Fanhua(FANH) - 2020 Q4 - Annual Report

PART I Key Information This section presents Fanhua Inc.'s selected historical financial data and significant risk factors from 2016 to 2020 Selected Financial Data Fanhua provides five years of selected consolidated financial data (2016-2020) showing fluctuating revenues and net income, with a general downward trend in assets and equity Selected Consolidated Statements of Income Data (2018-2020, in millions RMB) | Indicator | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Total net revenues | 3,471.3 | 3,706.0 | 3,268.1 | | Income from continuing operations | 425.7 | 469.4 | 302.2 | | Net income from continuing operations | 617.1 | 192.6 | 276.2 | | Net income attributable to the Company's shareholders | 609.9 | 188.9 | 268.3 | | Diluted Net income per share (RMB) | 0.49 | 0.17 | 0.25 | | Diluted Net income per ADS (RMB) | 9.83 | 3.46 | 4.99 | Selected Consolidated Balance Sheet Data (2018-2020, in millions RMB) | Indicator | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Total assets | 3,866.6 | 3,440.8 | 3,081.0 | | Total liabilities | 1,119.9 | 1,396.4 | 1,126.3 | | Total equity | 2,746.7 | 2,044.5 | 1,954.7 | Risk Factors Fanhua identifies various risks across business, corporate structure, China operations, and ADSs, including partner dependence, regulatory changes, COVID-19 impact, and potential delisting - The company has significant partner concentration risk, with its top four insurance partners (Huaxia, Aeon, Sinatay, and Evergrande) each accounting for over 10% of total net revenues in 2020[22][75] - The business was materially impacted by the COVID-19 pandemic in 2020, which hindered sales agents' face-to-face interactions, slowed agent recruitment, and shifted consumer preference towards more affordable online medical insurance products[79][81] - The company faces potential delisting from U.S. exchanges under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect its auditor's work in China for three consecutive years[145] - Regulatory changes in China, such as new definitions for critical illnesses and stricter rules for online insurance, could increase compliance costs and adversely affect business operations and product sales[28][37][44] Information on the Company This section details Fanhua's history, business operations, organizational structure, and properties, highlighting its O2O model and regulatory environment History and Development of the Company Fanhua, founded in 1999 and listed on NASDAQ in 2007, has grown organically and through acquisitions, investing in online platforms - The company was founded in 1999, listed on NASDAQ in 2007, and changed its name from CNinsure Inc. to Fanhua Inc. in 2016[166][167] - Fanhua has made strategic investments in complementary businesses, holding an 18.5% equity interest in CNFinance (NYSE: CNF) and a 4.5% interest in Puyi Inc. (NASDAQ: PUYI)[172] Business Overview Fanhua operates as a leading independent insurance intermediary in China, using an O2O model to distribute life and health products through agents and online platforms, also providing claims adjusting services - Fanhua operates an integrated offline-to-online (O2O) model, leveraging technology platforms and an extensive offline network of 362,580 sales agents and 763 sales outlets as of December 31, 2020[176][178] - The company's business is organized into two primary segments: the insurance agency segment, which accounted for 86.7% of net revenues in 2020, and the claims adjusting segment, which accounted for 13.3%[184][185][195] - Life and health insurance products are the main revenue driver, contributing 82.7% of total net revenues in 2020[186] - The Chinese insurance industry is highly regulated by the China Banking and Insurance Regulatory Committee (CBIRC), which governs licensing, market conduct, product design, and foreign investment[216][228] Organizational Structure Fanhua, a Cayman Islands holding company, conducts business in China through subsidiaries, having transitioned from VIEs to direct equity ownership for most operations by 2016 - The company has transitioned from a VIE structure to direct controlling equity ownership in its insurance intermediary and online operations by May 2016[287] - Fanhua controls 69.0% of the voting interests in its claims adjusting entity, FHISLA, through act-in-concert agreements[289][293] Property, Plants and Equipment Fanhua primarily operates from leased properties, with total rental expenses of RMB 106.6 million (US$16.3 million) in 2020 for approximately 183,192 square meters of office space - As of December 31, 2020, the company leased approximately 183,192 square meters of office space, with total rental expenses of RMB 106.6 million for the year[295] Operating and Financial Review and Prospects This section analyzes Fanhua's financial performance and condition, detailing operating results, liquidity, cash flows, and contractual obligations, highlighting the COVID-19 impact Operating Results In 2020, total net revenues decreased by 11.8% to RMB 3.3 billion due to COVID-19, while net income attributable to shareholders increased by 42.0% to RMB 268.3 million Year-over-Year Financial Performance (2019 vs. 2020, in millions RMB) | Metric | 2019 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Total Net Revenues | 3,706.0 | 3,268.1 | -11.8% | | Insurance Agency Revenue | 3,335.4 | 2,835.0 | -15.0% | | Claims Adjusting Revenue | 370.6 | 433.1 | +16.9% | | Income from Operations | 469.4 | 302.2 | -35.6% | | Net Income Attributable to Shareholders | 188.9 | 268.3 | +42.0% | - The decrease in insurance agency revenue was mainly due to a 22.9% year-over-year decline in first-year life insurance premiums, attributed to the adverse impact of the COVID-19 pandemic[370] - The significant increase in net income was primarily due to a substantial decrease in the net share of income and impairment of affiliates, which was negative RMB 2.7 million in 2020 compared to negative RMB 224.6 million in 2019, driven by a much smaller impairment charge on the investment in CNFinance (RMB 23.0 million in 2020 vs. RMB 322.7 million in 2019)[379] Liquidity and Capital Resources Fanhua's liquidity is primarily from operations, with RMB 245.4 million cash and RMB 1.3 billion short-term investments as of December 31, 2020, and no bank borrowings Summary of Cash Flows (in millions RMB) | Cash Flow Activity | 2019 | 2020 | | :--- | :--- | :--- | | Net cash from operating activities | 178.3 | 402.3 | | Net cash from investing activities | 12.0 | 325.3 | | Net cash used in financing activities | (792.1) | (638.8) | - As of December 31, 2020, the company had RMB 245.4 million in cash and cash equivalents and no short-term or long-term bank borrowings[383][395] - Major uses of cash in financing activities in 2020 included RMB 388.5 million for dividend payments and RMB 250.3 million for refunding share rights deposits related to the canceled 521 plan[393] Tabular Disclosure of Contractual Obligations As of December 31, 2020, Fanhua's primary contractual obligations were RMB 219.4 million in operating lease payments, with most due within three years Contractual Obligations as of December 31, 2020 (in millions RMB) | Obligation Type | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease liabilities | 219.4 | 92.4 | 98.7 | 23.5 | 4.8 | Directors, Senior Management and Employees This section details Fanhua's leadership, compensation, board structure, and workforce, including key executives, share incentive plans, and employee/agent counts Directors and Senior Management Fanhua's leadership includes Chairman and CEO Mr. Chunlin Wang and CFO Mr. Peng Ge, with detailed biographies for all directors and executive officers - The key leadership includes Mr. Chunlin Wang as Chairman and CEO, and Mr. Peng Ge as CFO and Director[409][411][412] - Executive officers have employment agreements that include confidentiality and non-competition clauses, which restrict them from joining competitors for one year following termination[418][419] Compensation In 2020, executive cash compensation was RMB 2.4 million, with share incentive plans like the 2007 Plan and the canceled 521 Plan used for talent retention - In 2020, aggregate cash compensation for executive officers was approximately RMB 2.4 million (US$0.4 million)[421] - The 521 Share Incentive Plan, which enabled participants to purchase 14 million ADSs, was canceled in December 2020 because performance targets were not met[437][439] Board Practices Fanhua's board comprises seven directors, mostly independent, and operates through four committees: Audit, Compensation, Corporate Governance & Nominating, and Financial Reporting & Disclosure - The board has seven directors, with a majority being independent, and has four key committees: Audit, Compensation, Corporate Governance & Nominating, and Financial Reporting & Disclosure[440][442] - The Audit Committee is composed entirely of independent directors and includes a designated audit committee financial expert, Mr. Allen Lueth[442][556] Employees As of December 31, 2020, Fanhua had 4,926 employees and a network of 362,580 registered sales representatives, emphasizing online and offline training Employee and Sales Agent Count | Category | Dec 31, 2019 | Dec 31, 2020 | | :--- | :--- | :--- | | Employees | 4,746 | 4,926 | | Registered Sales Representatives | 670,104 | 362,580 | Share Ownership As of March 31, 2021, directors and executive officers collectively owned 27.0% of outstanding shares, with co-founder Yinan Hu being the largest beneficial owner at 18.6% - As of March 31, 2021, directors and executive officers as a group beneficially owned 27.0% of the company's outstanding shares[457] - Co-founder Yinan Hu is the largest beneficial shareholder with 18.6% ownership, including shares held through Sea Synergy Limited[457][460] Financial Information This section covers Fanhua's legal proceedings and dividend policy, noting immaterial fines in 2020 and a quarterly dividend payout ratio of no less than 50% of net operating income - The company is not a party to any material litigation, but incurred administrative fines of RMB 0.13 million in 2020 from regulatory inquiries[462] - The company has a quarterly dividend policy with a payout ratio of no less than 50% of net operating income attributable to shareholders, with the dividend being US$0.25 per ADS for each quarter of 2020[465][466] Additional Information This section provides supplementary details on Fanhua's share capital, articles of association, material contracts, exchange controls, and taxation, including its PFIC status Memorandum and Articles of Association Fanhua is incorporated in the Cayman Islands, with articles granting broad board powers and requiring a two-thirds majority for special resolutions - The company is incorporated under the laws of the Cayman Islands, which provides for different shareholder rights compared to U.S. jurisdictions[471][472] - A special resolution, requiring a two-thirds majority vote, is needed for important matters such as a change of the company's name[477] Taxation This subsection outlines tax frameworks in the Cayman Islands, PRC (25% EIT, 5% withholding tax on dividends), and U.S., including Fanhua's PFIC status for prior years - The company is a tax-exempted entity in the Cayman Islands[485] - PRC subsidiaries are subject to a 25% EIT, but dividends paid to the company's Hong Kong subsidiary are subject to a lower 5% withholding tax rate[490][799] - The company believes it was not a PFIC for U.S. federal income tax purposes in 2020, but was a PFIC for 2017 and prior years, which could have adverse tax consequences for U.S. Holders[164][501] Quantitative and Qualitative Disclosures about Market Risk Fanhua's primary market risks are minimal interest rate risk and foreign exchange risk, with a 10% RMB appreciation potentially decreasing foreign currency assets by RMB 7.3 million - The company's main market risks are interest rate risk on its cash deposits and foreign exchange risk related to the RMB/USD exchange rate[533][534] - As of December 31, 2020, a hypothetical 10% appreciation of the RMB against the USD and HKD would have resulted in a decrease of RMB 7.3 million in the value of the company's foreign currency-denominated financial assets[535] PART II Controls and Procedures Management concluded Fanhua's disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with an unqualified auditor opinion - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[545] - Based on the COSO 2013 framework, management concluded that the internal control over financial reporting was effective as of December 31, 2020[548] - The independent auditor, Deloitte Touche Tohmatsu, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2020[550] Corporate Governance and Other Matters This section covers Fanhua's corporate governance, including its code of ethics, auditor fees (US$1.6 million in 2020), and use of NASDAQ "home country practice" exemptions - The company follows Cayman Islands "home country practice" which exempts it from the NASDAQ requirement to hold an annual shareholder meeting[563] Principal Accountant Fees (in millions USD) | Fee Type | 2019 | 2020 | | :--- | :--- | :--- | | Audit fees | 1.693 | 1.600 | | Audit-related fees | 0.251 | — | | All other fees | 0.000 | — | PART III Financial Statements This section presents Fanhua's audited consolidated financial statements for 2018-2020, prepared under U.S. GAAP, with an unqualified opinion from Deloitte Touche Tohmatsu - The independent auditor, Deloitte Touche Tohmatsu, issued an unqualified opinion on the consolidated financial statements for the three years ended December 31, 2020[578] - The auditor's report identifies the Other-than-temporary Impairment (OTTI) assessment of the equity method investment in CNFinance Holdings Limited as a critical audit matter due to the significant judgment required[585][587] - The company adopted new accounting standards for leases (ASC 842) in 2019 and for credit losses (ASU 2016-13) in 2020, with the latter resulting in a RMB 7.5 million reduction to opening retained earnings[581][728] Exhibits This section lists all exhibits filed with the annual report, including corporate governance documents, share incentive plans, and Sarbanes-Oxley Act certifications - The report includes key corporate governance documents such as the Amended and Restated Memorandum and Articles of Association and the 2007 Share Incentive Plan[570] - Certifications by the CEO and CFO as required by Sections 302 and 906 of the Sarbanes-Oxley Act are filed as exhibits[570]