruments, which the
Group is obligated to issue when the service has been rendered and any other conditions necessary to earn the right to
benefit from the instruments have been satisfied.
Classification of award
Options or similar instruments on shares shall be classified as liabilities instead of equity if either of the following
conditions is met:
● The underlying shares are classified as liabilities;
● The Group can be required under any circumstances to settle the option or similar instrument by transferring
cash or other assets.
The Group measures a liability award under a share-based payment arrangement based on the award’s fair value
remeasured at each reporting date until the date of settlement. The corresponding credit is recorded as a share-based
liability. Compensation cost for each period until settlement shall be based on the change (or a portion of the change,
depending on the percentage of the requisite service that has been rendered at the reporting date) in the fair value of
the instrument for each reporting date.
The Group measures an equity award based on the awards’ fair value on grant date and recognizes the
compensation cost over the vesting periods, with the corresponding credit recorded as additional paid-in capital.
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)
(o) Share-based Compensation (Continued)
Modification of an Award
A change in any of the terms or conditions of the awards is accounted for as a modification of the award.
Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair
value of the original award immediately before its terms are modified, measured based on the fair value of the awards
and other pertinent factors at the modification date. For vested awards, the Group recognizes incremental
compensation cost in the period the modification occurs. For unvested awards, the Group recognizes over the
remaining requisite service period, the sum of the incremental compensation cost and the remaining unrecognized
compensation cost for the original award on the modification date. If the fair value of the modified award is lower
than the fair value of the original award immediately before modification, the minimum compensation cost the Group
recognizes is the cost of the original award.
Cancellation of an Award
A cancellation of an award that is not accompanied by the concurrent grant of (or offer to grant) a replacement
award or other valuable consideration shall be accounted for as a repurchase for no consideration. Accordingly, any
previously unrecognized compensation cost shall be recognized immediately at the cancellation date.
Share-based compensation expenses of RMB(393), nil and RMB461 for the years ended December 31, 2020,
2021 and 2022, respectively, were included in the selling, general and administrative expenses. During fiscal year
ended December 31, 2020, the Group reversed cumulative cost recognized in prior periods as the stock option were
not probable to be vested because the performance target was not probable to be met.
(p) Employee Benefit Plans
As stipulated by the regulations of the PRC, the Group’s subsidiaries in the PRC participate in various defined
contribution plans organized by municipal and provincial governments for its employees. The Group is required to
make contributions to these plans at a percentage of the salaries, bonuses and certain allowances of the employees.
Under these plans, certain pension, medical and other welfare benefits are provided to employees. The Group has no
other material obligation for the payment of employee benefits associated with these plans other than the annual
contributions described above. The contributions are charged to the consolidated statements of income and
comprehensive income as they become payable in accordance with the rules of the above mentioned defined
contribution plans.
(q) Revenue Recognition
The Group’s revenue from contracts with insurance companies is derived principally from the provision of agency
and claims adjusting services, and insurance companies are defined as the Group’s customers under ASC 606
“Revenue from Contracts with Customers” (“ASC 606”). The Group disaggregates its revenue from different types
of service contracts with customers by principal service categories, as the Group believes it best depicts the nature,
amount, timing and uncertainty of its revenue and cash flows. See Note 22 for detailed disaggregated revenue
information that is disclosed for each reportable segment.
The following is a description of the accounting policy for the principal revenue streams of the Group.
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)
(q) Revenue Recognition (Continued)
Insurance agency services revenue
The Group derives agency revenue serving as a sales agent to distribute various life insurance and property and
casualty (“P&C”) insurance products on behalf of insurance companies by which the Group is entitled to receive an
initial commission from the insurance companies based on the premium paid by the policyholders for the related
insurance policy sold. For life insurance agency, the Group is also entitled to renewal commissions when the
policyholder renews the policy within the renewal term of the original policy as such life insurance products are
typically long-term products.
The Group has identified its promise to sell insurance products on behalf of an insurance company as the
performance obligation in its contracts with the insurance companies. The Group’s performance obligation to the
insurance company is satisfied and revenue is recognized at a point in time when an insurance policy becomes effective.
Specifically for life insurance agency business, certain contracts include the promise to provide certain post-sales
administrative services to policyholders on behalf of the insurance company, such as responding to the policyholder
inquiries, facilitating the renewal process and/or gathering information from the policyholder to assist the insurance
companies to update the contact information of the policy holder, the Group has concluded such services are
administrative in nature and immaterial, and none of these activities on their own results in a transfer of a good or
services to the insurance company in the context of the contract. Accordingly, no performance obligation exists after
a policy becomes effective.
Initial placement of an insurance policy
The Group recognizes agency revenue related P&C insurance products (which is short term in nature and related
premiums are collected upfront) when an insurance policy becomes effective. The commission to be earned is required
to be partially refunded contingently on policy cancellations. Based on its past experience, subsequent commission
adjustments in connection with P&C insurance policy cancellations have been de minims to date, and are recognized
upon notification from the insurance carriers. Actual commission and fee adjustments in connection with the
cancellation of P&C insurance policies were 0.2%, 0.1% and 0.1% of the total commission and fee revenues during
years ended December 31, 2020, 2021 and 2022, respectively.
For life insurance products, there is generally a 10 to 15 days hesitation period after an initial placement of a life
insurance policy, during which the policyholder has a legal right to unconditionally cancel the effective policy
regardless of the reasons. According to relevant terms of the insurance agency contracts with customers, the Group
reconciles information of policies sold which also includes policies that have been cancelled by policyholders within
the hesitation period, with the insurance companies on a monthly basis. Therefore, the Group estimates cancellation
of policies that have become effective but are still within the hesitation period based on subsequent actual data at each
reporting date. The cancellation of an effective life insurance policy by the policyholder after the hesitation period
does not require the Group to refund initial commission to insurance companies, but rather impacts the Group’s
estimate on future commission related to renewal(s) of the policy.
In addition, for life insurance agency, the Group may receive a performance bonus from insurance companies as
agreed and per contract provisions. Once the Group achieves a certain sales volume based on respective agency
agreements, the bonus will become due. Performance bonus represents a form of variable consideration associated
with certain sales volume, for which the Group earns commissions. The Group estimates the amount of consideration
with a constraint applied that will be received in the coming year such that a significant reversal of revenue is not
probable, and includes performance bonus as part of the transaction price. For the years ended December 31, 2020,
2021 and 2022, the Group recognized contingent performance bonus of RMB17,265, RMB3,887 and RMB11,387,
respectively.
F-25
(2) Summary of Significant Accounting Policies (Continued)
(q) Revenue Recognition (Continued)
Insurance agency services revenue (Continued)
Initial placement of an insurance policy (Continued)
In addition, for life insurance agency, the Group may receive a performance bonus from insurance companies as
agreed and per contract provisions. Once the Group achieves a certain sales volume based on respective agency
agreements, the bonus will become due. Performance bonus represents a form of variable consideration associated
with certain sales volume, for which the Group earns commissions. The Group estimates the amount of consideration
with a constraint applied that will be received in the coming year such that a significant reversal of revenue is not
probable, and includes performance bonus as part of the transaction price. For the years ended December 31, 2020,
2021 and 2022, the Group recognized contingent performance bonus of RMB17,265, RMB3,887 and RMB11,387,
respectively.
Renewals of a life insurance policy
For the long-term life insurance products, in addition to the initial commission earned, the Group is also entitled
to subsequent renewal commission and compensation, and renewal performance bonus which represents variable
considerations and are contingent on future renewals of initial policies or the Group achieves its performance target.
When making estimates of the amount of variable consideration to which the Group expects to be entitled, the
Group uses the expected value method and evaluates many factors, including but not limited to, insurance companies
mix, product mix, renewal term of various products, renewal premium rates and commission rates, to determine the
method(s) of measurement, relevant inputs and the underlying assumptions. The Group considers constraints as well
when determining the amount which should be included in the transaction price.
For years prior to 2021, revenue related to the variable consideration is recorded when it is probable that a
significant reversal in the amount of cumulative revenue recognized will not occur, i.e., when a policyholder pays the
renewal premium to the insurance company, and the policy is renewed because the Group was not able to conclude a
significant reversal to the estimated variable consideration is not probable, considering factors such as a) the Group
has limited history of selling its current life insurance products with its current customers, such that the Group’s past
experience in outdated products is of little predictive value in renewal(s) rate estimate; b) the occurrence of a renewal
is outside the Group’s control and the estimate of renewal premium rates is complex and requires significant
assumptions; and c) the contingency lasts across a long period of time.
The Group performs ongoing evaluation of the appropriateness of the constraint applied, and will consider the
sufficiency of evidence that would suggest that the long-term expectation underlying the assumptions has changed.
Starting from January 1, 2021, the Group believes that it has already accumulated adequate scale of historical data and
experiences at a confidence level that through which the Group can utilize to make a reasonable estimate of variable
considerations over its portfolio of contracts. The estimated renewal commissions are contingent on future renewals
of initial policies or achievement of certain performance targets. Given the material uncertainty around the future
renewal of the insurance policies, the estimated renewal commissions expected to be collected are recognized as
revenue only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized
will not occur when the uncertainty is subsequently resolved. The judgment and assumptions are continuously re-
evaluated and adjusted as needed along with the accumulation of historical experiences and data when new
information becomes available. Actual renewal commissions in the future may differ significantly from those
previously estimated.
For the year ended December 31, 2020, 2021 and 2022, the Group recognized revenues related to estimated
variable renewal commissions with respect to long-term life insurance products amounting to nil, RMB258,715 and
RMB245,717, 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)
(q) Revenue Recognition (Continued)
Insurance agency services revenue (Continued)
Renewals of a life insurance policy (Continued)
For the year ended December 31, 2020, 2021 and 2022, the Group recognized revenues related to estimated
variable renewal commissions with respect to long-term life insurance products amounting to nil, RMB258,715 and
RMB245,717, 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, 2021 and 2022 are all derived from contracts with customers.
Started in 2021, the Group recognized revenues and correspondent contract assets derived from estimated renewal
commissions. Accordingly, the Group presented separately, in the consolidated balance sheets as of December 31,
2021 and 2022, respectively.
The Group has no advance from customers in advance of revenue recognition, or contract liability and, therefore,
none of the revenue recognized in the current period was previously recognized as a contract liability.
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
income and comprehensive income, as the amortization period is less than one year and the Group has elected the
practical expedient included in ASC 606.
The Group has applied the optional exemption provided by ASC 606 to not disclose the value of remaining
performance obligations not yet satisfied as of period end for contracts with original expected duration of one year or
less.
Value-added tax and surcharges
The Group presents revenue net of tax surcharges and value-added taxes incurred. The tax surcharges amounted
to RMB20,610, RMB19,235 and RMB14,681 for the years ended December 31, 2020, 2021 and 2022, respectively.
Total value-added taxes paid by the Group during the years ended December 31, 2020, 2021 and 2022 amounted
to RMB179,663, RMB179,183 and RMB130,743 respectively.
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)
(r) Fair Value of Financial Instruments
Fair value is considered to be the price that would be received from selling an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the
principal or most advantageous market in which it would transact and considers assumptions that market participants
would use when pricing the asset or liability. The established fair value hierarchy requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial
instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to
the fair value measurement. The three levels of inputs may be used to measure fair value include:
Level 1 Applies to assets or liabilities for which there are quoted prices in active markets for identical assets or
liabilities.
Level 2 Applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1
that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active
markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in which significant inputs are observable
or can be derived principally from, or corroborated by, observable market data.
Level 3 Applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that
are significant to the measurement of the fair value of the assets or liabilities.
The carrying values of the Group’s financial instruments, including cash and cash equivalents, restricted cash,
accounts receivable, insurance premium payables, other receivables, accounts payable and other payables,
approximate their fair values due to the short-term nature of these instruments.
Measured at fair value on a recurring basis
As of December 31, 2021 and 2022, information about inputs into the fair value measurements of the Group’s
assets and liabilities that are measured at fair value on a recurring basis in periods subsequent to their initial recognition
is as follows.
Fair Value Measurements
at Reporting Date Using
Description
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
RMB
RMB
RMB
As of
December 31,
2021
RMB
Short-term investments - debt security
857,682
—
857,682
—
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)
(r) Fair Value of Financial Instruments (Continued)
Measured at fair value on a recurring basis (Continued)
Fair Value Measurements
at Reporting Date Using
Description
Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
RMB
RMB
RMB
As of
December 31,
2022
RMB
Short-term investments - debt security
331,228
—
331,228
—
The majority of debt security consists of investments in bank financial products, 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 the 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.
Goodwill (Note 7) and intangible assets (Note 2(h)) 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 8) 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.
(s) 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,
F-29
expenses, gains and losses are translated using the average rate for the year. Translation adjustments are reported as
cumulative translation adjustments and are shown as a separate component of other comprehensive income or loss in
the consolidated statements of income and comprehensive income. The Group has chosen the Renminbi (“RMB”) as
their reporting currency.
The functional currency of most of the Company’s subsidiaries is RMB. Transactions in other currencies are
recorded in RMB at the rates of exchange prevailing when the transactions occur. Monetary assets and liabilities
denominated in other currencies are translated into RMB at rates of exchange in effect at the balance sheet dates.
Exchange gains and losses are recorded in the consolidated statements of income and comprehensive income.
(t) Foreign Currency Risk
The RMB is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority
of the People’s Bank of China, controls the conversion of RMB into foreign currencies. The value of RMB is subject
to changes in central government policies and international economic and political developments that affect supply
and demand in the China Foreign Exchange Trading System market of cash and cash equivalents and restricted cash.
The Group had aggregate amounts of RMB595,428 and RMB600,901 of cash and cash equivalents and restricted cash
denominated in RMB as of December 31, 2021 and 2022, respectively.
(u) 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 outside of China and were calculated at the rate of US$1.00 =
RMB6.8972, representing the noon buying rate in the City of New York for cable transfers of RMB on December 30,
2022, the last business day in fiscal year 2022, 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.
(v) Segment Reporting
As of December 31, 2021 and 2022, 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 for which separate financial information is
available and evaluated regularly by the Group’s chief operating decision maker in deciding how to allocate resources
and in assessing performance.
Substantially all revenues of the Group are derived in the PRC and all long-lived assets are located in the PRC.
(w) Earnings per Share (“EPS”) or ADS
Basic EPS is calculated by dividing the net income available to common shareholders by the weighted average
number of ordinary shares /ADS outstanding during the year. Diluted EPS is calculated by using the weighted average
number of ordinary shares /ADS outstanding adjusted to include the potentially dilutive effect of outstanding share-
based awards, unless their inclusion in the calculation is anti-dilutive.
The contingently issuable shares /ADS related to the 521 Plan (see Note 21(b) for details), are subject to
fulfillment of the performance conditions as stipulated under the 521 Plan. Therefore, these shares are excluded from
basic earnings per share until the shares are fully vested upon the achievement of performance conditions under the
521 Plan by the Participants. In December 2020, the Group cancelled the 521 Plan and no impact in 2021 and 2022.
F-30
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(2) Summary of Significant Accounting Policies (Continued)
(x) Advertising Costs
Advertising costs are expensed as incurred. Advertising costs amounted to RMB37,389, RMB35,300 and
RMB18,822 for the years ended December 31, 2020, 2021 and 2022, respectively.
(y) Leases
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 balance sheets at commencement date. As all
of the leases do not have implicit rates available, the Group uses incremental borrowing rates based on the information
available at lease commencement date in determining the present value of future payments. The incremental borrowing
rates are estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in
economic environments where the leased assets are located.
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, 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 components. Therefore, the Group does not allocate the consideration in the contract to the
separate lease component and the non-lease components.
Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Group
has made an accounting policy election to exempt leases with an initial term of 12 months or less without a purchase
option that is likely to be exercised from being recognized on the balance sheet. Payments related to those leases
continue to be recognized in the consolidated statement of income and comprehensive income on a straight-line basis
over the lease term.
In addition, the Group does not have any related-party leases or sublease transactions.
F-31
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) Accumulated Other Comprehensive Income
The Group presents comprehensive income in the consolidated statements of income and comprehensive income
with net income in a continuous statement.
Accumulated other comprehensive income mainly represents foreign currency translation adjustments, changes
in fair value of short term investments and share of other comprehensive income of the affiliates for the period.
(aa) Government grants
Government grants primarily consist of financial subsidies received from provincial and local governments for
operating a business in their jurisdictions and compliance with specific policies promoted by the local governments.
The Group records such government subsidies as other income or reduction of expenses or cost of revenues when it
has fulfilled all of its obligation related to the subsidy. The Group recognized RMB27,352, RMB17,448 and
RMB10,396 in the year ended December 31, 2020, 2021 and 2022.
(ab) Recently Adopted Accounting Pronouncements
Government Assistance (Topic 832) – In November 2021, the FASB issued ASU 2021-10, Government
Assistance (Topic 832) — Disclosures by Business Entities about Government Assistance (“ASU 2021-10”). It
requires issuers to make annual disclosures about government assistance, including the nature of the transaction, the
related accounting policy, the financial statement line items affected and the amounts applicable to each financial
statement line item, as well as any significant terms and conditions, including commitments and contingencies. The
amendments in this Update are effective for all entities within their scope for financial statements issued for annual
periods beginning after December 15, 2021. The Company adopted this guidance on January 1, 2022 with no material
impact on its audited consolidated financial statements.
Business Combinations (Topic 805) – In October 2021, the FASB issued ASU 2021-08, Business Combinations
(Topic 805) — Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-
08”), which provides guidance on the acquirer’s accounting for acquired revenue contracts with customers in a
business combination. The amendments require an acquirer to recognize and measure contract assets and contract
liabilities acquired in a business combination at the acquisition date in accordance with ASC 606 as if it had originated
the contracts. This guidance also provides certain practical expedients for acquirers when recognizing and measuring
acquired contract assets and contract liabilities from revenue contracts in a business combination. The new guidance
should be applied prospectively to business combinations occurring on or after the date of adoption. This guidance is
effective for fiscal years beginning after December 15, 2022, including interim periods therein. Early adoption is
permitted. The Group early adopted the new standard beginning January 1, 2022 with no material impact on the
consolidated financial statements.
(3) Acquisitions and disposals
Acquisition of an agency intermediate company in 2022
In August of 2022, to support the Group’s new strategy on “Open Platform”, the Group acquired 100% equity
interest in an agency intermediate for cash consideration of RMB31,390. The Group accounted for this acquisition as
business combination.
F-32
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(3) Acquisitions and disposals (Continued)
The consideration, fair value of assets acquired and liabilities assumed, as well as goodwill resulted from the
acquisition are as follows:
Consideration:
Cash
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash and cash equivalents
Short term investments
Accounts receivables
Other receivable and current assets
Property and equipment
Right of use assets
Total assets acquired
Accounts payables
Accrued expenses and other current liabilities
Lease liability
Total liabilities assumed
Net assets acquired
Goodwill
RMB
31,390
9,819
5,360
401
33,192
11
521
49,304
(4,532 )
(13,045 )
(465 )
(18,042 )
31,262
128
Goodwill arising from the acquisition of this agency intermediate was attributable to the benefit of expected
synergies as of the date of acquisition and recorded in insurance agency segment. The resulted goodwill is not expected
to be tax deductible for tax purposes.
The result of operation of aforementioned acquisition has been consolidated by the Group from August 2022, and
the results of operations for the aforementioned acquisition is not material to the Group’s consolidated financial
statements as a whole.
Pro forma financial information is not presented for the aforementioned business acquisition in the fiscal year
2022 as it is immaterial to the reported results.
Disposal of subsidiaries in 2021
In 2021, the Group disposed of two subsidiaries for a total consideration of RMB3,600 and recognized a gain of
RMB2,051 in aggregate. As of December 31, 2021, RMB600 of the consideration remained outstanding as a payable
which was subsequently settled in 2022.
(4) Other Receivables, net
Other receivables, net consist of the following:
Advances to staff (i)
Advances to entrepreneurial agents (i)
Advances to a third party channel vendor (ii)
Rental deposits
Amount due from third parties (iii)
F-33
As of December 31,
2022
RMB
2021
RMB
16,437
907
17,898
21,864
11,397
81
22,818
19,535
— 183,353
Other
Less: Allowance for current expected credit losses
Other receivables, net
4,451
(802 )
4,841
(10,976 )
60,755 231,049
(i) Amounts represented advances to staffs or entrepreneurial agents of the Group for daily business operations,
which are unsecured, interest-free and repayable on demand.
(ii) Amount represented advances to Shenzhen Chetong Technology Co., Ltd. (“Chetong”) who provides platform
services to the Group. The advances were unsecured, interest-free and repayable on demand. With the cease of
cooperation with Chetong in 2022, the Group requested repayment of the advances. The Group estimated the net
amount expected to be collected was RMB14,736 and accordingly recorded an allowance for credit losses of
RMB8,082 in others, net of the consolidated statement of income and comprehensive income.
(iii) Amount represented 1) term-loan (matures in June 2023) to Sichuan Tianyi Real Estate Development Co., Ltd.
(“Sichuan Tianyi”) of RMB80,000 and corresponding interest receivable RMB3,353 as of December 31, 2022.
The loan is guaranteed by the ultimate controlling owner of Sichuan Tianyi, whom is jointly liable, with interest
rate 7.2% per annum. 2) term-loan (matures in June 2023) to Shenzhen Yingxin Asset Management Co., Ltd. of
RMB100,000 as of December 31, 2022, with the interest rate 7.3% per annum. The interest accrued until
December 31, 2022 has been paid. These loan receivables are expected to be settled within one year.
(5) Property, Plant and Equipment, net
Property, plant and equipment, net, is comprised of the following:
As of December 31,
2022
RMB
2021
RMB
Building
Office equipment, furniture and fixtures
Motor vehicles
Leasehold improvements
Total
Less: Accumulated depreciation
Construction in progress
12,317
19,694
36,791
12,317
141,313 162,573
18,641
39,993
210,115 233,524
(163,315 ) (191,945 )
56,880
—
98,459
46,800
No impairment for property, plant and equipment was recorded for the years ended December 31, 2020, 2021 and
2022.
(6) Other current assets, net
Other current assets consist of the following:
Prepayment for acquisition of short-term investments
Prepaid operating costs
Prepaid miscellaneous daily expenses
Other
Less: Allowance for current expected credit losses
F-34
2021
RMB
As of December 31,
2022
RMB
— 390,000
12,594
16,146
2,790
(1,795 )
39,947 419,735
15,206
22,744
1,997
—
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(7) Goodwill, net
The gross amount of goodwill and accumulated impairment losses by reporting unit as of December 31, 2021 and
2022 are as follows:
Gross as of December 31, 2021
Addition in 2022
Accumulated impairment loss as of December 31, 2021 and 2022
Net as of December 31, 2021
Agency
segment
RMB
131,977
128
(22,108 )
109,869
Claims
Adjusting
segment Total
RMB
RMB
—
(21,137 )
21,137 153,114
128
(43,245 )
— 109,869
Net as of December 31, 2022
109,997
— 109,997
The Group performed annual impairment analysis as of the balance sheet date. No impairment loss was
recognized in goodwill for the years ended December 31, 2020, 2021 and 2022.
(8) Investments in Affiliates
As of December 31, 2021 and 2022, the Group’s investments accounted for under the equity method were as
follows:
CNFinance
Others
Total
As of December 31,
2022
RMB
2021
RMB
329,158
6,650
335,808
—
4,035
4,035
Investment in CNFinance Holdings Limited (“CNFinance”)
The Group invested 18.5% equity interest of CNFinance after CNFinance’s listing in New York Stock Exchange
“NYSE” (symbol: CNF) on November 7, 2018. CNFinance is a leading home equity loan service provider
incorporated in the Cayman Islands and based in Guangzhou, PRC. Investment in CNFinance is accounted for using
the equity method as the Group has significant influence by the right to nominate one board member out of seven.
On May 27, 2022 (the “Declare Date”), the board of directors authorized and approved the Group’s distribution
of 252,995,600 ordinary shares of CNFinance to its shareholders on a pro rata basis. The distribution was completed
on June 28, 2022, after which the Group’s equity stake in CNFinance decreased from approximately 18.5% to
approximately 0.01%. Upon the completion of the distribution, the Company ceased to account for the remaining
equity investment in CNFinance using equity method as the Company no longer has significant influence over this
investee. For the year ended December 31, 2022, due to the continued decline in the share price of CNFinance, the
Group recognized an other-than-temporary impairment of RMB78,277 (for the year ended December 31, 2021
RMB29,316) to reduce the carrying value of the investment to reflect the market value of the shares held by the Group
up to the date of disposal.
F-35
The summarized financial information of equity method investees is illustrated as below:
Statements of Balance Sheet
Total assets
Total liabilities
Results of Operation
Income from operations
Net profit (loss)
As of
December
31,
2021
RMB
14,883,038
10,783,449
Year Ended December
31,
2021
RMB
2020
RMB
115,656
89,820
1,462
(7,089 )
Upon the completion of the disposal of CNFinance, the remaining two investees did not meet the significance
test in accordance with SEC Regulation S-X, Rule 1-02(w) (i.e., the asset, investment, or income test). In accordance
with SEC Regulation S-X, Rules 4-08(g), the Group did not disclose the investee’s summarized financial information
for the year ended December 31, 2022.
F-36
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(9) Leases
The Group’s lease for office space include only fixed rental payments with no variable lease payment terms. As
of December 31, 2021 and 2022, there were no leases that have not yet commenced.
The following represents the aggregate ROU assets and related lease liabilities as of December 31, 2021 and 2022:
Operating lease ROU assets
Current operating lease liability
Non-current operating lease liability
Total operating leased liabilities
As of December 31,
2022
RMB
2021
RMB
225,677 145,086
62,304
87,012
74,190
128,283
215,295 136,494
The weighted average lease term and discount rate as of December 31, 2021 and 2022 were as follows:
Weighted average lease term:
Operating leases
Weighted average discount rate:
Operating leases
As of December 31,
2022
2021
3.37
2.83
4.41 %
4.28 %
The components of lease expenses for the years ended December 31, 2021 and 2022 were as follows:
Operating lease expense
Short term lease expense
Total
As of December 31,
2022
RMB
2021
RMB
111,197
3,373
114,570
97,576
1,227
98,803
Supplemental cash flow information related to leases for the years ended December 31, 2021 and 2022 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 net of decrease in right-
As of December 31,
2022
RMB
2021
RMB
99,150
90,438
of-use assets for early determinations
125,487
4,462
F-37
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(9) Leases (Continued)
Maturities of lease liabilities at December 31, 2022:
Year ending December 31:
2023
2024
2025
2026
2027
Thereafter
Total remaining undiscounted lease payments
Less: Interest
Total present value of lease liabilities
Less: Current operating lease liability
Non-current operating lease liability
(10) Variable Interest Entities (“VIEs”)
Minimum
Lease
Payment
RMB
66,924
37,435
22,498
13,516
3,135
2,162
145,670
9,176
136,494
62,304
74,190
VIE related to Xinbao Investment and Fanhua RONS Technologies
The Measures on the Supervision of Internet Insurance Business implemented in February 2021 requires an
insurance institution conducts online insurance business through its own online platform who owns the domain name.
Fanhua RONS Insurance Sales & Services Co., Ltd., (“Fanhua RONS”), a wholly-owned subsidiary of Shenzhen
Xinbao Investment Co., Ltd. (“Xinbao Investment”), used to conduct its online P&C insurance business through an
online platform (www.baoxian.com) owned and operated by another subsidiary within the Group. To comply with the
newly implemented rules, the Group transferred the domain name and ICP license to Fanhua RONS. As the applicant
for an ICP license may be subject to foreign investment restriction, the Group commenced a restructuring to re-
establish the VIE structure.
Xinbao Investment was a wholly owned subsidiary of the Group who in December 2021 became 49% owned by
the Group where the remaining 51% equity interests were transferred to Mr. Shuangping Jiang at nominal value who
holds the interest on behalf of the Group, because Xinbao Investment is, under the new rule, prohibited to own more
than 50% of the equity interests in a value-added telecommunications service provider, i.e., Fanhau RONS.
Through the contractual arrangements entered in December 2021, with Xinbao Investment and its nominee
shareholder, the Group has the power to direct the activities that most significantly impact to and entitles to receive
economic benefits from Xinbao Investment, the consolidated VIE.
In preparation for the application of an ICP license for Fanhua RONs (Beijing) Technology Co., Ltd. (“Fanhua
RONS Technologies”), in July 2022, Beijing Fanlian Investment Co., Ltd. (“Fanlian Investment”), a wholly owned
subsidiary, transferred its entire equity interests holding in Fanhua RONS Technologies to Mr. Peng Ge, the chief
financial officer of the Group, who holds the equity interests on behalf of Fanlian Investment. Concurrently, Fanlian
Investment entered into contractual arrangements with Fanhua RONS Technologies and Mr. Ge which are
substantially similar to those among Fanhua Group Company, Xinbao Investment and its individual nominee
shareholder.
F-38
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(10) Variable Interest Entities (“VIEs”) (Continued)
VIE related to Xinbao Investment and Fanhua RONS Technologies (Continued)
As a result, the Group currently conducts its insurance agency and claims adjusting business in China primarily
through its wholly-owned subsidiaries Fanhua Group Company and Fanlian Investment (collectively the “relevant
PRC entities”), and its subsidiaries and the VIEs for part of its online insurance business in China. The following is a
summary of the contractual agreements that the Group entered into with Xinbao Investment, Fanhua RONS
Technologies and their individual nominee shareholders:
Agreements that Provide the Group Effective Control over Xinbao Investment and Fanhua RONS
Technologies
● Loan Agreement
Mr. Jiang and Mr. Ge (collectively the “nominee shareholders”) entered into a loan agreement, with the Group’s
wholly-owned subsidiaries. The principal loan amounts equal to the capital contributions to VIEs.
The term of the loan agreement is for ten years, which may be extended only upon written agreement of the parties.
If the loan is not extended, then upon its expiration and subject to then applicable PRC laws, the loan can be repaid
only with the proceeds from a transfer of the individual shareholder’s equity interests in VIEs to relevant PRC entities
or another person or entity designated by them. Relevant PRC entities may accelerate the loan repayment upon certain
events, including but not limited to if the individual shareholder resigns or is dismissed from employment by us or if
relevant PRC entities exercise its option to purchase the shareholder’s equity interests in VIEs pursuant to the exclusive
purchase option agreements described below.
● Equity Pledge Agreement
Relevant nominee shareholders entered into an equity pledge agreement, pledging their respective equity interests
in VIEs to relevant PRC entities to secure their obligations under the loan agreement. Relevant nominee shareholders
also agreed not to transfer or create any encumbrances adverse to relevant PRC entities on their equity interests in
VIEs. During the term of the equity pledge agreement, relevant PRC entities are entitled to all the dividends declared
on the pledged equity interests. The equity pledge agreements will expire when the individual shareholders fully
performs their respective obligations under the loan agreement. The equity pledge was recorded on the shareholder’
register of VIEs, and registered with the relevant local administration of industry and commerce.
● Power of Attorney
Relevant nominee shareholders executed powers of attorney, each appointing a person designated by relevant
PRC entities as his attorney-in-fact on all matters requiring shareholder approval. Further, if relevant PRC entities
designate the shareholder to attend a shareholder’s meeting of VIEs, the individual shareholder agrees to vote his
shares as instructed by relevant PRC entities. The term of the power of attorney is for ten years.
Agreements that Transfer Economic Benefits to the Group
● Exclusive Purchase Option Agreement
Relevant nominee shareholders entered into an exclusive purchase option agreement to irrevocably grant relevant
PRC entities an exclusive option to purchase part or all of their equity interests in VIEs, when and to the extent
permitted by PRC law. The purchase price will be the minimum price permitted under applicable PRC law.
F-39
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(10) Variable Interest Entities (“VIEs”) (Continued)
VIE related to Xinbao Investment and Fanhua RONS Technologies (Continued)
Agreements that Transfer Economic Benefits to the Group (Continued)
● Technology Consulting and Service Agreement
Pursuant to technology service agreements between (i) relevant PRC entities, and (ii) VIEs, relevant PRC entities
agreed to provide VIEs with training services and consulting and other services relating to IT platform and internal
control compliance. In exchange, VIEs agree to pay a quarterly fee calculated primarily based on a percentage of its
revenues. The agreement has a term of one year and can be renewed each year upon mutual agreement.
Because of contractual arrangements with VIEs and their nominee shareholders, the Group is the primary
beneficiary of VIEs and their subsidiaries and consolidated them into consolidated financial statements.
VIEs related to the 521 Plan
On June 14, 2018, the Group announced that its board of directors 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 in exchange for employee
and non-employee services, if service and performance conditions are achieved. 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.
Pursuant to the 521 Plan, the Group set up three companies which are Fanhua Employees Holdings Limited, Step
Tall Limited and Treasure Chariot Limited (collectively the “521 Plan Employee Companies”) to hold the Group’s
ordinary shares on behalf of the Participants of the 521 Plan. Each of the 521 Plan Employee Companies is a legal
entity formed in the British Virgin Islands with a sole shareholder appointed by the Group. Each shareholder is either
an employee, or a founder who is also a shareholder and director of the Group.
The following is a summary of the contractual agreements that the Group entered into relating to the 521 Plan:
The nature and structure of the 521 Plan Employee Companies is that they are investment vehicle companies
holding the Company’s shares on behalf of the Participants for the purpose of the 521 Plan. Loan agreements and
entrusted share purchase agreements were signed among the Group’s wholly-owned subsidiary CISG Holdings Ltd.,
the 521 Plan Employee Companies and each of the Participants. To effect the 521 Plan, Participants agreed to pay 10%
of the subscription price and executed a loan agreement with the Group for a loan representing 90% of the subscription
price of the ordinary shares under the 521 Plan. Participants executed an entrusted share purchase agreement with one
of the 521 Employee Companies whereby the 521 Plan Employee Company will legally hold the ordinary shares on
behalf of the Participants. As of December 31, 2018 and 2019, the loan agreements provide a total of US$184,815 and
US$344,988, respectively, in loans to the VIEs and Participants of the 521 Plan with the sole purpose of providing
funds necessary for the purchase of the Group’s ordinary shares under the 521 Plan. All the ordinary shares are pledged
as collateral to the Group for the loans and are not yet vested, the Participants cannot direct the sale of the ordinary
shares without the consent of the Group until the ordinary shares are fully vested in accordance with the 521 Plan’s
agreed target performance. The loan agreement and the entrusted share purchase agreement shall terminate after five
years or upon termination of agency relationship and employment relationship or the settlement of the loan, whichever
comes first.
F-40
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(10) Variable Interest Entities (“VIEs”) (Continued)
VIE related to Xinbao Investment and Fanhua RONS Technologies (Continued)
Agreements that Transfer Economic Benefits to the Group (Continued)
VIEs related to the 521 Plan (Continued)
The sole director and sole shareholder of each of the 521 Plan Employee Companies is either a significant
shareholder and director, or an employee of the Group, who has executed powers of attorney on behalf of the Group.
Under the power of attorney, they will follow, without any conditions, the Group’s instructions to manage all the
activities of each of the 521 Plan Employee Companies. In addition, the Group can replace the sole director and
shareholder of each of the 521 Plan Employee Companies to another designated party at its discretion.
The ordinary shares are the only significant assets held by the 521 Plan Employee Companies. Through the loan
agreements, entrusted share purchase agreements and letters of undertaking described above, the Group controls the
decision-making rights of the 521 Plan Employee Companies with respect to the shares held by the 521 Plan Employee
Companies as collateral to the loans issued to the Participants during the vesting period. Given the only substantial
recourse to the loans issued by the Group are the ordinary shares, the Group has potential exposure to the economics
of the 521 Plan Employee Companies resulting from the fluctuation in value of the ADS (principally decreases), which
is more than insignificant. Further, the Group will also participate in the variability and absorb the economic benefits
of the 521 Plan Employee Companies, through an increase in value of the shares held by the 521 Plan Employee
Companies, if the performance conditions are not met or partially met based on the profit distribution arrangements.
Based on above, the Group is the primary beneficiary of the 521 Plan Employee Companies and consolidates them
because it has the power to direct the activities that most significantly impact the 521 Plan Employee Companies’
economic performance, and the obligation to absorb losses of the 521 Plan Employee Companies that could potentially
be significant to them and the right to receive benefits from the 521 Plan Employee Companies that could potentially
be significant to the 521 Plan Employee Companies. Therefore, the Group has variable interests in the 521 Plan
Employee Companies during the vesting period.
As disclosed in Note 21(b), the Group entered into supplemental agreements with all remaining Participants in
December 2020 to cancel the 521 Plan upon which the 521 Plan Employee Companies returned all subscribed
280,000,000 ordinary shares to the Group, and as a condition, the Group refunded all share rights deposits back to the
Participants, and terminated the Participants’ obligation to repay the Group the non-recourse loan principal and interest,
and all the relevant original contractual agreements including the loan agreements, entrusted share purchase
agreements and letters of undertaking described above were agreed to be terminated and lapsed. As a result, the Group
no longer has power to direct the significant activities of the 521 Plan Employee Companies, and no longer bears
potentially significant economic exposure through its indirect interests to the 521 Plan Employee Companies, and
stopped consolidating the 521 Plan Employee Companies upon the cancellation of the 521 Plan.
In December 2020, upon the cancellation of the 521 Plan, the Group refunded all share rights deposits amounted
to RMB266,901 back to the Participants which was presented as cash outflows from financing activities.
Risks in relation to the VIE Arrangement (Continued)
In the opinion of the Company’s legal counsel, (i) the ownership structure relating to the consolidated VIEs of
the Company is in compliance with PRC laws and regulations; (ii) the contractual arrangements with the consolidated
VIEs and the individual shareholders are legal, valid and binding obligation of such party, and enforceable against
such party in accordance with their respective terms; and (iii) the execution, delivery and performance of the
consolidated VIEs and its shareholders do not result in any violation of the provisions of the articles of association
and business licenses of the VIEs, and any violation of any current PRC laws and regulations.
F-41
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(10) Variable Interest Entities (“VIEs”) (Continued)
Risks in relation to the VIE Arrangement (Continued)
Uncertainties in the PRC legal system could cause the Company’s current corporate structure to be found in
violation of any existing and/or future PRC laws or regulations and could limit the Company’s ability, through the
Primary Beneficiary, to enforce its rights under these contractual arrangements. Furthermore, the shareholders of the
VIEs may have interests that are different from those of the Company, which could potentially increase the risk that
the shareholders would seek to breach the existing terms of the aforementioned agreements.
In addition, if the current structure or any of the contractual arrangements were found to be in violation of any
existing or future PRC laws, the Company may be subject to penalties, which may include but not be limited to, the
cancellation or revocation of the Company’s business and operating licenses, being required to restructure the
Company’s operations or discontinue the Company’s operating activities. The imposition of any of these or other
penalties may result in a material and adverse effect on the Company’s ability to conduct its operations. In such case,
the Company may not be able to operate or control VIEs, which may result in deconsolidation of VIEs.
Summarized below is the information related to VIEs, including total assets, total current liabilities, total liabilities,
net revenues, total operating costs and expenses, net income (loss) and cash flows after intercompany elimination are
as follows:
Total assets
Total current liabilities
Total liabilities
As of December 31,
2022
RMB
2021
RMB
69,792 102,965
(50,457 )
(40,100 )
(77,990 )
(40,653 )
Year Ended December 31,
2021
RMB
2022
RMB
2020
RMB
Net revenues
Operating costs and expenses
Net income (loss)
Net cash generated from operating activities
Net cash used in financing activities
—
—
—
—
(266,901 )
16,267 141,086
67,788
(4,136 )
98,715
—
1,814
14,431
48,923
—
As of December 31, 2022 there were no consolidated VIE assets that are collateral for the VIE’s obligations or
are restricted solely to settle the VIEs’ obligations, other than aforementioned in the restricted cash as described in
Note 2(c). In the year ended December 31, 2022, aggregate revenues derived from these VIEs contributed 5.1% of the
total consolidated net revenues, based on the corporate structure as of the end of 2022. As of December 31, 2022, the
VIEs accounted for an aggregate of 3.3% of the consolidated total assets. The creditors of the VIEs’ third-party
liabilities did not have recourse to the general credit of the Company in normal course of business. The Company has
not provided any financial support that it was not previously contractually required to provide to the VIEs.
F-42
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(11) Other Payables and Accrued Expenses
Components of other payables and accrued expenses are as follows:
Business and other tax payables
Refundable deposits from employees and agents
Professional fees
Accrued expenses to third parties
Contributions from members of eHuzhu mutual aid program (Note 2(c))
Others
Total
(12) Short-term loan
As of December 31,
2022
RMB
2021
RMB
65,228
21,284
8,998
23,719
51,144
7,784
77,502
19,789
3,586
29,861
43,140
448
178,157 174,326
Short-term loans and total outstanding balance as of December 31, 2021 and 2022 amounted to nil and
RMB35,679, respectively, which is RMB-denominated borrowing made by the Company’s subsidiaries from financial
institutions in mainland China. In 2022, insurance agency segment borrowed RMB35,679 one-year loan for its general
working capital purposes.
As of December 31, 2021 and 2022, the weighted average interest rates for the outstanding borrowings were
approximately nil and 4.50%, respectively, and the aggregate amounts of unused lines of credit for short-term loans
were nil and RMB164,321, respectively.
(13) 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 a 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, 2020, 2021 and 2022, the Group contributed and accrued RMB52,942,
RMB118,837 and RMB131,385, respectively.
F-43
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(14) 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 its income or capital gains. In addition, upon any payments of
dividends by the Company to its shareholders, no Cayman Islands withholding tax is imposed.
Subsidiaries in Hong Kong are subject to Hong Kong Profits Tax rate at 16.5%, and foreign-derived income is
exempted from income tax. Under the two-tiered profits tax rates regime, 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, 2020, 2021 and 2022.
The Group’s subsidiaries and VIEs incorporated in the PRC are subject to the PRC Enterprise Income Tax and a
unified 25% enterprise income tax rate, except for certain entities that are entitled to preferential tax treatments.
Preferential EIT rates at 15% is available for qualified enterprises located in the western China regions in an
industry sector encouraged by the PRC government. Fanhua Lianxing Insurance Sales Co., Ltd., the Group’s wholly-
owned subsidiary, which is the holding entity of the Group’s life insurance operations, was entitled to a preferential
tax rate of 15% for the years ended December 31, 2020, 2021 and 2022, respectively. Tibet Zhuli Investment Co. Ltd.
(“Tibet Zhuli”), the Group’s wholly-owned subsidiary, was entitled to a preferential tax rate of 15% for the year ended
December 31, 2020. Tibet Zhuli no longer enjoys such a preferential rate from 2021 to 2022.
Pursuant to the relevant laws and regulations in the PRC, Shenzhen Huazhong United Technology Co., Ltd.
(“Shenzhen Huazhong”), a subsidiary of the Group, was regarded as a software company and thus exempted from
PRC Income Tax for two years starting from its first profit-making year, followed by a 50% reduction for the next
three years. For Shenzhen Huazhong, year 2017 was the first profit-making year and accordingly it has made a 12.5%
tax provision for its profits for the years ended December 31, 2020 and 2021, Shenzhen Huazhong no longer enjoys
such a preferential rate from 2022.
The Group’s subsidiaries that are the PRC tax resident are required to withhold the PRC withholding tax of 10%
on dividend payment to their non-PRC resident immediate holding company, unless such dividend payment is
qualified for the 5% reduced tax rate under the Arrangement between Mainland China and Hong Kong for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the “PRC-HK
DTA”).
One of the Group’s wholly-owned subsidiaries, CNinsure Holdings Limited, was determined by Hong Kong
Taxation Bureau to be a Hong Kong resident enterprise since July 2018. The Hong Kong resident certificate was
issued by the Hong Kong Inland Revenue Department valid till the year ending December 31, 2022. Accordingly,
CNinsure Holdings Limited qualified as a Hong Kong resident and was entitled to enjoy a reduced tax rate of 5% for
the dividends paid by PRC subsidiaries for the years ended December 31, 2020, 2021 and 2022 under Bulletin [2018]
No. 9 (e.g. beneficial ownership, shareholding percentage and holding period).
The Group accounts for uncertain income tax positions by prescribing a minimum recognition threshold in the
financial statements. The Group’s liabilities for unrecognized tax benefits were included in other tax liabilities. As of
December 31, 2021 and 2022, the balance of unrecognized tax benefits is comprised of amounts mainly arising from
gain on disposal of subsidiaries and certain transfer pricing arrangements.
F-44
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(14) Income Taxes (Continued)
The movements of unrecognized tax benefits are as follows:
Balance as of January 1, 2020
Change in unrecognized tax benefits
Decrease in tax positions
Balance as of December 31, 2020
Change in unrecognized tax benefits
Increase in tax positions
Balance as of December 31, 2021
Change in unrecognized tax benefits
Decrease in tax positions
Balance as of December 31, 2022
RMB
70,350
—
(3,131 )
67,219
—
5,994
73,213
—
(36,566 )
36,647
The uncertain tax positions are related to tax years that remain subject to examination by the relevant tax
authorities. Based on the outcome of any future examinations, or as a result of the expiration of statute of limitations
for specific jurisdictions, it is reasonably possible that the related unrecognized tax benefits for tax positions taken
regarding previously filed tax returns, might materially change from those recorded as liabilities for uncertain tax
positions in the Group’s consolidated financial statements. In addition, the outcome of these examinations may impact
the valuation of certain deferred tax assets (such as net operating losses) in future periods. The Group’s policy is to
recognize interest and penalties accrued on any unrecognized tax benefits, if any, as a component of income tax
expense. The Group does not anticipate any significant increases or decreases to its liability for unrecognized tax
benefits within the next twelve months.
According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the
underpayment of income taxes is due to computational errors made by the taxpayer. The statute of limitations will be
extended to five years under special circumstances, which are not clearly defined, but an underpayment of income tax
liability exceeding RMB100 is specifically listed as a special circumstance. In the case of a transfer pricing related
adjustment, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. During
the current year, the Group reversed transfer pricing related uncertain tax position amounting to RMB36,566 when its
statute of limitation expired in 2022.
Income tax expenses are comprised of the following:
Year Ended December 31,
2021
RMB
2022
RMB
2020
RMB
Current tax expense
Deferred tax expense
Income tax expense
67,609
15,778
83,387
66,665
23,909
90,574
13,169
27,847
41,016
F-45
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(14) Income Taxes (Continued)
The principal components of the deferred income tax assets and liabilities are as follows:
Deferred tax assets:
Operating loss carryforward
Intangible assets, net
Less: valuation allowances
Total
Deferred tax liabilities:
Fair value adjustments in relation to short-term investments
Estimated profit arising from future renewal commissions
PRC dividend withholding taxes
Total
As of December 31,
2022
RMB
2021
RMB
53,179
3,675
(38,126 )
18,728
96,173
2,856
(78,627 )
20,402
13,954
14,734
59,271
29,752
29,230
29,230
73,716 102,455
The Group considers positive and negative evidence to determine whether some portion or all of the deferred tax
assets will more likely than not be realized. This assessment considers, among other matters, the nature, frequency
and severity of recent losses, forecasts of future profitability, the duration of statutory carry forward periods, the
Group’s experience with tax attributes expiring unused and tax planning alternatives. Valuation allowances have been
established for deferred tax assets based on a more-likely-than-not threshold. The Group’s ability to realize deferred
tax assets depends on its ability to generate sufficient taxable income within the carry forward periods provided for in
the tax law. The Group has provided RMB38,126 and RMB78,627 valuation allowance for the years ended December
31, 2021 and 2022, respectively.
The Group had total operating loss carry-forwards of RMB213,184 and RMB385,155 as of December 31, 2021
and 2022, respectively. As of December 31, 2022, all of the operating loss carry-forwards will expire in the years from
2023 to 2027. During the years ended December 31, 2020, 2021 and 2022, RMB5,321, RMB8,314 and RMB18,349,
respectively, of tax loss carried forward has been expired and canceled.
F-46
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(14) Income Taxes (Continued)
Reconciliation between the provision for income taxes computed by applying the PRC enterprise income rate of
25% to net income before income taxes and income of affiliates, and the actual provision for income taxes is as follows:
Income from continuing operations before income taxes, share of income
Year Ended December 31,
2021
RMB
2022
RMB
2020
RMB
of affiliates, net
PRC statutory tax rate
Income tax at statutory tax rate
Expenses not deductible for tax purposes:
—Entertainment
—Other
Effect of tax holidays on concessionary rates granted to PRC entities
Effect of different tax rates of subsidiaries operating in other jurisdictions
Change in valuation allowance
Deferred income tax for dividend distribution
Effect of non-taxable income*
Unrecognized
tax benefits arising
transfer pricing
from certain
arrangements
Other
Income tax expense
362,302 371,088 196,335
25 %
90,576
25 %
92,772
25 %
49,084
2,428
202
(18,114 )
2,732
(3,355 )
18,483
(13,648 )
2,950
81
(13,523 )
2,070
2,999
10,349
(13,777 )
2,099
479
(12,671 )
2,342
40,501
—
(4,620 )
—
4,083
83,387
5,994
659
90,574
(36,566 )
368
41,016
* The effect of non-taxable income represents an income tax exemption according to the Notice (Cai Shui [2002]
No. 128) promulgated by the State Administration of Taxation and Ministry of Finance in China on dividend
income derived from a purchased open-end securities investment fund product that the Group recorded as short
term investment.
Additional PRC income taxes that would have been payable without the tax exemption amounted to
approximately RMB18,114, RMB13,523 and RMB12,671 for the years ended December 31, 2020, 2021 and 2022,
respectively. Without such exemption, the Group’s basic net profit per share for the years ended December 31, 2020,
2021 and 2022 would have been decreased by RMB0.02, RMB0.01and RMB0.01, and diluted net profit per share for
the years ended December 31, 2020, 2021 and 2022 would have been decreased by RMB0.02, RMB0.01and RMB0.01,
respectively.
If the entities were to be non-resident for PRC tax purposes, dividends paid to it out of profits earned after January
1, 2008 would be subject to a withholding tax. In the case of dividends paid by PRC subsidiaries, the withholding tax
would be 10%, whereas in the case of dividends paid by PRC subsidiaries which are 25% or more directly owned by
tax residents in the Hong Kong Special Administrative Region, the withholding tax would be 5%. The Group’s
subsidiary, CNinsure Holdings Limited qualified as Hong Kong resident and was entitled to enjoy a 5% reduced tax
rate under Bulletin [2018] No. 9 for the years ended December 31, 2020 and 2021, respectively.
Aggregate undistributed earnings of the Group’s subsidiaries and VIEs in the PRC that are available for
distribution to the Group of approximately RMB1,283,166 and RMB1,399,701 as of December 31, 2021 and 2022
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 RMB64,158 and RMB69,985, respectively.
F-47
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(14) Income Taxes (Continued)
During the years ended December 31, 2020，2021 and 2022, the Group provided RMB18,483, RMB10,349 and
nil, 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.
(15) Capital Structure
During 2022, the Company repurchased an aggregate of 72,465 ADSs from the open market, representing 0.1%
of the total shares outstanding as of December 31, 2022, at an average price of US$7.85 per ADS for a total amount
of approximately RMB3,984, under its share buyback program to repurchase up to US$20 million ADSs, as previously
announced by its board of directors in December 2022. The Group accounts for repurchased ordinary shares under the
par value method and includes such treasury stock as a component of the shareholders’ equity.
(16) Net Income per Share
The computation of basic and diluted net income per ordinary share is as follows:
Year Ended December 31,
2021
RMB
2020
RMB
2022
RMB
Basic:
Net income
Less: Net income (loss) attributable to the noncontrolling interests
Net income attributable to the Company’s shareholders
276,177
7,923
268,254
259,941
8,952
250,989
85,723
(14,549 )
100,272
Weighted average number of ordinary shares outstanding
1,073,891,784 1,073,891,784 1,074,196,310
Basic net income per ordinary share
Basic net income per ADS
0.25
5.00
0.23
4.67
0.09
1.87
F-48
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(16) Net Income per Share (Continued)
Year Ended December 31,
2021
RMB
2020
RMB
2022
RMB
Diluted:
Net income
Less: Net income (loss) attributable to the noncontrolling interests
Net income attributable to the Company’s shareholders
276,177
7,923
268,254
259,941
8,952
250,989
85,723
(14,549 )
100,272
Weighted average number of ordinary shares outstanding
Weighted average number of dilutive potential ordinary shares
from share options
Total
Diluted net income per ordinary share
Diluted net income per ADS
(17) Distribution of Profits
1,073,891,784 1,073,891,784 1,074,196,310
399,576
261,511
1,074,291,360 1,074,291,194 1,074,457,821
399,410
0.25
4.99
0.23
4.67
0.09
1.87
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, 2021 and 2022. Appropriations to the statutory surplus reserve are required to be
made at not less than 10% of individual company’s net profit as reported in the PRC statutory financial statements of
the Company’s subsidiaries and VIEs. The appropriations to statutory surplus reserve are required until the balance
reaches 50% of the registered capital of respective subsidiaries and VIEs.
The statutory surplus reserve is used to offset future losses. These reserves represent appropriations of retained
earnings determined according to PRC law and may not be distributed. The accumulated amounts contributed to the
statutory reserves were RMB557,221 and RMB559,520 as of December 31, 2021 and 2022, respectively.
Under PRC laws and regulations, there are restrictions on the Company’s PRC subsidiaries and VIEs with respect
to transferring certain of their net assets to the Company either in the form of dividends, loans, or advances. Amounts
of restricted net assets include paid in capital and statutory surplus reserve of the Company’s PRC subsidiaries and
the net assets of the VIEs in which the Company has no legal ownership, totaling RMB1,458,915 and RMB1,461,214
as of December 31, 2021 and 2022, respectively, which were not eligible to be distributed.
(18) Related-party Balances and Transactions
The principal related-party balances as of December 31, 2021 and 2022, and transactions for the years ended
December 31, 2020, 2021 and 2022 are as follows:
(i) On December 28, 2020, the Group entered into a framework strategic partnership agreement, or, the
“Agreement”, with Puyi Enterprise Management Consulting Co., Ltd (“Puyi Consulting”), which was
controlled by Puyi, the Group’s affiliate. 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. For the year
ended December 31, 2021, the Group incurred RMB5,386 commission cost to Puyi Consulting and the
balance of accounts payable as of December 31, 2021 was RMB2,894. For the year ended December 31,
2022, the Group incurred RMB13,548 commission cost to Puyi Consulting and the balance of account
payable as of December 31, 2022 was RMB4,987. In order to diversify the Group’s services and product
F-49
offerings, the Group provided referral services of publicly-raised and privately-raised fund products provided
by Puyi’s clients, the Group referred Puyi’s financial advisors to their clients and Puyi’s financial advisors
will be responsible for providing product information and handling purchasing procedures. For the year ended
December 31, 2022, the Group incurred RMB1,166 referral service fee from Puyi and the balance of account
receivable as of December 31, 2022 was RMB1.
(ii) On March 7, 2022, the Group entered into an agreement with Puyi Consulting. Pursuant to this agreement,
Puyi Consulting provided training services and customer salon support services to the Group. For the year
ended December 31, 2022, the Group incurred RMB7,017 services expense to Puyi Consulting and the
balance of other payable as of December 31, 2022 was RMB4,177.
(19) Commitments and Contingencies
(i) See Note 9 for the Group’s commitments for future minimum lease payments under operating leases.
(ii) As of December 31, 2022, there was no pending legal proceeding to which the Group is a party that will have
a material effect on the Group’s business, results of operations or cash flows.
(20) Concentrations of Credit Risk
Concentration risks
Customers accounting for 10% or more of total net revenues excluding estimated renewal commissions are as
follows:
Sinatay Life Insurance Co., Ltd. (“Sinatay”)
Aeon Life Insurance Co., Ltd. (“Aeon”).
Huaxia Life Insurance Company Limited
(“Huaxia”)
Evergrande Life Insurance Co., Ltd.
Year ended December 31,
2020
RMB
504,489
560,341
% of
sales
2021
RMB
15.4 % 451,840
17.1 % 437,132
% of
sales
2022
RMB
15.0 % 497,143
*
14.5 %
% of
sales
19.6 %
*
606,581
18.6 % 323,800
10.7 %
*
*
(“Evergrande”)
Subtotal
339,567
2,010,978
10.4 %
*
61.5 % 1,212,772
*
*
40.2 % 497,143
*
19.6 %
*
represented less than 10% of total net revenues for the year.
F-50
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(20) Concentrations of Credit Risk (Continued)
Concentration risks (Continued)
Customers which accounted for 10% or more of gross accounts receivable excluding estimated renewal
commissions are as follows:
Sinatay
Greatwall Life Insurance Co., Ltd
Subtotal
%
%
2021
RMB
186,289
*
186,289
As of December 31,
2022
RMB
31.1 % 124,847
85,616
31.1 % 210,463
*
23.4 %
16.0 %
39.4 %
*
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-term investments with financial institutions with low
credit risk.
(21) 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, 2021 and 2022, share-based compensation expenses of nil were recognized in
connection with the 2012 Options G, respectively.
F-51
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(21) Share-based Compensation (Continued)
(a) 2012 Option G (Continued)
For the year ended December 31, 2022, changes in the status of total outstanding options, were as follows:
Outstanding as of January 1, 2022
Exercised
Forfeited
Outstanding as of December 31, 2022
Exercisable as of December 31, 2022
Weighted
average
remaining
contractual
life
(years)
Weighted
average
exercise
price in
RMB
Aggregate
Intrinsic
Value
RMB
0.25
—
—
—
—
0.01
—
—
—
—
924
—
—
—
—
Number of
options
400,000
(400,000 )
—
—
—
As of December 31, 2022, all of the above options were fully vested and exercised.
(b) The 521 Plan
The 521 Plan was designed to incentivize the Participants and was originally accounted for as grant of share
options.
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. Upon a modification of the settlement terms of the 521
Plan from cash settlement to net share settlement of vested ADS options in November 2019, 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. The modification resulted in a change of awards’ classification from liability to
equity. At the modification date, the Group reclassified the amounts previously recorded as a share-based
compensation liability as a component of equity in the form of a credit to additional paid-in capital.
In December 2020, the Group entered into supplemental agreements with all remaining Participants to cancel the
521 Plan. In accordance with the supplemental agreements, all the relevant original contractual agreements were
terminated and lapsed and upon which, the 521 Plan Employee Companies returned a total of 280,000,000 subscribed
ordinary shares to the Group, and as a condition, the Group refunded all share rights deposits amounting RMB250,312
back to the Participants, and terminated the Participants’ obligation to repay the Group the non-recourse loan principal
and accumulated interest. By the end of 2020, the transaction was completed and the returned shares were all cancelled.
For the year ended December 31, 2019, the Group recognized RMB393 share-based compensation expense
related to the 521 plan, while for the year ended December 31, 2020, the Group reversed RMB393 as the stock options
related to the 521 Plan were estimated to be improbable to vest. As of December 31, 2021 and 2022, there was no
unrecognized share-based compensation expense related to the 521 Plan.
F-52
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(21) Share-based Compensation (Continued)
(c) 2022 Options
On August 12, 2022, the Company granted share options (“2022 Options”) to its independent directors to purchase
up to 4,000,000 ordinary shares of the Company. Pursuant to the option agreements entered into between the Company
and the option grantees, the options vest over a four-year service period starting from the date of grant, with 30%
(“Option D1”), 30% (“Option D2”), 20% (“Option D3”) and the remaining 20% (“Option D4”) of the options being
vested on August 31 of each of the years starting from 2023 to 2026, respectively, subject to the continuous service
of the option grantees. The 2022 Options expire no later than August 1, 2032, subject to earlier termination upon an
optionee’s cessation of service. The 2022 Options had an exercise price of US$0.2305 (RMB1.59) and an intrinsic
value of US$0.0020 (RMB0.01) per ordinary share on the date of grant.
The Group used the Black-Scholes option pricing model in determining the fair value of the options granted,
which requires the input of highly subjective assumptions, including the expected life of the stock option, stock price
volatility, dividend rate and risk-free interest rate. The assumptions used in determining the fair value of the 2022
Options on the grant date were as follows:
Assumptions
Expected dividend yield (Note i)
Risk-free interest rates (Note ii)
Expected volatility (Note iii)
Expected life in years (Note iv)
Fair value of options on grant date
(i) Expected dividend yield:
August 12, 2022
3.69%
2.92% ~ 2.96%
119.9% ~ 131.9%
5.54 ~ 7.04
US$0.1590 ~
US$0.1646
The expected dividend yield was estimated by the Group based on its historical and future dividend policy.
(ii) Risk-free interest rate:
Risk-free interest rate was estimated based on the US Government Bond yield and pro-rated according to the
tenor of the options 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 estimated based on the midpoint between the end of the vesting period and the contractual
term of the award of the 2022 Options.
As of December 31, 2022, the Group had reserved 161,143,768 ordinary shares available to be granted as options
under the 2022 Options. No actual forfeitures occurred for the independent directors for the year ended December 31,
2022.
F-53
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(21) Share-based Compensation (Continued)
(c) 2022 Options (Continued)
A summary of share options outstanding as of December 31, 2022, and activity during the year then ended, is
presented below:
Outstanding as of January 1, 2022
Granted
Exercised
Forfeited
Outstanding as of December 31, 2022
-
4,000,000
-
-
4,000,000
-
0.2305
-
-
0.2305
Weighted
average
exercise
price
in USD
Number of
options
Weighted
average
remaining
contractual
life
(In years)
-
6.19
-
-
6.19
Aggregate
Intrinsic
Value
USD
558
For the year ended December 31, 2022, share-based compensation expenses of RMB461 were recognized in
connection with the 2022 Options. As of December 31, 2022, unrecognized share-based compensation expense related
to unvested share options granted to the independent directors totaled US$572 (RMB3,942), which is expected to be
recognized over a weighted-average period of 3.6 years. The aggregate intrinsic value of the share options as of
December 31, 2022 was US$558 (RMB3,849).
(22) Segment Reporting
As of December 31, 2021 and 2022, the Group operated two segments: (1) the insurance agency segment, which
mainly consists of providing agency services for distributing life and P&C insurance products on behalf of insurance
companies, and (2) the claims adjusting segment, which consists of providing pre-underwriting survey services, claim
adjusting services, disposal of residual value services, loading and unloading supervision services, and consulting
services. Operating segments are defined as components of an enterprise about which separate financial information
is available and evaluated regularly by the Group’s chief operating decision maker (“CODM”) in deciding how to
allocate resources and in assessing performance. The Group’s CODM is the Chief Executive Officer.
F-54
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(22) Segment Reporting (Continued)
The following table shows the Group’s operations by business segment for the years ended December 31, 2020,
2021 and 2022. Other represents revenue and expenses that are not allocated to reportable segments and corporate
related items.
Year ended December 31,
2020
RMB
2021
RMB
2022
RMB
2022
US$
Net revenues
Agency
Claims Adjusting
Total net revenues
Operating costs and expenses
Agency
Claims Adjusting
Other
Total operating costs and expenses
Income (loss) from operations
Agency
Claims Adjusting
Other
Income from operations
Segment assets
Agency
Claims Adjusting
Other
Total assets
2,834,997 2,811,936 2,376,851 344,611
58,685
3,268,145 3,271,114 2,781,614 403,296
404,763
433,148
459,178
(2,481,219 ) (2,418,444 ) (2,068,194 ) (299,860 )
(60,405 )
(18,576 )
(2,965,959 ) (2,969,209 ) (2,612,939 ) (378,841 )
(416,619 )
(128,126 )
(416,241 )
(68,499 )
(442,349 )
(108,416 )
353,778
16,907
(68,499 )
302,186
393,492
16,829
(108,416 )
301,905
308,657
(11,856 )
(128,126 )
168,675
44,751
(1,720 )
(18,576 )
24,455
2021
RMB
As of December 31,
2022
RMB
2022
US$
1,259,973 1,513,449 219,429
302,592 252,130
36,555
1,679,553 1,323,937 191,954
3,242,118 3,089,516 447,938
Substantially all of the Group’s revenues for the three years ended December 31, 2020, 2021 and 2022 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-55
FANHUA INC.
Notes to the Consolidated Financial Statements
(In thousands, except for shares and per share data)
(23) Subsequent events
Acquisitions of quality insurance intermediaries companies
On January 3, 2023, the Group entered into definitive agreements with the existing shareholders of Zhongrong
Smart Finance Information Technology Co., Ltd. (“Zhongrong”), to acquire 57.73% of the equity interests of
Zhongrong. As of March 31, 2023, the Group has acquired 53.44% of the equity interests of Zhongrong with a capital
contribution of RMB122.7 million to Zhongrong. Zhongrong is currently in the process of repurchasing its shares
from certain of its existing shareholders which will result in its shareholding in Zhongrong ultimately increasing to
57.73%. In connection with the acquisition, 61,853,580 ordinary shares of the Company have been issued to the
existing shareholders of Zhongrong as of March 31, 2023. The consideration, adjustable based on the achievement of
certain performance targets in the next three years by Zhongrong, is subject to a lock-up period of three years and will
be released from lock-up in two batches after 2025.
On February 6, 2023, the Group entered into a definitive agreement with the existing shareholders of Jilin Zhongji
Shi’An Insurance Agency Co., Ltd (“Zhongji”), to acquire 51% of the equity interests of Zhongji. In connection with
the acquisition, 13,660,720 ordinary shares of the Company have been issued to the existing shareholders of Zhongji
as of March 31, 2023. The consideration, adjustable based on the achievement of certain performance targets in the
next three years by Zhongji, is subject to a lock-up period of three years and will be released from lock-up in two
batches after 2025.
On February 8, 2023, the Group entered into an another definitive agreement with the existing shareholders of
Wuhan Taiping Online Insurance Agency Co., Ltd. (“Taiping”), to acquire 51% of the equity interests of Taiping. In
connection with the acquisition, 9,107,140 ordinary shares of the Company have been issued to the existing
shareholders of Taiping as of March 31, 2023. The consideration, adjustable based on the achievement of certain
performance targets in the next three years by Taiping, is subject to a lock-up period of three years and will be released
from lock-up in two batches after 2025.
The Group is in the process of assessing the accounting treatment of the above mentioned acquisitions.
Share incentive plan
On February 6, 2023, the board of directors (the “board”) has approved the grant options to purchase an aggregate
of 13,680,000 ordinary shares to certain top agents who have met the requirements for Million Dollar Round Table
(the “MDRT”) Membership. Pursuant to the MDRT share incentive program, the exercise price of these options is
US$0.05 per ordinary share. The options are scheduled to vest over a two-year period starting from March 31, 2024,
subject to the achievement of certain key performance indicators by the option holders and their continued service
with the Group. The Group is in the process of assessing the accounting treatment of the above mentioned share
incentive program.
F-56
FANHUA INC.
SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF THE COMPANY
Balance Sheets
(In thousands, except for shares and per share data)
ASSETS:
Current assets:
Cash and cash equivalents
Short term investments
Other receivables and amounts due from subsidiaries and affiliates
Total current assets
Non-current assets:
Investment in subsidiaries
Investment in an affiliate
Total assets
2021
RMB
As of December 31,
2022
RMB
2022
US$
Note2(u)
14,507
34,705
38,512
27,619
635,953 417,613
685,165 483,744
5,584
4,004
60,549
70,137
3,328,864 2,520,667 365,463
585
4,020,407 3,008,446 436,185
6,378
4,035
2,182,522 1,385,043 200,813
2,182,522 1,385,043 200,813
8,091
(10 )
461
8,089
—
—
1,173
(1 )
67
1,868,936 1,647,504 238,866
(4,733 )
1,837,885 1,623,403 235,372
4,020,407 3,008,446 436,185
(39,140 )
(32,643 )
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Other payables and accrued expenses and amounts due to subsidiaries
Total liabilities
Ordinary shares (Authorized shares:10,000,000,000 at US$0.001 each;
issued 1,073,891,784 and 1,074,291,784 shares, of which 1,073,891,784
and 1,072,842,484 shares were outstanding as of December 31, 2021 and
2022, respectively)
Treasury Stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total equity
Total liabilities and shareholders’ equity
F-57
FANHUA INC.
SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF THE COMPANY—(Continued)
Statements of Income and Comprehensive Income
(In thousands)
Year Ended December 31,
2020
RMB
2021
RMB
2022
RMB
2022
US$
(11,318 )
General and administrative expenses
—
Selling expenses
5
Interest income
17,495
Others, net
Equity in earnings of subsidiaries and an affiliate
94,090
Net Income attributable to the Company’s shareholders 268,254 250,989 100,272
Other comprehensive income (loss):
Foreign currency translation adjustments
Unrealized net gains on available-for-sale investments
Share of other comprehensive (loss) gain of affiliates
Comprehensive income attributable to the Company’s
(331 )
—
2
—
271,133 251,318
(4,204 )
281
1,044
—
9,639
23,811
(3,016 )
3,728
(1,919 )
4,688
(9,116 )
6,252
(1,281 )
(1,641 )
—
1
2,536
13,642
14,538
541
(278 )
680
shareholders
298,688 246,844 106,769
15,481
F-58
FANHUA INC.
SCHEDULE I—CONDENSED FINANCIAL INFORMATION OF THE COMPANY—(Continued)
Statements of Cash Flows
(In thousands)
Cash flow from operating activities:
Net income
Adjustments to reconcile net income to net cash used in
operating activities:
Year Ended December 31,
2020
RMB
2021
RMB
2022
RMB
2022
US$
268,254 250,989 100,272
14,538
Equity in earnings of subsidiaries and an affiliate
Compensation expenses associated with stock options
Changes in operating assets and liabilities:
Other receivables
Other payables
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 and an affiliate
Advances to subsidiaries and affiliates
Proceeds from disposal of short-term investments
Net cash generated from investing activities
Cash flows generated from (used in) financing activities:
Proceeds on exercise of stock options
Dividends paid
Repurchase of ordinary shares from open market
Repayment of subscription from the 521 Plan participants
Net cash generated used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents and restricted cash at
(271,133 ) (251,318 )
—
(393 )
26
(7,707 )
(10,953 )
(71,382 )
26,195
392
(847 )
(784 )
—
(94,090 )
461
(13,642 )
67
—
696
7,339
—
102
1,065
43,757 907,006 131,504
660,004 157,582 (689,780 ) (100,009 )
1,464
—
32,959
10,095
688,127 201,339 227,321
73,310
—
—
2
(388,499 ) (242,518 ) (317,730 )
(3,984 )
—
(250,312 )
—
(638,811 ) (242,518 ) (321,712 )
(87,052 )
—
—
(41,963 )
38,363
—
(46,067 )
(578 )
—
(46,645 )
(12,621 )
beginning of year
Effect of exchange rate changes on cash and cash
equivalents
Cash and cash equivalents and restricted cash at end of
the year
32,314
66,345
14,507
2,103
(4,332 )
(9,875 ) 111,057
16,102
66,345
14,507
38,512
5,584
F-59
FANHUA INC.
Note to Schedule I
(In thousands, except for shares)
Schedule I has been provided pursuant to the requirements of Rule 12-04(a), 5-04(c) and 4-08(e)(3) of Regulation
S-X, which require condensed financial information as to the financial position, cash flows and results of operations
of a parent company as of the same dates and for the same periods for which audited consolidated financial statements
have been presented when the restricted net assets of the consolidated and unconsolidated subsidiaries (including
variable interest entities) together exceed 25 percent of consolidated net assets as of the end of the most recently
completed fiscal year.
As of December 31, 2022, RMB1,461,214 of the restricted capital and reserves are not available for distribution,
and as such, the condensed financial information of the Company has been presented for the years ended December
31, 2020, 2021 and 2022.
As of December 31, 2022, there were no material contingencies, significant provisions of long-term obligations,
and mandatory dividend or redemption requirements of redeemable shares or guarantees of the Company except for
those which have been separately disclosed in the consolidated financial statements, if any.
Basis of preparation
The condensed financial information of the Company has been prepared using the same accounting policies as
set out in the accompanying consolidated financial statements except that the equity method has been used to account
for investments in its subsidiaries.
Certain information and footnote disclosures normally included in financial statements prepared in accordance
with U.S. GAAP have been condensed or omitted. The footnote disclosures contain supplemental information relating
to the operations of the Company and, as such, these statements should be read in conjunction with the notes to the
consolidated financial statements of the Group as of December 31, 2021 and 2022 and the years ended 2020, 2021
and 2022.
F-60