20-F 1 d768221d20f.htm FORM 20-F FORM 20-F
Table of Contents

As filed with the Securities and Exchange Commission on April 29, 2020

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 20-F

 

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                 

 

 

Commission file number 001-31914

 

 

中国人寿保险股份有限公司

(Exact name of Registrant as specified in its charter)

 

 

China Life Insurance Company Limited

(Translation of Registrant’s name into English)

People’s Republic of China

(Jurisdiction of incorporation or organization)

 

 

16 Financial Street

Xicheng District

Beijing 100033, China

(Address of principal executive offices)

Yinghui Li

16 Financial Street

Xicheng District

Beijing 100033, China

Tel: (86-10) 6363 1191

Fax: (86-10) 6657 5112

Email: liyh@e-chinalife.com

(Name, Telephone, Email 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

 

Trading Symbol

 

Name of each exchange on which registered

American depositary shares   LFC   New York Stock Exchange
H shares, par value RMB 1.00 per share     New York Stock Exchange*

 

 

 

*

Not for trading, but only in connection with the listing on the New York Stock Exchange of American depositary shares, each representing 5 H 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.

As of December 31, 2019, 7,441,175,000 H shares and 20,823,530,000 A shares, par value RMB 1.00 per share, were issued and outstanding. H shares are listed on the Hong Kong Stock Exchange. A shares are listed on the Shanghai Stock Exchange. Both H shares and A shares are ordinary shares.

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 report or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    ☐  Yes    ☒  No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☒                       Accelerated filer  ☐                       Non-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.    ☒  Yes    ☐  No

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

by the International Accounting Standards Board  ☒

  Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    ☐  Item 17    ☐  Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

 

 

 


Table of Contents

CHINA LIFE INSURANCE COMPANY LIMITED

TABLE OF CONTENTS

 

FORWARD-LOOKING STATEMENTS

     1  

CERTAIN TERMS AND CONVENTIONS

     2  
PART I        4  

Item 1.

 

Identity of Directors, Senior Management and Advisers

     4  

Item 2.

 

Offer Statistics and Expected Timetable

     4  

Item 3.

 

Key Information

     4  

A.

 

Selected Financial Data

     4  

B.

 

Capitalization and Indebtedness

     9  

C.

 

Reasons for the Offer and Use of Proceeds

     9  

D.

 

Risk Factors

     9  

Item 4.

 

Information on the Company

     32  

A.

 

History and Development of the Company

     32  

B.

 

Business Overview

     36  

C.

 

Organizational Structure

     93  

D.

 

Property, Plants and Equipment

     95  

Item 4A.

 

Unresolved Staff Comments

     95  

Item 5.

 

Operating and Financial Review and Prospects

     95  

A.

 

Operating Results

     117  

B.

 

Liquidity and Capital Resources

     134  

C.

 

Research and Development, Patents and Licenses

     137  

D.

 

Trend Information

     138  

E.

 

Off-Balance Sheet Arrangements

     138  

F.

 

Tabular Disclosure of Contractual Obligations

     138  

Item 6.

 

Directors, Senior Management and Employees

     138  

A.

 

Directors and Senior Management

     138  

B.

 

Compensation

     146  

C.

 

Board Practices

     149  

D.

 

Employees

     150  

E.

 

Share Ownership

     151  

Item 7.

 

Major Shareholders and Related Party Transactions

     151  

A.

 

Major Shareholders

     151  

B.

 

Related Party Transactions

     152  

C.

 

Interests of Experts and Counsel

     167  

Item 8.

 

Financial Information

     168  

A.

 

Consolidated Financial Statements and Other Financial Information

     168  

B.

 

Significant Changes

     170  

C.

 

Embedded Value

     170  

Item 9.

 

The Offer and Listing.

     176  

Item10.

 

Additional Information.

     176  

A.

 

Share Capital

     176  

 

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B.

 

Articles of Association

     176  

C.

 

Material Contracts

     194  

D.

 

Exchange Controls

     194  

E.

 

Taxation

     195  

F.

 

Dividends and Paying Agents

     205  

G.

 

Statement by Experts

     205  

H.

 

Documents on Display

     205  

I.

 

Subsidiary Information

     205  

Item11.

 

Quantitative and Qualitative Disclosures about Market Risk

     206  

Item12.

 

Description of Securities Other Than Equity Securities

     214  

A.

 

Debt Securities

     214  

B.

 

Warrants and Rights

     214  

C.

 

Other Securities

     214  

D.

 

American Depositary Shares

     214  

PART II

       215  

Item13.

 

Defaults, Dividend Arrearages and Delinquencies

     215  

Item14.

 

Material Modifications to the Rights of Security Holders and Use of Proceeds

     215  

A.

 

Material Modification To The Rights Of Security Holders

     215  

B.

 

Use of Proceeds

     215  

Item15.

 

Controls and Procedures

     216  

Item16A.

 

Audit Committee Financial Expert

     217  

Item16B.

 

Code of Ethics

     217  

Item16C.

 

Principal Accountant Fees and Services

     217  

Item16D.

 

Exemptions from the Listing Standards for Audit Committees.

     218  

Item16E.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     218  

Item16F.

 

Change in Registrant’s Certifying Accountant

     218  

Item16G.

 

Corporate Governance

     218  

Item16H.

 

Mine Safety Disclosure

     221  

PART III

       221  

Item17.

 

Financial Statements

     221  

Item18.

 

Financial Statements

     221  

Item19.

 

Exhibits

     221  

 

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FORWARD-LOOKING STATEMENTS

This annual report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements state our intentions, beliefs, expectations or predictions for the future, in particular under “Item 4. Information on the Company”, “Item 5. Operating and Financial Review and Prospects” and “Item 8. Financial Information—Embedded Value”.

The forward-looking statements include, without limitation, statements relating to:

 

   

future developments in the insurance industry in China;

 

   

changes in interest rates and other economic and business conditions in China;

 

   

the industry regulatory environment as well as the industry outlook generally;

 

   

the amount and nature of, and potential for, future development of our business;

 

   

the outcome of litigation and regulatory proceedings that we currently face or may face in the future;

 

   

our business strategy and plan of operations;

 

   

the prospective financial information regarding our business;

 

   

our dividend policy; and

 

   

information regarding our embedded value.

In some cases, we use words such as “believe”, “intend”, “anticipate”, “estimate”, “project”, “forecast”, “plan”, “potential”, “will”, “may”, “should” and “expect” and similar expressions to identify forward-looking statements. All statements other than statements of historical facts included in this annual report, including statements regarding our future financial position, strategy, projected costs and plans and objectives of management for future operations, are forward-looking statements. Although we believe that the expectations reflected in those forward-looking statements are reasonable, we can give no assurance that those expectations will prove to have been correct, and you are cautioned not to place undue reliance on such statements. Important factors that could cause actual results to differ materially from our expectations are disclosed under “Item 3. Key Information—Risk Factors” and elsewhere in this annual report, including in conjunction with the forward-looking statements included in this annual report. We undertake no obligation to publicly update or revise any forward-looking statements contained in this annual report, whether as a result of new information, future events or otherwise, except as required by law. All forward-looking statements contained in this annual report are qualified by reference to this cautionary statement.

 

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CERTAIN TERMS AND CONVENTIONS

References in this annual report to “we”, “us”, “our”, the “Company” or “China Life” mean China Life Insurance Company Limited and, as the context may require, its subsidiaries. References to “CLIC” mean China Life Insurance (Group) Company and, as the context may require, its subsidiaries, other than China Life. References in this annual report to “AMC” mean China Life Asset Management Company Limited, the asset management company established by us with CLIC on November 23, 2003. References to “CLPCIC” mean China Life Property and Casualty Insurance Company Limited, the property and casualty company established by us with CLIC on December 30, 2006. References to “China Life Pension” mean China Life Pension Company Limited established by us, CLIC and AMC on January 15, 2007.

The statistical and market share information contained in this annual report has been derived from government sources, including the China Insurance Yearbook 2017, the China Insurance Yearbook 2018, the China Insurance Yearbook 2019 and other public sources. The information has not been verified by us independently. Unless otherwise indicated, market share information set forth in this annual report is based on premium information as reported by the CBIRC. The reported information includes premium information that is not determined in accordance with HKFRS, U.S. GAAP or IFRS.

References to “A shares” mean the RMB ordinary shares which have been listed on the Shanghai Stock Exchange since January 9, 2007.

References to the “CIRC” mean the China Insurance Regulatory Commission, which was established in 1998 and merged with the China Banking Regulatory Commission in April 2018. References to the “CBRC” mean the China Banking Regulatory Commission, which was established in 2003 and merged with the CIRC in April 2018. References to “CBIRC” mean the China Banking and Insurance Regulatory Commission, which was established in April 2018 as a result of the merger of CIRC and CBRC. In this annual report, references to the “CIRC” mean the China’s insurance regulator prior to April 2018 and references to the “CBIRC” mean the China’s insurance regulator after April 2018, as the context may require.

References to “China” or “PRC” mean the People’s Republic of China, excluding, for purposes of this annual report, Hong Kong, Macau and Taiwan. References to the “central government” mean the government of the PRC. References to “State Council” mean the State Council of the PRC. References to “MOF” or “Ministry of Finance” mean the Ministry of Finance of the PRC. References to “Ministry of Commerce” mean the Ministry of Commerce of the PRC. References to “SAFE” mean the State Administration of Foreign Exchange of the PRC. References to “SAMR” mean the State Administration for Market Regulation of the PRC.

References to “HKSE” or “Hong Kong Stock Exchange” mean The Stock Exchange of Hong Kong Limited. References to “NYSE” or “New York Stock Exchange” mean the New York Stock Exchange. References to “SSE” or “Shanghai Stock Exchange” mean the Shanghai Stock Exchange.

 

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References to “IFRS” mean the International Financial Reporting Standards as issued by the International Accounting Standards Board, references to “U.S. GAAP” mean the generally accepted accounting principles in the United States, references to “HKFRS” mean the Hong Kong Financial Reporting Standards, issued by the Hong Kong Institute of Certified Public Accountants, and references to “PRC GAAP” mean the PRC Accounting Standards for Business Enterprises applicable to companies listed in the PRC. Unless otherwise indicated, our financial information presented in this annual report has been prepared in accordance with IFRS.

References to “Renminbi” or “RMB” in this annual report mean the currency of the PRC, references to “U.S. dollars” or “US$” mean the currency of the United States of America, and references to “Hong Kong dollars”, “H.K. dollars” or “HK$” mean the currency of the Hong Kong Special Administrative Region of the PRC.

Unless otherwise indicated, translations of RMB amounts into U.S. dollars for presentation only in this annual report have been made at the rate of US$ 1.00 to RMB 6.9618, the noon buying rate in the City of New York for cable transfers payable in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2019. No representation is made that Renminbi amounts could have been, or could be, converted into U.S. dollars at that rate on December 31, 2019 or at all. Translations of foreign currency amounts into RMB amounts for the purpose of preparing our audited consolidated financial statements included elsewhere in this annual report or our previous annual reports have been made at the exchange rates published by the PBOC.

Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.

If there is any discrepancy or inconsistency between the Chinese names of the PRC entities in this annual report and their English translations, the Chinese version shall prevail.

 

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PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.

Not applicable.

ITEM 3. KEY INFORMATION.

A. SELECTED FINANCIAL DATA

Selected Historical Consolidated Financial Data

The following tables set forth our selected consolidated financial information for the periods indicated. We have derived the consolidated financial information from our audited consolidated financial statements included elsewhere in this annual report or our previous annual reports.

We prepare our consolidated financial statements in accordance with IFRS as issued by the IASB.

You should read this information in conjunction with the rest of the annual report, including our audited consolidated financial statements and the accompanying notes, “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report and the independent registered public accounting firm’s reports.

 

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     For the year ended December 31,  
     2015     2016     2017     2018     2019     2019  
     RMB     RMB     RMB     RMB     RMB     US$  
Consolidated Statement of Comprehensive Income    (in millions except for per share data)  

Revenues

            

Gross written premiums

     363,971       430,498       511,966       535,826       567,086       81,457  

Less: premiums ceded to reinsurers

     (978     (1,758     (3,661     (4,503     (5,238     (752
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net written premiums

     362,993       428,740       508,305       531,323       561,848       80,705  

Net change in unearned premium reserves

     (692     (2,510     (1,395     700       (1,570     (226
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

     362,301       426,230       506,910       532,023       560,278       80,479  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment income

     97,582       109,147       122,727       125,167       139,919       20,098  

Net realized gains on financial assets

     32,297       6,038       42       (19,591     1,831       263  

Net fair value gains through profit or loss

     10,209       (7,094     6,183       (18,278     19,251       2,765  

Other income

     5,060       6,460       7,493       8,098       8,195       1,177  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     507,449       540,781       643,355       627,419       729,474       104,782  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits, claims and expenses

            

Insurance benefits and claims expenses

            

Life insurance death and other benefits

     (221,701     (253,157     (259,708     (248,736     (127,877     (18,368

Accident and health claims and claim adjustment expenses

     (21,009     (27,269     (33,818     (40,552     (50,783     (7,295

Increase in insurance contract liabilities

     (109,509     (126,619     (172,517     (189,931     (330,807     (47,517

Investment contract benefits

     (2,264     (5,316     (8,076     (9,332     (9,157     (1,315

Policyholder dividends resulting from participation in profits

     (33,491     (15,883     (21,871     (19,646     (22,375     (3,214

Underwriting and policy acquisition costs

     (35,569     (52,022     (64,789     (62,705     (81,396     (11,692

Finance costs

     (4,320     (4,767     (4,601     (4,116     (4,255     (611

Administrative expenses

     (27,458     (31,854     (35,953     (37,486     (40,275     (5,785

Other expenses

     (7,428     (4,859     (6,426     (7,642     (9,602     (1,380

Statutory insurance fund contribution

     (743     (1,048     (1,068     (1,097     (1,163     (167
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits, claims and expenses

     (463,492     (522,794     (608,827     (621,243     (677,690     (97,344
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net gains on investments of associates and joint ventures

     1,974       5,855       7,143       7,745       8,011       1,151  

Including: share of profit of associates and joint ventures

     2,984       5,855       7,143       7,745       9,159       1,316  

Profit before income tax

     45,931       23,842       41,671       13,921       59,795       8,589  

Income tax

     (10,744     (4,257     (8,919     (1,985     (781     (112
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net profit

     35,187       19,585       32,752       11,936       59,014       8,477  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to:

            

- Equity holders of the Company

     34,699       19,127       32,253       11,395       58,287       8,372  

- Non-controlling interests

     488       458       499       541       727       105  

Basic and diluted earnings per share(1)

     1.22       0.66       1.13       0.39       2.05       0.29  

 

(1) 

Numbers are based on the weighted average number of 28,264,705,000 shares in issue.

 

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     For the year ended December 31,  
     2015     2016     2017     2018     2019     2019  
     RMB     RMB     RMB     RMB     RMB     US$  
     (in millions except for per share data)  

Other comprehensive income that may be reclassified to profit or loss in subsequent periods:

            

Fair value gains/(losses) on available-for-sale securities

     54,080       (44,509     (15,003     (24,591     69,600       9,997  

Amount transferred to net profit from other comprehensive income

     (32,297     (6,038     (42     19,549       (4,635     (666

Portion of fair value changes on available-for-sale securities attributable to participating policyholders

     (12,767     17,372       5,605       (32     (19,521     (2,804

Share of other comprehensive income of associates and joint ventures under the equity method

     353       (864     20       735       599       86  

Exchange differences on translating foreign operations

     10       21       (865     598       237       35  

Income tax relating to components of other comprehensive income

     (2,242     8,242       2,359       1,716       (11,292     (1,622
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income that may be reclassified to profit or loss in subsequent periods

     7,137       (25,776     (7,926     (2,025     34,988       5,026  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income that will not be reclassified to profit or loss in subsequent periods

            

Share of other comprehensive income of associates and joint ventures under the equity method

                             (76     (11

Other comprehensive income for the year, net of tax

     7,137       (25,776     (7,926     (2,025     34,912       5,015  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the year, net of tax

     42,324       (6,191     24,826       9,911       93,926       13,492  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to:

            

- Equity holders of the Company

     41,775       (6,647     24,341       9,325       93,134       13,378  

- Non-controlling interests

     549       456       485       586       792       114  

 

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     As of December 31,  
     2015      2016      2017      2018      2019      2019  
     RMB      RMB      RMB      RMB      RMB      US$  
Consolidated Statement of Financial Position    (in millions)  

Assets

                 

Property, plant and equipment

     26,974        30,389        42,707        47,281        51,758        7,435  

Right-of-use assets

                                 3,520        506  

Investment properties

     1,237        1,191        3,064        9,747        12,141        1,744  

Investments in associates and joint ventures

     47,175        119,766        161,472        201,661        222,983        32,030  

Held-to-maturity securities

     504,075        594,730        717,037        806,717        928,751        133,407  

Loans

     207,267        226,573        383,504        450,251        608,920        87,466  

Term deposits

     562,622        538,325        449,400        559,341        535,260        76,885  

Statutory deposits - restricted

     6,333        6,333        6,333        6,333        6,333        910  

Available-for-sale securities

     770,516        766,423        810,734        870,533        1,058,957        152,110  

Securities at fair value through profit or loss

     137,990        209,124        136,809        138,717        141,608        20,341  

Derivative financial assets

                                 428        61  

Securities purchased under agreements to resell

     21,503        43,538        36,185        9,905        4,467        642  

Accrued investment income

     49,552        55,945        50,641        48,402        41,703        5,990  

Premiums receivable

     11,913        13,421        14,121        15,648        17,281        2,482  

Reinsurance assets

     1,420        2,134        3,046        4,364        5,161        741  

Other assets

     23,642        22,013        33,952        33,437        34,029        4,887  

Deferred tax assets

                          1,257        128        18  

Cash and cash equivalents

     76,096        67,046        48,586        50,809        53,306        7,657  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     2,448,315        2,696,951        2,897,591        3,254,403        3,726,734        535,312  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities and equity

                 

Liabilities

                 

Insurance contracts

     1,715,985        1,847,986        2,025,133        2,216,031        2,552,736        366,678  

Investment contracts

     84,106        195,706        232,500        255,434        267,804        38,468  

Policyholder dividends payable

     107,774        87,725        83,910        85,071        112,593        16,173  

Interest-bearing loans and borrowings

     2,643        16,170        18,794        20,150        20,045        2,879  

Lease liabilities

                                 3,091        444  

Bonds payable

     67,994        37,998                      34,990        5,026  

Financial liabilities at fair value through profit or loss

     856        2,031        2,529        2,680        3,859        554  

Derivative financial liabilities

                          1,877                

Securities sold under agreements to repurchase

     31,354        81,088        87,309        192,141        118,088        16,962  

Annuity and other insurance balances payable

     30,092        39,038        44,820        49,465        51,019        7,328  

Premiums received in advance

     32,266        35,252        18,505        46,650        60,898        8,747  

Other liabilities

     26,514        36,836        47,430        58,426        81,114        11,653  

Deferred tax liabilities

     16,953        7,768        4,871               10,330        1,484  

Current income tax liabilities

     5,347        1,214        6,198        2,630        223        32  

Statutory insurance fund

     217        491        282        558        602        86  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     2,122,101        2,389,303        2,572,281        2,931,113        3,317,392        476,514  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity

     

Share capital

     28,265        28,265        28,265        28,265        28,265        4,060  

Other equity instruments

     7,791        7,791        7,791        7,791        7,791        1,119  

Reserves

     163,381        145,007        145,675        149,293        197,221        28,329  

Retained earnings

     123,055        122,558        139,202        133,022        170,487        24,489  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Attributable to equity holders of the Company

     322,492        303,621        320,933        318,371        403,764        57,997  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-controlling interests

     3,722        4,027        4,377        4,919        5,578        801  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity

     326,214        307,648        325,310        323,290        409,342        58,798  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and equity

     2,448,315        2,696,951        2,897,591        3,254,403        3,726,734        535,312  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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Exchange Rate Information

We prepare our consolidated financial statements in Renminbi. This annual report contains translations of Renminbi amounts into U.S. dollars, and U.S. dollars into Renminbi, at RMB 6.9618 to US$ 1.00, the noon buying rate on December 31, 2019 in the City of New York for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York. You should not assume that Renminbi amounts could actually be converted into U.S. dollars at these rates or at all. Translations of foreign currency amounts into RMB amounts for the purpose of preparing our audited consolidated financial statements included elsewhere in this annual report or our previous annual reports have been made at the exchange rates published by the PBOC.

Since July 21, 2005, the PRC government has followed a managed floating exchange rate system that allows the value of the Renminbi to fluctuate within a regulated band based on market supply and demand and by reference to a basket of currencies. Under this system, the PBOC announces the closing price of a foreign currency traded against the Renminbi in the inter-bank foreign exchange market after the closing of the market on each working day, and makes it the central parity for the trading against the Renminbi on the following working day. On August 11, 2015, the PBOC adjusted the quotation mechanism of the Renminbi central parity to also consider demand and supply in foreign exchange markets and price movements of major currencies, in addition to the closing price on the previous working day. On May 26, 2017, the PBOC introduced a “counter-cyclical factor” into its formula that determines a central parity of Renminbi against the U.S. dollar. Under the current mechanism, the central parity of the Renminbi against the U.S. dollar is determined based on the closing rate, changes in a basket of currencies and the counter-cyclical factor. See “Item 3. Key Information—Risk Factors—Risks Relating to the People’s Republic of China—Government control of currency conversion and the fluctuation of the Renminbi may materially and adversely affect our operations and financial results”. In 2019, the Renminbi depreciated by approximately 1.65% against the U.S. dollar. It remains unclear what further fluctuations may occur or what impact this will have on the value of the Renminbi.

Although PRC governmental policies were introduced in 1996 to reduce restrictions on the convertibility of Renminbi into foreign currency for current account items, conversion of Renminbi into foreign exchange for capital account items, such as foreign direct investments, loans or securities, requires the approval of the SAFE and other relevant authorities. Although experimental policies were introduced in certain pilot areas such as the Shanghai free trade zone to reduce foreign exchange control, restrictions on the convertibility of Renminbi into foreign currency are still in force in most parts of China.

 

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The Hong Kong dollar is freely convertible into other currencies, including the U.S. dollar. Since October 17, 1983, the Hong Kong dollar has been linked to the U.S. dollar at the rate of HK$ 7.80 to US$ 1.00. The central element in the arrangements which give effect to the link is that by agreement between the Hong Kong government and the three Hong Kong banknote issuing banks, The Hongkong and Shanghai Banking Corporation Limited, Standard Chartered Bank (Hong Kong) Limited and the Bank of China (Hong Kong) Limited, certificates of debts, which are issued by the Hong Kong Government Exchange Fund to the banknote issuing banks to be held as cover for their banknote issues, are issued and redeemed only against payment in U.S. dollars, at the fixed exchange rate of HK$ 7.80 to US$ 1.00. When the banknotes are withdrawn from circulation, the banknote issuing banks surrender the certificates of debts to the Hong Kong Government Exchange Fund and are paid the equivalent U.S. dollars at the fixed rate.

The market exchange rate of the Hong Kong dollar against the U.S. dollar continues to be determined by the forces of supply and demand in the foreign exchange market. However, against the background of the fixed rate which applies to the issue of the Hong Kong currency in the form of banknotes, as described above, the market exchange rate has not deviated materially from the level of HK$ 7.80 to US$ 1.00 since the link was first established. The Hong Kong government has stated its intention to maintain the link at that rate, and it, acting through the Hong Kong Monetary Authority, has a number of means by which it may act to maintain exchange rate stability. Exchange rates between the Hong Kong dollar and other currencies are influenced by the linked rate between the U.S. dollar and the Hong Kong dollar.

B. CAPITALIZATION AND INDEBTEDNESS

Not Applicable.

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

Not Applicable.

D. RISK FACTORS

Our business, financial condition and results of operations can be affected materially and adversely by any of the following risk factors. The risks and uncertainties described below may not be the only ones that we face. Additional risks and uncertainties that we are not aware of or that we currently believe are immaterial may also adversely affect our business, financial condition or results of operations.

Risks Relating to Our Business

Our investments are subject to risks.

We are exposed to potential investment losses if there is an economic downturn in China.

Until November 2006, we were only permitted to invest the premiums and other income we receive in investments in China. We obtained the approval to invest overseas with our foreign currency denominated funds in November 2006. See “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters—Insurance Company Regulation—Regulation of investments”. However, we have continued to make our investments mainly in China and, as of December 31, 2019, approximately 97.99% of our total investment assets were in China. In particular, as of December 31, 2019, approximately 42.65% of our total investment assets consisted of debt securities including Chinese government bonds, government agency bonds, corporate bonds, subordinated bonds and other debt securities as permitted by relevant government agencies; approximately 14.98% of our total investment assets consisted of term deposits with Chinese banks, of which 43.61% were placed with the five largest Chinese state-owned commercial banks; and approximately 17.04% of our total investment assets consisted of loans provided to Chinese entities and individuals, including policy loans, investment in debt investment plans and trust schemes. A serious downturn in the Chinese economy may lead to investment losses, which would reduce our earnings.

 

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The PRC securities markets are still emerging markets, which may expose us to risks of loss from our investments there.

As of December 31, 2019, we had RMB 605,568 million (US$ 86,984 million) invested in equity securities, among which RMB 192,063 million (US$ 27,588 million) were invested in PRC securities markets, including securities investment funds and shares traded on the securities markets in China. These securities investment funds and shares are primarily invested in equity securities that are issued by Chinese companies and traded on China’s stock exchanges. The PRC securities markets are still emerging markets and are characterized by evolving regulatory, accounting and disclosure requirements. This may from time to time result in significant price volatility, unexpected losses or lack of liquidity. These factors could cause us to incur losses on our publicly traded investments. Also, as one of the largest institutional investors in China, we may from time to time hold significant positions in many securities in which we invest, and any decision to sell or any perception in the market that we are a major seller of a security could adversely affect the liquidity and market price of that security.

Defaults on our debt investments may materially and adversely affect our profitability.

Approximately 42.65% of our investment assets as of December 31, 2019 were comprised of debt securities. The issuers whose debt securities we hold may fail to pay or otherwise default on their obligations due to bankruptcy, a lack of liquidity, a downturn in the economy, operational failures or other reasons. Losses due to these defaults could reduce our profitability.

Defaults on our investments in loans may materially and adversely affect our profitability.

Approximately 17.04% of our investment assets as of December 31, 2019 were comprised of loans, including policy loans, investments in debt investment plans and trust schemes. The borrowers to whom we provided loans may fail to pay or otherwise default on their obligations due to bankruptcy, a lack of liquidity, a downturn in the economy, operational failures or other reasons. Losses due to these defaults could reduce our profitability.

Investments in new investment channels may not lead to improvements in our rate of investment return or we may incur losses.

The CBIRC has in recent years significantly broadened the investment channels of Chinese life insurance companies. We have considered these alternative channels when making investments. For example, in 2014, we made our first overseas real estate investment, first overseas private equity fund investment and first domestic preferred shares investment. In 2016, we made our first investment in shares traded on the Hong Kong Stock Exchange through the Shanghai-Hong Kong Stock Connect between China’s mainland markets and the Hong Kong Stock Exchange, and we also made our first investment in interbank negotiable certificates of deposit. In 2019, we made our first investment in bonds issued by banks for capital replenishment. However, our experience with these new investment channels, especially overseas channels, is limited, and these new channels are still subject to evolving regulatory requirements, which may increase the risk exposure of our investments.

 

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We may incur foreign exchange and other losses for our investments denominated in foreign currencies.

A portion of our investment assets are held in foreign currencies. We are authorized by the CBIRC to invest our assets held in foreign currencies in the overseas financial markets as permitted by the CBIRC. Thus, our investment results may be subject to foreign exchange gains and losses due to changes in exchange rates as well as the volatility and various other factors of overseas capital markets, including, among others, increase in interest rates. We recorded RMB 67 million (US$ 10 million) in foreign exchange losses for the year ended December 31, 2019, resulting mainly from the change in foreign exchange rates applicable to our assets and liabilities held in foreign currencies. However, it remains unclear what further fluctuations may occur or what impact this will have on the value of the Renminbi. Future movements in the exchange rate of RMB against the U.S. dollar and other foreign currencies may adversely affect our results of operations and financial condition.

The outbreak of COVID-19 could have an adverse impact on our business.

The COVID-19 pandemic and the measures taken by governments around the world to contain its spread has negatively impacted the global economy, disrupted travel and business operations and created significant volatility and declines in the financial markets. Although, as of the date of this annual report, the travel and business restrictions imposed in China have largely been lifted, a further imposition of such restrictions, if the outbreak were to worsen, may interfere with our operations by, among other things, preventing face to face sales, which could have a material adverse impact on sales of our products. In addition, the value of the investments we hold, the income we receive from such investments, and our ability to adjust our portfolio mix, could be affected if there were further volatility or declines in the stock markets or if interest rates were to decline further as a result of government stimulus measures. See “Item 11 Quantitative and Qualitative Disclosures about Market Risk—Interest Rate Risk”. Furthermore, if a worsening of the COVID-19 outbreak were to result in increased claims for certain insurance products, it could reduce our earnings. Although the outbreak of COVID-19 has not had a material adverse impact on our business as of the date of this annual report, we cannot guarantee that this will continue to be the case if the outbreak were to worsen.

 

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We are exposed to changes in interest rates.

Changes in interest rates may affect our profitability.

Our profitability is affected by changes in interest rates. Interest rates are highly sensitive to many factors, including economic growth rate, inflation, governmental monetary and tax policies, domestic and international economic and political conditions, financial regulatory requirements and other factors beyond our control. If interest rates were to increase significantly in the future, surrenders and withdrawals of life insurance and annuity policies and contracts may increase as policy holders may seek other investments with higher perceived returns. This process may result in cash outflows requiring that we sell investment assets at a time when the prices of those assets are adversely affected by the increase in market interest rates, which may result in realized investment losses. However, if interest rates were to decline in the future, the income we realize from our investments may decrease, affecting our profitability. In addition, as instruments in our investment portfolio mature, we might have to reinvest the funds we receive in investments bearing low interest rates, which may also affect our profitability. See “Item 11 Quantitative and Qualitative Disclosures about Market Risk—Interest Rate Risk”.

For our long-term life insurance products including annuity products, we are obligated to pay contractual benefits to our policyholders or the beneficiaries based on a guaranteed interest rate, which is established when the product is priced. These products expose us to the risk that changes in interest rates may change our “spread”, or the difference between the amount of return that we are able to earn on our investments and the amount of return that we are required to pay based on a guaranteed interest rate under the policies.

On June 10, 1999, the CIRC set the maximum guaranteed interest rate which insurance companies could commit to pay on new policies at 2.50% (compounded annually) and, in response, we set the guaranteed interest rates on our products at a range of between 1.50% and 2.50%. In August 2013, February 2015 and September 2015, the CIRC removed the 2.50% cap on the guaranteed interest rates for traditional non-participating insurance policies, universal life insurance policies and participating life insurance policies, respectively. From October 1, 2015, the guaranteed interest rates of all long-term life insurance products are to be decided by insurance companies at their discretion in accordance with the principle of prudence, but CBIRC approval is required for products with guaranteed interest rates above the maximum valuation rate set by the CBIRC. This maximum valuation rate varies by product. Although the removal of the 2.50% cap has not resulted in any material impact on the profitability of our insurance policies in force, it could result in the increase of the guaranteed interest rates of our new products and the decrease of our spread. We cannot assure you that the removal of the 2.50% cap will not lead to a material adverse effect on our business, results of operations or financial condition.

As of December 31, 2019, the average guaranteed rate of return for all of our long-term insurance policies in force was 2.71%, while our investment yields for the years ended December 31, 2019, 2018 and 2017 were 5.24%, 3.29% and 5.16%, respectively. See “Item 4. Information on the Company—Business Overview—Investments—Investment Results”. If the rates of return on our investments were to fall below the minimum rates we guarantee, our profitability would be materially and adversely affected.

 

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Because of the general lack of long-term fixed income securities in the Chinese capital markets, we are unable to match closely the duration of our assets and liabilities, which increases our exposure to interest rate risk.

Like other insurance companies, we seek to manage interest rate risk through managing, to the extent possible, the average duration of our investment assets and the insurance policy liabilities they support. Matching the duration of our assets to their related liabilities reduces our exposure to changes in interest rates, because the effect of the changes largely will be offset against each other. However, the limited availability of long-duration investment assets in the markets in which we invest, has resulted in, and in the future may result in, the duration of our assets being shorter than that of our liabilities, particularly with respect to liabilities with durations of more than 20 years. Furthermore, the Chinese financial markets currently do not provide adequate financial derivative products for us to hedge our interest rate risk. We believe that with the development of the Chinese capital markets and the gradual easing of the investment restrictions imposed on insurance companies in China, our ability to match the duration of our assets to that of our liabilities will improve. We also seek to manage the risk of duration mismatch by focusing on product offerings whose maturity profiles are in line with the duration of investments available to us in the prevailing investment environment. However, until we are able to match more closely the duration of our assets and liabilities, we will continue to be exposed to interest rate changes, which may materially and adversely affect our business and earnings.

Our growth is dependent on our ability to attract and retain productive agents.

A substantial portion of our business is conducted through our exclusive agents. Because of differences in productivity, some of our sales agents are responsible for a disproportionately high percentage of our sales of individual products. If we are unable to retain and build on this core group of highly productive agents, our business could be materially and adversely affected. Increasing competition for agents from other insurance companies and business institutions and increasing labor costs in China may also force us to increase the compensation of our agents, which would increase our operating costs and reduce our profitability. In addition, on January 6, 2013, the CIRC issued the Regulatory Rules on Insurance Sales Personnel, or the Sales Personnel Rules, which became effective on July 1, 2013. Among other things, the Sales Personnel Rules provide that exclusive agents must have at least a college degree, instead of a junior high school degree as previously required by the CIRC. See “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters—Regulation of Insurance Agencies, Insurance Brokers and Other Intermediaries”. The CIRC has authorized its local branches to set the education degree requirements for exclusive agents by considering local conditions. We believe that if more CBIRC branches were to impose the requirement of having a college degree or above on new qualified exclusive agents, we cannot guarantee that we will not have difficulty in attracting and retaining productive agents in the future. In addition, as the market competition for qualified agents increases, our costs of attracting and retaining qualified agents may increase.

 

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If we are unable to develop other distribution channels for our products, our growth may be materially and adversely affected.

Commercial banks are rapidly emerging as some of the fastest growing distribution channels in China. Many newly established domestic and foreign-invested life insurance companies have been focusing on commercial banks as one of their main distribution channels. In addition, with the relaxation of the regulatory restrictions of ownership by commercial banks in insurance companies, the number of insurance companies owned or controlled by commercial banks is increasing. Among the six largest Chinese state-owned commercial banks, five banks and the controlling shareholder of the remaining one have set up their own life insurance companies. These insurance companies are able to benefit from their holding relationships with these commercial banks to develop bancassurance as their main distribution channels. We do not have exclusive arrangements with any of the commercial banks through which we sell life insurance and annuity products, and thus our sales may be materially and adversely affected if one or more commercial banks choose to favor our competitors’ products over our own. In addition, as the bancassurance market becomes increasingly competitive, commercial banks may demand higher commission rates, which could increase our cost of sales and reduce our profitability. If we are unable to continue to develop our alternative distribution channels, our growth may be materially and adversely affected.

Agent and employee misconduct is difficult to detect and deter and could harm our reputation or lead to regulatory sanctions or litigation costs.

Agent or employee misconduct could result in violations of law by us, regulatory sanctions, litigation or serious reputational or financial harm. Misconduct could include:

 

   

engaging in misrepresentation or fraudulent activities when marketing or selling insurance policies or annuity contracts to customers;

 

   

hiding unauthorized or unsuccessful activities, resulting in unknown and unmanaged risks or losses; or

 

   

otherwise not complying with laws or our control policies or procedures.

We cannot always deter agent or employee misconduct, and the precautions we take to prevent and detect these activities may not be effective in all cases. We have experienced agent and employee misconduct that has resulted in litigation and administrative actions against us and these agents and employees, and in some cases criminal proceedings and convictions against the agent or employee in question. None of these actions has resulted in material losses, damages, fines or other sanctions against us. We cannot assure you, however, that agent or employee misconduct will not lead to a material adverse effect on our business, results of operations, financial condition or prospects.

Our business is dependent on our ability to attract and retain key personnel, including senior management, underwriting personnel, actuaries, information technology specialists, investment managers and other professionals.

The success of our business is dependent to a large extent on our ability to attract and retain key personnel who have in-depth knowledge and understanding of the life insurance market in China, including members of our senior management, qualified underwriting personnel, actuaries, information technology specialists and experienced investment managers. As of the date of this annual report, we do not carry key personnel insurance for any of these personnel. We compete to attract and retain these key personnel with other life insurance companies and financial institutions, some of which may offer better compensation arrangements. Existing insurers are expanding their operations and the number of other financial institutions is growing. As the insurance and investment businesses continue to expand in China, we expect that competition for these personnel will increase in the future. Although we have not had difficulty in attracting and retaining qualified key personnel in the past, we cannot guarantee that this will continue to be the case. If we were unable to continue to attract and retain key personnel, our business and financial performance could be materially and adversely affected.

 

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Differences in future actual operating results from the assumptions used in pricing and establishing reserves for our insurance and annuity products may materially affect our earnings.

Our earnings depend significantly upon the extent to which our actual operating results are consistent with the assumptions used in pricing and establishing the reserves for insurance contracts in our financial statements. Our assumptions include those for discount rate, mortality, morbidity, lapse rate and expenses. To the extent that trends in actual experiences are less favorable than our underlying assumptions used in establishing these reserves, and these trends are expected to continue in the future, we could be required to increase our reserves. Any such increase could have a material adverse effect on our profitability and, if significant, our financial condition.

We establish the reserves for insurance contracts based on the use of assumptions for discount rate, mortality, morbidity, lapse rate and expenses. These assumptions are based on our previous experience and the data published by other Chinese life insurers, as well as judgments made by the management. These assumptions may deviate from our actual experience, and, as a result, we cannot determine precisely the amounts which we will ultimately pay to fulfill our obligations under the insurance contracts or when these payments will need to be made. These amounts may vary from the estimated amounts, particularly when those payments may not occur until well into the future. The discount rate assumption is affected by certain factors, such as further macro-economy, monetary and exchange rate policies, capital market results and availability of investment channels to invest our insurance funds. We review and update the assumptions used to evaluate the reserves periodically, and establish the reserves for insurance contracts based on such assumptions. If the reserves originally established for future policy benefits prove inadequate, we must increase our reserves established for future policy benefits, which may have a material effect on our earnings and our financial condition.

We have data available for a shorter period of time than life insurance companies operating in some other countries do and, as a result, less claims experience on which to base some of the assumptions used in establishing our reserves. For a discussion of how we establish our assumptions for mortality, morbidity and lapse rate, see “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies”. Given the limited nature of this experience, it is possible that our actual claims could vary significantly from the assumptions used.

 

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Our risk management and internal reporting systems, policies and procedures may leave us exposed to unidentified or unanticipated risks, which could materially and adversely affect our businesses or result in losses.

Our policies and procedures to identify, monitor and manage risks may not be fully effective. Many of our current methods of managing risk and exposures are based upon our use of observed historical market behavior or statistics based on historical models. As a result, these methods may not fully predict future exposures, which could be significantly greater than what the historical measures indicate. In addition, risk management depends upon the evaluation of information regarding markets, customers or other matters that is publicly available or otherwise accessible to us, which may not always be accurate, complete, up-to-date or properly evaluated. In addition, a significant portion of business information needs to be centralized from our many branch offices. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective. Failure or the ineffectiveness of these systems could materially and adversely affect our business or result in losses.

We are likely to offer a broader and more diverse range of insurance and investment products in the future as the insurance market in China continues to develop. At the same time, we anticipate that we may invest in a significantly broader range of asset classes. The combination of these factors will require us to continue to enhance our risk management capabilities and is likely to increase the importance of our risk management policies and procedures to our results of operations and financial condition. If we fail to adapt our risk management policies and procedures to our changing business, our business, results of operations and financial condition could be materially and adversely affected.

Catastrophes could materially reduce our earnings and cash flow.

We could in the future experience catastrophic losses that may have an adverse impact on the business, results of operations and financial condition of our insurance business. Catastrophes can be caused by various events, including terrorist attacks, earthquakes, hurricanes, floods and fires, as well as pandemics and epidemics, including the recent COVID-19 outbreak.

We establish liabilities for claims arising from a specific catastrophe after assessing the exposure and damages arising from the event. Although we have purchased catastrophe reinsurance in order to reduce our catastrophe exposure, we cannot assure you that any significant catastrophic event will not have a material adverse effect on us.

Current or future litigation, arbitration and regulatory proceedings could result in financial losses or harm our businesses.

We are involved in litigation and arbitration proceedings involving our insurance operations on an ongoing basis. In addition, the CBIRC as well as other PRC governmental agencies, including tax and audit bureaus and the PBOC, from time to time make inquiries and conduct examinations or investigations concerning our compliance with PRC laws and regulations. These litigation, arbitration and administrative proceedings have in the past resulted in payments of insurance benefits, damage awards, settlements or administrative sanctions, including fines, which have not been material to us. We currently have control procedures in place to monitor our litigation, arbitration and regulatory exposure and take appropriate actions. See “Item 8. Financial Information—Consolidated Financial Statements and Other Financial Information—Legal and Regulatory Proceedings”. While we cannot predict the outcome of any pending or future litigation, arbitration, examination or investigation, 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 litigation, arbitration or regulatory proceeding will not have an adverse outcome, which could have a material adverse effect on our operating results or cash flows. See “Item 8. Financial Information—Consolidated Financial Statements and Other Financial Information—Legal and Regulatory Proceedings”.

 

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The embedded value information we present in this annual report is based on several assumptions and may vary significantly as those assumptions are changed.

In order to provide investors with an additional tool to understand our economic value and business results, we have disclosed information regarding our embedded value, as discussed in the section entitled “Item 8. Financial Information—Embedded Value”. The embedded value is an estimate of our economic value (excluding the value attributed to new business after the valuation date) and is based on a discounted cash flow valuation determined using commonly applied actuarial methodologies. Standards with respect to the calculation of embedded value are still evolving, however, and there is no universal standard which defines the form, calculation method or presentation format of the embedded value of an insurance company. Assumptions used in embedded value calculations include rate of investment return, discount rate, mortality, morbidity, expenses and surrender rate, as well as certain macro factors, many of which are beyond our control. These assumptions may deviate significantly from our actual experience and therefore the embedded value is consequently not inherently predictive. Furthermore, since our actual market value is determined by investors based on a variety of information available to them, the embedded value should not be construed to be a direct reflection of our performance. The inclusion of the embedded value in this annual report should not be regarded as a representation by us, our management or any other person as to our future profitability. Because of the technical complexity involved in embedded value calculations and the fact that embedded value estimates vary materially as key assumptions are changed, you should read the discussion under the section entitled “Item 8. Financial Information—Embedded Value” in its entirety. You should use special care when interpreting embedded value results and should not place undue reliance solely on them. See also “Forward-Looking Statements”.

A computer system failure, cyber-attacks or other security breaches may disrupt our business, damage our reputation 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 developing and selling insurance products, providing customer support, policy management, filing and paying claims, managing our investment portfolios and producing financial statements. 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 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.

We retain confidential information on our computer systems, including customer information and proprietary business information. In addition, for business purposes, from time to time customer information is transmitted between our computer systems and those of third parties, such as third-party agents selling insurance products for us. Any compromise of the security or other errors of our computer systems or those arising during the information transmission process that result in the disclosure of personally identifiable customer information could damage our reputation, expose us to litigation, increase regulatory scrutiny and require us to incur significant technical, legal and other expenses.

 

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United States Foreign Account Tax Compliance Act

The Foreign Account Tax Compliance Act, or FATCA, generally requires a foreign financial institution, or FFI, to enter into an FFI agreement under which it will agree to identify and provide the United States Internal Revenue Service, or the IRS, with information regarding accounts, including certain insurance policies, held by U.S. persons and U.S.-owned foreign entities, or be subject to a 30% withholding tax on “withholdable payments”, which include, among other items, payments of U.S.-source interest and dividends and gross proceeds from the sale or other disposition of property that may produce U.S.-source interest or dividends. Proposed regulations promulgated on December 13, 2018, or the proposed FATCA regulations, eliminate withholding on payments of gross proceeds from the sale or other disposition of property that may produce U.S.-source interest or dividends. In addition, an FFI that has entered into an FFI agreement may be required to withhold on certain “foreign passthrough payments” that it makes to FFIs that have not entered into their own FFI agreements or to account holders who do not respond to requests to confirm their U.S. person status and/or do not agree to allow the FFI to report certain account related information to the IRS. Under the proposed FATCA regulations, withholding on foreign passthru payments will begin no earlier than the date that is two years after the date of publication in the Federal Register of final regulations that define the term “foreign passthru payment”. Consequently, the scope of any withholding on foreign passthru payments is uncertain at this time.

The United States and the PRC have agreed in substance on the terms of an intergovernmental agreement, or IGA, that is intended to facilitate the type of information reporting required under FATCA. Under the agreed terms, instead of reporting directly to the IRS, Chinese FFIs are required to report specified account information directly to the PRC tax authority, which will then pass that information to the IRS. While compliance with the IGA will not eliminate the risk of withholding described above, it is expected to reduce that risk for FFIs that are resident in China. Although the IGA has not yet been officially signed, the PRC and the United States have agreed to treat the IGA as in effect from June 26, 2014, provided that the PRC continues to demonstrate “firm resolve” to sign the IGA as soon as possible. If the United States and the PRC ultimately fail to reach a final agreement on the terms of the IGA, then the FATCA reporting and withholding regime described in the prior paragraph will apply to Chinese FFIs.

We will closely monitor developments regarding FATCA and the IGA. If we are required to comply with the terms of the IGA or FATCA, as applicable, we expect that our compliance costs will increase. If we do not comply with the terms of the IGA or FATCA, as applicable, then certain payments to us will be subject to withholding under FATCA. However, since the text of the IGA has not been released, and regulations and other guidance remain under development, the future impact of this law on us is uncertain.

 

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U.S. Holders will be subject to adverse tax consequences if we are considered to be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes

If we are considered a PFIC for U.S. federal income tax purposes, a U.S. Holder will be subject to adverse tax consequences. A non-U.S. corporation will generally be a PFIC if 75% or more of its gross income constitutes “passive income” or 50% or more of its assets produce “passive income” or are held for the production of “passive income”. The PFIC provisions, as modified by the Tax Cuts and Jobs Act, or the TCJA, specifically exclude from the definition of “passive income” any income “derived in the active conduct of an insurance business by a qualifying insurance corporation”. A non-U.S. corporation is a qualifying insurance corporation if it would be subject to tax as an insurance company if it were a domestic corporation and (i) loss and loss adjustment expenses and certain reserves, or “applicable insurance liabilities”, constitute more than 25% of the non-U.S. corporation’s gross assets for the relevant year or (ii) a U.S. Holder makes an election to apply an alternative facts and circumstances test that applies only in certain runoff-related or ratings-related circumstances involving the insurance business. We make various simplifying assumptions to estimate the asset composition and value of our subsidiaries in order to apply the PFIC tests to the income and assets of our 25% or greater owned subsidiaries.

The IRS released proposed Treasury regulations regarding the application of the PFIC rules to insurance companies in July 2019. These regulations are not yet in force but are proposed to be effective for taxable years of U.S. Holders beginning on or after the date that final regulations are issued. The proposed Treasury regulations provide that whether a company is engaged in the active conduct of an insurance business is a facts and circumstances test, but also introduce a “bright-line” test providing that the active conduct requirement is met only if the insurance company’s “active conduct percentage” is at least 50%. In general, a company’s active conduct percentage is determined by dividing the company’s aggregate expenses for certain insurance-related services of its officers and employees (and the officers and employees of certain affiliates) by the company’s aggregate expenses for such insurance-related services (including those paid to unaffiliated persons). If these rules are finalized in proposed form, we cannot assure you that we would not be treated as a PFIC.

Although we believe that we were not classified as a PFIC in 2019, there is no assurance that the IRS will not take a contrary position and assert that we are a PFIC, and no assurances can be given that we will not become a PFIC at some point in the future. U.S. Holders are urged to consult their tax advisors regarding the effects of the PFIC rules.

 

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The auditors’ reports included in this annual report are prepared by relying on audit work which is not inspected by the Public Company Accounting Oversight Board and, as such, investors may be deprived of the benefits of such inspection.

Auditors of companies that are registered with the SEC and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the US Public Company Accounting Oversight Board (United States), or the PCAOB, and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards. Because we have substantial operations within China and our independent registered public accounting firm is based in China, the PCAOB is currently unable to conduct inspections of the work of our auditor as it relates to those operations without the approval of the Chinese authorities, and thus our auditor’s work related to our operations in China is not currently inspected by the PCAOB.

This lack of PCAOB inspection of audit work performed in China prevents the PCAOB from regularly evaluating the audit work of any auditor that was performed in China including those performed by our auditor. As a result, investors may be deprived of the full benefits of PCAOB inspections.

The inability of the PCAOB to conduct inspections of audit work performed in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures as compared to auditors in other jurisdictions that are subject to PCAOB inspections on all of their work. Investors may lose confidence in our reported financial information and procedures and the quality of our consolidated financial statements.

On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. The joint statement reflects a heightened interest in an issue that has vexed U.S. regulators in recent years. However, it remains unclear what further actions the SEC and the PCAOB will take to address this issue.

Inspections of other firms that the PCAOB has conducted outside the PRC have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct full inspections of auditors in the PRC makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of the PRC that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress, which if passed, would require the SEC to maintain a list of issuers for which PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges included on the SEC’s list for three consecutive years. Enactment of this legislation or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of the ADSs could be adversely affected. It is unclear if this proposed legislation would be enacted. Furthermore, there has been recent media reports on deliberations within the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets. If any such deliberations were to materialize, the resulting legislation may have material and adverse impact on the stock performance of China-based issuers listed in the United States.

 

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We may be adversely affected if additional remedial measures are imposed on the four China-based accounting firms which reached settlement with the SEC in the administrative proceedings brought by the SEC against them.

In December 2012, the SEC initiated administrative proceedings against five accounting firms in China, alleging that they refused to produce audit work papers and other documents related to certain China-based companies under investigation by the SEC for potential accounting fraud. In January 2014, an SEC administrative law judge ruled in favor of the SEC, issuing an initial decision which censured each of the five accounting firms for failure to provide their audit work papers to the SEC and ordered a six-month suspension of the China-based affiliates of four of the five accounting firms’ right to practice before the SEC. The accounting firms have appealed the decision of the administrative law judge to the SEC, and the decision will not come into force unless and until an order of finality is issued by the SEC. We are not subject to any SEC investigations, nor are we involved in the proceedings brought by the SEC against the accounting firms. However, the China affiliate of the independent registered public accounting firm that has issued the auditor’s report included in our annual reports filed with the SEC for the 2013, 2014 and 2015 fiscal years, which is also our independent registered public accounting firm for the 2016, 2017, 2018 and 2019 fiscal years, is one of the five accounting firms named in the SEC’s proceedings.

In February 2015, four of the five accounting firms, including the China affiliate of the independent registered public accounting firm that has issued the auditor’s report included in our annual report filed with the SEC for the 2013, 2014 and 2015 fiscal years, which is also our independent registered public accounting firm for the 2016, 2017, 2018 and 2019 fiscal years, each agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement required the firms to follow detailed procedures and to seek to provide the SEC with access to audit documents of China-based companies via the CSRC. If future document productions fail to meet the specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure, including an automatic six-month bar on the performance of certain audit work, commencement of a new proceeding or the resumption of the current proceeding by the SEC. While we cannot predict if the SEC will further review the four China-based accounting firms’ compliance with specified criteria or if the results of such a review would result in the SEC imposing penalties, if they are subject to additional remedial measures, we may be adversely affected, along with other U.S.-listed companies in China audited by these accounting firms. If none of the China-based auditors are able to continue to perform audit work for China-based companies listed in the U.S., we will not be able to meet the reporting requirements under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which may ultimately result in our deregistration by the SEC and delisting of our ADSs from the NYSE.

Risks Relating to the PRC Life Insurance Industry

We expect competition in the Chinese insurance industry to increase, which may materially and adversely affect the growth of our business.

We face competitive pressures from both domestic and foreign-invested life insurance companies operating in China, as well as from property and casualty insurance companies, which may compete with our accident and short-term health insurance businesses, and other financial institutions that sell other financial investment products in competition with ours. In addition, the establishment of other professional health insurance companies and pension annuities companies may also lead to greater competition in the health insurance business and commercial pension insurance business. If we are not able to adapt to these increasingly competitive pressures in the future, our growth rate may decline, which could materially and adversely affect our earnings.

Competition among domestic life insurance companies is increasing.

According to statistical and market share information derived from China Insurance Yearbook, in 2018, the last year for which the market information for separate geographic markets is available, our closest competitors are Ping An Life Insurance Company of China, Ltd., or Ping An Life, China Pacific Life Insurance Co., Ltd., or China Pacific Life, Huaxia Life Insurance Company Limited, or Huaxia Life, and Taiping Life Insurance Company Limited, or Taiping Life. Ping An Life, China Pacific Life, Huaxia Life, Taiping Life and we together accounted for approximately 56% of the life insurance premiums in China in 2018, with our market share in China increasing from 19.7% in 2017 to 20.4% in 2018. Each of Ping An Life, China Pacific Life, Huaxia Life and Taiping Life has operated in the Chinese insurance market for more than ten years, and each has a recognized brand name. In 2018, Ping An Life had a greater market share than we did in Shanghai, Guangdong, Shenzhen, Beijing, Tianjin, Heilongjiang, Liaoning, Dalian, Ningbo, Qingdao, Hubei, Chongqing, Hainan and Xiamen, China Pacific Life had a greater market share than we did in Ningbo, and Huaxia Life had a greater market share than we did in Hainan.

 

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We also face competition from insurance companies owned or controlled by commercial banks. Among the six largest Chinese state-owned commercial banks, five banks and the controlling shareholder of the remaining one have set up their own life insurance companies. These insurance companies are able to benefit from their holding relationships with these commercial banks to develop bancassurance as their main distribution channels. In addition, we also face competition from smaller insurance companies, which may have competitive advantages in various regions in which we operate, and new entrants to the group life insurance market, including professional pension companies that are being established pursuant to a set of regulations promulgated by the Ministry of Human Resources and Social Security of the PRC, and new entrants to the health insurance industry, including newly approved and established professional health insurance companies, following Chinese government’s adoption of policies that encourage the development of health insurance and improved health care in China.

Competition from foreign-invested life insurance companies is increasing, as restrictions on their operations in China are relaxed.

Foreign-invested life insurance companies are insurance companies in which foreign entities hold at least a 25% interest. Foreign-invested life insurers have been permitted to sell individual and group life insurance, health insurance and annuity products nationwide in China since December 2004. According to statistical and market share information derived from China Insurance Yearbook, in 2018, foreign-invested insurers had a life insurance market share of approximately 8.1% . On November 10, 2017, China announced that it will substantially relax foreign ownership limits in life insurance companies. In 2018, China increased the limit on foreign ownership in Chinese life insurance companies to 51% and on December 6, 2019, CBIRC announced that starting from January 1, 2020, foreign investors will be allowed to own 100% in Chinese life insurers. We believe that the relaxation of the restrictions on foreign-invested insurers will continue to increase the competitive pressures we are facing.

We are likely to face increasing competition from property and casualty insurance companies and other companies offering products that compete with our own.

In addition to competition from life insurance companies, we face competition from other companies that may offer products that compete with our own, including:

 

   

Property and casualty companies. Beginning on January 1, 2003, property and casualty insurance companies have been permitted to sell short-term health insurance and accident products, but only with regulatory approval. There were 88 property and casualty insurers as of December 31, 2018. We believe property and casualty insurers have the competitive advantage of being able to bundle, or cross-sell, short-term health and accident products with the other non-life insurance products that they are currently selling to their existing and potential customers. We believe this will lead to greater competition in the accident and health insurance sectors. On December 30, 2006, we established a property and casualty company, CLPCIC, with CLIC. While this joint venture mainly focuses on property insurance business, it also develops short-term health insurance and accident business. Its operations may have a negative impact on sales of our short-term health insurance and accident products in the future.

 

   

Mutual fund companies, commercial banks and other financial services providers. We face increasing competition from other financial services providers, primarily licensed mutual fund companies, commercial banks providing personal banking services and offering various financial products, trust companies and securities brokerage firms licensed to manage separate accounts. These financial service providers provide a variety of financial investment products that may prove to be attractive to the public and thereby adversely affect the sale of some products we offer, including traditional life insurance policies with a savings feature, participating life insurance policies and annuities.

 

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All of our institutional insurance agencies and brokers are required to obtain permits and be registered. If a substantial number of our institutional insurance agencies and brokers fail to meet these qualification and registration requirements or this failure results in policyholders canceling their policies, our business may be materially and adversely affected.

Institutional insurance agents and insurance brokers are required under the PRC insurance law to register with the administration of industry and commerce, and obtain business licenses with the permits issued by the CBIRC. It also requires non-dedicated institutional insurance agencies to obtain registrations with the administration of industry and commerce with the permits issued by the CBIRC. We cannot assure you that all of our institutional agents will obtain such licenses. The enforcement of this requirement could adversely affect the composition and productivity of our distribution channel, which could have a material adverse effect on our business.

Further development of regulations in China may impose additional costs or restrictions on our activities.

We operate in a highly regulated industry. The CBIRC supervises and administers the insurance industry in China. In exercising its authority, it is given certain discretion to administer the law. China’s insurance regulatory regime is undergoing significant changes toward a more transparent regulatory process and a convergent movement toward international standards. Some of these changes may result in additional costs or restrictions on our activities. For example, the CIRC issued notices in September 2016 and May 2017 to further reinforce the regulation of life insurance products by requiring insurance companies to revise or improve the design of a number of insurance products. For instance, insurance companies are required to (i) increase the death coverage for insurance products including individual term life insurance, individual endowment insurance and individual whole life insurance products, and (ii) seek CIRC approval for universal insurance products with a guaranteed interest rate above 3%. CIRC also required that (i) whole life insurance, annuity insurance and care insurance products must not be designed as short-to-medium term products, (ii) the first payment of survival insurance benefits for endowment products and annuity products must only occur after five years since the policy has become effective, and the annual payment or partial payment must not exceed 20% of the paid premiums, and (iii) insurance companies must not design universal insurance products or investment-linked insurance products in the form of riders. See “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters—Insurance Company Regulation—Regulation of products”. These new requirements apply to a number of key products sold by us. Although these requirements are consistent with our long-term development strategy, revising the design of a number of products during a short period of time may increase our operating costs and may adversely affect our business, results of operations and financial condition.

 

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In addition, because the terms of our products are subject to regulations, changes in regulations may affect our profitability on the policies and contracts we issue. For instance, under the guidelines issued by the CIRC, the dividends on our participating products must be no less than 70% of the distributable earnings from participating products in accordance with CIRC requirements. If this level were to be increased in the future, our profitability could be materially and adversely affected. Furthermore, in August 2013, February 2015 and September 2015, the CIRC removed the 2.50% cap on the guaranteed interest rates for traditional non-participating insurance policies, universal life insurance policies and participating life insurance policies, respectively. From October 1, 2015, the guaranteed interest rates of all long-term life insurance products are to be decided by insurance companies at their discretion in accordance with the principle of prudence, but CBIRC approval is required for products with guaranteed interest rates above the maximum valuation rate set by the CBIRC, which varies by product. Although the removal of the 2.50% cap has not resulted in any material impact on the profitability of our insurance policies in force, it could result in the increase of the guaranteed interest rates of our new products and the decrease of our spread, and therefore we cannot assure you that the removal of the 2.50% cap will not lead to a material adverse effect on our business, results of operations or financial condition.

Our ability to comply with minimum solvency requirements is affected by a number of factors, and our compliance may force us to raise additional capital, which could increase our financing costs or be dilutive to our existing investors, or to reduce our growth.

In February 2015, the CIRC issued the major technical standards for a new set of solvency regulations, the “China Risk Oriented Solvency System”, or C-ROSS, with the aim of replacing the then current solvency requirements on Chinese insurance companies, or Solvency I. C-ROSS adopts the internationally accepted “three-pillar” regulatory system which includes quantitative capital requirements, qualitative regulatory requirements and market discipline mechanisms while its regulatory concept, models, methods and parameters are based on Chinese insurance market conditions. C-ROSS was officially implemented by the CIRC on January 1, 2016. See “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters—Insurance Company Regulation—Solvency requirements”. Our core solvency adequacy ratio under C-ROSS as of December 31, 2019 was 266.71%, and our comprehensive solvency adequacy ratio under C-ROSS as of December 31, 2019 was 276.53%. While our solvency ratio is currently above the regulatory requirements, if we grow rapidly in the future, or if the required solvency level is raised in the future, we may need to raise additional capital to meet our solvency requirement, including through additional issuance of capital replenishment bonds, which would increase our financing costs, or through additional issuance of shares, which would be dilutive to our existing investors. If we are not able to raise additional capital, we may be forced to reduce the growth of our business.

 

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Furthermore, as we are exposed to potential insurance, market and investment risks, we cannot assure you that our solvency ratio under C-ROSS will always be above the required level. If our solvency ratio under C-ROSS is below the required solvency level, we may need to raise additional capital to meet our solvency requirement, including through additional issuance of subordinated debt, which would increase our financing costs, or through additional issuance of shares, which would be dilutive to our existing investors. If we are not able to raise additional capital, we may be forced to reduce the growth of our business. A failure to meet our Solvency requirement can also lead to various regulatory actions being taken by the CBIRC, which could have a material adverse effect on our business or financial condition. See “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters—Insurance Company Regulation—Solvency requirements”.

Risks Relating to the Restructuring

CLIC has incurred substantial losses on the policies retained by it in the restructuring. If CLIC is unable to meet its obligations to its policyholders, it may seek to increase the level of dividends we pay, sell the China Life shares it owns or take other actions which may have a material adverse effect on the value of the shares our other existing investors own.

In connection with the restructuring, CLIC transferred to us (1) all long-term insurance policies (policies having a term of more than one year from the date of issuance) issued on or after June 10, 1999, having policy terms approved by or filed with the CIRC on or after June 10, 1999 and either (i) recorded as a long-term insurance policy as of June 30, 2003 in an actuarial database attached to the restructuring agreement as an annex or (ii) having policy terms for group supplemental medical insurance (fund type), (2) stand-alone short-term policies (policies having a term of one year or less from the date of issuance) issued on or after June 10, 1999, and (3) all riders supplemental to the policies described in clauses (1) and (2) above, together with the reinsurance contracts specified in an annex to the restructuring agreement. See “Item 4. Information on the Company—History and Development of the Company—Our Restructuring”. CLIC has incurred substantial losses on these non-transferred policies, primarily because the guaranteed interest rates it had committed to pay on these policies are higher than the investment return it was able to generate on its investment assets. This negative spread on non-transferred policies created substantial losses for CLIC and a resulting negative net worth. The amount of accumulated undistributed profits of CLIC itself is expected to remain negative in the short term.

In connection with the restructuring, CLIC established, together with the MOF, a special purpose fund for the purpose of paying claims under the non-transferred policies. The approval of the special purpose fund issued to CLIC provides that in the event there is any deficiency in the special purpose fund for so long as the fund is in existence, the MOF will provide support through the injection of funds to ensure the payments of benefits and claims to the policyholders of the non-transferred policies. See “Item 4. Information on the Company—History and Development of the Company—Our Restructuring”. In connection with the restructuring, we were advised by our PRC legal counsel, King & Wood, that (1) the MOF had the authority to issue this approval regarding the special purpose fund, (2) the approval was valid and effective, and (3) it had no reason to believe that the MOF will revoke the approval. We cannot assure you, however, that changes in law, facts or circumstances that may occur after such date will not affect the conclusions stated in such advice.

 

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We cannot predict the amount of funds that will be available to the special purpose fund from CLIC’s own operations to satisfy its obligations to its policyholders as they become due. CLIC’s cash requirements and available cash resources will be affected by several factors which are subject to uncertainty, including prevailing interest rates and the returns on investment generated by CLIC’s assets, as well as the claims, expenses and persistency experience with respect to CLIC’s insurance policies. The cash resources available to CLIC will also depend in part on our profitability, which will affect the amount of our tax payments and hence the amount of refund contributed to the fund (if CLIC’s application for the extension of the period during which the income tax payments will be rebated is approved; See “Item 4. Information on the Company—History and Development of the Company—Our Restructuring”), the timing and amount of our dividend payments and the market prices of our shares and ADSs, which will affect the proceeds to CLIC from dispositions of our shares. If it is unable to satisfy its obligations to its policyholders from other sources, CLIC may seek, subject to our articles of association and applicable laws, to increase the amount of dividends we pay in order to satisfy its cash flow requirements. Any such increase in our dividend payments would reduce the funds available for reinvestment in our business. In addition, if we are unable to pay dividends in amounts sufficient to satisfy these requirements, CLIC may seek to sell its shareholdings in us or take other actions in order to satisfy these needs. The sale of these holdings or even the market perception of such a sale may materially and adversely affect the price of our shares.

The transfer of policies to us by CLIC and/or the separation of assets between CLIC and us may be subject to challenge.

In connection with the restructuring, we were advised by our PRC legal counsel, King & Wood, that (1) the transferred policies were legally and validly transferred to China Life and (2) following the restructuring, we would not have any continuing obligations to holders of the non-transferred policies who remain policyholders of CLIC and that there was no legal basis on which holders of the non-transferred policies can make a claim against China Life. We were advised by King & Wood that, although there was no specific law applicable to restructurings, these conclusions were supported by, among other things, the approval of the restructuring and various related matters by the State Council, the MOF and the CIRC; the support provided by the MOF with respect to the non-transferred policies as described above; and contract and other law. We cannot assure you that policyholders of CLIC, holders of transferred policies or other parties will not seek to challenge the transfer of the transferred policies or the separation of assets occurring as a consequence of the restructuring, or that a court would decide in a manner consistent with King & Wood’s conclusions. If the transfer of policies to us or the separation of assets were challenged successfully, our financial condition and results of operations would likely be materially and adversely affected.

 

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We do not hold exclusive rights to the trademarks in the “China Life” name (in English and Chinese), the “ball” logos and other business related slogans and logos, and CLIC, which owns these trademarks, may take actions that would impair the benefits we derive from their use.

We conduct our business under the “China Life” brand name, the “ball” logos, the “C” mark and other business related slogans and logos. CLIC owns these trademarks and has registered them with the Trademark Office of the SAMR. CLIC has entered into a trademark license agreement with us, under which CLIC has agreed to grant us and our branches a royalty-free license to use the “China Life” brand name, the “ball” logos and the “C” mark.

Although CLIC has undertaken in a non-competition agreement with us not to compete with us in China, without our prior consent in writing, in any life, accident and health insurance and any other businesses in China which may compete with our insurance business, CLIC, its subsidiaries and affiliates are permitted to use the brand name and logo in their own businesses, including life insurance business outside China and any other businesses they may enter into in the future within China, including property and casualty (other than businesses that compete with our accident and health businesses) and asset management businesses. In addition, they are not precluded from taking actions that may impair the value of the brand name, which could harm our business. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Continuing Related Party Transactions with CLIC”. The China Life brand name and our reputation could be materially harmed if CLIC fails to make payments when due on outstanding policies retained by CLIC in the restructuring or new policies written by CLIC after the restructuring, if CLIC reduces the rates of return payable on policies retained by CLIC or if CLIC is placed into receivership.

As our controlling shareholder, CLIC will be able to exert influence on our affairs and could cause us to make decisions or enter into transactions that may not be in your best interests.

We are controlled by CLIC, whose interests may conflict with those of our other shareholders. As of the date of this annual report, CLIC holds approximately 68.37% of our share capital. As a result of these factors, CLIC, which is wholly owned by the PRC government, will, so long as it holds the majority of our shares, effectively be able to control the composition of our board of directors and, through the board, exercise a significant influence over our management and policies. In addition, subject to our articles of association and applicable laws, CLIC may, so long as it holds the majority of our shares, effectively be able to determine the timing and amount of our dividend payments and approve increases or decreases of our share capital, the issuance of new securities, amendments of our articles of association, mergers and acquisitions and other major corporate transactions. CLIC may also be able to prevent us effectively from taking actions to enforce or exercise our rights under agreements to which we are a party, including the agreements we entered into with CLIC in connection with the restructuring. See “Item 7. Major Shareholders and Related Party Transactions”. As a majority shareholder, CLIC may be able to take these actions without your approval. In addition, CLIC’s control could have the effect of deterring takeovers or delaying or preventing changes in control or changes in management that might be desirable to other shareholders.

 

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CLIC may direct business opportunities elsewhere.

CLIC has other business interests, including the run-off of the insurance policies retained by it in the restructuring. Notwithstanding a general undertaking pursuant to a non-competition agreement with us not to compete with us in our principal areas of business in China, CLIC is permitted to sell riders to these retained policies and enter into other businesses, including life insurance businesses outside of China and property and casualty (other than businesses that compete with our accident and health businesses) and asset management businesses, both inside and outside of China. In 2006, we formed a property and casualty company with CLIC, in connection with which we granted a waiver to CLIC allowing it to engage in accident and short-term health businesses indirectly through the property and casualty company.

CLIC engages in insurance businesses in Hong Kong, Macau, Singapore and Indonesia through China Life Insurance (Overseas) Co., Limited, or China Life Overseas, its wholly owned subsidiary. CLIC also may continue to engage in insurance business in other regions outside of China in the future. Although it is required under the non-competition agreement to give us a right of first refusal over business opportunities it develops in these areas, we may not be in a position to take advantage of these opportunities at that time, which could harm our business. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Continuing Related Party Transactions with CLIC”.

In addition, while we provide policy administration and other services to CLIC for the policies retained by CLIC in the restructuring, and provide investment management services to CLIC through our asset management subsidiary, these agreements can be terminated with notice or upon expiration. If CLIC were to terminate its policy administration and asset management arrangements with us and our asset management subsidiary, respectively, our loss of fees could materially and adversely affect us.

Risks Relating to the People’s Republic of China

China’s economic, political and social conditions, as well as government policies, could affect our business.

Substantially all of our assets are located in China and substantially all of our revenues are derived from our operations in China. Accordingly, our results of operations and prospects are subject, to a significant degree, to economic, political and legal developments in China. The economy of China differs from the economies of most developed countries in many respects, including, without limitation:

 

   

the extent of government involvement;

 

   

its level of development;

 

   

its growth rate; and

 

   

its control of foreign exchange.

 

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The economy of China has been transitioning from one of high-speed growth to one that seeks high-quality development. Although in recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industrial development. It also exercises significant control over China’s economic growth through controlling payment of foreign currency denominated obligations, setting and implementing financial and monetary policy and providing preferential treatment to particular industries.

According to data released by the National Bureau of Statistics of China, China’s Gross Domestic Product, a key indicator of economic growth, was 6.1% in 2019. The recent outbreak of COVID-19 and the global effort to contain it have negatively impacted the global economy and have slowed the Chinese economy as well. China’s Gross Domestic Product in the first quarter of 2020 shrank 6.8% year-on-year. In an effort to bolster the economy, the Chinese government may take certain measures, including adjustment of interest rates and market-oriented financial reforms. Some of the measures taken by the Chinese government to improve China’s economic performance may have a negative effect on our business. For example, our operating results and financial condition could be materially and adversely affected by government monetary policies and changes in interest rate policies, tax regulations and policies and regulations affecting the capital markets and the asset management industry. A slowdown in Chinese growth rates could also adversely affect us by impacting sales of our products, reducing our investment returns, or otherwise.

The PRC legal system has inherent uncertainties that could limit the legal protections available to you.

We are organized under the laws of China and are governed by our articles of association. The Chinese legal system is based on written statutes. Prior court decisions may be cited for reference but are not binding on subsequent cases and have limited precedential value. Since 1979, the Chinese legislative bodies have promulgated laws and regulations dealing with such economic matters as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new, and because of the limited volume of published decisions, the interpretation and enforcement of these laws and regulations involve uncertainties.

Holders of H shares and ADSs generally are required to resolve disputes with us, our senior management and holders of our A shares only through arbitration in Hong Kong or China.

In accordance with the rules applicable to Chinese overseas listed companies, our articles of association provide that, with certain limited exceptions, all disputes or claims based on our articles of association, PRC company law or other relevant laws or administrative rules, and concerning matters between holders of H shares and ADSs and holders of A shares, us, or our directors, supervisors, president, vice presidents or other senior officers, must be submitted for arbitration at either the China International Economic and Trade Arbitration Commission or the Hong Kong International Arbitration Center. If an applicant chooses to have the dispute arbitrated at the Hong Kong International Arbitration Center, either party may request that the venue be changed to Shenzhen, a city in China near Hong Kong. The governing law for any such disputes or claims is Chinese law, unless Chinese law itself provides otherwise. Pursuant to an arrangement of mutual enforcement of arbitration awards between the PRC courts and the Hong Kong courts, Hong Kong arbitration awards are enforceable in China, subject to the satisfaction of certain legal requirements. However, due to the limited number of actions that have been brought in China by holders of shares issued by a Chinese company to enforce an arbitral award, we are uncertain as to the outcome of any action brought in China to enforce a Hong Kong arbitral award made in favor of holders of H shares and ADSs.

 

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The laws in China differ from the laws in the United States and may afford less protection to our minority shareholders.

Although Chinese company law provides that shareholders of a Chinese company may, under certain circumstances, sue the company’s directors, supervisors and senior management in the interests of the company, limited detailed implementation rules or court interpretations have been issued in this regard. Also, class action lawsuits are generally uncommon in China. In addition, PRC company law imposes limited obligations on a controlling shareholder with respect to protection of the interests of minority shareholders, although overseas listed joint stock companies, such as ourselves, are required to adopt certain provisions in their articles of association that are designed to protect minority shareholder rights. These mandatory provisions provide, among other things, that the rights of any class of shares, including H shares, may not be varied without a resolution approved by holders of shares in the affected class holding no less than two-thirds of the shares of the affected class entitled to vote, and provide that in connection with a merger or division involving our company, a dissenting shareholder may require us to purchase the dissenters’ shares at a fair price. Disputes arising from these protective provisions would likely have to be resolved by arbitration. See “—Holders of H shares and ADSs generally are required to resolve disputes with us, our senior management and holders of our A shares only through arbitration in Hong Kong or China”.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in the PRC based on U.S. or other foreign laws against us, our management and some of the experts named in the annual report.

We are a company incorporated under the laws of China, and substantially all of our assets are located in China. In addition, most of our directors, supervisors, executive officers and some of the experts named in this annual report reside within China, and substantially all of the assets of these persons are located within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon our directors, supervisors or executive officers or some of the experts named in this annual report, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Our PRC legal counsel, King & Wood, has advised us that China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States, the United Kingdom, Japan or many other countries. Our Hong Kong legal adviser, Latham & Watkins, has also advised us that Hong Kong has no statutory arrangement for the reciprocal enforcement of judgments with the United States although it may be possible for a civil action to be brought in Hong Kong based on a monetary judgment of the courts of the United States. As a result, recognition and enforcement in China or Hong Kong of judgments of a court in the United States and any of the other jurisdictions mentioned above in relation to any matter may be difficult or impossible. Furthermore, an original action may be brought in the PRC against us, our directors, supervisors, executive officers or the experts named in this annual report only if the actions are not required to be arbitrated by PRC law and our articles of association, and only if the facts alleged in the complaint give rise to a cause of action under PRC law. In connection with any such original action, a PRC court may award civil liability, including monetary damages.

Due to jurisdictional limitations and various other factors, the U.S. Securities and Exchange Commission, the U.S. Department of Justice and other U.S. authorities may also be limited in their ability to pursue companies and individuals in China, in connection with any alleged violation of U.S. securities and other laws.

 

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Holders of H shares may be subject to PRC taxation.

Under current PRC tax laws, regulations and rulings, dividends paid by us to individual holders of H shares outside of the PRC are subject to PRC individual income tax at rates not exceeding 20%, depending on the applicable tax treaties between the home country of the individual holder of H shares and the PRC. When paying dividends to non-resident enterprise holders of H shares outside of the PRC, such dividends are subject to an enterprise income tax, which is currently levied at a rate of 10%. Such non-resident enterprise holders of H shares may be entitled to tax reductions or exemptions according to applicable tax treaties. In addition, to date, relevant tax authorities have not collected capital gains tax on the gains realized by individuals upon the sale or other disposition of H shares. If relevant tax authorities promulgate implementation rules on the taxation of capital gains realized by individuals upon the sale or other disposition of H shares, individual holders of H shares may be required to pay capital gains tax. See “Item 10. Additional Information—Taxation—The People’s Republic of China”.

Government control of currency conversion and the fluctuation of the Renminbi may materially and adversely affect our operations and financial results.

We receive substantially all of our revenues in Renminbi, which currently is not a freely convertible currency. A portion of these revenues must be converted into other currencies to allow us to make payments on declared dividends, if any, on our H shares, and payments of interest and principal on our debt held in foreign currencies.

Under China’s existing foreign exchange regulations, we are able to pay dividends and interest and principal in foreign currencies without prior approval from the SAFE by complying with various procedural requirements. The Chinese government, however, may, at its discretion, restrict access in the future to foreign currencies for current account transactions. If this were to occur, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

The value of the Renminbi against the U.S. dollar and other currencies fluctuates and is affected by, among other things, changes in China’s political and economic conditions. On July 21, 2005, the PRC government introduced a managed floating exchange rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market supply and demand and by reference to a basket of currencies. Under this system, the PBOC announces the closing price of a foreign currency traded against the Renminbi in the inter-bank foreign exchange market after the closing of the market on each working day, and makes it the central parity for the trading against the Renminbi on the following working day. On August 11, 2015, the PBOC adjusted the quotation mechanism of the Renminbi central parity to also consider demand and supply in foreign exchange markets and price movements of major currencies, in addition to the closing price on the previous working day. On May 26, 2017, the PBOC introduced the “counter-cyclical factor” into its formula that determines a central parity of Renminbi against the U.S. dollar. Under the current mechanism, the central parity of the Renminbi against the U.S. dollar is determined based on the closing price, changes in a basket of currency exchange rates and the counter-cyclical factor. From July 21, 2005 to April 10, 2020, the Renminbi appreciated by approximately 13.25% against the U.S. dollar. In 2019, the Renminbi depreciated by 1.65% against the U.S. dollar. A portion of our assets and liabilities are held in foreign currencies and may be subject to foreign exchange gains and losses due to changes in exchange rates. We recorded RMB 67 million (US$ 10 million) in foreign exchange losses for the year ended December 31, 2019, resulting mainly from the change in foreign exchange rates applicable to our assets and liabilities held in foreign currencies. Any future appreciation of the Renminbi may materially and adversely affect the value of, and any dividends payable on, our H shares in foreign currency terms. Our financial condition and results of operations also may be affected by changes in the value of certain currencies other than the Renminbi.

 

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Payment of dividends is subject to restrictions under Chinese law.

Under Chinese law, dividends may be paid only out of distributable profits. Any distributable profits that are not distributed in a given year are retained and available for distribution in subsequent years. However, ordinarily we will not pay any dividends in a year in which we do not have any distributable profits.

Payment of dividends by us is also regulated by the PRC insurance law. See “Item 8. Financial Information—Consolidated Financial Statements and Other Financial Information—Policy on Dividend Distributions”.

ITEM 4. INFORMATION ON THE COMPANY

A. HISTORY AND DEVELOPMENT OF THE COMPANY

We were formed as a joint stock life insurance company pursuant to the PRC company law on June 30, 2003 under the corporate name of 中国人寿保险股份有限公司 in connection with the restructuring.

General Information

Our principal executive offices are located at 16 Financial Street, Xicheng District, Beijing 100033, China. Our telephone number is (86-10) 6363-3333. Our official website address is www.e-chinalife.com. The information on our website is not a part of this annual report. We have appointed CT Corporation System at 111 Eighth Avenue, New York, New York 10011 as our agent for service of process in the United States.

Our Restructuring

Upon the approval of the State Council and the CIRC, we were formed on June 30, 2003 as a joint stock company in connection with the restructuring by CLIC, our controlling shareholder. The restructuring was effected through a plan of restructuring, which was approved by the CIRC on August 21, 2003, and a restructuring agreement we entered into with CLIC on September 30, 2003, with retroactive effect to June 30, 2003, which we refer to in this annual report as the effective date. Pursuant to PRC law and the restructuring agreement, we enjoyed the rights and benefits and assumed the obligations and liabilities arising from the restructuring from and after the effective date.

 

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In connection with the restructuring:

 

   

CLIC transferred to us (1) all long-term insurance policies (policies having a term of more than one year from the date of issuance) issued on or after June 10, 1999, having policy terms approved by or filed with the CIRC on or after June 10, 1999 and either (i) recorded as a long-term insurance policy as of June 30, 2003 in an actuarial database attached to the restructuring agreement as an annex or (ii) having policy terms for group supplemental medical insurance (fund type), (2) stand-alone short-term policies (policies having a term of one year or less from the date of issuance) issued on or after June 10, 1999 and (3) all riders supplemental to the policies described in clauses (1) and (2) above, together with the applicable reinsurance contracts specified in an annex to the restructuring agreement. We refer to these policies in this annual report as the “transferred policies”. All other insurance policies were retained by CLIC. We refer to these policies as the “non-transferred policies”. We assumed all obligations and liabilities of CLIC under the transferred policies. CLIC continues to be responsible for its liabilities and obligations under the non-transferred policies following the effective date.

 

   

Cash, specified investment assets and various other assets were also transferred to us.

 

   

CLIC agreed not to, directly or indirectly through its subsidiaries and affiliates, participate, operate or engage in life, accident and health insurance businesses and any other business in China which may compete with our insurance business. CLIC also undertook (1) to refer to us any corporate business opportunity that falls within our business scope and which may directly or indirectly compete with our business and (2) to grant us a right of first refusal, on the same terms and conditions, to purchase any new business developed by CLIC. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Continuing Related Party Transactions with CLIC”.

 

   

Substantially all of the management personnel and employees who were employed by CLIC in connection with the transferred assets and business were transferred to us. Some management and personnel remained with CLIC.

 

   

CLIC retained the trademarks used in our business, including the “China Life” name in English and Chinese and the “ball” logos, and granted us and our branches a royalty-free license to use these trademarks. CLIC and its subsidiaries and affiliates will be entitled to use these trademarks, but CLIC may not license or transfer these trademarks to any other third parties. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Continuing Related Party Transactions with CLIC”.

 

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CLIC’s contracts with its agents and other intermediaries were transferred to us.

 

   

We entered into various agreements under which we provide policy administration services to CLIC for the non-transferred policies, manage CLIC’s investment assets and lease office space from CLIC for our branch and field offices. See “Item 7. Major Shareholders and Related Party Transactions”.

In connection with the restructuring, CLIC established, together with the MOF, a special purpose fund for the purpose of paying claims under the non-transferred policies. Under the administrative measures for the special purpose fund as amended in May 2012, the special purpose fund will be funded by renewal premiums paid on the non-transferred policies over time; tax rebates received by CLIC; proceeds from the investments of the special purpose fund; shareholder dividends paid in cash to CLIC by its subsidiaries and shareholding enterprises; proceeds from the disposition by CLIC of its shares in its subsidiaries and shareholding enterprises over time; cash income from the disposition of assets by CLIC; financial assets owned by CLIC; long-term equity investment held by CLIC; and funds injected by the MOF in the event of a deficiency in the special purpose fund. The special purpose fund is co-administered by CLIC and the MOF. The special purpose fund will be available to satisfy CLIC’s operating expenses, including the payment of benefits and claims obligations arising from the non-transferred policies, as well as expenses incurred in operating the special purpose fund, including third-party management fees, professional fees and such other purposes as the management committee of the special purpose fund may agree, as well as capital expenses as approved by the MOF. A management committee of the special purpose fund comprised of four representatives from the MOF and three representatives from CLIC oversees the management of the fund, with specified material items subject to the approval of the MOF. The special purpose fund will be dissolved when all claims and benefits under the non-transferred policies have been paid, or sooner if the management committee so agrees.

The MOF’s approval of the special purpose fund issued to CLIC provides that in the event there is any deficiency in the special purpose fund for so long as the fund is in existence as described above to meet any payment obligation arising out of the non-transferred policies, the MOF will provide support through the injection of funds to ensure the payments of benefits and claims to the policyholders of the non-transferred policies. In connection with the restructuring, we were advised by our PRC legal counsel, King & Wood, that (1) the MOF had the authority to issue this approval regarding the special purpose fund, (2) the approval was valid and effective, and (3) it had no reason to believe that the MOF will revoke the approval. We cannot assure you, however, that changes in law, facts or circumstances that may occur after such date will not affect the conclusions stated in such advice.

In accordance with generally applicable tax laws and regulations, CLIC, AMC and ourselves will file income tax returns and pay our respective income taxes as separate and independent taxpayers. In accordance with a circular issued by the MOF, a portion of the income tax payments made by CLIC and us during the period of January 1, 2003 to December 31, 2010 is required to be rebated to CLIC. All of the income tax payments made by AMC may also be rebated to CLIC, if the current shareholding structure of AMC remains unchanged. In 2011 CLIC applied for the extension of the period during which the income tax payments will be rebated, but no substantive progress had been made as of the date of this annual report.

 

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In connection with the restructuring, we were advised by our PRC legal counsel, King & Wood, that following the restructuring we would not have any continuing obligations to holders of the non-transferred policies and that there was no legal basis on which holders of the non-transferred policies could make a claim against China Life. King & Wood based its conclusion on, among other things, the following factors: (1) after the restructuring, China Life was established as a separate legal entity and China Life’s assets and liabilities should be regarded as distinct and separate from those of CLIC; (2) there was no contractual relationship, direct or indirect, between the holders of the non-transferred policies and China Life; (3) the restructuring (including the transfer of the transferred policies to China Life) was approved by the CIRC and was conducted without infringing upon the rights of the holders of non-transferred policies; (4) the arrangements made under the restructuring agreement, in particular the MOF’s support as described above, were expected to enable CLIC to satisfy its obligations under the non-transferred policies; and (5) PRC regulatory authorities had no legal power to direct China Life to assume CLIC’s obligations under the non-transferred policies or to indemnify the holders of the non-transferred policies.

See “Item 3. Key Information—Risk Factors—Risks Relating to the Restructuring”.

Developments After Restructuring

On November 23, 2003, we established an asset management company, AMC, with CLIC, in connection with the restructuring. AMC manages our investment assets and, separately, substantially all of those of CLIC. On December 30, 2006, we established a property and casualty company, CLPCIC, with CLIC. On January 15, 2007, we established a pension insurance company, China Life Pension, with CLIC and AMC.

In December 2003, we successfully completed our initial public offering of H shares, including H shares in the form of American depositary shares, or ADSs, and raised approximately RMB 24,707 million in aggregate net proceeds. Upon completion of our initial public offering, our H shares became listed on the Hong Kong Stock Exchange and ADSs each representing 40 of our H shares became listed on the New York Stock Exchange. The ratio of ADSs to H shares was reduced from 40 H shares to 15 H shares on December 29, 2006 and was further reduced from 15 H shares to 5 H shares on May 26, 2015.

In December 2006, we issued 1,500,000,000 new ordinary domestic shares through public offering on the SSE at the offering price of RMB 18.88 per share, raising RMB 28,320 million in aggregate gross proceeds. The A shares have been listed on the SSE since January 9, 2007. Prior to the offering, CLIC held 19,323,530,000 ordinary domestic shares, or CLIC A shares, which have been registered with the China Securities Depository and Clearing Corporation Limited as circulative A shares with restrictive trading following the A share offering. CLIC has undertaken that for a period of 36 months commencing on January 9, 2007 it will not transfer or put on trust the CLIC A shares held by it or allow such CLIC A shares to be repurchased by China Life. On January 11, 2010, 19,323,530,000 CLIC A shares were released from trading restrictions.

In July 2015, we issued Core Tier 2 Capital Securities in the principal amount of US$ 1,280 million to qualified investors who meet applicable regulatory requirements at an initial distribution rate of 4.00%.

 

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In March 2019, we issued bonds in the principal amount of RMB 35 billion for capital replenishment in the national inter-bank bond market. The bonds have a 10-year maturity and a fixed coupon rate of 4.28% per annum. We have a conditional right to redeem the bonds on the fifth anniversary of issuance. The proceeds from the issuance of the bonds will be used to replenish our capital so as to enhance our solvency according to applicable laws and approvals from regulatory authorities.

We incurred capital expenditures of RMB 10,562 million (US$ 1,517 million), RMB 14,755 million, and RMB 17,055 million in 2019, 2018 and 2017, respectively. These capital expenditures mainly comprised of the addition of properties for our own use.

SEC’s Website and Our Website

The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Our official website address is www.e-chinalife.com. The information on our website is not a part of this annual report.

B. BUSINESS OVERVIEW

We are the leading life insurance company in China. We provide a broad range of insurance products, including individual and group life insurance, annuity, health insurance and accident insurance products. We had nearly 303 million insurance policies in force as of December 31, 2019, including individual and group life insurance policies, annuity contracts, health insurance and accident insurance policies. As of December 31, 2019, the average guaranteed rate of return for all of our long-term insurance policies in force was 2.71%. For the financial year ended December 31, 2019, our lapse rate was approximately 1.89%. The policy persistency rates, which measure the ratio of the insurance policies that are still effective after a certain period, were 86.80% for 14 months after issuance and 85.90% for 26 months after issuance.

The information below is organized in accordance with our identified segments.

Life Insurance

We offer life insurance and annuity products to individuals and groups. We market our individual life insurance and annuity products primarily through a distribution force comprised of approximately 1,613,000 exclusive agents operating in approximately 16,000 field offices throughout China, as well as other non-dedicated agencies located at branch offices of banks and other organizations. We offer group life insurance and annuity products to the employees of companies and institutions through approximately 65,500 direct sales representatives, as well as insurance agencies and insurance brokerage companies. Gross written premiums generated by our life insurance and annuity products totaled RMB 446,562 million (US$ 64,145 million) for the year ended December 31, 2019, RMB 437,540 million for the year ended December 31, 2018, and RMB 429,822 million for the year ended December 31, 2017, constituting 78.74%, 81.66% and 83.96% of our total gross written premiums for those periods. Gross written premiums generated by our life insurance and annuity products for 2019 increased by 2.06 % from 2018.

 

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The following table sets forth selected financial and other data regarding our life insurance and annuity business as of the dates or for the periods indicated.

 

     As of or for the year ended December 31,      Compound
annual
growth rate
 
     2017      2018      2019      2019      (2017-2019)  
     RMB      RMB      RMB      US$         
     (in millions, except as otherwise indicated)  

Gross written premiums

     429,822        437,540        446,562        64,145        1.93

Liabilities of insurance contracts

     1,914,597        2,081,822        2,385,407        342,642        11.62

Liabilities of investment contracts

     218,436        240,152        252,362        36,250        7.49

Products

We offer a wide variety of life insurance and annuity products to individuals, providing a wide range of coverage for the whole length of a policyholder’s life. Our individual life insurance products consist of whole life and term life insurance and endowment insurance. We also offer group annuity products and term life insurance products to enterprises and institutions. We market these products as an important part of our group customers’ overall employee benefit plans. We believe we are the market leader in the development of group annuity products.

We offer both non-participating and participating products. There were approximately 249 million non-participating policies and 54.53 million participating policies as of December 31, 2019, among which approximately 151 million non-participating policies and 35.99 million participating policies were sold to individuals.

The following table sets forth selected financial information regarding our life insurance and annuity products.

 

     For the year ended December 31,      Compound
annual
growth rate
 
     2017      2018      2019      2019      (2017-2019)  
     RMB      RMB      RMB      US$         
     (in millions, except as otherwise indicated)  

Gross written premiums

              

Whole life and term life insurance

     40,606        49,520        64,196        9,221        25.74

Endowment

     198,418        126,318        113,950        16,368        (24.22 %) 

Annuities

     190,798        261,702        268,416        38,556        18.61

Whole Life and Term Life Insurance

Non-participating whole life and term life insurance

We offer non-participating whole life and term life insurance products.

Non-participating whole life insurance products provide a guaranteed benefit, pre-determined by the contract, upon the death of the insured, in return for the periodic payment of fixed premiums over a pre-determined period. Premium payments may be required for the length of the contract period, to a specified age or for a specified period, and are typically level throughout the period.

 

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Non-participating term life insurance products provide a guaranteed benefit upon the death of the insured within a specified time period in return for the periodic payment of fixed premiums. Specified coverage periods generally range from 5 to 30 years or expire at specified ages. Death benefits and premiums are typically set at a level amount over the coverage period. Term life insurance products are sometimes referred to as pure protection products, in that there are normally little or no savings or investment elements. Unlike endowment products, term life insurance policies expire without maturity benefits.

Participating whole life insurance

We also offer participating whole life insurance products, which, in addition to the benefit payment of traditional whole life insurance policies, also provide a participation feature in the form of dividends. The policyholder is entitled to share a portion of the distributable earnings from participating products, as determined by us based on formulas prescribed by the CIRC. Under guidelines issued by the CIRC, the dividends must be no less than 70% of the distributable earnings from participating products. We offer participating whole life insurance products only to individual customers.

Endowment

Non-participating endowment products

Non-participating endowment products provide to the insured various guaranteed benefits if the insured survives specified maturity dates or periods stated in the policy, and provide to a beneficiary guaranteed benefits upon the death of the insured within the coverage period, in return for the periodic payment of premiums. Specified coverage periods generally range from 5 to 30 years or end at specified ages. Premiums are typically at a level amount for the coverage period.

Participating endowment products

We also offer participating endowment products, which are endowment policies that also provide a participation feature in the form of dividends. Policyholders are entitled to share a portion of the distributable earnings from participating products, as determined by us based on formulas prescribed by the CIRC. Under guidelines issued by the CIRC, the dividends must be no less than 70% of the distributable earnings from participating products.

China Life Xin Fu Yi Sheng Participating Endowment and China Life Fu Lu Shuang Xi Participating Endowment generated the most income of our participating endowment products in 2019. China Life Xin Fu Yi Sheng Participating Endowment generated RMB 16,963 million (US$ 2,437 million) of net premiums in 2019, representing 3.81% of the net premiums of our life insurance business, and China Life Fu Lu Shuang Xi Participating Endowment generated RMB 15,129 million (US$ 2,173 million) of net premiums in 2019, representing 3.39% of the net premiums of our life insurance business. The net premiums earned from our participating endowment products decreased by RMB 15,182 million (US$ 2,181 million), or 14.56%, to RMB 89,076 million (US$ 12,795 million) in 2019 from RMB 104,258 million in 2018.

We offer endowment products only to individual customers.

 

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Annuities

Annuities are used for both asset accumulation and asset distribution needs. Annuitants pay premiums into our accounts, and receive payments of benefits during the payoff period as specified in the contracts. We offer both non-participating and participating annuities. For non-participating annuity products, risks associated with the underlying investments are borne entirely by us. A significant portion of our non-participating annuity products imposes charges upon surrender.

Participating annuity products are annuities that provide a participation feature in the form of dividends in addition to the guaranteed annuity benefits. The dividends are determined by us in the same manner as our life insurance policies. Like non-participating annuities, a significant portion of our participating annuity products imposes charges upon surrender.

In our universal group annuities, interest accrued on an annuitant’s deposits is credited to each participating employee’s personal account, or to each participating employee’s personal account and employer’s group account.

Universal Insurance Products

Universal insurance products are insurance policies with flexible premium and sum insured as well as transparency on costs. For each universal insurance policy, we establish a separate account and determine the interest credit rate, mortality and expense charges specifically for the account. The benefits of universal insurance products are linked to the account value of each separate account.

Personal Tax-deferred Pension Insurance Products

In May 2018, the Chinese government permitted trial sales of personal tax-deferred pension insurance products in Shanghai, the Fujian province (including Xiamen) and Suzhou Industrial Park, and we commenced our personal tax-deferred pension insurance business. Because such business is still at the trial stage and sales are limited geographically, our premium income from personal tax-deferred pension insurance business remains small.

Marketing and Distribution

Individual

We have historically sold most of our individual life insurance and annuity products to the mass market and will continue to actively serve this market. However, we believe our core individual customer base will evolve as China’s economy develops. We will seek to capitalize on the market opportunities in the growing affluent segment of China’s population by focusing our marketing efforts on large and medium-sized cities with an aim to attract more medium- and high-end customers, as we believe that the demand for life insurance and annuity products in these areas is greater. In addition, we have been implementing a customer segmentation sales approach which targets different customers with different products, with these products in many cases supplemented by our individual accident and health products.

 

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We distribute our individual life and annuity products nationwide through multiple channels. Our primary distribution system is comprised of approximately 1,613,000 exclusive agents in approximately 16,000 field offices throughout China. In addition, we are implementing our customer-oriented market segmentation sales initiatives to all exclusive agents nationwide. While continuing to invest in our exclusive agent force, we have also expanded into other distribution channels, primarily non-dedicated agencies located in approximately 42,600 outlets of commercial banks, to diversify our distribution channels and to achieve higher growth. See “—Distribution Channels”.

Group

We target our group life insurance and annuity products to large institutional customers in China, including branches of foreign companies, which we believe have a greater awareness of and need for group life insurance and annuity products. We have long-term customer relationships with many of China’s largest companies and institutions. We provide large group customers with products having flexible fee and dividend structures, as well as convenient customer service. While continuing to focus on large institutional clients, we also target small- to medium-sized companies to supplement our growth.

We market our group life insurance and annuity products primarily through our direct sales representatives. We also market our group life insurance and annuity products through commercial banks, insurance agency companies and insurance brokerage companies. See “—Distribution Channels”.

Health Insurance

We offer a broad array of health insurance products and services to both individuals and groups, including medical insurance, care insurance, disease insurance and disability income insurance. Our health insurance gross written premiums totaled RMB 105,581 million (US$ 15,166 million) for the year ended December 31, 2019, RMB 83,614 million for the year ended December 31, 2018 and RMB 67,708 million for the year ended December 31, 2017, constituting 18.62%, 15.60% and 13.23% of our total gross written premiums for those periods. Gross written premiums generated by our health insurance products for 2019 increased by 26.27% from 2018.

Our health insurance business shares our nationwide life insurance sales force and distribution network of exclusive agents. Our policy review and claim adjustment processes are facilitated through a team of supporting personnel with medical training.

 

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The following table sets forth selected financial and other data regarding our health insurance as of the dates or for the periods indicated. The financial results of both our long-term health insurance and short-term health insurance are reflected in the following table.

 

     As of or for the year ended December 31,      Compound
annual
growth rate
 
     2017      2018      2019      2019      (2017-2019)  
     RMB      RMB      RMB      US$         
     (in millions, except as otherwise indicated)  

Gross written premiums

     67,708        83,614        105,581        15,166        24.87

Liabilities of insurance contracts

     102,190        125,743        158,800        22,810        24.66

Liabilities of investment contracts

     14,064        15,282        15,442        2,218        4.78

Products

We offer health insurance products to both individuals and groups. We classify our health insurance products as short-term products, having policy terms of less than or up to one year, and long-term products, having policy terms longer than one year. We offer both short-term and long-term defined health benefit plans, medical expense reimbursement plans, care insurance plans and disease-specific plans to individuals and groups.

Defined health benefit plans

These plans provide a fixed payment based on the number of days of hospitalization resulting from diseases, injuries from accidents or surgical operations. Policyholders either pay premiums in a single payment or on a periodic basis.

Medical expense reimbursement plans

These plans provide for the reimbursement of a portion of the participant’s outpatient or hospitalization treatment fees and expenses. Policyholders pay premiums either in a single payment or on a periodic basis or, for certain group medical expense reimbursement plans, irregularly as determined by the policyholder.

We also provide medical agency services for the basic social medical insurance plans offered by local governments. The agency services include checking and reimbursement of medical expenses and medical service investigations. We do not collect premiums but only charge a specified amount of handling fees for these services. As of December 31, 2019, we had carried out more than 600 medical agency services projects in over 29 provinces and cities, providing services to more than 100 million people.

We also commenced our supplementary major medical insurance business in 2013. As part of the Chinese government’s overall medical insurance scheme, supplementary major medical insurance reimburses policyholders for a specified percentage of their high medical expenses caused by major illnesses which are in excess of the maximum amounts covered by the basic social medical insurance and which would otherwise be borne by the individuals. The Chinese government has implemented supplementary major medical insurance programs nationwide in China. Local governments use a portion of the basic medical insurance funds to purchase supplementary major medical insurance services from qualified insurance companies through a government tender. Supplementary major medical insurance offers protection to all the policyholders covered by the basic social medical insurance in the pilot areas. As of December 31, 2019, we had undertaken over 230 supplementary major medical insurance programs, providing services to approximately 400 million people.

 

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Care insurance plans

These plans provide individuals who have disabilities covered by the insurance contracts with a fixed allowance and reimbursement of expenses for their daily living and medical care. Premium payments are paid either in a single payment or on a periodic basis.

We commenced our care insurance business in 2015. The Chinese government launched pilot long-term care insurance programs beginning in 2016. Under these programs, local governments in pilot areas raise funds through various channels to provide funds or protection services to people who have life disabilities for their daily living and medical care. Some local governments purchase long-term care insurance services from qualified insurance companies through government tender procedures. As of December 31, 2019, we had undertaken more than 40 long-term care insurance programs, providing services to over 13 million people.

Disease-specific plans

These plans provide a payment benefit for various diseases. Premium payments for disease-specific plans are paid either in a single payment or on a periodic basis.

Marketing and Distribution

We offer our health insurance products to both individuals and groups through the same distribution channels we use to market our life insurance products. We market our individual health insurance products through our exclusive agent sales force, and our group health insurance products primarily through our direct sales representatives. See “—Distribution Channels”.

We market our health insurance products either as primary products, as riders or as supplementary products packaged with our life, annuity or accident insurance products. We conduct extensive health insurance related training programs for our direct sales representatives and our exclusive agents.

Accident Insurance

We are the leading accident insurance provider in China. Our accident insurance gross written premiums totaled RMB 14,943 million (US$ 2,146 million) for the year ended December 31, 2019, RMB 14,672 million for the year ended December 31, 2018 and RMB 14,436 million for the year ended December 31, 2017, constituting 2.64%, 2.74% and 2.82% of our total gross written premiums for those periods. Gross written premiums generated by our accident insurance products for 2019 increased by 1.85% from 2018.

 

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The following table sets forth selected financial and other data regarding our accident insurance as of the dates or for the periods indicated. The financial results of both our long-term accident insurance and short-term accident insurance are reflected in the following table.

 

     As of or for the year ended December 31,      Compound
annual
growth rate
 
     2017      2018      2019      2019      (2017-2019)  
     RMB      RMB      RMB      US$         
     (in millions, except as otherwise indicated)  

Gross written premiums

     14,436        14,672        14,943        2,146        1.74

Liabilities of insurance contracts

     8,346        8,466        8,529        1,225        1.09

Products

We offer a broad array of accident insurance products to both individuals and groups.

Individual accident insurance

Individual accident insurance products provide a benefit in the event of death or disability of the insured as a result of an accident and, for certain products, a reimbursement of medical expenses to the insured in connection with an accident. Typically, a death benefit is paid if the insured dies as a result of the accident within 180 days of the accident, and a disability benefit is paid if the insured is disabled, with the benefit depending on the extent of the disability. Certain individual accident insurance products may also provide coverage if the insured receives medical treatment at a medical institution approved by us as a result of an accident. We offer a broad array of individual accident insurance products, such as insurance for students and infants against death and disability resulting from accidental injury and comprehensive coverage against accidental injury. We also offer products to individuals requiring special protection, such as accidental death and disability insurance for commercial air travel passengers and automobile passengers and drivers.

Group accident insurance

We offer a number of group accident insurance products and services to businesses, government agencies and other organizations of various sizes. We also offer group accident products targeted at specific groups, such as small-value group accident injury insurance to low-income people in rural areas.

Marketing and Distribution

We market our individual accident insurance products through our direct sales force and our exclusive agent sales force, as well as intermediaries, such as non-dedicated agencies located at outlets of commercial banks, savings cooperatives, travel agencies, hotels and airline sales counters and insurance agency and insurance brokerage companies. We market our group accident insurance products primarily through our direct sales representatives and the same intermediaries we use to sell our individual accident products. See “—Distribution Channels”.

We market our accident insurance products either as primary products, as riders or as supplementary products packaged with our life, annuity or health products. Our direct sales representatives market our individual accident products to employees of our institutional customers.

 

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Product Development

In 2019, in line with our general development strategy, we developed and introduced 102 new products, including: 38 long-term insurance products consisting of 12 life insurance products, nine annuity products, one accident insurance product and 16 health insurance products; and 64 short-term insurance products consisting of 11 life insurance products, 26 accident insurance products and 27 health insurance products.

With respect to long-term insurance products, we developed and introduced, among others:

 

   

for the individual insurance distribution channel, Xin Xiang Zhi Zun (celebration edition), Jin Xiu Qian Cheng, Xin Fu Lin Men and modified universal product Xin Zun Bao (Type A) for better meeting the demands of the customers; upgraded products of Kang Ning series, relaunch of the sale of Rui Xin series products and upgraded Bai Wan Ru Yi Xing product for promoting the development of protection-based products by enhancing the accidental injury protection function; universal endowment product Fu Lu Xiang Ban, which allows for refund of premiums paid upon policy maturity; upgraded China Life Luck series products; and participating endowment product Ru Yi Chuan Jia, which features both protection and savings;

 

   

for the bancassurance distribution channel, products including China Life Xin Ying Yi Sheng Whole Life Insurance, China Life Le An Xiang Ban Hospitalization Expense Reimbursement Supplementary Medical Insurance, China Life Xin Ji Bao Annuity Insurance, China Life Xin Yuan Bao Whole Life Insurance (universal) (Le Xin edition) and China Life Xin Fu Xiang Ying Pension Annuity Insurance;

 

   

for the group distribution channel, products including China Life Kang Hui Group Whole Life Critical Illness Insurance (exclusive edition), China Life Additional Hui Xiang Yi Sheng Disease-specific Insurance and China Life Sales Elite Group Pension Annuity Insurance (universal).

With respect to short-term insurance products, we developed products including, among others, Ru E Kang Yue Proton and Heavy Ion, China Life Additional Fu Pin Bao Group Medical Insurance with Defined Benefits for Illness Hospitalization, China Life Additional Fu Pin Bao Group Medical Insurance with Defined Benefits for Accidental Injury Hospitalization, Xi Yang Hong series, Xi Yang Bao series, “OBOR” series, China Life Group Disability Income Insurance for Professional Athletes, China Life Additional Xin Lv Zhou Expense Reimbursement Medical Insurance for Illness Hospitalization, China Life Additional Xin Lv Zhou Supplementary Medical Insurance for Illness Hospitalization, China Life Comprehensive Group Medical Insurance, Tong Tai Wu You series, China Life Da Ai Wu Jiang Disease-specific Group Insurance, China Life Fei An Bao Insurance for Specific Tumor Diseases, and China Life Additional Insurance for Overseas Treatment of Specific Diseases.

 

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Distribution Channels

We believe we have the largest distribution force with the most extensive geographic reach compared with any of our competitors. Our distribution network reaches almost every county in China. Throughout China, we have approximately 1,613,000 exclusive agents operating in approximately 16,000 field offices for our individual products and approximately 65,500 direct sales representatives for group products. We have a multi-channel distribution network selling individual and group insurance products through intermediaries, primarily non-dedicated agencies located in approximately 42,600 outlets of commercial banks as of the end of 2019. Commission rates vary by product, based on such factors as the payment terms and period over which the premiums are paid for the product, as well as CIRC regulations. We support our agents and representatives through training programs, sales materials and information technology systems.

Exclusive agent force

Our exclusive agent force of approximately 1,613,000 agents is the primary distribution channel for our individual life, annuity, health and accident insurance products.

The following table sets forth information relating to our exclusive agent force as of the dates indicated.

 

     As of December 31,  
     2017      2018      2019  

Number of exclusive agents (approximately)

     1,578,000        1,439,000        1,613,000  

Number of field offices (approximately)

     17,100        17,451        16,000  

Our exclusive agent force is among our most valuable assets, allowing us to more effectively control our distribution and build and maintain long-term relationships with our individual customers. The number of our exclusive agents increased from 1,439,000 as of the end of 2018 to 1,613,000 as of the end of 2019. During 2019, we continued to improve both the quantity and quality of our agent force, which has become an important driver of our business growth. See “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters—Regulation of Insurance Agencies, Insurance Brokers and Other Intermediaries” and “Item 3. Key Information—Risk Factors—Risks Relating to Our business—Our growth is dependent on our ability to attract and retain productive agents”. We believe that our customers and prospective customers prefer the personal approach of our exclusive agents and, therefore, we believe our exclusive agent force will continue to serve as our core distribution channel.

We also have developed a special sales force targeting “orphan policies” (policies which were serviced by former exclusive agents who have since left the company) to improve our service for these policies.

We supervise and provide training to our exclusive agents through more than 5,307 full-time trainers and 127,536 part time trainers. We set product management and customer service standards, and have developed sales risk warning and credit rating systems, which we require all of our field offices and agents to meet, and conduct field tests with a view to ensuring quality. We also have an extensive training program.

We compensate our exclusive agent force through a system of commissions and bonuses to reward performance. Our agents are compensated based on a commission rate that generally decreases over the premium period. For short-term insurance products, our exclusive agents are generally compensated with fixed agent fees. We provide group annuities, group commercial supplemental pension insurance, group life and medical insurance for our exclusive agents. We motivate our agents by rewarding them with performance-based bonuses and by organizing sales-related competitions among different field offices and sales units. We also try to increase the loyalty of our exclusive agents through other methods, such as through participation in sales conferences.

 

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We believe we have the largest exclusive agent sales force in China. We intend to improve the quality and productivity of our individual exclusive agent force and reduce the attrition rate of our agents by taking the following actions:

 

   

improving the overall productivity of our exclusive agents by implementing our market segmentation sales approach, managing, supporting and incentivizing the exclusive agents through different levels, and providing standardized sales services to our customers;

 

   

motivating our exclusive agents with an improved performance-based evaluation and compensation scheme;

 

   

building a more professional exclusive agent force by improving our education and training system and programs, enhancing our training efforts and increasing the number of qualified exclusive agents;

 

   

improving the quality of our exclusive agent force and reducing turnover by expanding our recruitment program and strengthening the cultivation, training and performance support for our new exclusive agents;

 

   

improving the productivity of our exclusive agent force by strengthening professional operation and standardized management; and

 

   

improving the capabilities of our exclusive agent force for customer service and self and team management by providing effective sales support, including establishing a customer service platform and improving and expanding the China Life E-Home sales support system.

Group distribution channel

Our group distribution channel is comprised of our direct sales force and intermediaries.

Direct sales force

Our direct sales force, which consists of approximately 65,500 direct sales representatives, is our primary distribution system for our group life insurance and annuities, group accident insurance and group health insurance products, as well as our individual accident insurance and individual short-term health insurance products. As of the end of 2019, the number of our direct sales representatives was 65,500, and, in particular, the number of direct sales representatives with high productivity reached 45,000. In 2019, we continued to improve the quality of the sales force by dismissing direct sales representatives with lower productivity, and further strengthened and improved our group distribution channel.

 

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We believe maintaining our leading position in the group insurance market depends on a professional and qualified direct sales force. We set product management and customer service standards which we require all of our branch offices and direct sales representatives to meet.

We motivate our direct sales representatives by rewarding them with performance-based bonuses and by organizing sales and services-related competitions among different branch offices and sales units.

Intermediaries

We also offer individual and group products through intermediaries.

We market group products through dedicated insurance agencies and insurance brokerage companies. Dedicated insurance agencies and insurance brokerage companies work with companies primarily to select group insurance providers and group products and services in return for commission fees. Currently, the market of dedicated insurance agencies and insurance brokerage companies in China generally remains underdeveloped. However, we expect that the dedicated insurance agencies and insurance brokerage companies will play a more important role in sales of our group products in the future.

We also sell short-term insurance products through other non-dedicated agencies. Currently, we have non-dedicated agencies operating at outlets of commercial banks, travel agencies, credit cooperatives, small loan companies and airline sales counters. We expect non-dedicated agencies to become an increasingly important distribution channel for individual products.

Bancassurance channel

We have bancassurance arrangements with major commercial banks in China, and currently generate a significant portion of our total sales through bancassurance. Our distribution channels are primarily comprised of non-dedicated agencies located in approximately 42,600 outlets of commercial banks. We have established strategic alliances with many banks. We intend to improve the attractiveness of our products by providing new products and all-around services to each major bank and providing training and integrated systems support to our banking partners.

Other distribution channels

During 2019, in response to regulatory requirements and our development strategy, we integrated our telephone sales channel with our exclusive agent force. We also continued to improve our Internet-based sales channel and increase the variety of products sold online. Our customers are able to purchase some of our life, health and accident insurance products through our Internet-based channel. We have continued to optimize online services and improve user experience, supporting our other distribution channels through our Internet-based distribution channel.

 

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Gross written premiums attributable to each distribution channel

The following table sets forth gross written premiums attributable to each distribution channel, as of the dates indicated.

 

     For the year ended December 31,  
     2017      2018      2019      2019  
     RMB      RMB      RMB      US$  
     (in millions)  

Exclusive agent force

     353,668        408,278        436,621        62,717  

First-year business of long-term insurance

     90,629        79,513        84,142        12,086  

First-year regular

     90,240        79,241        83,865        12,046  

Single

     389        272        277        40  

Renewal business

     253,586        316,930        336,676        48,361  

Short-term insurance business

     9,453        11,835        15,803        2,270  

Group distribution channel

     26,207        26,404        28,846        4,143  

First-year business of long-term insurance

     4,368        3,487        3,018        433  

First-year regular

     943        1,004        968        139  

Single

     3,425        2,483        2,050        294  

Renewal business

     999        1,649        1,995        287  

Short-term insurance business

     20,840        21,268        23,833        3,423  

Bancassurance channel

     113,505        76,841        70,060        10,063  

First-year business of long-term insurance

     80,731        31,881        23,851        3,426  

First-year regular

     20,954        23,239        23,820        3,422  

Single

     59,777        8,642        31        4  

Renewal business

     31,880        43,785        44,623        6,409  

Short-term insurance business

     894        1,175        1,586        228  

Other distribution channels

     18,586        24,303        31,559        4,534  

First-year business of long-term insurance

     1,064        937        763        110  

First-year regular

     984        935        763        110  

Single

     80        2        —          —    

Renewal business

     1,641        2,314        2,503        360  

Short-term insurance business

     15,881        21,052        28,293        4,064  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     511,966        535,826        567,086        81,457  
  

 

 

    

 

 

    

 

 

    

 

 

 

Competition

According to statistical and market share information derived from China Insurance Yearbook, in 2018, the last year for which the market information for each individual insurance company and separate business segments is available, our nearest competitors were Ping An Life, China Pacific Life, Huaxia Life and Taiping Life.

 

   

In the life insurance market, Ping An Life, China Pacific Life, Huaxia Life, Taiping Life, and we collectively represented approximately 54.8% of total life insurance premiums in 2018. We primarily compete based on the nationwide reach of our sales network, our large distribution force and the level of services we provide, as well as our strong brand name.

 

   

In the accident insurance market, Ping An Life, China Pacific Life, Huaxia Life, Taiping Life, and we collectively represented approximately 63.0% of total accident premiums in 2018. We primarily compete based on the nationwide reach of our sales network and the level of services we provide and our strong brand name, as well as our cooperative arrangements with other companies and institutions.

 

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In the health insurance market, Ping An Life, China Pacific Life, Huaxia Life, Taiping Life, and we collectively represented approximately 56.2% of total health premiums in 2018. We primarily compete based on the nationwide reach of our sales network, the level of services we provide, our multi-layered managed care scheme and systems of policy review and claim management, as well as our strong brand name.

The following table sets forth market share information for the year ended December 31, 2018, the most recent year for which official market information for separate business segments is available, in all segments of the life insurance market in which we do business.

 

     Life
premiums
market share
    Accident
premiums
market share
    Health
premiums
market share
    Total
premiums
market share
 

China Life

     20.8     22.3     17.2     20.4

Ping An Life Insurance Company of China, Ltd. (1)

     15.5     27.0     21.2     17.0

China Pacific Life Insurance Co., Ltd.

     7.3     9.2     8.6     7.7

Huaxia Life Insurance Co., Ltd.

     6.8     1.2     3.1     6.0

Taiping Life Insurance Co., Ltd

     4.4     3.4     6.1     4.7

Others(2)

     45.2     37.0     43.8     44.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

For purposes of this annual report, the statistics for Ping An Life Insurance Company of China, Ltd. do not include those of Ping An Health Insurance Company of China, Ltd. and Ping An Annuity Insurance Company of China, Ltd.

(2)

Others include: PICC Life Insurance Co., Ltd., PICC Health Insurance Co., Ltd., Taiping Pension Co., Ltd., Minsheng Life Insurance Co., Ltd., CPIC Allianz Health Insurance Co., Ltd., Ping An Annuity Insurance Company of China, Ltd., Ping An Health Insurance Company of China, Ltd., China United Life Insurance Co., Ltd., Sunshine Life Insurance Corporation Limited, Taikang Life Insurance Co., Ltd., Taikang Pension & Insurance Co., Ltd., New China Life Insurance Co., Ltd., Huatai Life Insurance Co., Ltd., Tianan Life Insurance Company Limited of China, Funde Sino Life Insurance Co., Ltd., Anbang Life Insurance Co., Ltd., Anbang Annuity Insurance Co., Ltd., Hexie Health Insurance Co., Ltd., Union Life Insurance Co., Ltd., Greatwall Life Insurance Co., Ltd., ABC Life Insurance Co., Ltd., Kunlun Health Insurance Co., Ltd., June Life Insurance Co., Ltd., Sinatay Life Insurance Co., Ltd., Yingda Taihe Life Insurance Co., Ltd., Guohua Life Insurance Co., Ltd., Happy Life Insurance Co., Ltd., Aeon Life Insurance Co., Ltd., China Post Life Insurance Co., Ltd., Zhongrong Life Insurance Co., Ltd., Lian Life Insurance Co., Ltd., Sino-Conflux Insurance Company, Qian Hai Life Insurance Co., Ltd., Soochow Life Insurance Co., Ltd., Hongkang Life Insurance Co., Ltd., Pearl River Life Insurance Co., Ltd., Jixiang Life Insurance Company Limited, Bohai Life Insurance Corporation Limited, Guolian Insurance Co., Ltd., Shanghai Life Insurance Company Limited, Hengqin Life Insurance Co., Ltd., Fosun United Health Insurance Co., Ltd., Hetai Life Insurance Co., Ltd., Huagui Life Insurance Co., Ltd., Trust Mutual Life Insurance Company, Aixin Life Insurance Co., Ltd., China Merchants Life Insurance Company Limited, China Three Gorges Life Insurance Co., Ltd., Beijing Life Insurance Co., Ltd., Guobao Life Insurance Co., Ltd., Ruihua Health Assurance Corporation, Haibao Life Insurance Co., Ltd., Guofu Life Insurance Co., Ltd., Manulife-Sinochem Life Insurance Co., Ltd., CCB Life Insurance Company Limited, Allianz China Life Insurance Co., Ltd., ICBC-AXA Assurance Co., Ltd., BoComm Life Insurance Co., Ltd., Citic-Prudential Life Insurance Co., Ltd., Generali China Life Insurance Co., Ltd., Sun Life Everbright Life Insurance Co., Ltd., ING-BOB Life Insurance Co., Ltd., Founder Meiji Yasuda Life Insurance Co., Ltd., Aviva-COFCO Life Insurance Co., Ltd., Aegon THTF Life Insurance Co., Ltd., CIGNA – CMB Life Insurance Co., Ltd., Greatwall Changsheng Life Insurance Co., Ltd., Heng An Standard Life Insurance Co., Ltd., Skandia-BSM Life Insurance Co., Ltd., Sino-US United MetLife Insurance Company Ltd., Cathay Lujiazui Life Insurance Co., Ltd., BOC Samsung Life Insurance Co., Ltd., Sino-French Life Insurance Co., Ltd., Evergrand Life Assurance Co., Ltd., King Dragon Life Insurance Co., Ltd., HSBC Life Insurance Co., Ltd., Shin Kong – HNA Life Insurance Co., Ltd., Pramerica Fosun Life Insurance Co., Ltd., Sino-Korea Life Insurance Co., Ltd., ERGO China Life Insurance Co., Ltd. and American International Assurance Co., Ltd. (China).

Source: China Insurance Yearbook 2019

 

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We face competition not only from domestic life insurance companies, but also from non-life insurance companies and foreign-invested life insurers. There were 85 licensed life insurers as of December 31, 2017 and 91 as of December 31, 2018. Property and casualty insurers were allowed to sell accident and short-term health insurance products with regulatory approval starting from January 2003, which we believe will lead to greater competition in the accident and health insurance sectors, especially in the group accident and group health insurance products. In addition, we believe that China’s commitment to accelerate the opening of its insurance sector to foreign investors, including the relaxation on market access requirements applicable to foreign-invested insurance companies and foreign ownership limits in its insurance sector, will further increase competition in China’s life insurance market. In 2018, China increased the limit on foreign ownership in Chinese life insurance companies to 51% and on December 6, 2019, CBIRC announced that starting from January 1, 2020, foreign investors will be allowed to own 100% in Chinese life insurers. We believe that the relaxation of the restrictions on foreign-invested insurers will continue to increase the competitive pressures we are facing.

See “Item 3. Key Information—Risk Factors—Risks Relating to the PRC Life Insurance Industry—We expect competition in the Chinese insurance industry to increase, which may materially and adversely affect the growth of our business”.

We also face increasing competition from other financial services providers, primarily licensed mutual fund companies, commercial banks providing personal banking services and operating business of various financial products, trust companies and brokerage houses licensed to manage separate accounts. These financial services providers may be permitted to manage employer-sponsored defined contribution pension plans, which we believe will compete directly with our group annuity products. We also face competition in the sale of our traditional life insurance savings policies, individual participating policies and annuities from financial institutions which offer investment products to the public.

Business Management

Customer Support Management

We seek to provide quality services to our customers and potential customers and to be responsive to their needs, both before and after a sale, through an extensive customer support network. Our customer service network is managed by specialized customer service departments, which are responsible for setting uniform standards and procedures for providing policy-related services to customers, handling inquiries and complaints from customers and training customer services personnel.

We deliver customer services primarily through customer service centers and customer contact centers operating in our branch offices and in field offices throughout China. We have upgraded our telephone call center to a multimedia coordination center that allows customers to access our various service channels, including our dedicated customer service line “95519”, official WeChat account, official website and China Life Insurance application. We take advantage of alternative customer services channels, such as online electronic notification, cell phone messages and online smart robots, complementing the customer services provided by our customer service centers and customer contact centers.

Customer service centers

We provide comprehensive insurance service to customers through approximately 2,600 customer service centers nationwide. Our customer service centers provide several types of policy-related services to our customers, including policy administration and claims settlement. We apply AI technology to our customer service and use technology products such as Smart Teller Machines, Intelligent Robot at Counter, China Life Electronic Counter, Intelligent Appointment and China Life Insurance App, to simplify service process and improve service efficiency. We have uniform service standards for customer service centers nationwide and require our customer service centers to provide these policy related services in accordance with the uniform standards to ensure the high quality of the services we provide. In 2019, we received the award of “Enterprise with Outstanding Contribution for Improving the Service Quality of China Insurance Industry” from the China Association for Quality Promotion for the tenth time. Many of our customer service centers won the title of “Customer Satisfaction AAA Unit”.

 

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Customer contact centers

Our customer contact centers allow customers to make product and service inquiries, file suggestions and complaints, report claims and losses, make appointments and apply for conservations through telephone and Internet channels. Our customer contact centers also allow the customers to access online self-services through a smart voice navigation system, an interactive voice response system and intelligent online robots. They also provide follow-up review of policies, notifications and reminder services to customers. With our dedicated customer service line “95519”, our customers can reach us on a “24 hours/7 days” basis. We have also built an integrated financial service ecology. Through our dedicated customer line “95519”, in addition to access to our service, customers are also able to access other financial services provided by CLPCIC, China Life Pension, CGB, AMP and China Life Insurance Overseas.

We believe our customer contact centers have become popular with our customers because of the quality of services we provide and our continuous efforts in innovation. We received the awards of “China’s Best Customer Contact Center of Year 2018-2019” and “China’s Best Customer Contact Center for Operation and Management” from the Customer Relationship Management Committee of the China Federation of IT Promotion and Customer Contact Center Committee. We also received the “Best Call Centers in the World” award from the International Customer Management Institute in 2007, 2011 and 2015, respectively. We will use new technology and new services to innovate and continue to promote the intelligent and digital transformation and upgrading of our customer contact centers. We seek to ensure that we have a sufficient number of lines and staff to service the increasing use of our customer contact centers.

We have established system-wide standards for our customer contact centers, which we monitor periodically through regular quality monitoring and customer satisfaction surveys on the contact centers.

Notification services

We send cellphone messages and online notifications to convey such information as renewal payment reminders, notice of successful premium payment and birthday greetings.

Internet-based services

Our customers can access our various service guides through our website (www.e-chinalife.com). We also use emails to send messages to our customers throughout China, conveying such information as renewal payment reminders.

 

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Our Internet-based services are offered through our China Life Insurance App (formerly China Life E Bao) and official WeChat account. During 2019, the number of registered users of our online channels increased by 24.92% from 2018, and 99.56% of policy loans and 95.69% of the receipt of policies were handled online including through our China Life Insurance application and official WeChat account.

Supplementary services

To allow our customers to benefit from superior service and enhance their service experience, we provide several types of supplementary services while continuing to provide quality basic insurance services.

To meet the demand of different customer groups, we have launched four service programs, namely “Excellent Teenagers”, “Healthy Family”, “Financial Elite” and “Colorful Life”. In 2019, we continued to hold the “Little Painters of China Life” and “China Life 700 Running” activities and also organized a series of online and offline customer festival activities. In 2019, we carried out over 32,000 activities and served 40.28 million customers.

Underwriting and Pricing

Our individual and group insurance underwriting involves the evaluation of applications for life, accident and health insurance products by a professional staff of underwriters and actuaries, who determine the type and the amount of risk that we are willing to accept. We have established qualification requirements and review procedures for our underwriting professionals. We employ detailed underwriting policies, guidelines and procedures designed to assist our underwriters to assess and quantify risks before issuing a policy to qualified applicants.

We generally evaluate the risk characteristics of each prospective insured. Requests for coverage are reviewed on their merits, and a policy is not issued unless the particular risk or risk portfolio has been examined and approved for underwriting.

We have different authorization limits and procedures depending on the amount of the claim. We also have authorization limits for personnel depending on their qualifications.

In order to maintain high standards of underwriting quality and consistency, we engage in periodic internal underwriting audits.

Individual and group product pricing reflects our insurance underwriting standards. Product pricing on insurance products is based on the expected payout of benefits, calculated through the use of mortality table, morbidity, expenses and investment returns. Those assumptions and other assumptions for calculating expected profit margin are based on our own experience, third party consultation, the experience of reinsurance companies and published data from other institutions. For more information on regulation of insurance products, see “—Regulatory and Related Matters—Insurance Company Regulation”.

We primarily offer products denominated in Renminbi.

 

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Claims Management

We manage the claims from policyholders through our claims verification staff at our headquarters and branch offices. Typically, upon receiving a claim, a staff person will make a preliminary verification if all materials supporting the claim have been submitted; if so, the claim and its materials will be forwarded to the claim settlement department to confirm liability and to determine whether a claim investigation is needed. Upon confirming the validity of the claim and insurance liability, the amount payable to the insured will be calculated, and the claim will be paid upon completion of approval procedure. Meanwhile, in order to improve the operational efficiency of claims for small-sum medical insurance with low risks, we have built an automatic operation mode to automatically handle the entire process after the acceptance of the claim.

We manage claims management risk through organizational controls and computer systems controls. Our organizational controls include specific limits on authorization for branches at different levels; periodic case inspection and special inspections in particular situations by risk management departments at all levels of our organization; and expense mechanisms linking payout ratios of short-term insurance policies and expense ratios of branches. Except for some health insurance claims below a certain amount, verification of claims by two staff members is also required. We also periodically provide training for our claims verification personnel and conduct appraisals of their performance. Our claims management is strictly processed with computers to streamline claims verification and handling.

Reinsurance

We have entered into various reinsurance agreements with China Life Reinsurance Company Ltd., or China Life Re, formerly known as China Reinsurance Company, for the reinsurance of individual risks and group risks. In general, individual and group risks are primarily reinsured either on a surplus basis, whereby we are reinsured for risks above a specified amount, or on a quota share basis. Under our reinsurance policy, the specified amount above which the risks are reinsured varies among different types of insurance products. In general, our reinsurance agreements with China Life Re do not have a definite term, but may be terminated with respect to new business thereunder by either party on a date agreed by both parties with three to six months’ notice.

We have also entered into reinsurance agreements separately with other reinsurance companies including the Beijing branch of Munich Reinsurance Company, the Beijing Branch of SCOR, the Shanghai branch of Reinsurance Group of America, the Beijing branch of Swiss Reinsurance Company Limited, the Shanghai branch of Hannover Re, the Shanghai branch of General Re Corporation and Aetna Life & Casualty (Bermuda) Ltd.

In June 2019, we renewed our catastrophe reinsurance in order to reduce our catastrophe exposure.

These reinsurance agreements spread the risk and reduce the effect on us of potential losses. Under the terms of the reinsurance agreements, the reinsurer agrees to assume liabilities for the ceded business in the event the claim is paid. However, we remain liable to our policyholders if the reinsurer fails to meet the obligations assumed by it.

We also accept external auditing of reinsured business by our reinsurers.

 

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Investments

As of December 31, 2019, we had RMB 3,573,154 million (US$ 513,251 million) of investment assets. As provided by China’s insurance laws and regulations, we may invest insurance premiums and other insurance funds in five categories of investment assets, including liquidity assets, fixed income assets, equity assets, real properties and other financial assets, all as defined by the CBIRC and subject to various limitations. Each category of investment assets is also divided into domestic assets and overseas assets. See “—Regulatory and Related Matters—Insurance Company Regulation—Regulation of investments”. As of December 31, 2019, we have invested our insurance premiums and other insurance funds in term deposits, debt securities, loans, securities investment funds, stocks, resale agreements, investment properties, investments in associates and joint ventures, equity interests of non-listed enterprises and related financial products.

We direct and monitor our investment activities through the application of our strategic asset allocation plan, annual asset allocation plan, investment guidelines and a series of investment management systems, which include: (1) performance goals for the investment fund; (2) specified asset allocations and investment scope based on regulatory provisions, level of indebtedness and market forecasts; (3) specified investment duration and asset-liability matching requirements based on asset-liability matching strategies; (4) specified authorization levels required for approval of significant investment projects; and (5) specified risk management policies and prohibitions. These are subject to review and approval by the board of directors, and, in particular, the strategic asset allocation plan and annual asset allocation plan are subject to review and approval by the board of directors annually. The board of directors may delegate and authorize our management to review and approve investment guidelines and some investment management systems.

Investment proposals typically originate from our investment management department, which is in charge of all of our investment assets except for investment in real properties used by us, which is separately managed by our own-use real property investment management department. Material investment decisions are reviewed and approved by our board of directors or shareholder’s meeting and other investment proposals are reviewed by our president and senior management for final approval.

AMC, the asset management company that we established with CLIC, manages a substantial part of our Renminbi investments and, separately, substantially all of the investments retained by CLIC. See “—Asset Management Business”. IHC, a wholly owned subsidiary of CLIC, also manages our investments in unlisted equity interests, real estate and related financial products and securitization financial products. Other related parties are also entrusted to manage a small amount of our assets. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions”. In addition, as of December 31, 2019, we had also engaged 22 third party domestic investment managers to manage RMB 96,257 million (US$ 13,826 million) for investment in Chinese public markets and 10 third party overseas investment managers to manage US$ 1,363 million for investment in overseas public markets.

 

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The following table summarizes information concerning our investment assets as of December 31, 2017, 2018 and 2019.

 

     As of December 31,  
     2017     2018     2019  
     Carrying
value
     % of
total
    Carrying
value
     % of
total
    Carrying
value
     % of
total
 
     (RMB in millions, except as otherwise indicated)  

Cash and cash equivalents

     48,586        1.8     50,809        1.6     53,306        1.5

Term deposits

     449,400        16.3     559,341        18.0     535,260        15.0

Statutory deposits—restricted

     6,333        0.2     6,333        0.2     6,333        0.2

Debt securities, held-to-maturity

     717,037        26.1     806,717        26.1     928,751        26.0

Debt securities, available-for-sale

     455,124        16.5     496,590        16.0     509,791        14.3

Debt securities, securities at fair value through profit or loss

     82,891        3.0     88,003        2.8     85,206        2.4

Debt securities

     1,255,052        45.6     1,391,310        44.9     1,523,748        42.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Loans

     383,504        13.9     450,251        14.5     608,920        17.0

Equity securities, available for sale

     355,610        12.9     373,943        12.1     549,166        15.4

Equity securities, securities at fair value through profit or loss

     53,918        2.0     50,714        1.6     56,402        1.6

Equity securities

     409,528        14.9     424,657        13.7     605,568        17.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Derivative financial assets

     —          —         —          —         428        0.0

Resale agreements

     36,185        1.3     9,905        0.3     4,467        0.1

Investment properties

     3,064        0.1     9,747        0.3     12,141        0.3

Investments in associates and joint ventures

     161,472        5.9     201,661        6.5     222,983        6.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total investment assets

     2,753,124        100.0     3,104,014        100.0     3,573,154        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Average investment assets balance

     2,633,087          2,928,569          3,338,584     

Risk management

Our primary investment objective is to pursue optimal investment yields while considering macroeconomic factors, risk control and regulatory requirements. We are exposed to five primary sources of investment risk:

 

   

interest rate risk, relating to the market price and cash flow variability associated with changes in interest rates;

 

   

credit risk, relating to the uncertainty associated with the continued ability of a given obligor to make timely payments of principal and interest;

 

   

market valuation risk, relating to the changes in market value for our investments, particularly our securities investment fund holdings and shares listed on the Chinese securities exchanges, which are denominated and traded in Renminbi;

 

   

liquidity risk, relating to the lack of liquidity in many of the debt and equity securities markets we invest in, due to contractual restrictions on transfer or the size of our investments in relation to the overall market; and

 

   

currency exchange risk, relating to the impact of changes in the value of the Renminbi against the U.S. dollar and other currencies on the value of our investments.

 

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Our investment assets are principally comprised of fixed income securities and term deposits, and therefore changes in interest rates have a significant impact on the rate of our investment return. We manage interest rate risk through adjustments to our portfolio mix and terms, and by managing, to the extent possible, the average duration and maturity of our assets and liabilities. However, because of the general lack of long-term fixed income securities in the Chinese financial markets, the duration of some of our assets is lower than our liabilities. We believe that with the development of China’s financial markets and the gradual easing of our investment restrictions, our ability to match our assets to our liabilities will improve. Although we have been approved to enter into interest rate swaps, it is still not an effective means for us to hedge our interest rate risk as the Chinese interest rate swap market is still in the early stages of development.

We believe we have a relatively low credit risk, because we mainly invest in fixed income products with high credit ratings. We monitor our credit risk through in-house fundamental analysis of the Chinese economy and the underlying obligors and transaction structures.

We are subject to market valuation risk, particularly because China’s bond and stock markets are more volatile than developed markets. We manage valuation risk through industry and issuer diversification and asset allocation.

Since substantially all of our investments are made in China, we are exposed to the effect of changes in the Chinese economy and other factors which affect the Chinese banking industry and securities markets.

We are also subject to market liquidity risk for many of the investments we make, due to the size of our investments in relation to the overall market. We manage liquidity risk through selection of liquid assets and through asset diversification. In addition, we view fundraising through repurchase agreements as a way of managing our short-term liquidity risk.

Our ability to manage our investment risks is limited by the investment restrictions placed on us and the lack of sophisticated investment vehicles for risk management in China’s capital markets. The CBIRC allows insurance companies to invest in financial derivative products with the aim to hedge and reduce investment risks. We are considering these alternative ways of investing to further improve our risk management.

Our assets held in foreign currencies are subject to foreign exchange risks resulting from the fluctuations of the value of the Renminbi against the U.S. dollar and other foreign currencies. As we are approved by the CIRC to invest our assets held in foreign currencies in overseas financial markets, the return from overseas investments could, to a certain extent, reduce the foreign exchange risks we are exposed to.

For further information on our management of interest rate risk and market valuation risk, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk”.

 

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Investment results

Our investment yields for the years ended December 31, 2019, 2018 and 2017 were 5.24%, 3.29%, and 5.16%, respectively. Beginning in 2018, we revised the formula to calculate our investment yield to consider the impact of investments in associates and joint ventures on our investment yield. The investment yield for the fiscal years ended December 31, 2017 has also been revised to conform to the revised formula.

The following table sets forth the yields on average assets for each major component of our investment portfolios for the periods indicated.

 

     As of or for the years ended December 31,  
     2017     2018     2019  
     Yield (1)     Amount     Yield (1)     Amount     Yield (1)     Amount  
     (RMB in millions, except as otherwise indicated)  

Cash, cash equivalents, statutory deposits and term deposits:

 

       

Investment income

     4.3     23,827       4.1     22,699       4.4     26,695  

Ending assets: cash and cash equivalents

       48,586         50,809         53,306  

Ending assets: statutory deposits—restricted

       6,333         6,333         6,333  

Ending assets: term deposits

       449,400         559,341         535,260  
    

 

 

     

 

 

     

 

 

 

Ending assets

       504,319         616,483         594,899  

Debt securities:

            

Investment income

       53,895         61,517         63,148  

Net realized gains on financial assets

       (123       357         (35

Net fair value gains through profit or loss

       (1,542       2,006         778  
    

 

 

     

 

 

     

 

 

 

Total

     4.3     52,230       4.8     63,880       4.4     63,891  

Ending assets

       1,255,052         1,391,310         1,523,748  

Loans:

            

Investment income

     5.4     16,320       5.5     22,894       5.1     27,111  

Ending assets

       383,504         450,251         608,920  

Equity securities:

            

Investment income

       27,939         17,776         22,804  

Net realized gains on financial assets

       165         (19,948       1,866  

Net fair value gains through profit or loss

       8,179         (18,938       18,279  
    

 

 

     

 

 

     

 

 

 

Total

     8.7     36,283       (5.1 %)      (21,110     8.3     42,949  

Ending assets

       409,528         424,657         605,568  

Resale agreements:

            

Investment income

     1.9     746       1.2     281       2.2     161  

Ending assets

       36,185         9,905         4,467  

Investments properties:

            

Income of investments properties

     3.2     69       1.6     105       0.3     31  

Ending assets

       3,064         9,747         12,141  

Investments in associates and joint ventures:

            

Net gains on investments of associates and joint ventures

     5.1     7,143       4.3     7,745       3.8     8,011  

Ending assets

       161,472         201,661         222,983  

Securities sold under agreements to repurchase:

            

Interest expense

     (3.7 %)      (3,144     (2.6 %)      (3,565     (1.5 %)      (2,392

Ending liabilities

       87,309         192,141         118,088  

Total investments:

            

Investment income

       122,727         125,167         139,919  

Net realized gains on financial assets

       42         (19,591       1,831  

Net fair value gains through profit or loss

       6,183         (18,278       19,251  

Income of Investments properties

       69         105         31  

Net gains on investments of associates and joint ventures

       7,143         7,745         8,011  

Interest expense of securities sold under agreements to repurchase

       (3,144       (3,565       (2,392

Total

     5.16     133,020       3.29     91,583       5.24     166,651  

Ending assets excluding securities sold under agreements to repurchase

       2,665,815         2,911,873         3,455,066  

 

(1)

Yields for 2019, 2018 and 2017 are calculated by dividing the gross investment income for that year by the average of the ending balances of that year and the previous year.

 

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Term deposits

Term deposits consist principally of term deposits with Chinese commercial banking institutions and represented 15.0% of our total investment assets as of December 31, 2019, 18.0% of our total investment assets as of December 31, 2018 and 16.3% of our total investment assets as of December 31, 2017.

We generally place term deposits with state-owned commercial banks and large joint stock commercial banks. The terms of the term deposits vary. They typically allow us to renegotiate terms with the banks upon prepayment, including the methods for the calculation of accrued interest, if any. We make large term deposits to obtain higher yields than can ordinarily be obtained with regular deposits.

The following table sets forth term deposits by contractual maturity dates, as of the dates indicated.

 

     As of December 31,  
     2017      2018      2019  
     Amortized
cost
     Amortized
cost
     Amortized
cost
 
     (RMB in millions)  

Due in one year or less

     97,076        158,920        107,039  

Due after one year and through five years

     349,524        323,021        420,191  

Due after five years and through ten years

     2,800        77,400        8,030  
  

 

 

    

 

 

    

 

 

 

Total term deposits

     449,400        559,341        535,260  
  

 

 

    

 

 

    

 

 

 

The following table sets forth term deposits outstanding to Chinese banking institutions as of the dates indicated.

 

     As of December 31,  
     2017      2018      2019  
     Amortized
cost
     Amortized
cost
     Amortized
cost
 
     (RMB in millions)  

Industrial & Commercial Bank of China

     10,819        5,378        3,205  

Agriculture Bank of China

     50,819        42,264        49,089  

Bank of China

     43,625        40,000        40,000  

China Construction Bank

     26,070        25,200        5,200  

Bank of Communications

     132,922        200,534        135,950  

Other banks

     185,145        245,965        301,816  
  

 

 

    

 

 

    

 

 

 

Total term deposits

     449,400        559,341        535,260  
  

 

 

    

 

 

    

 

 

 

 

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Debt securities

Debt securities in which we are permitted to invest mainly consist of the following categories:

 

   

Chinese government bonds;

 

   

government agency bonds (including local government bonds issued and repaid by the MOF as agent, central bank notes, financial bonds issued by Chinese state-owned policy banks and RMB-denominated bonds issued by international development institutions);

 

   

corporate bonds (including financial bonds issued by commercial banks, corporate bonds, convertible corporate bonds, short-term financing bonds and medium-term notes);

 

   

subordinated bonds and debt (including subordinated bonds issued by Chinese state-owned policy banks, subordinated bonds issued by commercial banks, subordinated debt with fixed terms issued by commercial banks and subordinated debt with fixed terms issued by insurance companies); and

 

   

tier 2 capital bonds and perpetual capital bonds (including tier 2 capital bonds and perpetual capital bonds issued by Chinese state-owned policy banks, and tier 2 capital bonds and perpetual capital bonds issued by qualified commercial banks).

Debt securities represented 42.7% of our total investment assets as of December 31, 2019, 44.9% of our total investment assets as of December 31, 2018 and 45.6% of our total investment assets as of December 31, 2017.

Based on estimated fair value, Chinese government bonds, Chinese government agency bonds, corporate bonds, subordinated bonds and debt and other debt securities comprised 4.7%, 33.6%, 29.1%, 10.6% and 22.0% of our total available-for-sale debt securities as of December 31, 2019, 5.7%, 36.3%,37.5%,4.3% and 16.2% of our total available-for-sale debt securities as of December 31, 2018 and 5.4%, 34.7%, 43.3%, 3.0% and 13.6% of our total available-for-sale debt securities as of December 31, 2017. Except for a small number of debt securities, which collectively had a carrying value of RMB 41,650 million (US$ 5,983 million) as of December 31, 2019, most of our debt securities are traded on security exchanges or in the unlisted interbank market in China.

We mainly invest in secured bonds and unsecured bonds rated AA or above by the rating agencies recognized by the CBIRC, such as China Chengxin International Credit Rating Co., Ltd., or Chengxin International, and China Lianhe Credit Rating Co., Ltd., or Lianhe Credit. We also invest in short-term financing bonds rated A-2 or above.

Chengxin International is a member of Moody’s Investors Service Inc., with Moody’s owning 30% equity interest in Chengxin International. Chengxin International created its own rating structures by making reference to the rating structures and experience of Moody’s and Fitch Ratings. AAA is the highest rating. Other approved rating agencies, such as Lianhe Credit, have similar rating structures. Ratings given by these entities are not directly comparable to ratings given by U.S. rating agencies.

 

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The following table sets forth the amortized cost and estimated fair value of debt securities, as of the dates indicated.

 

     As of December 31,  
     2017     2018     2019  
     Amortized
cost
     % of
total
    Estimated
fair value
     % of
total
    Amortized
cost
     % of
total
    Estimated
fair value
     % of
total
    Amortized
cost
     % of
total
    Estimated
fair value
     % of
total
 
     (RMB in millions)  

Debt securities, available-for-sale:

 

                      

Government bonds

     24,818        2.0     24,632        2.0     26,759        1.9     28,440        2.0     22,500        1.5     23,758        1.5

Government agency bonds

     164,331        13.0     157,765        12.8     172,250        12.5     180,273        12.6     163,678        10.9     171,189        10.9

Corporate bonds

     199,613        15.7     197,133        16.1     181,178        13.2     185,720        13.1     145,033        9.6     148,455        9.5

Subordinated bonds/debt

     13,588        1.1     13,495        1.1     20,953        1.5     21,514        1.5     53,062        3.5     53,922        3.4

Others

     62,651        4.9     62,099        5.0     78,136        5.8     80,643        5.6     109,729        7.3     112,467        7.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities, available-for-sale

     465,001        36.7     455,124        37.0     479,276        34.9     496,590        34.8     494,002        32.8     509,791        32.6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Debt securities, held to maturity:

                              

Government bonds

     125,866        9.9     123,712        10.0     179,943        13.1     191,009        13.4     215,928        14.3     228,198        14.6

Government agency bonds

     241,808        19.1     223,313        18.2     266,986        19.4     276,484        19.3     401,799        26.6     415,013        26.6

Corporate bonds

     200,869        15.9     196,536        16.0     212,709        15.5     220,267        15.4     198,322        13.2     206,793        13.2

Subordinated bonds/debt

     148,494        11.7     149,423        12.1     147,079        10.7     155,783        10.9     112,702        7.5     118,571        7.6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities, held to maturity

     717,037        56.6     692,984        56.3     806,717        58.7     843,543        59.0     928,751        61.6     968,575        62.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Debt securities, securities at fair value through profit or loss

                              

Government bonds

     2,139        0.2     2,081        0.2     118        0.0     118        0.0     41        0.0     41        0.0

Government agency bonds

     9,463        0.7     9,084        0.7     6,639        0.5     6,760        0.5     6,829        0.5     6,859        0.4

Corporate bonds

     68,401        5.4     66,915        5.4     79,390        5.8     79,774        5.6     76,395        5.0     77,215        4.9

Others

     4,819        0.4     4,811        0.4     1,346        0.1     1,351        0.1     1,083        0.1     1,091        0.1

Total debt securities, securities at fair value through profit or loss

     84,822        6.7     82,891        6.7     87,493        6.4     88,003        6.2     84,348        5.6     85,206        5.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total debt securities

     1,266,860        100.0     1,230,999        100.0     1,373,486        100.0     1,428,136        100.0     1,507,101        100.0     1,563,572        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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The following table shows the amortized cost and estimated fair value of debt securities excluding securities at fair value through profit or loss by contractual maturity dates, as of the dates indicated.

 

     As of December 31,  
     2017      2018      2019  
     Amortized
cost
     Estimated
fair value
     Amortized
cost
     Estimated
fair value
     Amortized
cost
     Estimated
fair value
 
     (RMB in millions)  

Due in one year or less

     64,919        64,884        28,371        28,529        51,097        50,715  

Due after one year and through five years

     268,090        265,832        304,467        313,067        279,248        288,711  

Due after five years and through ten years

     460,372        452,122        485,722        506,005        457,940        478,297  

Due after ten years

     388,657        365,270        467,433        492,532        634,468        660,643  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities, excluding those at fair value through profit or loss

     1,182,038        1,148,108        1,285,993        1,340,133        1,422,753        1,478,366  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our investments in debt securities are subject to strict restrictions under relevant Chinese regulation. See “—Regulatory and Related Matters—Regulation of investments”. We diversify our corporate bonds by industry and issuer to effectively manage and control concentration risks. As of the date of this annual report, we believe that our corporate bond portfolio does not have significant exposure to a single industry or issuer.

Loans

We offer interest-bearing policy loans to our policyholders, who may borrow from us in amounts up to the total cash values of their policies. In general, the loans are secured by the policyholders’ rights under the policies. As of December 31, 2019, the total amount of our policy loans was RMB 174,872 million (US$ 25,119 million), and represented 4.89% of our total investment assets as of that date.

In addition to policy loans, our other loans mainly consist of our investment in debt investment plans and trust schemes. As of and for the year ended December 31, 2017, the total amount of our investment in debt investment plans was RMB 73,668 million, and we had total investment proceeds from such plans of approximately RMB 3,605 million. As of and for the year ended December 31, 2018, the total amount of our investment in debt investment plans was RMB 75,717 million, and we had total investment proceeds from such plans of approximately RMB 4,295 million. As of and for the year ended December 31, 2019, the total amount of our investment in debt investment plans was RMB 83,924 million (US$ 12,055 million), and we had total investment proceeds from such plans of approximately RMB 4,489 million (US$ 645 million). As of and for the year ended December 31, 2017, the total amount of our investment in trust schemes was RMB 163,764 million, and we had total investment proceeds from such schemes of approximately RMB 6,343 million. As of and for the year ended December 31, 2018, the total amount of our investment in trust schemes was RMB 185,105 million, and we had total investment proceeds from such schemes of approximately RMB 9,276 million. As of and for the year ended December 31, 2019, the total amount of our investment in trust schemes was RMB 215,306 million (US$ 30,927 million), and we had total investment proceeds from such schemes of approximately RMB 11,077 million (US$ 1,591 million).

 

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Securities investment funds

Securities investment funds consist of Chinese domestic investment funds and overseas investment funds that primarily invest in securities. As of December 31, 2019, our investment in securities investment funds was RMB 118,450 million (US$17,014 million) and represented 3.31% of our total investment assets as of that date. Our investment in securities investment funds mainly consists of investment in Chinese domestic investment funds.

We invest in both “closed-end” securities investment funds, in which the number of shares is fixed and the share value depends on the trading prices, and “open-end” securities investment funds, in which the number of shares issued by the fund fluctuates and the share value is set by the value of the assets held by the fund. Our investments in securities investment funds are subject to strict restrictions under relevant Chinese regulations. See “—Regulatory and Related Matters—Insurance Company Regulation—Regulation of investments”. Our holdings in securities investment funds comply with those restrictions.

The following table presents the carrying values of investments in open-end and closed-end securities investment funds as of the dates indicated.

 

     As of December 31,  
     2017     2018     2019  
     Carrying
value
     % of
total
    Carrying
value
     % of
total
    Carrying
value
     % of
total
 
     (RMB in millions, except as otherwise indicated)  

Open-end

     99,012        97.8     104,107        98.0     118,450        100.0

Closed-end

     2,224        2.2     2,164        2.0             
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     101,236        100.0     106,271        100.0     118,450        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Stocks

Investments in stocks consist of investment in publicly offered and listed equity securities that are denominated and traded in Renminbi and investment in stocks listed on specified overseas stock exchanges that are permitted by the CIRC. Our investments in stocks are subject to strict restrictions under relevant Chinese regulations. See “—Regulatory and Related Matters—Insurance Company Regulation—Regulation of investments”. As of December 31, 2019, the total amount of our investment in common stocks was RMB 276,604 million (US$ 39,732 million), and represented 7.7% of our total investment assets as of that date. As of December 31, 2018, the total amount of our investment in common stocks was RMB 178,710 million , and represented 5.8 % of our total investment assets as of that date. As of December 31, 2017, the total amount of our investment in common stocks was RMB 173,450 million, and represented 6.3% of our total investment assets as of that date.

Resale agreements

We enter into resale agreements, which consist of securities resell activities in resell markets.

The securities purchased under agreements to resell were RMB 4,467 million (US$ 642 million) as of December 31, 2019, RMB 9,905 million as of December 31, 2018, and RMB 36,185 million as of December 31, 2017.

 

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Equity interests in non-listed enterprises and related financial products

Insurance companies are allowed to invest, directly or indirectly, in equity interests in non-listed enterprises. These investments are categorized either as “direct investments”, for investments by an insurance company in its name, or as “indirect investments”, for investments through equity investment funds and other related financial products sponsored and established by an investment management institution. Our investments in equity interests in non-listed enterprises and related financial products are subject to strict restrictions under relevant Chinese regulations. See “—Regulatory and Related Matters—Insurance Company Regulation—Regulation of investments”.

We started to make investments in equity interests in non-listed enterprises in 2006. In November 2017, we entrusted IHC to invest in Ningbo Meishan Bonded Port Area Baishan Investment Management Partnership, or Baidu Fund Partnership. The total capital commitment in the Baidu Fund Partnership is RMB 7.011 billion, of which RMB 5.6 billion was subscribed by us and RMB 1.4 billion was subscribed by Ningbo Meishan Bonded Port Area Baidu Zhixin Asset Management Company, each as a limited partner. The Baidu Fund Partnership primarily makes mid-to-late stage investments in private equity transactions in the Internet sector, including Internet, mobile Internet, artificial intelligence, Internet finance, consumption upgrade, and Internet+.

In 2018, we subscribed for additional shares of CLPCIC by contributing RMB 1.52 billion undistributed profits of CLPCIC. In December 2018, we subscribed for an additional 1,871,875,329 shares of China Guangfa Bank, or CGB, for RMB 13.012 billion. Upon closing, we hold 8,600,631,426 shares of CGB, and our shareholding in CGB remains at 43.686%. We are still the largest shareholder of CGB.

In 2018, we invested RMB 8 billion in equity interests in China Power Investment Nuclear Power Co., Ltd.

In 2019, we invested RMB 9 billion in equity interests in Qinghai Huanghe Hydropower Development Co., Ltd.

 

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The following table presents the carrying values of our major investments in equity interests in non-listed enterprises as of the dates indicated.

 

     As of December 31,  
     2017      2018      2019  
     Carrying
value
     Carrying
value
     Carrying
value
 
     (RMB in millions, except as otherwise indicated)  

China Life Property and Casualty Insurance Company Limited

     8,185        7,963        9,332  

China Guangfa Bank Co., Ltd.

     53,459        72,655        75,180  

Sinopec Sales Co., Ltd.

     10,172        10,219        10,232  

Sinopec Sichuan to East China Gas Pipeline Co., Ltd.

             21,347                21,387                21,433  

Ningbo Meishan Bonded Port Area Baishan Investment Management Partnership

     1,680        1,698        1,751  

China Power Investment Nuclear Power Co., Ltd.

     —          8,036        8,607  

Qinghai Huanghe Hydropower Development Co., Ltd.

     —          —          9,007  

Asset Management Business

On November 23, 2003, in connection with the restructuring, we established an asset management company, AMC, with CLIC, for the purpose of operating the asset management business more professionally in a separate entity and to better attract and retain qualified investment management professionals. AMC manages our investment assets and, separately, substantially all of those of CLIC. For a description of our investment assets, see “—Investments”.

We own 60% and CLIC owns 40% of AMC. Directors of AMC are appointed by the shareholders at a general meeting. As the controlling shareholder, we effectively control the composition of AMC’s board of directors. In 2014, the registered capital of AMC was increased from RMB 3 billion to RMB 4 billion. The proportionate shareholding between CLIC and us remains unchanged.

As of and for the year ended December 31, 2019, AMC had total assets of RMB 11,914 million (US$ 1,711 million), net assets of RMB 10,354 million (US$ 1,487 million) and net profit of RMB 1,286 million (US$ 185 million).

Property and Casualty Business

In December 2006, we and CLIC established a property and casualty company, CLPCIC, with us owning 40% and CLIC owning the remaining 60%. In 2018, the registered capital of CLPCIC was increased from RMB 15 billion to RMB 18.8 billion, with us and CLIC contributing RMB 1.52 billion and 2.28 billion undistributed profits of CLPCIC, respectively. The proportionate shareholding between CLIC and us remains unchanged.

As of and for the year ended December 31, 2019, CLPCIC had total assets of RMB 91,167 million (US$ 13,095 million), net assets of RMB 23,330 million (US$ 3,351 million) and net profit of RMB 2,123 million (US$ 305 million).

Pension Insurance Business

In January 2007, we, CLIC and AMC established a pension insurance company, China Life Pension, with us owning 55%, CLIC owning 25% and AMC owning the remaining 20%. In January 2015, the registered capital of China Life Pension was increased from RMB 2.5 billion to RMB 3.4 billion. China Life Pension is currently held 70.74%, 4.41%, 3.53%, 1.33%, and 19.99% by us, CLIC, AMC, China Credit Trust Company Limited and AMP Life Limited, respectively.

 

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China Life Pension has obtained qualifications to serve as investment manager, trustee and account manager of enterprise annuity funds.

As of and for the year ended December 31, 2019, China Life Pension had total assets of RMB 5,644 million (US$ 811 million), net assets of RMB 4,084 million (US$ 587 million) and net profit of RMB 635 million (US$ 91 million).

Information Technology

Our computer systems provide support for many aspects of our businesses, including product development, sales and marketing, business management, cost control and risk control. We have approximately 1,981 experienced engineers, technicians and specialists providing professional and flexible support for our business operations in various aspects, including the design, research and development and operation of our computer systems.

During 2019, we actively applied advanced technologies and pushed forward digital transformation. We took the following steps:

 

   

Upgrade of sales model. We adopted technologies such as AI and Big Data to achieve data integration, and developed innovative sales models such as an AI sales model called “Golden Instruction”, which is designed to achieve smarter, more accurate and convenient sales of insurance products. In 2019, the online customer acquisition rate grew by 47% year-on-year, and the percentage of online sales force recruitment reached 70%. We held online training sessions for new agents with 4.9 million participants. More than 60 million customers were recommended to the sales team through the intelligent platform, and the ratio of customers who purchased long-term insurance policies to all the recommended customers increased by four times.

 

   

Upgrade of field offices and equipment. We used the “Internet of Things” technology, which accelerated the real-time interconnection between different field offices and networks as well as the intelligent upgrade of daily office operations. In 2019, we added 88,000 sets of intelligent equipment and deployed more than 2,000 self-service terminals at our service counters nationwide and set up demonstrative 5G digital field offices in multiple cities.

 

   

Upgrade of service and customer experience. We continued to use AI technology in underwriting, policy administration, claims settlement, services and risk control. In 2019, the approval rate of individual insurance policies by automatic underwriting was 89.4%, and the number of claims settled through complete automatic process reached more than 11.3 million. We introduced a short-term risk identification model for critical illness insurance with a 91% accuracy rate in identifying risks. We also developed a platform to utilize intelligent technologies to discover and verify suspected money-laundering activities, which enhanced our ability to control sales risks.

 

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Establishment of cloud-based infrastructure. We utilized industry-leading hybrid clouds to achieve the rapid deployment of our front office applications and secure storage of back office data, which effectively improved the stability, smoothness and security of our systems. Specifically, resource allocation efficiency and overall access speed increased by nine-times and two-times, respectively. While substantially expanding the resources of our basic platform, we also managed to reduce the costs of resources.

 

   

Roll-out of new digital applications and establishment of digital ecosystem. We introduced component-based plug-in professional service modules and efficiently launched various types of flexibly-combined “light” applications suited for different market application scenarios for their users. We also introduced a series of innovative applications such as cloud video and cloud desktop, and provided readily available, mobile, convenient live-streaming and smart office services for our salespersons and employees nationwide. In addition, during 2019, we developed more than 1,000 innovative applications based on the platform and cooperated with more than 6,000 institutions to carry out various services and over 40,000 activities, which enhanced our insurance-centered ecosystem services.

We also continue to attach importance to financial data security and have implemented projects, including the separation of internal and external networks, cloud desktops, providing different levels of protection fitting to the various application systems, intelligent security monitoring and supervision platforms and anti-intrusion systems. User access information obtained through front office applications is gathered and managed at a back office platform. We have built a security protection system to cover assessment, protection, detection, response, recovery and other aspects of data protection. We have an intelligent visualization system to provide real-time monitoring on cyber attacks. We also have internal rules on the procedures for reporting and handling material accidents, including cybersecurity incidents, occurring during business operations.

Trademarks

We conduct our business under the “China Life” brand name (in English and Chinese), the “ball” logos, the “C” mark and other business related slogans and logos. CLIC owns these trademarks and has registered them with the Trademark Office of the SAMR. CLIC has entered into a trademark license agreement with us, under which CLIC has agreed to grant us a royalty-free license to use the “China Life” brand name, the “ball” logos and the “C” mark. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Continuing Related Party Transactions with CLIC”.

 

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Regulatory and Related Matters

Overview

The insurance industry is heavily regulated in the PRC. The applicable laws and regulations governing insurance activities undertaken within the territories of the PRC consist principally of the PRC Insurance Law and rules and regulations promulgated under that law. The CBIRC is the authority authorized by the PRC State Council to regulate and supervise the insurance industry in the PRC. The CBIRC has been the principal regulatory authority over the PRC insurance industry since 2018, when its predecessor, the CIRC, was merged with China’s banking regulator, the CBRC.

The PRC Insurance Law, which provided the initial framework for regulating the PRC insurance industry, was enacted in 1995, and significantly amended on October 28, 2002, February 28, 2009, August 31, 2014 and April 24, 2015. Among other things, the major provisions of the PRC Insurance Law include: (1) licensing of insurance companies and insurance intermediaries, such as agents and brokers; (2) separation of property and casualty business and life insurance business; (3) regulation of market conduct by participants; (4) substantive regulation of insurance products; (5) regulation of the financial condition and performance of insurance companies; and (6) supervisory and enforcement powers of the CBIRC.

The CIRC, the predecessor to the CBIRC, was established in 1998. The CBIRC has extensive supervisory authority over the PRC insurance industry, including: (1) promulgation of regulations applicable to the insurance industry; (2) approval for establishment of insurance companies and their subsidiaries; (3) review of qualifications of senior management of insurance companies; (4) supervision of insurance companies and their solvency and market activities; (5) establishment of investment regulations; (6) approving the policy terms and premium rates for certain insurance products; (7) setting standards for measuring the financial soundness of insurance companies; (8) requiring insurance companies to submit reports concerning their business operations and condition of assets; and (9) ordering the suspension of all or part of an insurance company’s business. Since their establishment, CBIRC and its predecessor CIRC have promulgated a series of regulations indicating a gradual shift in the regulatory approach to a more transparent regulatory process and a convergent movement toward international standards.

Insurance Company Regulation

Licensing requirements

An insurance company is required to obtain a license from the CBIRC in order to engage in an insurance business. In general, a license will be granted only if the company can meet prescribed registered capital requirements and other specified requirements, including requirements relating to its form of organization, the qualifications of its senior management and actuarial staff, the adequacy of its information systems and specifications relating to the insurance products to be offered.

The CBIRC may grant a life insurer a license to offer all or part of the following products: accident insurance, term life insurance, whole life insurance, annuities, short-term and long-term health insurance, endowment insurance (for individuals only) and other personal insurance approved by the CBIRC, as well as reinsurance relating to any of the foregoing.

An insurance company may seek approval for establishing branch offices to meet its business needs so long as it meets minimum capital and other requirements. Our headquarters and all of our branch offices have obtained the requisite insurance licenses.

 

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Minimum capital requirements

The minimum paid-in capital for an insurance company is RMB 200 million. For an insurance company whose registered capital is RMB 200 million, the minimum incremental capital for each first branch office in a province other than the province where its headquarter is located is RMB 20 million. No additional capital will be required when the paid-in capital has reached RMB 500 million, and the insurer’s solvency is sound.

Restriction of ownership in joint stock insurance companies

Any acquisition of shares which results in the acquirer owning 5% or more of the registered capital of a joint stock insurance company, whether or not listed, requires the approval of the CBIRC. A filing with the CBIRC is required with respect to a change of equity interest of less than 5% in an insurance company, unless it is a listed insurance company. Equity interests held by a single shareholder, including its related parties and persons acting in concert, must not exceed one-third of the registered capital of a single insurance company. An exception to the one-third cap applies to insurance companies establishing or investing in other insurance companies for the purposes of innovation and specialization of their business, or consolidating their operations under a single group management. Equity interests held by a single domestic limited partnership must not exceed 5% of the registered capital of a single insurance company. The combined equity interests held by several domestic limited partnerships must not exceed 15% of the registered capital of a single insurance company, and the combined equity interests held by foreign investors may not exceed 51% of the total equity of a single life insurance company. On December 6, 2019, CBIRC announced that starting from January 1, 2020, restrictions on foreign ownership in Chinese life insurers will be removed and foreign investors will be allowed to own 100% in Chinese life insurers.

Fundamental changes

Prior approval must be obtained from the CBIRC before specified fundamental changes relating to a Chinese insurance company may occur. These include: a change of company name, registered capital or address of executive offices of companies or their subsidiaries; an expansion of business scope; an amendment to articles of association; a merger or spin-off; a change in a shareholder whose capital contribution accounts for 5% or more of the total capital of the company or a change in shareholding of 5% or more of the shares of the company; and a termination of a branch office. In addition, certain other changes relating to the insurance company must be reviewed by or filed with the CBIRC.

 

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Regulation of products

Regulation of ordinary personal insurance products. An ordinary personal insurance product is one whose insurance premiums and policy benefits are definite upon issuance of the insurance policy. Beginning from August 5, 2013, the CIRC removed the original 2.50% cap on the guaranteed interest rates of ordinary personal insurance products, and such guaranteed interest rates can be decided by insurance companies at their discretion in accordance with the principle of prudence. Meanwhile, the statutory valuation rates of ordinary personal insurance policies issued on and after August 5, 2013 have been increased from 2.50% to 3.50%. In addition, beginning from August 5, 2013, if the guaranteed interest rate of an ordinary personal insurance product developed by an insurance company is not higher than the maximum valuation rate set by the CBIRC which varies depending on product, the insurance company must file the relevant information of the product with the CBIRC. If such rate is higher than the maximum valuation rate set by the CBIRC, the insurance company is required to obtain the approval of the CBIRC on the product in advance, and during the approval process, the insurance company is not allowed to submit new insurance clauses and premium rates to the CBIRC for approval. On September 2, 2016, the CIRC further required that policy loans provided by an insurer may not exceed 80% of the cash value or account value of the policy. From October 1, 2017, the first payment of survival insurance benefits for the ordinary endowment products and annuity products must occur only after five years since the policy becomes effective and the annual payment or partial payment must not exceed 20% of the paid premiums. Beginning from August 30, 2019, the cap on the valuation rate of premium reserves of ordinary pension annuity products or ordinary long-term annuity products with a term more than ten years issued on and after August 5, 2013 is equal the lower of 3.50% or the guaranteed interest rate.

Regulation of participating products. A participating product is one which the policyholder or annuitant is entitled to share in the distributable earnings of the insurer through “policy dividends”. The participation dividend may be in the form of a cash payment or an increase in the insured amount. At least 70% of the distributable earnings is required to be distributed as dividends. In September 2015, the CIRC removed the original 2.50% cap on the guaranteed interest rate of participating products. From October 1, 2015, the guaranteed interest rate is to be decided by insurance companies at their discretion in accordance with the principle of prudence. If the guaranteed interest rate of a participating product developed by an insurance company is not higher than 3.50%, the insurance company must file the specific information of such product with the CBIRC for record. If such rate is higher than 3.50%, the insurance company is required to obtain the approval of the CBIRC for the product. In addition, the valuation rate of unearned premium reserves of participating products equals to either the guaranteed interest rate or 3.00%, whichever is lower. Beginning from September 2, 2016, if the guaranteed interest rate of a life insurance product newly developed by an insurance company is lower than the maximum valuation rate set by the CIRC, which is 3.00% for participating products, the insurance company is only required to file specified information relating to the product with the CBIRC, and if such rates are higher than 3.00%, the insurance company is required to obtain the approval of the CBIRC for such products. From October 1, 2017, the first payment of survival insurance benefits for the participating endowment products and annuity products must occur only after five years since the policy becomes effective and the annual payment or partial payment must not exceed 20% of the paid premiums.

 

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Regulation of universal products. A universal product is one which offers the typical protection of life insurance with investment accounts providing a minimum yield. The premium payments and coverage of universal products are flexible, usually with a minimum guaranteed interest rate, and the investment yields are settled periodically. Beginning from February 16, 2015, the CIRC removed the original 2.50% cap on the minimum guaranteed interest rate of universal products, with the guaranteed interest rate to be decided by insurance companies at their discretion in accordance with the principle of prudence. Meanwhile, the maximum valuation rate of a universal product has been increased from a compound annual rate of 2.50% to a compound annual rate of 3.50%. Beginning from September 2, 2016, the CIRC changed the maximum valuation rate of a universal product from a compound annual rate of 3.50% to a compound annual rate of 3.00%. If the minimum guaranteed interest rate of a universal product developed by an insurance company is not higher than the maximum valuation rate set by the CBIRC (i.e., a compound annual rate of 3.00%), the insurance company must file specified information relating to the product with the CBIRC. If such rate is higher than the maximum valuation rate set by the CBIRC, the insurance company is required to obtain the approval of the CBIRC for the product. Any amendment to the insurance clauses, premium rates, insurance liabilities, types of insurance or pricing methods of universal products must be filed with or approved by the CBIRC. From October 1, 2017, universal products must be designed to allow the flexibility to pay additional premiums from time to time and to adjust the insured amount. Insurance companies may not design the universal products in the form of riders.

Regulation of investment-linked products. An investment-linked product is one which insures the policyholder or annuitant against one or more separate risks and at the same time gives the policyholder or annuitant an interest in one or more separate investment accounts. Insurance companies must complete the establishment of investment accounts before submitting the required information regarding their investment-linked products to the CBIRC for approval or filing. Insurance companies must report on the establishment, change, consolidation, division, close or settlement of the investment accounts to the CBIRC within 10 business days after occurrence of these events. Transactions between a separate investment account and any other account of the insurance company, other than a transfer of cash to establish the investment account, are prohibited, and, investment-linked products must be designed to allow the flexibility to pay additional premiums from time to time and to adjust the insured amount. Insurance companies may not design investment-linked products in the form of riders. Other CIRC regulations govern the sale and disclosure terms of investment-linked products.

Regulation of variable annuity insurance. Variable annuity insurance is a type of insurance where the policy benefits are associated with the price of the investment unit in the linked investment account, and a minimum amount of policy benefits is guaranteed as stipulated in the insurance agreement. Under variable annuity insurance, the insurance company is obliged to pay an annuity or offer an option for the conversion of the insurance proceeds to be annuitized upon maturity. Variable annuity products may not be sold or amended without the prior approval of the CBIRC. Variable annuity products must be sold and disclosed in accordance with the requirements of the CIRC.

Regulation of pension insurance. A life insurance company or a pension insurance company, as approved by the CIRC, may engage in individual and group pension insurance business. The pension insurance terms and premium rates determined by an insurance company must be filed with or approved by the CBIRC in accordance with its regulatory provisions. Other CIRC regulations govern the sale and disclosure terms of pension insurance, as well as the investments by pension insurance funds.

 

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Regulation of enterprise annuity funds. Subject to the approval of the PRC Ministry of Human Resources and Social Security, insurance companies may serve as the trustee, account manager and investment manager for enterprise annuity funds. China Life Pension has obtained qualifications to serve as investment manager, trustee and account manager of enterprise annuity fund.

Regulation of health insurance. Subject to approval by the CBIRC, life insurance companies may engage in health insurance business. Other insurance companies may, subject to approval by the CBIRC, engage in short-term health insurance business. Insurance companies engaged in health insurance business are required to submit an actuarial report or reserves assessment report for the preceding year in accordance with the relevant provisions of the CIRC. Insurance companies must also submit a pricing review report to the CBIRC before March 15 of each year regarding the short-term health insurance products. Insurance companies were permitted to sell health insurance products eligible for preferential individual income tax policies in accordance with the CIRC’s relevant requirements in 31 pilot cities, including Beijing, Shanghai, Tianjin and Chongqing beginning in 2016 and, from July 1, 2017, nationwide in China. The health insurance products may be offered to taxpayers who have reached the age of 16 but have not reached the statutory retirement age. The expenses incurred by individuals for purchasing such health insurance products will be deductible from their individual income tax up to RMB 2,400 per year or RMB 200 per month. Survival benefits paid before the expiry of the policy term of a care insurance product may only be paid under the condition that the care required by the insured is caused by disability in activities of daily living as agreed in the insurance contract. Survival benefits paid before the expiry of the policy term of a disability income insurance product may only be paid under the condition that the loss of working ability of the insured is caused by a disease or an accidental injury as agreed in the insurance contract. On December 1, 2019, the new Measures for the Administration of Health Insurance came into effect, pursuant to which sales of products that are not in compliance with the requirements under the new measure must be ceased before April 1, 2020.

Regulation of short-term accidental injury insurance. Short-term accidental injury insurance is a type of insurance that uses death or disability caused by accidents or physical injuries stipulated in the insurance agreement as a condition for paying insurance proceeds. Short-term accidental injury insurance products must be developed and managed by the headquarters of the insurance company and filed with the CBIRC. Insurance companies must also submit a pricing review report to the CBIRC before March 15 of each year regarding the short-term accident insurance products they offer.

Regulation of foreign exchange denominated insurance. Insurance companies may seek approval from the CBIRC and the SAFE to engage in foreign exchange denominated insurance and reinsurance businesses, allowing them to offer products to non-Chinese policyholders or for non-Chinese beneficiaries, as well as policies covering accidents and illnesses which occur outside China, together with related reinsurance.

 

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Regulation of supplementary major medical insurance. As part of the Chinese government’s overall medical insurance scheme, supplementary major medical insurance reimburses policyholders for a specified percentage of their medical expenses which are in excess of the maximum amounts covered by the basic social medical insurance as long as such medical expenses are caused by the diseases covered by the basic social medical insurance. The supplementary major medical insurance programs have now been launched nationwide in China. Local governments use a portion of the basic medical insurance funds to purchase supplementary major medical insurance service from qualified insurance companies through a government tender. Insurance companies are required to apply to the CBIRC for the qualification to engage in such business. Supplementary major medical insurance products must be filed with the CBIRC.

Regulation of investments

Permitted investments. As a Chinese life insurance company, we are subject to restrictions under the PRC Insurance Law, the Measures for the Administration of the Utilization of Insurance Funds and other related rules and regulations on the asset categories and percentages in which we are permitted to invest. Assets that insurance companies may invest in are classified into five broad categories: current assets, fixed-income assets, equity assets, property assets and other financial assets. The amounts in percentages that may be invested in each asset category and the percentages that correspond to concentration risks for investing in a single item and counter-party are limited to specified amounts, and insurance companies are subject to risk monitoring requirements and early warning mechanisms with respect to liquidity, financing scale and asset classes.

Asset categories, investment and concentration risk regulatory percentages. Currently, Chinese life insurance companies are allowed to invest their funds in the following asset categories, subject to the satisfaction of conditions prescribed for each form of investment.

 

                           Regulatory Percentage(1)
Asset
Category
   Definition    Specific Items Included    Investment
Regulatory
Percentage
   Concentration Risk Regulatory
Percentage
Current assets    Current assets refer to cash reserves, deposits payable on demand, and highly-liquid assets with shorter terms and less risk of changes in value that can be readily converted into a definite amount of cash.    Domestic items mainly include cash, current deposits, bank call deposits, insurance asset management products on the monetary market, and government bonds, quasi-government bonds and reverse repurchase agreements with residual maturities of one year or less. Overseas items mainly include bank current deposits, monetary market funds, overnight lending, commercial bills, bank bills, negotiable certificates of deposit, reverse repurchase agreements, short-term government bonds, government-backed bonds, bonds of international financial organizations, corporate bonds and convertible bonds with residual maturities of one year or less, as well as other tools or products recognized by the CBIRC in this category.    None.    The total outstanding investments by an insurance company in a single legal person(2) must not exceed 20% of the total assets(3) of the insurance company as at the end of the last quarter (excluding, among others, investments in domestic central government bonds, quasi-government bonds, and equity investments in insurance enterprises with proprietary funds).

 

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                           Regulatory Percentage(1)
Asset
Category
   Definition    Specific Items Included    Investment
Regulatory
Percentage
   Concentration Risk Regulatory
Percentage
Fixed-income assets    Fixed-income assets refer to assets characterized by a definite maturity date and payments of interest and principal according to pre-determined interest rates and payment methods, as well as other assets whose main value is dependent on the changes in the value of the aforesaid assets.    Domestic items mainly include term deposits, negotiated deposits, bond funds, fixed-income insurance asset management products, financial institution (company) bonds, non-financial institution (company) bonds and government bonds and quasi-government bonds with residual maturities of more than one year. Overseas items mainly include term deposits, structured deposits with bank guaranteed commitments, securities investment funds with fixed-income commitments, government bonds, government-backed bonds, bonds of international financial organizations, corporate bonds and convertible bonds with residual maturities of more than one year, as well as other tools or products recognized by the CBIRC in this category.    None.   

The book balance of investment by an insurance company in a single fixed-income asset(4) must not exceed 5% of the total assets of the insurance company as at the end of the last quarter, excluding investments in domestic central government bonds, quasi-government bonds and bank deposits.

 

The total outstanding investment by an insurance company in a single legal person must not exceed 20% of the total assets of the insurance company as at the end of the last quarter (excluding, among others, investments in domestic central government bonds, quasi-government bonds and equity investments in insurance enterprises with proprietary funds).

Equity assets   

Equity assets include both listed and unlisted equity assets.

 

Listed equity assets refer to the ownership certificate representing the equity or other residual income rights of enterprises that are publicly listed and traded on stock exchanges or financial asset markets, as well as other assets whose main value depends on the changes in the value of the aforesaid assets.

 

Unlisted equity assets refer to the equity or other residual income rights of enterprises that are established and registered but are not publicly listed on exchanges, as well as other assets whose main value depends on the changes in the value of the aforesaid assets.

  

Domestic items of listed equity assets mainly include shares(6), equity funds, hybrid funds and equity insurance asset management products. Overseas items of listed equity assets mainly include ordinary shares, preferred shares, global depositary receipts, American depositary receipts and equity securities investment funds, as well as other tools or products recognized by the CBIRC in this category.

 

Domestic and overseas items of unlisted equity assets mainly include equities of unlisted companies, equity investment funds (including venture capital funds), asset backed securities, insurance private equity funds and other related financial products, as well as other tools or products recognized by the CBIRC in this category.

   The total book balance of investments by an insurance company in equity assets must not exceed 30%(5) of the total assets of the insurance company as at the end of the last quarter, and the book balance of significant equity investments must not be higher than the net assets of the insurance company as at the end of the last quarter. The book balance does not include the equity of any insurance enterprise as invested by the insurance company with its proprietary funds.   

The book balance of investments by an insurance company in a single equity asset must not exceed 5%(5) of the total assets of the insurance company as at the end of the last quarter, except as otherwise provided for significant equity investments, investments in equities of insurance enterprises with self-owned funds and acquisitions of listed companies and investments in shares of listed commercial banks.

 

The total outstanding investments by an insurance company in a single legal person must not exceed 20% of the total assets of the insurance company as at the end of the last quarter (excluding, among others, investments in domestic central government bonds, quasi-government bonds, and equity investments in insurance enterprises with proprietary funds).

 

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                           Regulatory Percentage(1)
Asset
Category
   Definition    Specific Items Included    Investment
Regulatory
Percentage
   Concentration Risk Regulatory
Percentage
Property assets    Property assets refer to purchased or invested land, structures and other land attachments, as well as other assets whose main value depends on the changes in the value of the aforesaid assets.    Domestic items mainly include real estate, infrastructure investment schemes, property investment schemes, property insurance asset management products and other property related financial products. Overseas items mainly include commercial properties, office properties and real estate investment trusts (REITs), as well as other tools or products recognized by the CBIRC in this category.   

The total book balance of investments by an insurance company in property assets must not exceed 30%(5)of the total assets of the insurance company as at the end of the last quarter. The book balance does not include the properties purchased by the insurance company for its own use.

 

The book balance of the properties purchased by an insurance company for its own use must not exceed 50% of the net assets of the insurance company as at the end of the last quarter.

  

The book balance of investments by an insurance company in a single property asset must not exceed 5%(6) of the total assets of the insurance company as at the end of the last quarter, excluding properties purchased for its own use.

 

The total outstanding investments by an insurance company in a single legal person must not exceed 20% of the total assets of the insurance company as at the end of the last quarter (excluding, among others, investments in domestic central government bonds, quasi-government bonds and equity investments in insurance enterprises with proprietary funds).

 

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                           Regulatory Percentage(1)
Asset
Category
   Definition    Specific Items Included    Investment
Regulatory
Percentage
   Concentration Risk Regulatory
Percentage
Other financial assets    Other financial assets refer to other kinds of assets that are distinctively different from all the foregoing categories of assets, including in terms of risk-return characteristics, liquidity and other characteristics, and cannot be classified into any of the foregoing categories.    Domestic items mainly include financial products by commercial banks, asset-backed securities offered by banking financial institutions, trust schemes of collective funds offered by trust companies, special asset management schemes offered by securities companies, project asset-backed schemes offered by insurance asset management companies and other insurance asset management products. Overseas items mainly include structured deposits without bank guaranteed commitments, as well as other tools or products recognized by the CBIRC in this category.    The total book balance of investments by an insurance company in other financial assets must not exceed 25% of the total assets of the insurance company as at the end of the last quarter.   

The book balance of investments by an insurance company in a single other financial asset must not exceed 5% of the total assets of the insurance company as at the end of the last quarter, excluding purchase of insurance asset management products within its group.

 

The total outstanding investments by an insurance company in a single legal person must not exceed 20% of the total assets of the insurance company as at the end of the last quarter (excluding, among others, investments in domestic central government bonds, quasi-government bonds, and equity investments in insurance enterprises with proprietary funds).

Overseas investment    An insurance company is allowed to participate in overseas investments in 25 developed markets, 20 emerging markets and Macau in accordance with the relevant requirements of the CBIRC.    As referred to in the investable overseas items listed in each of the above asset categories.    The total outstanding overseas investments by an insurance company must not exceed 15% of the total assets of the insurance company as at the end of the last quarter.    The total outstanding investments by an insurance company in a single legal person must not exceed 20% of the total assets of the insurance company as at the end of the last quarter (excluding, among others, equity investments in insurance enterprises with proprietary funds).

 

(1)

When calculating the regulatory percentages for each asset category, an insurance company is required to combine its domestic and overseas investments in assets of the category on a consolidated basis.

(2)

A single legal person refers to a single fund-raising party with legal person status that establishes a direct creditor-debtor or shareholder relationship with an insurance company due to the latter’s investment therein.

(3)

Total assets exclude the balance of the funds raised from bond repurchases and the amount of assets under independent accounts (including investment-linked life insurance products, variable annuity products, health care entrusted management products, pension insurance entrusted management products and investment-oriented non-life insurance products without pre-agreed returns).

(4)

Single asset investments refer to the investments in a single specific item under any category of investment assets. Where an investment product is issued in several phases, the book balance of the investment in a single asset is the sum of the investments in each phase.

(5)

An insurance institution that has already taken advantage of relevant policies to increase its holdings of blue-chip stocks must adjust the percentage of investments within two years from January 24, 2017 or within the time limit otherwise provided by relevant regulatory authorities until the percentage requirements under applicable regulatory requirements are met, i.e., the total book balance of investments by an insurance company in equity assets must not exceed 30% of the total assets of the insurance company as at the end of the last quarter, and the book balance of investments by an insurance company in a single equity asset must not exceed 5% of the total assets of the insurance company as at the end of the last quarter.

 

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(6)

The CBIRC classifies investments in stocks into three categories: (i) ordinary stock investment, which refers to investment in less than 20% of the total share capital of a listed company without control over the company, (ii) material stock investment, which refers to investment in 20% or more of the total share capital of a listed company without control over the company, and (iii) acquisition of a listed company, which refers to becoming the controlling shareholder or actual controller of a listed company or otherwise having control over a listed company. There is no regulatory restriction for ordinary stock investment that does not involve an acquisition in the secondary market of more than 5% of the share capital of a listed company. For ordinary stock investment that involves an acquisition in the secondary market of more than 5% of the share capital of a listed company, information disclosure and reporting after the investment are required. For a material stock investment, filing with the regulatory authorities after the investment is required. For acquisition of a listed company, prior regulatory approval is required.

Investment risk monitoring percentages. To alleviate the risks associated with liquidity and high volatility of assets, an insurance company that experiences any of the following circumstances is required to report to the CBIRC in a timely manner, and the CBIRC will closely monitor the operation of the insurance company and disclose the related information to the public when necessary:

 

   

Liquidity monitoring. The total book balance of investments by an insurance company in current assets and government bonds and quasi-government bonds with residual maturities of one year or longer is lower than 5% of the total assets of the insurance company as at the end of the last quarter.

 

   

Financing leverage monitoring. The total outstanding borrowings (including inter-industry lending and bond repurchases) of an insurance company exceed 20% of the total assets of the insurance company as at the end of the last quarter.

 

   

Monitoring of different categories of assets. The total book balance of investments by an insurance company in domestic bonds with a long-term credit rating of AA or lower as rated by domestic credit rating agencies exceeds 10% of the total assets of the insurance company as at the end of the last quarter, or the total book balance of investments in equity assets exceeds 20% of the total assets of the insurance company as at the end of the last quarter, or the total book balance of investments in property assets exceeds 20% of the total assets of the insurance company as at the end of the last quarter, or the total book balance of investments in other financial assets exceeds 15% of the total assets of the insurance company as at the end of the last quarter, or the total book balance of outstanding overseas investments exceeds 10% of the total assets of the insurance company as at the end of the last quarter.

 

   

The book balance of a single inter-group insurance asset management product purchased by an insurance company exceeds 5% of the total assets of such insurance company as at the end of the last quarter.

Risk Classification of Insurance Assets. An insurance company must evaluate, at least once every half year, the quality of its insurance assets falling within the categories of fixed-income assets, equity assets and property assets, and divide such assets into five categories based on risk, namely “pass”, “special mention”, “substandard”, “doubtful” and “loss”, with the last three categories collectively referred to as “non-performing assets”. Insurance assets that require risk classification include assets invested by the insurance company other than those subject to fair value measurement and changes to these assets are counted as gains or losses for the period in question or owners’ equity. An insurance company must establish and improve risk classification systems and working processes for its assets and file reports on such systems and processes with the CBIRC. In addition, an insurance company is required to semiannually report to the CBIRC the relevant information on the classification of its assets. An insurance company must also establish feasible plans for annual asset loss provisions and write-offs, as well as plans for the disposal of non-performing assets based on its actual operations and the quality of its assets. These plans must be approved by its board of directors and be filed with the CBIRC.

Insurance private equity funds. Insurance companies are allowed to establish private equity funds that comply with the requirements of the CBIRC, including growth funds, buyout funds, funds for strategic emerging industries, mezzanine funds, real estate funds, venture capital funds, and funds of funds (FoF) primarily investing in the aforementioned funds. Insurance companies must register the establishment of private equity funds with the CBIRC, and periodically submit quarterly reports, annual reports and other related information to the CBIRC during the term of private equity funds.

 

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Financial derivative products. Apart from the regulations on the five asset categories described above, the CIRC has separately issued a series of rules governing the operation of domestic and overseas trading of derivative products by an insurance company. Financial derivative products are financial contracts whose value is determined by one or more types of underlying assets, indices or certain events. Typical financial derivative products include forwards, futures, options and swaps.

Bank capital replenishment bonds. On January 25, 2019, the CBIRC issued separate rules allowing insurance companies to invest in Tier 2 capital bonds and non-fixed term capital bonds issued by banks. Investment in Tier 2 capital bonds and non-fixed term capital bonds issued by policy banks is regulated in accordance with requirements on investment in quasi-government bonds. Investment in Tier 2 capital bonds and non-fixed term capital bonds issued by commercial banks is regulated in accordance with requirements on investment in unsecured non-financial institution (company) bonds.

Insurance companies may participate in derivatives transactions only for the purpose of hedging or averting risks, and not for the purpose of speculation. Legitimate purposes include hedging or averting risks of current assets and liabilities, or the company as a whole, and hedging the risk of assets scheduled to be bought within the next month, or locking in future transaction prices.

“Assets scheduled to be bought”, as used above, refers to assets that an insurance institution has decided to buy after going through its investment decision-making process. If the assets are not bought within one month of the decision date, or the plan was aborted within the aforementioned period, the insurance institution must terminate, liquidate or unwind the relevant derivative upon the expiration of the prescribed period or within five trading days of such decision.

For an insurer carrying out interest rate swaps, the notional principal may not exceed 10% of its fixed-income assets (including bank deposits, bonds and other debt instruments) as of the end of the previous quarter. The notional principal swapped with the same counterparty may not exceed 3% of such counterparty’s fixed-income assets as of the end of the previous quarter.

Solvency requirements

On January 1, 2016, the CIRC implemented a new set of solvency regulations, the “China Risk Oriented Solvency System”, or C-ROSS, which replaced its previous solvency requirements known as “Solvency I”.

C-ROSS adopts the internationally accepted “three-pillar” regulatory system while its regulatory concept, models, methods and parameters are based on Chinese insurance market conditions. The three pillars are:

 

   

Pillar I: quantitative capital requirements which aim to prevent quantifiable risks, and include quantifying capital requirements, criteria for assessment and recognition of actual assets and liabilities, capital classification, stress tests and regulatory measures to be imposed on the insurers which fail to meet the quantitative capital requirements.

 

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Pillar II: qualitative regulatory requirements which aim to prevent unquantifiable risks, and which include an integrated risk rating, requirements on assessment and management of risks by the insurers, and regulatory inspection and analysis and regulatory measures to be imposed on the insurers which fail to meet the qualitative regulatory requirements.

 

   

Pillar III: market discipline mechanisms which aim to involve, through sufficient information disclosure systems and other means, market players including the public, customers, rating agencies and industry analysts by introducing mechanisms through which they will play an important role in the solvency supervision process.

Under C-ROSS, the three indicators to measure the solvency ratio of an insurer include the following:

 

   

the core solvency adequacy ratio, which is calculated by dividing the core capital of an insurer by the minimum capital it is required to meet;

 

   

the comprehensive solvency adequacy ratio, which is calculated by dividing the sum of core capital and supplementary capital of an insurer by the minimum capital it is required to meet; and

 

   

an integrated risk rating, which is a comprehensive rating system that the CIRC uses to evaluate an insurer’s overall solvency based on both quantitative assessments on quantifiable risks in Pillar I and qualitative risk assessments on unquantifiable risks in Pillar II.

The core solvency adequacy ratio and comprehensive solvency adequacy ratio of an insurer reflect the capital adequacy for quantifiable risks of such insurer, and the integrated risk rating reflects the overall solvency risks of such insurer.

The actual capital of an insurer is admitted assets less admitted liabilities, determined in accordance with relevant rules under C-ROSS. The actual capital is classified into core capital and supplementary capital, depending on the loss absorbing capacity and features of such capital. The minimum capital of an insurer is the capital that the CIRC requires it to meet.

Under C-ROSS, solvency risks are classified into inherent risk and control risk. Inherent risk refers to the risks that are unavoidable in the writing of insurance business. Control risk refers to the risks of failure to identify, evaluate and manage control inherent risk timely due to imperfections in the internal management and control process. Inherent risk includes both quantifiable risks and unquantifiable risks.

Quantifiable risks include the following:

 

   

Insurance risk, which includes life insurance risk and non-life insurance risk;

 

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Market risk, which includes interest rate risk, equity price risk, property price risk, overseas assets price risk and foreign exchange risk; and

 

   

Credit risk, which includes spread risk and default risk.

Unquantifiable risks include the following:

 

   

Operation risk;

 

   

Reputation risk;

 

   

Strategy risk; and

 

   

Liquidity risk.

The minimum capital requirement for quantifiable risks is determined using a value at risk approach. The minimum capital requirement for control risk is determined based on solvency aligned risk management requirements and assessment, or SARMRA.

The CIRC comprehensively evaluates the inherent risk and control risk of an insurer and determines an integrated risk rating of solvency risks. Insurers will then be classified into the following four supervision categories:

 

   

Category A: an insurer’s solvency adequacy ratio meets the CIRC requirement, and its risk level is very low for the four unquantifiable risks;

 

   

Category B: an insurer’s solvency adequacy ratio meets the CIRC requirement, and its risk level is low for the four unquantifiable risks;

 

   

Category C: an insurer’s solvency adequacy ratio does not meet the CIRC requirement, or an insurer’s solvency adequacy ratio meets the CIRC requirement but its risk level is high for one or more of the four unquantifiable risks; or

 

   

Category D: an insurer’s solvency adequacy ratio does not meet the CIRC requirement, or an insurer’s solvency adequacy ratio meets the CIRC requirement but its risk level is serious for one or more of the four unquantifiable risks.

The CIRC applies different regulatory policies to each of the four supervision categories with respect to, among others, market access, product management, use of insurance funds and on-site inspection.

Category B insurer may be subject to a range of regulatory actions by the CBIRC, including, among others, risk alert, supervisory conversation, rectification of identified problems within a specified deadline, on-site inspection or request to submit and implement plans to prevent insolvency or improve risk management.

 

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If a Category C insurer does not meet the solvency adequacy ratio required by the CBIRC, the CBIRC may in such situations require the insurer to, in addition to the regulatory actions for category B, adjust its business structure, restrict business expansion and increase in assets, restrict the establishment of branch offices, restrict its commercial advertising activities, limit its business scope, transfer its insurance business to others or seek reinsurance of its insurance obligations, adjust investment portfolios or counterparties, limit its channels or percentages of investment, raise additional share capital, limit paying dividends on its shares, limit the remuneration of its directors and senior management or change its management team. If an insurer of category C meets the solvency adequacy ratio as required by the CBIRC but its risk level is high for one or more of the four unquantifiable risks, the CBIRC may take specific regulatory actions that target on the respective issues of each insurer.

For a Category D insurer the CBIRC may, in addition to the regulatory actions for category C, require such insurer to rectify or cease part or all new business, put the insurer into receivership or take other regulatory actions as determined by the CBIRC.

Based on the latest comprehensive rating results regarding the solvency risks of insurers released by the CBIRC for the fourth quarter of 2019, we had been classified as a Category A insurer.

Our core solvency adequacy ratio as of December 31, 2019 was 266.71%, and our comprehensive solvency adequacy ratio as of December 31, 2019 was 276.53%.

Statutory deposits

Insurance companies in China are required to deposit an amount equal to 20% of their registered capital with at least two qualified commercial banks, each of which must, among other things, have net assets of no less than RMB 20 billion as of the end of the previous year and have no affiliated relationship with the insurance company. These funds may not be used for any purpose other than to pay off debts during a liquidation proceeding. Insurance companies must choose more than two qualified commercial banks as statutory deposit banks and the statutory deposit period must be for a minimum of one year. In addition, when an insurance company deposits the statutory funds for a business opening or capital increase, renews the deposit upon maturity or transfers the deposit to another bank, changes the nature of the deposit upon maturity or withdraws the deposit before maturity, the insurance company must file with the CBIRC within 10 business days after these funds are duly deposited.

Statutory insurance fund

Chinese life insurance companies are required to contribute to a statutory insurance fund 0.15% of the premiums for life insurance with guaranteed earnings and 0.05% of the premiums for life insurance without guaranteed benefits; 0.8% of insurance premiums for short-term health insurance and 0.15% of insurance premiums for long-term health insurance; 0.8% of the premiums for non-investment accident insurance, 0.08% of the premiums for investment accident insurance with guaranteed benefits, and 0.05% of premiums for investment accident insurance without guaranteed benefits. Contributions are not required once the balance of the statutory insurance fund of a life insurance company reaches 1% of the company’s total assets.

 

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Statutory reinsurance

Insurance companies are required to reinsure, for any single risk, the excess of the maximum potential liability over an amount equal to 10% of the sum of paid-in capital and capital reserves.

Actuaries

Insurance companies are required to employ actuarial professionals and establish a system for actuarial reporting.

Regulation of corporate governance

Directors and senior management qualification and remuneration management requirements. Directors, supervisors and senior management of an insurance company are subject to qualification requirements implemented by the CBIRC. An insurance company must have at least three independent directors and the number of independent directors shall be no less than one third of the number of all the directors. In addition, if any of the shareholders of an insurance company holds more than 50% of the registered capital or equity of the company, then the number of independent directors must be no less than one half of the number of all the directors, unless such 50% or greater shareholder is an insurance group company or an insurance company. An insurance company must reasonably determine the remuneration paid to its directors, supervisors and senior management based on the company’s financial conditions, operating results, risk control and other factors. Where an insurance company has inadequate solvency, the CBIRC will place restrictions on the remuneration of its directors, supervisors and senior management in accordance with relevant regulatory rules on solvency. The senior management of an insurance company receive in-office audits once every three years. If any member of the senior management leaves due to a job change, promotion or any other reasons, a departure audit must be conducted.

Risk management. Insurance companies must establish and adopt procedures, organizational structures, systems and measures to identify, evaluate and control the risks involved in its insurance operation. Insurance companies must report to the regulatory authorities in a timely manner any major risks, and submit an annual risk management report reviewed by the board of directors. In addition, as required by the CBIRC, an insurance company that conducts certain activities, such as direct share investments, equity investments, real estate investments, investments in unsecured bonds, development of infrastructure investment schemes and real estate investment schemes and use of derivatives, must have at least two qualified risk officers. Where an insurance company decides to change a risk officer, impose disciplinary sanctions on a risk officer, dismiss a risk officer or terminate the employment of a risk officer, the insurance company must replace such risk officer within 10 business days from the date of the decision, and report to the CBIRC the reasons for such replacement.

Asset-liability management. On July 24, 2019, the CBIRC released interim measures for the supervision and regulation of insurance asset-liability management. The new interim measures, as well as the other regulatory requirements including the previously issued rules on insurance asset-liability management, set forth a set of specific technical criteria and rules on the quantitative and competency assessments on asset-liability management, as well as requirements on preparing and submitting asset-liability management reports. Under the new interim measures, the CBIRC will adopt differential regulation and supervision standards for insurance companies depending on their respective asset-liability management competency and quantitative assessment scores.

 

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Compliance management. Insurance companies must prevent, identify, evaluate, report and manage compliance risks by taking measures such as setting up a compliance department, formulating and implementing compliance policies (which are required to be filed with the CBIRC), exercising compliance monitoring and providing compliance trainings, so as to ensure compliance by the company, its staff and sales agents with the relevant laws and regulations, rules of regulatory authorities, industrial self-regulatory rules, internal management systems and codes of ethics. An annual compliance report must be submitted to the CBIRC by April 30 each year. Each insurance company is required by the CBIRC to appoint a compliance officer and establish a compliance management department in its head office. Where the proposed compliance head of an insurance company for whom the insurance company has applied for CBIRC approval of post-holding qualifications also serves in other senior management positions, the insurance company must submit a statement that the proposed compliance head will not also manage a business or financial department during his or her term of office. Beginning from July 1, 2017, the headquarter and provincial branches of an insurance company must each set up a compliance management department. Where the proposed compliance head of an insurance company for whom the insurance company has applied for approval of post-holding qualifications is to be served by a senior management person other than the general manager, the insurance company must submit a statement that the proposed compliance head will not also manage departments that may be in conflict with his or her responsibilities for compliance management, such as those for business, finance, fund use and internal audit during his or her term of office. As of the date of this annual report, we have set up a compliance management department, established compliance standards and appointed a compliance officer whose qualification has been approved by the CBIRC.

Related party transactions. Insurance companies are required to establish a related party transaction control committee to be responsible for identifying related parties, managing, reviewing and approving related party transactions and controlling risks. The related party transaction control committee must be composed of at least three directors, with an independent director acting as the person in charge. The related party transaction control committee should focus on the compliance, fairness and necessity of related party transactions. According to applicable CBIRC regulations, related party transactions between an insurance company and any of its related parties are classified as either “material related party transactions” or “ordinary related party transactions”. The term “material related party transactions” refers to any single transaction or a series of transactions within any given year between an insurance company or any of its controlled subsidiaries and a related party in which the trading volume exceeds RMB30 million and accounts for 1% or more of the insurance company’s audited net assets as of the end of the previous year. The term “ordinary related party transactions” refers to all related party transactions other than “material related party transactions”.    A material related party transaction must be first reviewed by the related party transaction control committee, and then be approved by the board of directors, by vote of more than two thirds of non-affiliated directors, or by shareholders. An ordinary related party transaction must be reviewed in accordance with the internal management system and authorization process of the insurance company, and then be filed with or approved by the related party transaction control committee. An insurance company is required to maintain a system to manage related party transactions and file them with the CBIRC. Companies must take effective measures to prevent their shareholders, directors, supervisors, senior management and other related parties from taking advantage of their positions and acting against the interests of the company or the insured through related party transactions. In addition, an insurance company must report to the CBIRC each of its material related party transactions, the execution, renewal or substantive change of any framework transaction agreement, as well as any other transaction as required by the CBIRC.

 

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Internal audit. Insurance companies are required to establish an independent department for internal audit purposes, staffed with sufficient internal audit personnel (the number of full-time internal audit personnel generally must not be less than 5‰ of the total number of the company’s employees), establish an audit committee, and designate an audit controller whose appointment and replacement must be filed with the CBIRC. An internal audit report must be submitted to the CBIRC by April 30 of each year and any major risk identified during the internal audit process must be reported to the CBIRC in a timely manner.

Reporting and disclosure requirements. An insurance company must disclose to the public various information regarding its operations and business, including financial and accounting information, information on its insurance liabilities and reserves, risk management, its insurance products, solvency, material related transactions and major events, as well as other information required by the CBIRC. An insurance company must disclose this information on its website, and by April 30 of each year, an insurance company must also disclose an annual report on its website and in media designated by the CBIRC. In addition, within 10 business days after the occurrence of a material related party transaction or other material events, an insurance company must disclose information about such transactions and events on its website.

Internal control assessment. Life insurance companies are required to submit to the CBIRC an internal control assessment form and an annual internal control assessment report each year. The CBIRC assesses the internal control of life insurance companies at least every three years, covering at least one third of all life insurance companies each year. Under the Basic Guidelines for Internal Controls in Insurance Companies issued by the CIRC in August 2010 and the Measures for Compliance Management of Insurance Companies issued by the CIRC in December 2016, an insurance company must establish an internal control evaluation system in various operations including sales, operation, basic management and fund use, and by April 30 of each year, submit to the CBIRC an evaluation report on its internal control. In addition, where the CBIRC deems necessary, the CBIRC may collect information reflecting the corporate governance of insurance companies, establish an information database of insurance companies’ governance, and conduct governance ratings for insurance companies through on-site or off-site investigations, media reports, assessments of independent rating agencies and public disclosure by insurance companies. The CBIRC may take regulatory measures against insurance companies based on the rating results, including interviews, a risk warning in writing and rectifications within a specified period.

 

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Custody of insurance assets. Insurance companies are required to establish and improve mechanisms for the custody of insurance assets, select qualified commercial banks and other professional institutions, place various assets generated by the investment of insurance funds under third-party custody and oversight, and ensure that the revenue and expenditure concerning the use of insurance funds (except for expenditure of daily expenses) are primarily processed through the custody fund accounts. Insurance companies are required to submit implementing plans relating to the custody of their insurance assets to the CBIRC.

Market conduct

Insurance companies are required to take steps to ensure that sales promotional materials used by their sales representatives and agents are objective, true and correct, with no material omissions or misleading information, contain no forecasts of benefits that are not guaranteed under the insurance or annuity product and do not exaggerate the benefits provided under the insurance or annuity product. The sales promotional materials must also highlight in an appropriate fashion any exclusions of coverage or liability in their products, as well as terms providing for policy or annuity surrenders and return of premiums. If any insurance policy or consulting service is provided through telephone sales, requisite office space, staff, facilities and adequate supervision must be furnished. In addition, the telephone sale must be conducted directly by the insurance company, and the terms and rates of the premiums of the insurance policy and geographic business area must be submitted to the CBIRC for approval.

Insurance companies which conduct marketing and promotional activities through we-media platforms (such as websites, apps, blogs, microblogs, corporate accounts and WeChat) are required to establish an appropriate management system. The management criteria of such system should be no less strict than the criteria provided in existing regulations in relation to the insurance promotional materials for off-line channels.

Insurance companies are subject to extensive regulation against any anti-competitive behavior or unfair dealing conduct. They may not pay insurance agents, the insured or the beneficiary any rebates or other illegal payments, nor may they pay their agents commissions over and above the industry norm.

Insurance companies are required to establish internal rules and procedures to protect the personal data of policyholders and insureds. Insurance companies are prohibited from illegally obtaining, using or selling of the personal data of policyholders and insureds.

Insurance companies are also required to comply with anti-money laundering regulations and establish internal operational procedures and anti-money laundering control systems. No insurance activity can be conducted for the purpose of illegal fundraising.

 

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Regulation of issuance of subordinated debt

Insurance companies that meet a series of qualification tests and are approved by the CBIRC may issue subordinated debt with a fixed term of at least five years to certain qualified Chinese legal persons and foreign investors. The audited net asset value of the issuer must be at least RMB 500 million as of the end of the prior year and the total amount of unpaid debt at any given point after the issuance, including both principal and interest, must not exceed the issuer’s net asset value as of the end of the prior year. Proceeds from the issuance of subordinated debt may be recorded as supplementary capital of an issuance company, provided that the total amount that has been recorded as supplementary capital may not exceed 50% of the net assets of an insurance company. Proceeds from the issuance of subordinated debt may not be used to offset daily operating losses of an insurance company. The issuer must comply with certain disclosure obligations both at the time of the issuance and during the term of the debt. The issuer may repay the debt only if its solvency ratio would remain at least 100% after the repayment of both principal and the interest. Qualified insurance groups or holding companies are also allowed to issue subordinated debt in accordance with the relevant requirements.

Since 2012, publicly listed insurance companies that meet a series of qualification tests and are approved by the CBIRC have also been permitted to issue subordinated convertible bonds. Subordinated convertible bonds refer to bonds issued by an insurance company in accordance with statutory procedures that satisfy the following conditions: the bonds have a maturity of five years or longer; the principal and interest of the bonds shall be repaid and paid after insurance policy liabilities and other general liabilities in the event of bankruptcy liquidation; and the bonds can be converted into shares of the insurance company in accordance with the agreed conditions within a certain period of time. An insurance company must submit an issuance application to the relevant securities regulatory authority within six months after the CBIRC has approved the issuance of subordinated convertible bonds, and an issuer must report the issuance information to the CBIRC within ten working days after completion of the issuance of subordinated convertible bonds.

Regulation of issuance of capital replenishment bonds by insurance companies

Since January 2015, insurance companies including insurance group companies that meet a series of qualification tests and are approved by the CBIRC and PBOC may issue bonds for capital replenishment in the national inter-bank bond market. The capital replenishment bonds issued by an insurance company must have a maturity of at least five years and be repaid after insurance policy liabilities and other general liabilities, but prior to payment related to the equity capital of such insurance company. The audited net asset value of the issuer as of the end of the prior year and its net asset value in the latest quarterly financial statements must be no less than RMB 1 billion, and the total amount of its issued capital replenishment bonds and fixed-term subordinated debts pursuant to CBIRC requirements must not exceed 100% of the issuer’s net asset value. The issuer must comply with certain disclosure obligations both at the time of the issuance and during the term of the bonds. The issuer has the right to redeem the capital replenishment bonds after five years of its issuance provided that its solvency ratio is at least 100% after the redemption.

 

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Regulation of merger and acquisition of insurance companies

An insurance company may apply to the CBIRC for approval of the acquisition of control of another insurance company through the acquisition of equity or shares of the other insurance company. Except under special circumstances, such as a transfer between affiliated parties under common control or risk disposition, the acquiring party is not allowed to transfer the acquired equity or shares in the target insurance company within five years from the completion of the acquisition. Upon approval by the CBIRC, the acquiring party may control two insurance companies engaging in the same type of business after the completion of acquisition. In addition, an insurance company may apply to the CBIRC for approval for the merger with other insurance companies by absorption or establishing a new insurance company. The business scope of the insurance company subsequent to the merger is subject to the re-approval by the CBIRC. An insurance company must, during the twelve-month period after the completion of merger or acquisition, report the following information in writing to the CBIRC within the first 30 days of each quarter: the making of investments in and purchases or sales of material assets, related party transactions, business transfers, notifications to insurance consumers, public announcements, changes of senior management personnel and employee placements.

Regulation of establishment and management of non-insurance subsidiaries

An insurance company may apply to the CBIRC for approval for the direct or indirect establishment of domestic or overseas non-insurance subsidiaries (excluding insurance companies, insurance asset management institutions, dedicated insurance agencies, insurance brokerage institutions and insurance assessment institutions), primarily including: (1) financial institutions that engage in non-insurance financial services; (2) service firms that provide various supporting services to insurance companies; (3) investment platform companies with a strong connection with an insurance business, project companies established for managing the investment of insurance funds in real properties, and companies formed as a result of the investment of insurance funds in the upstream and downstream industry chain of an insurance business; and (4) other types of companies. Unless otherwise prescribed by laws, administrative regulations and the CBIRC, an insurance company is not allowed to guarantee the debts of its non-insurance subsidiaries, or lend funds to its non-insurance subsidiaries. An insurance company must build firewalls between its non-insurance subsidiaries in terms of personnel, capital, business and information to prevent risks spreading from its non-insurance subsidiaries. An insurance company must also cause its non-insurance subsidiaries to establish and improve their respective information disclosure systems, and submit to the CBIRC an annual report on its non-insurance subsidiaries by April 30 of each year.

Regulation of establishment of overseas insurance institutions

An insurance company may apply to the CBIRC for approval for the establishment of overseas branches, overseas insurance companies and overseas insurance intermediaries, or the acquisition of overseas insurance companies or intermediaries. In order to submit such an application, an insurance company must have an operating history of no less than two years, total assets of no less than RMB 5 billion as at the end of the prior year and foreign exchange funds of no less than US$ 15 million or its equivalent in other freely convertible currencies as at the end of the preceding year. The applicant insurance company must also comply with applicable solvency, risk management and other requirements as stipulated by the CBIRC.

 

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Compliance with regulatory requirements

Our management confirms that we have complied in all material respects with all applicable regulatory requirements set out above.

Regulation of Foreign-Invested Insurance Companies

China acceded to the WTO on December 11, 2001. As a result of China’s commitments in connection with the accession, the Chinese insurance market is gradually opening up to foreign insurers and insurance-related service providers. The geographic limitation on foreign life insurers, which were permitted to operate only in specified cities, has been lifted since December 11, 2004. Accordingly, foreign life insurers have been permitted to provide group life insurance, health insurance and annuity and other pension-like products since December 11, 2004. Since December 11, 2006, foreign insurance brokers have been permitted to set up wholly owned subsidiaries in China. In December 2019, the CBIRC announced that starting from January 1, 2020, the 51% cap on foreign ownership in Chinese life insurers will be removed and foreign investors will be allowed to own 100% in Chinese life insurers, and the CBIRC also removed the requirements that a foreign insurance company must have engaged in insurance business for more than 30 years and have maintained a representative office in China for at least two years before it can establish a foreign invested insurance company in China.

Foreign-invested insurance companies, including Sino-foreign equity joint ventures, wholly foreign-owned insurance companies and branches of foreign insurance companies, are generally regulated in the same manner as domestic insurance companies. Without the approval of the CBIRC, foreign-invested insurance companies may not engage in asset purchases and sales or other transactions with their affiliates, but may engage in outward and inward reinsurance with their affiliates. In addition, where the foreign-invested insurance company is a branch of a foreign insurance company, it is required to notify the CBIRC of fundamental events relating to the foreign insurance company within ten days following the occurrence of the event. Reportable events include: (1) a change of name, senior management or jurisdiction of incorporation of the foreign insurance company, (2) a change in the foreign insurance company’s share capital, (3) a change in any person beneficially owning 10% or more of the foreign insurance company’s shares, (4) a change in business scope, (5) the imposition of administrative sanctions by any applicable regulatory authority, (6) a material loss incurred by the foreign insurance company, (7) a spin-off, merger, dissolution, revocation of corporate franchise or bankruptcy involving the foreign insurance company and (8) other events specified by the CBIRC. If the foreign insurance company is dissolved, or its corporate franchise is revoked or it is declared bankrupt, the Chinese branch of the foreign insurance company will be prohibited from conducting any new business.

The CBIRC delegates certain authorities with respect to foreign-invested insurance companies to its provincial and local branch offices: approving the change of place of business of branches and subsidiaries of foreign-invested insurance companies; approving the establishment of subsidiary agencies of foreign-invested insurance companies below the branch-office level; approving the opening of subsidiary agencies of foreign-invested insurance companies below the branch-office level; and approving the qualification of senior management personnel of subsidiary agencies of foreign-invested insurance companies below the branch-office level.

 

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Regulation of Insurance Asset Management Companies

An insurance asset management company is a limited liability company or joint stock company that manages insurance funds on behalf of others. Insurance asset management companies are regulated by the CBIRC.

Minimum capital requirements

The registered capital of an insurance asset management company may not be lower than RMB 100 million or the equivalent amount of other freely convertible currencies.

Business operations

An insurance asset management company may conduct the following businesses: (1) managing funds in Renminbi or other foreign currencies entrusted to it, including insurance funds, funds of pension, annuity and housing provident institutions, as well as funds of other qualified investors that are capable of identifying and undertaking corresponding risks; (2) managing and operating its own insurance funds in Renminbi or foreign currencies; (3) as trustee, carrying out asset management business appointed by and on behalf of the trustor, or developing asset management products for the interest of the beneficiary or for specific purposes and carrying out asset management business; (4) applying to relevant financial regulatory authorities to carry out publicly-raised asset management business in accordance with the law, provided that relevant conditions are met; (5) as approved by the CBIRC, issuing relevant asset management products to domestic insurance groups or holding companies, insurance companies, insurance asset management companies and other qualified investors capable of identifying and bearing the applicable risk; and (6) other businesses approved by the CBIRC or other departments of the State Council.

The investments of the insurance funds by insurance asset management companies are subject to the same requirements and limitations applicable to the investments by the insurance companies themselves. With the regulatory expansion of insurance company investment channels, the investment channels of insurance asset management companies over their own funds have been expanded as well to cover subordinated bonds issued by banks and insurance companies, bank subordinated bonds and stock investments.

Insurance asset management companies are also subject to the governance of regulations which generally apply to the asset management businesses of financial institutions. Starting from April 27, 2018, the asset management businesses of financial institutions are subject to new supervision rules, which apply to the participation of insurance funds in publicly-offered funds, private equity funds, trust schemes, equity investment schemes, debt investment schemes and portfolio insurance asset management products through the asset management products of insurance asset management companies.

In connection with the funds being managed by an insurance asset management company, a custodian is required to be appointed. The custodian must be an independent commercial bank or financial institution satisfying applicable CBIRC requirements.

 

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Shareholding restrictions

At least 75% of the shares of an insurance asset management company must be owned by domestic insurance companies, and at least one of the shareholders of an insurance asset management company must be an insurance company or insurance holding company satisfying specified requirements.

Investment risk control

Both insurance companies and asset management companies must establish structures, arrangements and measures to recognize, assess, manage and control investment risks. Members of senior management may not be responsible for the management of departments in charge of investment decisions, investment transactions and risk controls at the same time. Branches of insurance companies may not manage insurance funds. Insurance asset management companies must arrange for separate investment managers to manage their own funds and the insurance funds from other insurance companies, as well as insurance funds from an insurance company that are of a different nature.

Major emergency response management

An insurance asset management company is required to establish a monitoring and precaution mechanism for major emergencies.

Regulation of Insurance Agencies, Insurance Brokers and Other Intermediaries

Insurance agents are business entities or individuals which or who act on behalf of an insurance company in respect of insurance matters. An insurance company is responsible for the acts of its agents when the acts are within the scope of their agency. Licensed insurance agencies fall into two groups: dedicated agencies and non-dedicated agencies.

A dedicated agency is a company (and its branches) organized under the PRC company law whose principal business is to act as an agent of insurance companies. Dedicated agencies are subject to minimum capital and other requirements, and their business is generally limited to insurance-related activities.

A non-dedicated agency is a business entity whose principal business is other than as an insurance agency. To receive a license, the agency business must have a direct relationship with its principal business, which the CBIRC has interpreted as permitting commercial banks to act as non-dedicated insurance agencies. Sales representatives of insurance companies are prohibited from selling insurance products at commercial bank outlets. The bancassurance management personnel of insurance companies are responsible for providing services (including training and the exchange of documents) to commercial banks and assisting commercial banks to provide related customer services, such as the payment of maturity benefits and handling of renewal fee after selling insurance products.

 

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Prior to August 3, 2015, individual insurance agents, representatives of insurance agencies and insurance brokers were required to obtain qualification certificates issued by the CIRC. Under such CIRC regulations, we were subject to sanctions if we retained exclusive agents without CIRC qualification certificates, and policyholders who bought insurance policies through our unqualified agents were allowed to cancel the policies under some circumstances. On August 3, 2015, the CIRC issued a Notice on the Administration of Insurance Intermediary Personnel, effective on the same day. Under the new regulations, the CIRC canceled the requirements on qualification certificates or practice certificates for individual insurance agents, representatives of insurance agencies and insurance brokers, with the effect that insurance companies are now only required to complete registration for their individual insurance agents in the insurance intermediary regulatory information system maintained by the CIRC. In addition, insurance companies are required to take adequate measures to ensure the good conduct and professional competence of their individual insurance agents, representatives of insurance agencies and insurance brokers.

All insurance agencies and agents are required to enter into agency agreements that specify the duration of the agency; the amount of the agency fee and the method of payment; the scope of the agency, including the insurance products to be marketed; and other relevant matters. Absent specific CBIRC approval, insurance agents are prohibited from signing insurance and annuity products on behalf of the insurance companies they represent. None of our agents is authorized to sign insurance policies or annuity contracts for us.

Insurance agencies are required to open special accounts for the handling of funds that they hold or collect for the insurance companies they represent. They may not engage in the following activities: dealing with unauthorized insurers or insurance intermediaries, engaging in activities beyond their authorized business scope or geographical area, causing injury to the rights of the insurance companies they represent, spreading rumors or otherwise injuring the reputation of others in the insurance industry, misappropriating the funds of the insurance companies they represent, defrauding insurance customers through false or misleading representations or material omissions, using undue influence to induce insurance customers to purchase insurance, or defrauding the insurance companies they represent through collusion with the insured or the insurance beneficiary. In addition, dedicated insurance agencies are subject to various reporting requirements, including submission of annual financial reports, and are subject to supervision and examination by the CBIRC.

Insurance brokers who represent individuals and companies purchasing insurance and other intermediaries are subject to similar regulatory requirements regarding their activities. Among other things, they are subject to supervision and examination by the CBIRC, and fundamental corporate changes must be approved by the CBIRC. Only companies organized under the PRC company law and meeting requirements set by the CBIRC are authorized to act as insurance brokers. Insurance brokers are required to comply with standards prescribed by the CBIRC. Insurance brokerage agencies must provide training to their brokerage personnel regarding insurance laws and provide education on ethics and other matters.

 

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Regulation of Internet Insurance Businesses

Insurance companies and intermediaries are allowed to carry out an Internet-based insurance business, including sales, underwriting, claims settlement, policy surrender, complaint handling, customer services and other insurance business activities, through proprietary network platforms or third-party network platforms that meet the relevant requirements prescribed by the CBIRC. Insurance companies and intermediaries that carry out an internet-based insurance business must set up an information disclosure column on their official websites, disclosing the related website names and addresses, internet insurance products, existing branches, customer services and ways for consumers to make complaints. The CBIRC is required to carry out regulation and on-site inspection of an internet insurance business, and may take rectification measures against insurance companies and intermediaries that conduct operations in violation of the regulations. Insurance companies engaging in internet-based guaranteed insurance businesses, which use internet credit lending platforms as intermediaries to provide both the borrowers (i.e., insurance applicants) and the lenders (i.e., the insured) on such platforms with guaranteed insurance services, must comply with regulatory requirements on solvency, verify the qualifications of insurance applicants in a prudent manner, clarify the information disclosure obligations of the internet platforms, enhance product management and adhere to other compliance requirements stipulated by the CBIRC.

No.2 Interpretation of Accounting Standard for Business Enterprises

On August 7, 2008, the MOF issued the No.2 Interpretation of Accounting Standard for Business Enterprises, requiring listed companies which issue both H shares and A shares to adopt consistent accounting policies to recognize, calculate and report a particular transaction in their H share financial statements and A share financial statements, except for certain differences in relation to the reversal of impairment losses of long-term assets and disclosures in relation to related party transactions.

On January 5, 2009, the CIRC issued the Notification on the Implementation of the No.2 Interpretation of Accounting Standards for Business Enterprises in the Insurance Sector (No.1 [2009] of CIRC), which requires insurance companies to make appropriate changes to their accounting policies that cause differences between onshore and offshore financial statements when preparing their 2009 annual financial statements, such that the same accounting policies and estimates will apply to a particular transaction.

On December 22, 2009, the MOF issued the Notification on the Promulgation of the Regulations regarding the Accounting Treatment of Insurance Contracts, which regulates issues relating to, among other things, the unbundling of mixed insurance contracts, tests for significant insurance risks and the calculation of reserves for insurance contracts, and requires insurance companies to comply with these requirements beginning with the preparation of their financial statements for the year ended December 31, 2009. The accounting treatment of any transaction item adopted in previous year which differs from those set out in the MOF’s regulations must be retrospectively adjusted, unless any such adjustment is not practicable under the circumstances.

 

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Implementation of VAT

Following the decision of the PRC State Council, the Value Added Tax, or VAT, has applied to the financial and insurance sector since May 1, 2016. Therefore, our primary business has been subject to 6% VAT from May 1, 2016 instead of the 5% business tax, or BT, which previously had applied to our business.

Policy on pre-tax deduction of underwriting and policy acquisition costs

In May 2019, the MOF and SAT issued a policy on pre-tax deduction of underwriting and policy acquisition costs of insurance companies. Under the policy, from January 1, 2019, the underwriting and policy acquisition costs incurred by insurance companies in connection with their operating activities that do not exceed 18% of the balance of total premium income for the year, after deducting surrender payments and other expenses, can be deducted when calculating taxable income, and the portion that exceeds 18% can be carried forward and deducted in following years. The policy applies to the final settlement of enterprise income tax of insurance companies for the 2018 tax year. Therefore, the pre-tax deduction percentage for enterprise income tax on our underwriting and policy acquisition costs has been adjusted to 18% from the previous 10%, which will result in a reduction in our income tax in 2019 and future years.

Administrative Penalty by the PBOC

In July 2018, the PBOC imposed a fine of RMB 700,000 on us for non-compliance with anti-money laundering laws and regulations during the period from July 1, 2015 to June 30, 2016. The non-compliance issues identified by the PBOC include failure to preserve clients’ identity information and transaction records and failure to submit reports on transactions of large payments and suspicious transactions to the PBOC. We have taken corrective measures and improved our anti-money laundering system by refining the process for identifying customers’ data, retaining transaction records and reporting large payment transactions and suspicious transactions. The fine imposed by the PBOC did not have a material impact on the business operations and financial results of our company.

 

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C. ORGANIZATIONAL STRUCTURE

The following is our simplified corporate structure as of the date of this annual report:

 

 

LOGO

 

 

 

(1)

Wholly owned by CLIC

(2)

Formerly known as China Life Asset Management (Hong Kong) Company Limited

 

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List of Significant Subsidiaries

 

Name of Subsidiary

  

Jurisdiction of Incorporation

  

Proportion of Ownership Interest

Owned by China Life

中国人寿资产管理有限公司

China Life Asset Management Company Limited

   The People’s Republic of China   

60%

(directly)

中国人寿富兰克林资产管理有限公司

China Life Franklin Asset Management Company Limited (1)

   Hong Kong   

50%(2)

(indirectly through affiliate)

中国人寿养老保险股份有限公司

China Life Pension Company Limited

   The People’s Republic of China   

74.27%(3)

(directly and indirectly through affiliate)

国寿安保基金管理有限公司

China Life AMP Asset Management Co., Ltd.

   The People’s Republic of China   

85.03%(4)

(indirectly through affiliate)

国寿财富管理有限公司

China Life Wealth Management Company Limited

   The People’s Republic of China   

100%(5)

(indirectly through affiliate)

 

 

(1)

Formerly known as China Life Asset Management (Hong Kong) Company Limited.

(2)

AMC, which is 60% owned by us, owns 50%.

(3)

We own 70.74% and AMC, which is 60% owned by us, owns 3.53%.

(4)

AMC, which is 60% owned by us, owns 85.03%.

(5)

AMC, which is 60% owned by us, owns 48%, and China Life AMP, which is 85.03% owned by AMC, owns 52%.

 

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D. PROPERTY, PLANTS AND EQUIPMENT

As of December 31, 2019, we owned and leased 4,171 and 11,887 properties, respectively, and had 307 properties under construction. Among the 4,171 properties owned by us, 1,639 properties are leased to third parties (including partial leasing) while the remaining properties are mainly occupied by us as office premises. Nine properties are recognized as investment properties.

On December 29, 2017, we entered into a new property leasing agreement with China Life Investment Holding Company Limited, or IHC. Under this property leasing agreement, which will expire on December 31, 2020, IHC agreed to lease to us 1,893 properties owned by it. The annual rent is determined by reference to market rent or, where there is no available comparison, by reference to the costs incurred by IHC in holding and maintaining the properties, plus a margin of approximately 5%.

ITEM 4A. UNRESOLVED STAFF COMMENTS.

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.

You should read the following discussion and analysis in conjunction with the audited consolidated financial statements and accompanying notes included elsewhere in this annual report.

Overview of Our Business

We are the leading life insurance company in China. We provide a broad range of insurance products, including individual and group life insurance, annuity contracts, health insurance and accident insurance products. We had nearly 303 million insurance policies in force as of December 31, 2019, including individual and group life insurance policies, annuity contracts, health insurance and accident insurance policies.

We report our financial results according to the following three principal business segments:

 

   

Life insurance, which offers participating and non-participating life insurance and annuities to individuals and groups.

 

   

Health insurance, which offers short-term and long-term health insurance to individuals and groups. The financial results of our supplementary major medical insurance are also reflected in our health insurance business segment.

 

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Accident insurance, which offers short-term and long-term accident insurance to individuals and groups.

In addition, we have an “other” reporting segment, in which we primarily report the income and cost of the agency business in respect of transactions with CLIC and other companies, net share of profit of associates and joint ventures, income and expenses of subsidiaries, and unallocated income and expenditure of our company. See Note 5 to our consolidated financial statements included elsewhere in this annual report.

Financial Overview of Our Business

We had total gross written premiums of RMB 567,086 million (US$ 81,457 million) and net profit of RMB 59,014 million (US$ 8,477 million) for the year ended December 31, 2019. Our principal business segments had the following results:

 

   

Life insurance had total gross written premiums of RMB 446,562 million (US$ 64,145 million) in 2019.

 

   

Health insurance had total gross written premiums of RMB 105,581 million (US$ 15,166 million) in 2019.

 

   

Accident insurance had total gross written premiums of RMB 14,943 million (US$ 2,146 million) in 2019.

Our business has been characterized by growth of premium income over the past several years, together with a move towards an improved business structure which has been evidenced by a rapid increase in first-year regular premiums, with the percentage of first-year regular premiums for products with regular premiums of ten years or more in first-year regular premiums being above 50% since 2013. At the same time, our business has also been affected by certain unfavorable factors, including the increasing cross-industry competition from companies in other financial industries, and the rapid development of the insurance companies owned or controlled by commercial banks and some other small and medium-sized insurance companies, which have secured an increasing market share, as well as the changing economic and investment environment within China, including slowing economic growth and fluctuations in interest rates.

Factors Affecting Our Results of Operations

Revenues, Expenses and Profitability

We earn our revenues primarily from:

 

   

insurance premiums from the sale of life insurance policies and annuity contracts, including participating and non-participating policies and annuity contracts with life contingencies, as well as accident and health insurance products. Net premiums earned accounted for 76.81% of total revenues in 2019.

 

   

investment income and net realized gains on financial assets, net fair value gains through profit or loss. Investment income and net realized gains on financial assets, net fair value gains through profit or loss accounted for 22.07% of total revenues in 2019.

 

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In addition, following the restructuring, we receive service fees for policy management services we provide to CLIC. AMC also receives asset management fees for asset management services provided to CLIC. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions”.

Our operating expenses primarily include:

 

   

insurance benefits provided to our policyholders, accident and health claims and claim adjustment expenses;

 

   

increase in insurance contracts liabilities;

 

   

investment contract benefits;

 

   

policyholder dividends resulting from participation in profits;

 

   

underwriting and policy acquisition costs; and

 

   

administrative and other expenses.

We also pay rent to IHC on the properties we lease from it.

Our profitability depends principally on our ability to price and manage risk on insurance and annuity products, our ability to maximize the return on investment assets, our ability to attract and retain customers, and our ability to manage expenses. In particular, factors affecting our profitability include:

 

   

our ability to design and distribute products and services and to introduce new products which gain market acceptance on a timely basis;

 

   

our ability to price our insurance and investment products at levels that enable us to earn a margin over the costs of providing benefits and the expense of acquiring customers and administering those products;

 

   

our returns on investment assets;

 

   

our mortality and morbidity experience, which affects our insurance reserves;

 

   

our lapse experience, which affects our ability to recover the cost of acquiring new business over the lives of the contracts;

 

   

our cost of administering insurance contracts and providing customer services;

 

   

our ability to manage liquidity, market and credit risk in our investment portfolio and to manage duration risk in our asset and policy portfolios through asset-liability management; and

 

   

changes in regulations.

In addition, other factors, such as competition, securities market conditions, taxes and general economic conditions, affect our profitability.

 

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Interest Rates

For our long-term life insurance products including annuity products, we are obligated to pay contractual benefits to our policyholders or the beneficiaries based on a guaranteed interest rate, which is established when the product is priced. These products expose us to the risk that changes in interest rates may change our “spread”, or the difference between the amount of return we are able to earn on our investments and the amount of return we are required to pay under the policies. In August 2013, February 2015 and September 2015, the CIRC removed the 2.50% cap on the guaranteed interest rates for the traditional participating insurance policies, universal life insurance policies, and participating life insurance policies, respectively. From October 1, 2015, the guaranteed interest rates of all long-term life insurance products are to be decided by insurance companies at their discretion in accordance with the principle of prudence, but CBIRC approval is required for products with guaranteed interest rates above the maximum valuation rate set by the CBIRC, which varies by product. If the rates of return on our investments fall below the rates we guarantee, our profitability would be adversely affected. In November 2014, the interest rate on one-year term deposits, a key benchmark rate, was reduced from 3.00% to 2.75%, and in 2015, the interest rate was further reduced five times from 2.75% to 1.50%. As of the date of this annual report, this interest rate remained unchanged. If economic conditions change in the future, the Chinese government may adjust the interest rates accordingly. As of December 31, 2019, the average guaranteed rate of return for all of our long-term insurance policies in force was 2.71%, while our investment yields for the years ended December 31, 2019, 2018 and 2017were 5.24%, 3.29% and 5.16%, respectively. However, if the rates of return on our investments were to fall below the rates we guarantee, our profitability would be materially and adversely affected. If the interest rates were to be increased, but we did not raise the guaranteed rates of our products, sales of some of our products could be adversely impacted.

Interest rates also affect our returns on investment assets, a large proportion of which is held in term deposits and debt securities. In a declining interest rate environment, interest rate changes expose us to reinvestment risks. In a rising interest rate environment, higher rates may yield greater interest income but also may result in a decline in the fair value of debt securities designated as trading.

For further information on our exposure to interest rate risk, see “Item 11 Quantitative and Qualitative Disclosure about Market Risk—Interest Rate Risk” and Note 4 to our consolidated financial statements included elsewhere in this annual report.

Investments

As an insurance company, we are permitted to invest in five categories of investment assets, including liquidity assets, fixed income assets, equity assets, real properties and other financial assets. However, we are limited by Chinese laws and regulations in the maximum amount that we may invest in each type of assets. See “Item 4. Information on the Company—Business Overview—Investments” and “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters—Insurance Company Regulation—Regulation of investments”. Our material concentration risks relate to our investments in bank deposits and Chinese government securities.

 

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Our investments are subject to risks. Volatility or declines in Chinese and international financial markets may expose us to higher market and credit risks, such as when domestic and international economic conditions differ from market expectations. We may also invest in new investment channels, use new investment tools or engage new investment managers, which may expose us to new risks. These factors could affect our investment income and the book value of our investment assets. In addition, as a portion of our investment assets are held in foreign currencies, our investment results may also be subject to foreign exchange gains and losses due to changes in exchange rates. Furthermore, our investments in associates are also affected by the operational conditions, financial risks and volatility in profits of these associates, which, in turn, will affect our profitability. See “Item 3. Key Information—Risk Factors—Risks Relating to Our Business—Our investments are subject to risks”.

Our results can be materially affected by investment impairments. The following table sets forth impairment charges and reversal of impairment charges, which are included in net realized gains on financial assets and net gains on investments of associates and joint ventures, for the years ended December 31, 2017, 2018 and 2019.

 

Impairment    For the year ended December 31,  
   2017      2018      2019      2019  
     (RMB in millions)      US$  

Debt securities

     (114      (42      (3,749      (539

Equity securities

     (2,643      (8,163      (2,638      (379

Associates and joint ventures

     —          —          (1,500      (215
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     (2,757      (8,205      (7,887      (1,133
  

 

 

    

 

 

    

 

 

    

 

 

 

During the year ended December 31, 2019, we recognized an impairment expense of RMB 2,638 million (US$ 379 million) for available-for-sale equity securities for which we determined that objective evidence of impairment existed. During the year ended December 31, 2018, we recognized an impairment expense of RMB 8,163 million for available-for-sale equity securities for which we determined that objective evidence of impairment existed. During the year ended December 31, 2017, we recognized an impairment expense of RMB 2,643 million for available-for-sale equity securities for which we determined that objective evidence of impairment existed. Our rationale for the impairment is based on a severe or prolonged decline in value. These securities were not impaired due to company-specific events such as bankruptcies.

During the year ended December 31, 2019, we recognized an impairment expense of RMB 3,749 million (US$ 539 million) in debt securities. During the year ended December 31, 2018, we recognized an impairment expense of RMB 42 million in debt securities. During the year ended December 31, 2017, we recognized an impairment expense of RMB 114 million in debt securities.

During the year ended December 31, 2019, we recognized an impairment expense of RMB 1,500 million (US$ 215 million) in associates and joint ventures. During the years ended December 31, 2018 and December 31, 2017, we recognized no impairment expense in associates and joint ventures.

 

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Available-for-sale securities comprised of the following asset classes as of December 31, 2017, 2018 and 2019.

 

     As of December 31,  
     2017      2018      2019  
     Cost or
amortized
cost
     Estimated
fair value
     Cost or
amortized
cost
     Estimated
fair value
     Cost or
amortized
cost
     Estimated
fair value
 
     (RMB in millions)  

Debt securities

                 

Government bonds

     24,818        24,632        26,759        28,440        22,500        23,758  

Government agency bonds

     164,331        157,765        172,250        180,273        163,678        171,189  

Corporate bonds

     199,613        197,133        181,178        185,720        145,033        148,455  

Subordinated bonds/debt

     13,588        13,495        20,953        21,514        53,062        53,922  

Other

     62,651        62,099        78,136        80,643        109,729        112,467  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     465,001        455,124        479,276        496,590        494,002        509,791  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

                 

Funds

     97,516        91,344        115,949        92,304        97,208        102,349  

Common stocks

     124,090        129,424        160,231        143,469        217,564        236,323  

Other

     127,689        134,842        126,253        138,170        195,360        210,494  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     349,295        355,610        402,433        373,943        510,132        549,166  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     814,296        810,734        881,709        870,533        1,004,134        1,058,957  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The difference between the aggregate cost/amortized cost and the aggregate estimated fair value reflects the amount of the unrealized gains and losses, and provision for impairment losses. As of December 31, 2019, we had gross unrealized gains of RMB 63,261 million (US$ 9,087 million) and gross unrealized losses of RMB 5,055 million (US$ 726 million), and made a provision for impairment losses of RMB 3,383 million (US$ 486 million). As of December 31, 2018, we had gross unrealized gains of RMB 37,125 million and gross unrealized losses of RMB 43,884 million, and made a provision for impairment losses of RMB 4,417 million. As of December 31, 2017, we had gross unrealized gains of RMB 25,120 million and gross unrealized losses of RMB 26,837 million, and made a provision for impairment losses of RMB 1,845 million. The unrealized losses as of December 31, 2019 related primarily to the unrealized losses of available-for-sale stocks and funds.

The following tables set forth the length of time that each class of available-for-sale securities has continuously been in an unrealized loss position as of December 31, 2019, 2018 and 2017. For the year ended December 31, 2019, the decrease of our unrealized losses on equity securities, mainly resulting from the overall upturn of the Chinese stock market, constituted a significant component of the movement of the total unrealized losses compared to the prior year. For the year ended December 31, 2018, unrealized losses on equity securities, mainly resulting from the overall volatility and downturn of the Chinese stock market, constituted a significant component of the movement of the total unrealized losses compared to the prior year. For the year ended December 31, 2017, unrealized losses on debt securities, mainly resulting from the increase in interest rates in the Chinese market, constituted a significant component of the movement of the total unrealized losses compared to the prior year.

 

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As of December 31, 2019

   0-6
months
    7-12
months
    More than 12
months
    Total  
     (RMB in millions)  

Debt securities

        

Unrealized losses

     374       141       531       1,046  

Carrying amounts

     28,298       2,794       25,884       56,976  

Unrealized losses as a percentage of carrying amounts

     1.32     5.05     2.05     1.84

Equity securities

        

Unrealized losses

     2,084       1,029       896       4,009  

Carrying amounts

     50,291       26,006       3,175       79,472  

Unrealized losses as a percentage of carrying amounts

     4.14     3.96     28.22     5.04

Total

        

Total unrealized losses

     2,458       1,170       1,427       5,055  

Total carrying amounts

     78,589       28,800       29,059       136,448  

Unrealized losses as a percentage of carrying amounts

     3.13     4.06     4.91     3.70

As of December 31, 2018

   0-6
months
    7-12
months
    More than 12
months