Fanhua(FANH) - 2021 Q4 - Annual Report

PART I Key Information This section details Fanhua's corporate structure, including its VIE, associated risks, and condensed financial data for its entities The Consolidated VIE and China Operations Fanhua operates its online insurance business in China through a VIE structure, subject to PRC regulations on fund flows - Fanhua operates its online insurance business via a VIE structure, with a 2021 restructuring reducing direct equity to 49% while maintaining control through contracts[14][15][57] - Fund flows from PRC subsidiaries to the parent are subject to PRC regulations, including currency conversion controls and statutory reserve requirements for dividends[20][24][25] - In 2021, inter-company cash flows included RMB 89.8 million in advances received by subsidiaries from the VIE, RMB 16.4 million in repayments, and RMB 16.2 million in commissions paid by the VIE to subsidiaries[22] Financial Information Related to the VIEs This section provides condensed consolidating financial data for 2021, highlighting the VIE's relatively small contribution to total assets and revenues Summary Consolidated Balance Sheet Data as of December 31, 2021 (RMB in thousands) | | Parent | Consolidated VIE and its subsidiaries | WOFE | Other Subsidiaries | Consolidated total | | :--- | :--- | :--- | :--- | :--- | :--- | | Total assets | 4,020,407 | 186,143 | 1,902,273 | 6,461,451 | 3,242,118 | | Total liabilities | 2,182,522 | 133,789 | 1,377,087 | 2,671,551 | 1,281,756 | | Total net assets | 1,837,885 | 52,354 | 525,186 | 3,789,900 | 1,960,362 | Summary Consolidated Statement of Income Data for the Year Ended December 31, 2021 (RMB in thousands) | | Parent | Consolidated VIE and its subsidiaries | WOFE | Other subsidiaries | Consolidated total | | :--- | :--- | :--- | :--- | :--- | :--- | | Total net revenues | — | 16,267 | — | 3,268,763 | 3,271,114 | | Income (loss) from operations | (331) | 537 | (37,677) | 339,376 | 301,905 | | Net income | 250,989 | 515 | 298,837 | 264,725 | 259,941 | Summary Consolidated Cash Flow Data for the Year Ended December 31, 2021 (RMB in thousands) | | Parent | Consolidated VIE and its subsidiaries | WOFE | Other subsidiaries | Consolidated total | | :--- | :--- | :--- | :--- | :--- | :--- | | Cash flows from operating activities | (784) | 32,674 | (7,013) | 101,321 | 126,198 | | Cash flows from investing activities | 201,339 | (73,430) | (283,323) | 261,650 | 450,399 | | Cash flows from financing activities | (242,518) | — | 501,745 | (175,362) | (260,298) | Risk Factors This section outlines significant investment risks, including corporate structure, business, China operations, and ADS-specific factors - Corporate Structure Risks: The VIE structure for online insurance poses a primary risk, as PRC authorities could deem contractual arrangements non-compliant, leading to severe penalties and potential loss of control[56][59][84] - Business and Industry Risks: Key risks include failure to implement strategic initiatives, potential suspension of contracts with major partners (each over 10% of 2021 revenue), intense competition, and evolving online insurance regulations[106][109][137] - Risks of Doing Business in China: Uncertainties in the PRC legal system, government currency controls, potential PRC taxes on global income, and economic downturns pose significant risks[184][188][195] - Risks Related to ADSs and PCAOB Inspections: Potential delisting from U.S. exchanges under the HFCA Act due to PCAOB inspection issues with the China-based auditor could render ADSs illiquid or worthless[53][210][214] Information on the Company This section provides a detailed overview of Fanhua Inc., including its corporate history, business operations, organizational structure, and properties History and Development of the Company Fanhua Inc., incorporated in 2007, re-established a VIE structure in 2021 for its online business and received a privatization proposal - The company re-established a VIE structure for its online insurance business in 2021 to comply with new internet insurance rules, reducing its direct equity in Xinbao Investment to 49%[257] - On December 16, 2021, the board received a preliminary non-binding proposal from a consortium led by Chairman and CEO Mr. Yinan Hu to take the company private for $9.80 per ADS[182][265] Business Overview Fanhua is a leading independent insurance intermediary in China, operating an O2O model across two segments in a highly regulated market - Fanhua operates an integrated O2O model, combining a large offline network of 284,053 sales agents as of December 31, 2021, with online platforms like Lan Zhanggui and Baowang[269][272] - The company has two operating segments: Insurance Agency, accounting for 86.0% of 2021 net revenues, and Claims Adjusting, accounting for 14.0%[281][282][283][290] - The Chinese insurance industry is highly regulated by the CBIRC, which oversees companies and intermediaries, approves products, and enforces market conduct[309][321] - New internet insurance regulations, effective February 2021, prompted the company's 2021 restructuring by setting higher requirements for online platforms and IT system safety[354][357] Organizational Structure Fanhua Inc., a Cayman Islands holding company, operates in China through a WOFE and a VIE for its online insurance business, with control maintained via contractual arrangements - The company's online insurance business operates through a VIE, Xinbao Investment, due to PRC foreign investment restrictions, with direct equity reduced to 49% in 2021[391] - Control over the VIE is maintained through contractual arrangements, including a loan agreement, equity pledge, irrevocable power of attorney, and exclusive purchase option[397][400][402][403] - As of December 31, 2021, consolidated VIEs accounted for 0.5% of total consolidated net revenues and 2.2% of consolidated total assets[405] Operating and Financial Review and Prospects This section analyzes Fanhua's 2021 financial performance, highlighting stable revenues, a slight net income decline, and strong liquidity Operating Results In 2021, total net revenues remained stable at RMB 3.27 billion, while net income attributable to shareholders decreased by 6.4% FY2021 vs. FY2020 Performance (RMB in millions) | Metric | 2020 | 2021 | YoY Change | US$ (2021) in millions | | :--- | :--- | :--- | :--- | :--- | | Total Net Revenues | 3,268.1 | 3,271.1 | +0.1% | 513.3 | | - Insurance Agency | 2,835.0 | 2,811.9 | -0.8% | 441.2 | | - Claims Adjusting | 433.1 | 459.2 | +6.0% | 72.1 | | Income from Operations | 302.2 | 301.9 | -0.1% | 47.4 | | Net Income Attributable to Shareholders | 268.3 | 251.0 | -6.4% | 39.4 | - The decline in life insurance agency revenue resulted from a product mix shift towards whole life products, despite a 12.5% year-over-year increase in total life insurance GWP to RMB 11.3 billion[462] - General and administrative expenses increased by 18.1% to RMB 547.6 million in 2021, driven by strategic initiatives and increased social benefit contributions[465] - Share of income of affiliates resulted in a net loss of RMB 20.6 million in 2021, including a RMB 29.3 million impairment loss on the investment in CNFinance[470] Liquidity and Capital Resources Fanhua's liquidity is primarily from operations, with RMB 564.6 million cash and RMB 870.7 million short-term investments as of December 31, 2021 Cash and Liquidity Position (as of Dec 31, 2021) | Item | Amount (RMB millions) | Amount (US$ millions) | | :--- | :--- | :--- | | Cash and cash equivalents | 564.6 | 88.6 | | Short-term investments | 870.7 | 136.6 | Summary of Cash Flows (RMB in millions) | Cash Flow Activity | 2020 | 2021 | | :--- | :--- | :--- | | Net cash from operating activities | 402.3 | 126.2 | | Net cash from investing activities | 325.3 | 450.4 | | Net cash used in financing activities | (638.8) | (260.3) | - Capital expenditures totaled RMB 30.8 million (US$4.8 million) in 2021, primarily for IT infrastructure, online platforms, and new sales outlets[485] Directors, Senior Management and Employees This section details Fanhua's board, management, employee base, and share ownership, highlighting governance and key personnel - As of December 31, 2021, the company had 5,785 employees and 284,053 registered sales agents, a decrease from 362,580 agents in 2020[551][556] - The board of directors comprises six members, with a majority of independent directors, and operates through four committees: Audit, Compensation, Corporate Governance & Nominating, and Financial Reporting & Disclosure[535][536][537] - As of March 31, 2022, executive officers and directors collectively owned 25.6% of outstanding ordinary shares, with Chairman and CEO Yinan Hu beneficially owning 18.6%[562][563] - The company's 521 Share Incentive Plan, approved in 2018, was canceled in December 2020 due to unmet performance targets, with all subscribed shares returned and deposits refunded[534][962] Major Shareholders and Related Party Transactions This section details Fanhua's major shareholders and significant related party transactions, including a 2021 privatization proposal - A significant related party transaction is the preliminary non-binding proposal received on December 16, 2021, from a consortium led by Chairman and CEO Mr. Yinan Hu to take the company private[568] - The company has a strategic partnership with Puyi Inc., an affiliate, for resource sharing, incurring RMB 5.4 million in commission costs to Puyi Enterprise in 2021[569][570] Financial Information This section covers Fanhua's consolidated financial statements, legal proceedings, and its dividend policy, including historical quarterly payouts - The company's dividend policy, adopted in September 2017, targets a quarterly payout of no less than 50% of net operating income attributable to shareholders[576] Quarterly Dividend History (2021-2022) | Declaration Date | Per Ordinary Share (US$) | Per ADS (US$) | Record Date | Payable Date | | :--- | :--- | :--- | :--- | :--- | | Mar 22, 2021 | 0.0125 | 0.25 | Mar 31, 2021 | Apr 15, 2021 | | May 27, 2021 | 0.0075 | 0.15 | Jun 11, 2021 | Jun 25, 2021 | | Aug 23, 2021 | 0.0075 | 0.15 | Sep 7, 2021 | Sep 23, 2021 | | Nov 23, 2021 | 0.0075 | 0.15 | Dec 8, 2021 | Dec 22, 2021 | | Mar 28, 2022 | 0.0075 | 0.15 | Apr 12, 2022 | Apr 26, 2022 | - As a holding company, Fanhua relies on dividends from its PRC subsidiaries, which are subject to PRC regulations on profit distribution and statutory reserve requirements[579] Additional Information This section provides supplementary details on Fanhua's share capital, articles of association, and material tax considerations across jurisdictions - The company is incorporated in the Cayman Islands, which currently levies no taxes on corporate profits, income, or gains[597] - Under PRC tax law, if deemed a 'resident enterprise,' Fanhua would face a 25% EIT on worldwide income, and foreign shareholder dividends could incur a 10% withholding tax[599][601] - For U.S. federal income tax purposes, the company believes it was not a PFIC for 2021 but was for 2017 and prior years, impacting U.S. Holders of its ADSs[251][617][619] Quantitative and Qualitative Disclosures about Market Risk This section details Fanhua's exposure to market risks, primarily interest rate and foreign exchange fluctuations impacting its RMB-denominated operations - The company's primary market risks are interest rate risk and foreign exchange risk[646][647] - Foreign exchange risk arises from RMB-denominated revenues and USD-traded ADSs; a 10% RMB appreciation would decrease foreign currency financial assets by RMB 6.1 million[647][648] Description of Securities Other than Equity Securities This section details fees associated with the company's American Depositary Shares (ADSs) payable to the depositary, J.P. Morgan Fees Payable by ADS Holders to Depositary (J.P. Morgan) | Service | Fee | | :--- | :--- | | Issuance of ADSs | US$5.00 per 100 ADSs (or portion) | | Dividend distribution | US$0.02 or less per ADS | | Withdrawal of underlying security | US$5.00 per 100 ADSs (or portion) | | General depositary services (annual) | US$0.02 per ADS (or portion) | - The depositary, J.P. Morgan, reimbursed the company US$1.1 million for ADR program-related expenses in both 2020 and 2021[652] PART II Controls and Procedures This section confirms the effectiveness of Fanhua's disclosure controls and internal control over financial reporting as of December 31, 2021 - Management concluded that as of December 31, 2021, the company's disclosure controls and procedures were effective[655] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021, based on the COSO framework (2013)[658] - The independent auditor, Deloitte Touche Tohmatsu Certified Public Accountants LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2021[659] Corporate Governance and Other Disclosures This section covers Fanhua's corporate governance, including auditor changes, principal accountant fees, and Nasdaq listing standard exemptions - On August 25, 2021, the company changed its independent registered public accounting firm from Deloitte Hong Kong to Deloitte Touche Tohmatsu Certified Public Accountants LLP (Mainland China)[668][673] Principal Accountant Fees (in thousands of US$) | Fee Category | 2020 | 2021 | | :--- | :--- | :--- | | Audit fees | 1,600.0 | 1,650.0 | | Audit-related fees | — | — | | Tax fees | — | — | | All other fees | — | — | - As a foreign private issuer, the company follows Cayman Islands 'home country practice' for governance, exempting it from Nasdaq's annual shareholder meeting requirement[676] PART III Financial Statements This section presents Fanhua's audited consolidated financial statements for 2021, prepared under U.S. GAAP, including the auditor's report and notes - Deloitte's auditor report identified the estimation of variable renewal commissions for long-term life insurance products as a Critical Audit Matter due to complex and judgmental estimates[698][700] - Effective January 1, 2021, the company began recognizing estimated variable renewal commissions for long-term life insurance at the point of sale, recognizing RMB 258.7 million in 2021[498][806][807]