ITEM 1. BUSINESS
Change in Fiscal Year End
On January 17, 2014, the board of directors of the Company
approved a change in our fiscal year end from June 30 to December 31. As a result of this change, we are filing this Transition
Report on Form 10-K for the six-month transition period ended December 31, 2013 (the “Transition Period”). References
to any of our previous fiscal years mean the fiscal years ending on June 30.
Corporate History and Structure
China United Insurance Service, Inc. (“China
United,” “CUIS,” or the “Company”) is a Delaware corporation organized on June 4, 2010 by Mao Yi
Hsiao, a Taiwanese citizen, and is quoted on the Over the Counter Bulletin Board (“OTCBB”). The Company’s operating
companies are in Taiwan and China. Unless context indicates otherwise, reference to the “Company” throughout this
annual report refers to China United and its subsidiaries. Reference to Action Holdings Financial Limited (“AHFL”),
refers to the combined operations of AHFL and its Taiwan Subsidiaries. Reference to Anhou refers to the combined operations of
Anhou and its subsidiaries.
ZLI Holdings Limited (“CU Hong Kong”),
a wholly owned Hong Kong-based subsidiary of China United, was originally founded by China United, on July 12, 2010 under Hong
Kong laws. On October 20, 2010, CU Hong Kong founded a wholly foreign owned enterprise, Zhengzhou Zhonglian Hengfu Consulting
Co., Ltd. (“CU WFOE”) in Henan province of the PRC.
Law
Anhou Insurance Agency Co., Ltd. (“Anhou”, formerly known as Zhengzhou Anhou Insurance Agency Co., Ltd. ) was founded
in Henan province of the PRC on October 9, 2003. Anhou provides insurance agency services in the PRC.
On
November 26, 2013, Anhou changed its name into Law Anhou Insurance Agency Co., Ltd. and obtained its new business license. On
December 18, 2013, Anhou obtained its new Professional Insurance Agency License from local bureau of China Insurance Regulatory
Commission (“CIRC”) which reflects its new name.
On September 26, 2013, several new PRC
individual investors, namely Wang Yanyan, Chen Zhaohui, Yue Jing, Hou Weizhe, Zhang Yong, Chen Li (“Anhou New Investors”)
and the original shareholders of Anhou, namely, Zhu Shuqin, Wei Qun, Fang Qunlei and Chen Yanxia (“Anhou Original Shareholders”)
entered into a shareholders resolution of Anhou, pursuant to which, Anhou Original Shareholders and Anhou New Investors agreed
to increase the registered capital of Anhou to RMB50 million ($8,165,895), among which, Wang Yanyan would invest RMB10 million
($1,633,179), accounting for 20%, Chen Zhaohui would invest RMB10 million ($1,633,179), accounting for 20%, Yue Jing would invest
RMB7.5 million ($1,224,871), accounting for 15%, Hou Weizhe would invest RMB5 million ($816,589), accounting for 10%, Zhang Yong
would invest RMB4.5 million ($734,930), accounting for 9%, and Chen Li would invest RMB3 million ($489,949), accounting for 6%,
of the registered capital of Anhou.
Due to PRC legal restrictions on foreign
ownership and investment in the insurance agency businesses in China, particularly those based on qualifications as well as capital
requirements of the investors, Able Capital Holding Co., Ltd., a limited liability company established and registered in Hong
Kong, delegated four PRC individuals, namely Wang Yanyan, Chen Zhaohui, Hou Weizhe and Zhang Yong, to invest in Anhou on its behalf.
On October 24, 2013, Anhou completed the
registration with local Administration Industry and Commerce (“AIC”) on the above-mentioned capital increase. The
new business license was issued to Anhou on October 25, 2013.
The registered capital increase of Anhou
is in response to the recent promulgations of certain regulations by China Insurance Regulatory Commission (“CIRC”).
On April 27, 2013, CIRC issued the Decision on Revising the Provisions of the Supervision and Administration of Specialized Insurance
Agencies (the “Decision on Revising the Agency Provisions”), pursuant to which, CIRC has mandated any insurance agency
established subsequent to the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50
million ($8,165,890). On May 16, 2013, CIRC issued Notice for Further Clarification on Related Issues of Access to Professional
Insurance Intermediary Market (the “Notice”), pursuant to which, professional insurance agencies established prior
to the issuance of the Decision on Revising the Agency Provisions, with registered capital less than RMB50 million ($8,165,890),
can continuous operation of their existing business within the provinces where they have the registered office or branch office,
but shall not set up any new branches in any province where they do not have the registered office or any branch office.
Prior to the capital increase, Anhou,
a professional insurance agency with a PRC nationwide license, has a registered capital in the amount of RMB10 million ($1,633,178).
The branch offices of Anhou currently are all in Henan province. To better implement its expansion strategies, Anhou increased
its registered capital to RMB50 million ($8,165,890) to meet the requirement of CIRC so that it can set up new branches in any
province beyond its current operations in Mainland China.
On October 24, 2013, Anhou Original Shareholders
entered into share transfer agreements (the “Share Transfer Agreements”) with Hu Changrong, a PRC citizen (“Mr.
Hu” together with Anhou New Investors, “Anhou Existing Shareholders”), respectively. Under the Share Transfer
Agreements, Anhou Original Shareholders transferred all of their equity interests in Anhou to Mr. Hu for an aggregate transfer
price of RMB10 million ($1,633,178). Mr. Hu is currently the legal representative and the sole director of Anhou.
On October 24, 2013, Anhou completed
the share transfer registration with the local AIC. At the end of October 2013, Anhou completed its filing with local CIRC
with respect to its previously-conducted share transfer and capital increase.
Anhou’s wholly owned subsidiary
Sichuan Kangzhuang Insurance Agency Co., Ltd. (“Sichuan Kangzhuang”) was founded on September 4, 2006 in Sichuan province
of the PRC, and it provides insurance agency services in the PRC. On August 23, 2010, at Sichuan Kangzhuang’s general meeting
of shareholders, its shareholders voted for transferring all of their equity interests in Sichuan Kangzhuang to Anhou for RMB532,622
($83,444). On September 6, 2010, the equity transfer agreements were signed between Anhou and each shareholder of Sichuan Kangzhuang.
Anhou has complied with all of the applicable laws and regulations with respect to its holding 100% equity interests in Sichuan
Kangzhuang.
Jiangsu Law Insurance Brokers Co., Ltd.
(“Jiangsu Law” collectively with Anhou, Sichuan Kangzhuang, the “Consolidated Affiliated Entities”, each
a “Consolidated Affiliated Entity”) was founded on September 19, 2005 in Jiangsu province of the PRC. Jiangsu Law
is allowed to provide insurance brokerage services. On August 12, 2010, at Jiangsu Law’s general meeting of shareholders,
its shareholders voted for transferring all of their shareholdings to Anhou for RMB518,000 ($81,153). On September 28, 2010, the
equity transfer agreements were signed between Anhou and each individual shareholder of Jiangsu Law. Pursuant to Provisions on
the Supervision and Administration of Insurance Brokerage Institutions, effective on October 1, 2009, if an insurance brokerage
entity fails to bring its registered capital to no less than RMB10,000,000 ($1,566,661) on or prior to October 1, 2012, the China
Insurance Regulatory Commission (“CIRC”) or its local counterpart, as applicable, may determine not to extend the
insurance brokerage license. To meet such minimum registered capital requirement, on February 11, 2011, Anhou invested RMB4.82
million ($755,131) in Jiangsu Law to increase the registered capital to RMB10 million ($1,566,661). Anhou has complied with all
of the applicable laws and regulations with respect to its holding 100% equity interests in Jiangsu Law.
On January 16, 2011, China United issued
20,000,000 shares of common stock, $0.00001 par value per share, to several non-US persons for their investment of $300,000 in
cash in the Company’s subsidiaries. The issuance was made pursuant to an exemption from registration contained in Regulation
S under the Securities Act of 1933, as amended. The consideration was paid to the account of CU Hong Kong by May 6, 2011. All
$300,000 was contributed into the bank account of CU WFOE as registered capital.
Due to PRC legal restrictions on foreign
ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications as well as
capital requirement of the investors, we operate our PRC business primarily through our Consolidated Affiliated Entities in China.
We do not hold equity interests in our Consolidated Affiliated Entities. However, through the VIE Agreements (as described in
more details below) with Anhou and its shareholders, we effectively control, and are able to derive substantially all of the economic
benefits from, these Consolidated Affiliated Entities.
Our Consolidated Affiliated Entities in
China are variable interest entities through which all of our insurance services are operated. It is through the VIE Agreements
that we have effective control of the Consolidated Affiliated Entities, which allows us to consolidate the financial results of
the Consolidated Affiliated Entities in our financial statements. If Anhou and its shareholders fail to perform their obligations
under the VIE Agreements, we could be limited in our ability to enforce the VIE Agreements that give us effective control. Furthermore,
if we are unable to maintain effective control of our Consolidated Affiliated Entities, we would not be able to continue to consolidate
the Consolidated Affiliated Entities’ financial results with our financial results. During each of the fiscal years ended
June 30, 2011 and 2012, 100% of our revenues in our consolidated financial statements were derived from our Consolidated Affiliated
Entities. For the year ended June 30, 2013, the first fiscal year after the acquisition of AHFL together with its Taiwan Subsidiaries,
92.66% and 7.34% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries and Consolidated
Affiliated Entities, respectively. During the six months ended December 31, 2013, 93.72% and 6.28% of our revenues in our consolidated
financial statements were derived from our Taiwan Subsidiaries and Consolidated Affiliated Entities, respectively.
On January 17, 2010, CU WFOE and Anhou
and Anhou Original Shareholders entered into a series of agreements known as variable interest agreements (the “Old VIE
Agreements”) pursuant to which CU WFOE has executed effective control over Anhou through these contractual arrangements.
As a result of the capital increase and the share transfer described above, on October 24, 2013, CU WFOE, Anhou and Anhou Existing
Shareholders entered into a series of variable interest agreements (the “VIE Agreements”), including Power of Attorneys,
Exclusive Option Agreements, Share Pledge Agreements, in the same form as the previous Old VIE Agreements, other than the change
of shareholder names and their respective shareholdings. The Old VIE Agreements were terminated by and among CU WFOE, Anhou and
Anhou Original Shareholders on the same date. The Exclusive Business Cooperation Agreement executed by and between CU WFOE and
Anhou on January 17, 2011 remains in full effect. The VIE Agreements now in effect included:
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(1)
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An Exclusive Business Cooperation
Agreement through which CU WFOE is appointed the exclusive services provider to provide Anhou with complete technical support,
business support and related consulting services (as described in the agreement) in exchange for 90% of the net profits (as
defined in the agreement) of Anhou. The agreement does not provide that CU WFOE is responsible for the debts of the Consolidated
Affiliated Entities. The term of the Exclusive Business Cooperation Agreement began on January 17, 2011 and lasts ten years,
unless earlier terminated as provide in the agreement. The term of the agreement may be extended at CU WFOE’s discretion
prior to the expiration thereof. CU WFOE may terminate the agreement at any time with 30 days’ written notice but Anhou
may only terminate the agreement if CU WFOE commits gross negligence or a fraudulent act against Anhou;
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(2)
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a Power of Attorney under which the
shareholders of Anhou have vested their collective voting control over Anhou to CU WFOE;
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(3)
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an Option Agreement under which the
shareholders of Anhou granted to CU WFOE the irrevocable right and option to acquire all of their equity interests in Anhou,
subject to applicable PRC laws and regulations. The Option Agreement began on October 24, 2013 and lasts ten years, but may
be renewed at CU WFOE’s election; and
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(4)
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a Share Pledge Agreement under which
the shareholders of Anhou have pledged all of their equity interests in Anhou to CU WFOE to guarantee Anhou’s performance
of its obligations under the Exclusive Business Cooperation Agreement.
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As a holding company with no business
other than holding equity interest of our operating subsidiary, CU WFOE in China and Law Broker in Taiwan, we rely principally
on dividends to be paid by CU WFOE in China and Law Broker in Taiwan. CU WFOE, being the exclusive service provider to Anhou,
relies on the service fees to which it is entitled from Anhou. Pursuant to the Exclusive Cooperation Agreement between CU WFOE
and Anhou, CU WFOE has the right to collect 90% of the net profits of Anhou. As Anhou is still operating at a loss, Anhou has
not paid any service fees to CU WFOE yet and CU WFOE has not paid any dividend to us to date. We expect Anhou to make a profit
beginning in the fiscal year ending December 31, 2016, when it should start to pay service fees to CU WFOE, although there can
be no assurance that Anhou will become profitable by that time or ever. Our capability to receive dividends from CU WFOE, convert
them into USD and make the repatriation out of China is subject to the applicable PRC restrictions on the payment of dividends
by PRC companies, laws and regulations on foreign exchange and restrictions on foreign investment. Law Broker, being the only
operating entity for our Taiwan business, is primarily focused on life and property insurance brokerage and agency business. Through
years of operation, Law Broker has become one of the leading insurance brokerage firms in Taiwan and has expanded its business
across Taiwan, with 24 sales and service outlets (including the headquarters) and 2,149 employees and insurance sales professionals.
On February 26, 2014, Anhou completed
the registration with local AIC of Jiangsu Province on the change of its registered address to Room 1906-1910, No. 215 Jiangdong
Middle Road, Jianye District, Nanjing, Jiangsu Province, and the previous headquarter of Anhou in Henan province will become a
branch office. The new business license was issued to Anhou on February 26, 2014. Anhou will proceed with the said share
pledge upon completion of its tax registration with Jiangsu tax authorities.
Anhou owns 100% equity interest in both
Sichuan Kangzhuang and Jiangsu Law. The shareholders of Anhou are Hu Changrong, Wang Yanyan, Chen Zhaohui, Yue Jing, Hou Weizhe,
Zhang Yong and Chen Li. All of these shareholders are PRC citizens and do not hold any shares in the Company. Pursuant to the
VIE Agreements, CU WFOE becomes the primary beneficiary of Anhou and only leaves Anhou shareholders nominal value therein.
On January 28, 2011, the Company increased
the number of authorized shares from 30,000,000 shares of common stock to 100,000,000 shares of common stock and 10,000,000 shares
of preferred stock. On July 2, 2012, the Board of Directors and stockholders of the Company approved, in connection with a reclassification
of 1,000,000 issued and outstanding shares of common stock (the “Reclassified Shares”), par value $0.00001 per share
held by Mao Yi Hsiao (“Mr. Mao”) into 1,000,000 shares of Series A Convertible Preferred Stock, par value $0.00001
per share (the “Series A Preferred Stock”) on a share-for-share basis (the “Reclassification”), the issuance
of 1,000,000 shares of Series A Preferred Stock to Mr. Mao and cancellation of 1,000,000 common stock held and submitted by Mr.
Mao pursuant to the Reclassification. All of the 1,000,000 shares of Series A Preferred Stock are reclassified from the 1,000,000
common stock held by Mr. Mao and no additional consideration has been paid by Mr. Mao in connection with the Reclassification.
Each holder of common stock shall be entitled to one vote for each share of common stock held of record by such holder as of the
applicable record date on any matter that is submitted to a vote of the stockholders of the Company; while each holder of Series
A Preferred Stock shall be entitled to ten votes for each share of Series A Preferred Stock held of record by such holder as of
the applicable record date on any matter that is submitted to a vote of the stockholders of the Company.
On August 24, 2012, the Company acquired
all of the issued and outstanding shares of AHFL, a limited liability company (“LLC”) incorporated under the laws
of British Virgin Islands on April 30, 2012, together with its subsidiaries in Taiwan. Subsequent to the acquisition, AHFL becomes
a 100% subsidiary of the Company. On August 5, 2013, AHFL, Taiwan Branch (“AHFLTW”) was established with registered
capital of NT$100,000.
AHFL holds 65.95% of the issued and outstanding
shares of Law Enterprise Co., Ltd. (“Law Enterprise”), a company limited by shares incorporated under the laws of
Taiwan on January 30, 1996. Law Enterprise holds (i) 100% Law Insurance Broker Co., Ltd. (“Law Broker”), a company
limited by shares incorporated in Taiwan on October 9, 1992; (ii) 97.84% of Law Risk Management & Consultant Co., Ltd. (“Law
Management”), a company limited by shares incorporated in Taiwan on December 5, 1987; and (iii) 96% of Law Insurance Agent
Co., Ltd. (“Law Agent” collectively with “Law Enterprise”, “Law Broker” and “Law Agent”,
the “Taiwan Subsidiaries”, each a “Taiwan Subsidiary”), a LLC incorporated in Taiwan on June 3, 2000.
Law Enterprise acts as a holding company
of its operating subsidiaries in Taiwan. Law Broker primarily engages in insurance brokerage and insurance agency service business
across Taiwan, while Law Management and Law Agent are not in active operation. We operate our Taiwan business primarily through
Law Broker.
Please refer to the chart below for detailed
information of the Company’s shareholders who serve as a director or officer of the Company, the Company’s subsidiaries,
or the Consolidated Affiliated Entities.
Name
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Position in the
Company
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Position
in
AHFL
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Position in
Law
Enterprise
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Position in
Law
Broker
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Position in
Law Agent
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Position in Law
Management
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Position in
CU Hong
Kong
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Position in CU
WFOE
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Position in
Anhou
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Position in
Jiangsu Law
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Mao Yi Hsiao
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Director
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Director
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Director
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Director
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Director
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General Manager and Chairman
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General Manager and Chairman
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Supervisor
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Li Chwan Hau
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Director
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Li Fu Chang
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Director
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Chen Kuei Chiao
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Director
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Lo Chung Mei
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Chief Executive Officer
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General Manager
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Chuang Yung Chi
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Chief Financial Officer
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Manager of Financial Department
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Hsieh Tung Chi
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Chief Operating Officer
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Division Chief
of Management
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Chiang Te Yun
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Chief Technology Officer
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Manager
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Chao Hui Hsien
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Director
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General Manager
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Director
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Vice-General Manager
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Lee Shu Fen
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Director
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General Manager
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Director
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Tu Wen Ti
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Senior Assistant General Manager
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Shen
Wen Che
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Senior Assistant
General Manager
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See “Related Party Transactions”
for further information on our contractual arrangements with these parties.
The following flow chart illustrates our
Company’s organizational structure:
Products and Services
Law Broker and Anhou market and sell to
customers two broad categories of insurance products: life insurance products and property and casualty insurance products, both
focused on meeting the particular insurance needs of individuals. The insurance products that Law Broker and Anhou sell are underwritten
by some of the leading insurance companies in Taiwan and China, respectively.
Through Anhou’s wholly-owned insurance
brokerage firm Jiangsu Law, it also closely interacts with insurance companies and actively locates and introduces the right customers
in Anhou’s database matching the insurance products offered by such insurance companies to them.
Life Insurance Products
The life insurance products Law Broker
distributes can be broadly classified into the categories set forth below. Due to constant product innovation by insurance companies,
some of the insurance products Law Broker distributes combine features of one or more of the categories listed below. Total net
revenues from life insurance products distributed by Law Broker accounted for 95.20 % of Law Broker’s total net revenues
during the Transition Period. Total net revenues from life insurance products distributed by Law Broker accounted for 95.05% of
CUIS’ total net revenues of life insurance during the Transition Period.
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·
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Individual Whole Life Insurance.
The individual whole life insurance products Law Broker distributes provide insurance for the insured person’s entire
life in exchange for the periodic payment of fixed premiums over a pre-determined period, generally ranging from six to 20
years, or until the insured reaches a certain age. The face amount of the policy or, for some policies, the face amount plus
accumulated interests is paid upon the death of the insured.
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Individual Term Life Insurance.
The individual term life insurance products Law Broker distributes provide insurance for the insured for a specified time
period or until the attainment of a certain age, in return for the periodic payment of fixed premiums over a pre-determined
period, generally ranging from six to 20 years. Term life insurance policies generally expire without value if the insured
survives the coverage period.
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·
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Individual Health Insurance.
The
individual health insurance products Law Broker distributes pay the insured amount of reasonable hospitalization cost, or
certain death benefit in case of the death of the insured, due to sickness, accident or childbirth. Individual health insurance
policies expire when the premium is not paid or a certain age is attained.
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·
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Casualty Insurance.
Accidental
Injury Insurance is the kind of life insurance that insurance benefit is given when the insured is dead or disabled because
of accidental injury, which is unforeseen by the injured or against his will. Casualty insurance policies expire when the
premium is not paid or a certain age is attained.
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Investment-oriented Insurance.
Investment-oriented insurance products are the market linked insurance plan which also provide life coverage. The premium
amount (after deduction of certain charges) is invested into different funds. The performance of the fund will depend on the
market. A growing upward trend in market will increase the fund value. Every investment-oriented insurance policy has market
risk exposure depending on the fund invested and such investment risk is solely borne by the policyholder. Depending on the
death benefit, Investment-oriented insurance policies are categorized into two broad categories: (1) The death benefit is
equal to the higher of insured amount or fund value. (2) The death benefit is equal to the insured amount plus fund value.
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Foreign Currency Policy Commodity.
It is a life insurance policy in which a policy benefit shall all be paid in foreign currencies. The foreign currency
policy provides insurance for the insured person’s life in exchange for the periodic payment of fixed premiums over
a pre-determined period, generally ranging from six to 20 years, or until the insured reaches a certain age. The face amount
of the policy or, for some policies, the face amount plus accumulated interests, is paid upon the death of the insured.
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Travel Accident Insurance
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It is a kind of casualty insurance. The travel accident insurance provides monetary compensation in case the insured dies
or loses a limb in an accident while he or she is traveling. The premium is based on the days of traveling and the insured
amount.
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The life insurance products
Law Broker distributed in the Transition Period were primarily underwritten by Farglory Life Insurance Co, Ltd., Fubon Life Insurance
Co, Ltd., AIA International Limited, Taiwan Branch, TransGlobe Life Insurance Company and China Life Insurance Co., Ltd.
The life insurance products Anhou distributes
can be broadly classified into the categories set forth below. Due to constant product innovation by insurance companies, some
of the insurance products Anhou distributes combine features of one or more of the categories listed below. Total net revenues
from life insurance products accounted for 73.95% of Anhou’s total net revenues in the Transition Period.
Total net revenues from life insurance
products distributed by Anhou accounted for approximately 4.95% of CUIS’ total net revenues of life insurance products in
the Transition Period.
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Individual Whole Life Insurance.
The individual whole life insurance products Anhou distributes provide insurance for the insured person’s entire
life in exchange for the periodic payment of fixed premiums over a pre-determined period, generally ranging from five to 20
years, or until the insured reaches a certain age. The face amount of the policy or, for some policies, the face amount plus
accumulated interests is paid upon the death of the insured.
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Individual Term Life Insurance.
The individual term life insurance products Anhou distributes provide insurance for the insured for a specified time period
or until the attainment of a certain age, in return for the periodic payment of fixed premiums over a pre-determined period,
generally ranging from five to 20 years. Term life insurance policies generally expire without value if the insured survives
the coverage period.
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Individual Endowment Life Insurance.
The individual endowment products Anhou distributes generally provide maturity benefits if the insured reaches a specified
age, and provide to a beneficiary designated by the insured guaranteed benefits upon the death of the insured within the coverage
period. In return, the insured makes periodic payment of premiums over a pre-determined period, generally ranging from five
to 25 years.
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Individual Education Annuity.
The
individual annuity products Anhou distributes are primarily education related products. They provide annual benefit payments
after the insured attains a certain age, e.g., 18, for a fixed time period, or e.g., four years, and a lump payment at the
end of the coverage period. In addition, the beneficiary designated in the annuity contract will receive guaranteed benefits
upon the death of the insured during the coverage period. In return, the purchaser of the annuity products makes periodic
payment of premiums during a pre-determined accumulation period.
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Individual
Health Insurance.
The individual health insurance products Anhou distributes primarily consist of dread disease insurance
products, which provide guaranteed benefits for specified dread diseases during the coverage period. In return, the insured
makes periodic payment of premiums over a pre-determined period.
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The life insurance products Anhou distributed
in the Transition Period were primarily underwritten by Sunshine Insurance Group Corporation Limited, Taiping Life Insurance Co.
Ltd., Taikang Life Insurance Company and Sino Life Insurance Co., Ltd.
In addition to the periodic premium payment
schedules described above, most of the individual life insurance products we distribute also allow the insured to choose to make
a single, lump-sum premium payment at the beginning of the policy term. If a periodic payment schedule is adopted by the insured,
a life insurance policy can generate periodic payment of fixed premiums to the insurance company for a specified period of time.
This means that once Anhou or Law Broker sells a life insurance policy with a periodic premium payment schedule, they will be
able to derive commission and fee income from that policy for an extended period of time, sometimes up to 25 years. Because of
this feature and the expected sustained growth of life insurance sales in China and Taiwan, we have focused significant resources
ever since the incorporation of Anhou and Law Broker on developing our capability to distribute individual life insurance products
with periodic payment schedules. We expect that sales of life insurance products will continuously be our primary source of revenue
in the next several years.
Property and Casualty Insurance
Products
Law Broker’s main
property and casualty insurance products are automobile insurance, casualty insurance and liability insurance. Law Broker commenced
sale of automobile insurance, casualty insurance and liability insurance business in August 2003. Total net revenues from property
and casualty insurance products accounted for 4.8% of Law Broker’s total net revenues in the Transition Period.
Total net revenues from property and casualty
insurance products distributed by Law Broker accounted for 73.33% of CUIS’ total net revenues of property and casualty insurance
products in the Transition Period.
The property and casualty insurance products
Law Broker distributes can be further classified into the following categories:
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·
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Automobile Insurance.
Law Broker distributes both standard
automobile insurance policies and supplemental policies, which we refer to as riders. The standard automobile insurance policies
Law Broker sells generally have a term of one year and cover damages caused to the insured vehicle by collision and other
traffic accidents, falling or flying objects, fire, explosion and natural disasters. Law Broker also sells standard third
party liability insurance policies, which cover bodily injury and property damage caused by an accident involving an insured
vehicle to a person not in the insured vehicle. The riders Law Broker distributes cover additional losses, such as liability
to passengers, losses arising from vehicle theft and robbery, broken glass and vehicle body scratches.
|
|
·
|
Casualty Insurance
. Casualty insurance is made to insure
any loss or damage to property. This is designed to cover loss that is made by direct accident. The policy period is usually
one year. The premium is based on the insured amount.
|
|
·
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Liability Insurance.
When the insured is legally obligated
to indemnify a third party and subject to a claim in connection therewith, the liability insurer is liable to provide such
indemnification on behalf of the insured. The policy period is usually one year. The premium is based on the insured amount.
|
The property and casualty insurance products
Law Broker distributed in the Transition Period were primarily underwritten by Fubon Insurance Co, Ltd., Taian Insurance Co.,
Ltd., Zurich Insurance Company, ACE Insurance Company, and Union Insurance Company.
Anhou’s main property and casualty
insurance products are automobile insurance and commercial property insurance. Anhou commenced its sale of commercial property
insurance in 2009 and had developed its automobile insurance business since 2010. Total net revenues from property and casualty
insurance products distributed by Anhou accounted for 26.05% of Anhou’s total net revenues in the Transition Period.
Total net revenues from property and casualty
insurance products distributed by Anhou accounted for 26.67% of CUIS’ total net revenues of property and casualty insurance
products in the Transition Period.
The property and casualty insurance products
Anhou distributes can be further classified into the following categories:
|
·
|
Automobile Insurance.
Automobile insurance is the largest
segment of property and casualty insurance in the PRC in terms of gross written premiums. Anhou distributes both standard
automobile insurance policies and supplemental policies, which we refer to as riders. The standard automobile insurance policies
Anhou sells generally have a term of one year and cover damages caused to the insured vehicle by collision and other traffic
accidents, falling or flying objects, fire, explosion and natural disasters. Anhou also sells standard third party liability
insurance policies, which cover bodily injury and property damage caused by an accident involving an insured vehicle to a
person not in the insured vehicle. The riders Anhou distributes cover additional losses, such as liability to passengers,
losses arising from vehicle theft and robbery, broken glass and vehicle body scratches.
|
|
·
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Commercial Property Insurance.
The commercial property insurance
products Anhou distributes include basic, comprehensive and all risk policies. Basic commercial property insurance policies
generally cover damage to the insured property caused by fire, explosion and thunder and lightning. Comprehensive commercial
property insurance policies generally cover damage to the insured property caused by fire, explosion and certain natural disasters.
All risk commercial property insurance policies cover all causes of damage to the insured property not specifically excluded
from the policies.
|
The property and casualty insurance products
Anhou distributed in the Transition Period were primarily underwritten by PICC Property and Casualty Co., Ltd., China Pacific
Insurance (Group) Co., Ltd., Cathay Insurance Co., Ltd.,China Life &Casualty Insurance Co., Ltd. and Samsung Property&
Casualty Insurance Company (China) Limited.
Strategic Alliance with AIATW
On June 10, 2013, AHFL entered into a
Strategic Alliance Agreement (the “Alliance Agreement”) with AIA International Limited Taiwan Branch (“AIATW”).
The purpose of the Alliance Agreement is to promote life insurance products provided by AIATW within the territory of Taiwan by
insurance agency companies or insurance brokerage companies affiliated with AHFL or CUIS. The term of the Alliance Agreement is
from April 15, 2013 to August 31, 2018. Pursuant to the terms of the Alliance Agreement, AIATW shall pay AHFL an Execution Fee
of $8,367,947 (NT$ 250,000,000). The fee will be recorded as revenue upon fulfilling sales target over the next five years. As
of September 23, 2013, AHFL has received $8,367,947 (NT$250,000,000) from AIATW under the Alliance Agreement. Pursuant to the
Alliance Agreement, AHFL is entitled to the payment of the execution fee, subject to certain terms and conditions therein, including
the satisfaction of the performance targets and the threshold 13-month persistency ratio. The Execution Fee may be required to
be recalculated if certain performance targets are not met by AHFL.
Unified Operating Platform
Law Broker has its own self-developed
Unified Operating Platform. Since Law Broker’s establishment in 1992, it has successfully implemented the following components
of its operating platform across its branch offices in Taiwan through a hub center located in Taipei:
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·
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A centralized clients and insurance
policy management and analysis system, which encompasses our life insurance unit and property and casualty insurance unit,
that will better support business operations and facilitate risk control;
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|
·
|
An integrated administrative and information
system, that increases the management efficiency among the subsidiaries, branches and sales departments;
|
|
·
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A centralized and computerized accounting
and financial management system, that increases the commission distribution and enforcement;
|
|
·
|
A human resources management and analysis
system; and
|
|
·
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An e-learning system to provide online
training to sales professionals.
|
Through years of operation, the Unified
Operating Platform has proved to be an efficient and streamlined operating system which contributes to the successful expansion
and growth of Law Broker into one of the leading companies in Taiwan, with 24 sales and service outlets (including the headquarter)
across Taiwan and 2,149 employees and insurance sales professionals.
In accordance with our growth strategy
in China, Anhou has made significant effort to adapt the Unified Operating Platform utilized by Law Broker to better meet the
operational need in China. Since September 2010, Anhou has successfully implemented the tailored operating platform across the
PRC subsidiaries through a hub center located in Nantong, Jiangsu province. We expect that this tailored operating platform will
make selling easier for sales agents in China, facilitate standardized business and financial management, enhance risk control
and increase operational efficiency for the PRC subsidiaries.
Anhou has tailored and refined the platform
on the basis of Law Broker’s well-developed operating platform in Taiwan and believes that it is difficult for our competitors
in China, particularly new market entrants, to reproduce a similar platform without substantial financial resources, time and
operating experience.
Because the various systems, policies
and procedures under both of operating platforms utilized by Law Broker and Anhou can be rolled out quickly as we enter new regions
or make acquisitions, we believe we can expand our distribution network rapidly and efficiently while maintaining the quality
of our services.
Distribution and Service Network and
Marketing
Since Law Broker’s establishment
in 1991, it has devoted substantial resources in building up its distribution and service network. Law Broker currently has 24
sales and service outlets spread across Taiwan (including the headquarter), among which, 7 located in northern region, 10 located
in central region, 5 located in southern region and 2 located in eastern region. As of December 31, 2013, Law Broker had 1,594
full-time sales professionals, 406 part-time sales professionals and 149 administrative staff.
The following table sets forth some additional
information of Law Broker’s distribution and service network as of December 31, 2013, broken down by the four regions:
|
|
Number of Full-time
|
|
|
Number of Full-time
|
|
|
Number of Part-time
|
|
Province
|
|
Number of Sales and Service
Outlets
|
|
|
Sales Professionals
|
|
|
Sales Professionals
|
|
Northern region
|
|
|
7
|
|
|
|
402
|
|
|
|
93
|
|
Southern region
|
|
|
5
|
|
|
|
353
|
|
|
|
102
|
|
Central region
|
|
|
10
|
|
|
|
785
|
|
|
|
199
|
|
Eastern region
|
|
|
2
|
|
|
|
54
|
|
|
|
12
|
|
Total
|
|
|
24
|
|
|
|
1,594
|
|
|
|
406
|
|
Law Broker markets and sells life insurance
products, property and casualty insurance products directly to the targeted customers through the sales professionals, who are
not its employees.
Since Anhou’s establishment in 2003,
it has devoted substantial resources in building up its distribution and service network. Anhou has targeted its distribution
and service network in provinces with most population in China, such as Henan, Jiangsu and Sichuan
.
As of December 31,
2013, Anhou has two insurance agencies and one insurance brokerage firm, with 954 full time sales professionals and 37 part-time
sales professionals and 82 administrative staffs operating across 39 cities within these three provinces.
The following table sets forth some additional
information of Anhou’s distribution and service network as of December 31, 2013, broken down by provinces:
|
|
|
|
|
Number of Full-time
|
|
|
Number of Part-time
|
|
Province
|
|
Number of Sales and Service
Outlets
|
|
|
Sales Agents
|
|
|
Sales
Agents
|
|
Henan
|
|
|
34
|
|
|
|
804
|
|
|
|
-
|
|
Sichuan
|
|
|
4
|
|
|
|
135
|
|
|
|
-
|
|
Jiangsu
|
|
|
1
|
|
|
|
15
|
|
|
|
37
|
|
Total
|
|
|
39
|
|
|
|
954
|
|
|
|
37
|
|
Anhou markets and sells life insurance
products, property and casualty insurance products directly to the targeted customers through the sales agents, who are not its
employees.
Customers
As of December 31, 2013, Law Broker had
approximately 530,000 customers, among which approximately 92% purchased life insurance products and approximately 8% purchased
property and casualty insurance products from Law Broker.
Due to its extensive line of insurance
products underwritten by the insurance companies in Taiwan, Law Broker managed to offer a variety of insurance products to customers
of different ages or professions. However, as aging population in Taiwan has gradually become a more recognized social issue,
despite of a relatively healthy government-sponsored retirement and medial programs, more and more Taiwanese, especially those
with stable financial means and aiming for high-end retirement and medical treatment, has been focusing on endowment and medical
type of commercial insurance products, while the investment type of insurance products have been playing a less significant role
since the economic downturn. In particular, 17.6% of the revenues of Law Broker are generated from sale of endowment insurance
and 46.3% of the revenues of Law Broker are generated from the sale of medical insurance.
In addition, from time to time, Law Broker
has been, either voluntarily or upon request of insurance companies, advising insurance companies or providing feedback on particular
type of insurance products before they are put on the market. This interaction with insurance companies has not only enhanced
the close cooperation between Law Broker and the insurance companies, but also gives it an edge in understanding the in-depth
feature of such insurance products for marketing and distribution purposes.
Law Broker sells automobile insurance
and casualty insurance primarily to individual customers. Law Broker sells liability insurance to institutional customers.
As of December 31, 2013, Anhou had
34,162 customers, among which 32,976 purchased life insurance products and 1,186 purchased property and casualty insurance
products from Anhou.
Anhou sells automobile insurance and individual
accident insurance primarily to individual customers. Anhou sells commercial property insurance to institutional customers.
Anhou targeted middle class individuals
and family members under 50 years age to be its priority clients, which represent 95% of its client base. The revenues of Anhou
are primarily generated from the sale of life insurance products and we expect the continuous growth in this regard, as more and
more customers in China realized the insufficiency of the mandatory social insurance coverage and the necessity to supplement
it with commercial insurance. In particular, approximately 30% of the revenues of Anhou are generated from sale of endowment insurance
and approximately 33% of the revenues of Anhou are generated from the sale of medical insurance. With the implementation of the
national one-child policy in China, in fact, approximately 40% of the insurance policies distributed by Anhou have designated
children under 14 years age as the beneficiary of such policies, Anhou expects the continuous growth of insurance market of these
factors in the near future.
During the Transition Period, no single
customer accounted for more than 3% of the net revenues of CUIS, Law Broker or Anhou.
Insurance Company Partners
We are selective in terms of choosing
insurance company as our partners. We take into consideration of a variety of factors, such as the reputation and integrity of
the insurance company, the quality and competitiveness of insurance products offered, the prudence and health of the financial
standing of the insurance company as well as the complexity and efficiency of claim adjustment and settlement. During years of
operation, both Law Broker and Anhou have formed strategic relationships with numerous insurance companies in Taiwan and China,
respectively, as of December 31, 2013, Law Broker had established business relationships with 20 insurance companies in Taiwan
and Anhou had established business relationships with 33 insurance companies in China.
On June 10, 2013, AHFL entered into an
Alliance Agreement with AIATW. The purpose of the Alliance Agreement is to promote life insurance products provided by AIATW within
the territory of Taiwan by insurance agency companies or insurance brokerage companies affiliated with AHFL or CUIS. The term
of the Alliance Agreement is from April 15, 2013 to August 31, 2018. Pursuant to the terms of the Alliance Agreement, AIATW shall
pay AHFL an Execution Fee of $8,367,947
(NT$ 250,000,000). The fee will be recorded as revenue upon fulfilling sales target
over the next five years. As the date of September 23, 2013, AHFL has received $8,367,947 (NT$250,000,000) from AIATW. Pursuant
to the Alliance Agreement, AHFL is entitled to the payment of the execution fee, subject to certain terms and conditions therein,
including the satisfaction of the performance targets and the threshold 13-month persistency ratio. The Execution Fee may be required
to be recalculated if certain performance targets are not met by AHFL.
During the Transition Period, Law Broker’s
top five insurance company partners, after aggregating the business conducted between Law Broker and the various local branches
of the insurance companies were Farglory Life Insurance Co., Ltd., Fubon Life Insurance Co., Ltd., TransGlobe Life Insurance
Company, AIA International Limited, Taiwan Branch and China Life Insurance Co., Ltd.. Among them, Farglory Life Insurance Co.,
Ltd. accounted for 29.69% of Law Broker’s total net revenues from commissions and fees in the Transition Period.
Anhou’s
top five insurance company partners, after aggregating the business conducted between Anhou and the various local branches of
the insurance companies were Taikang Life Insurance Co., Ltd., Sunshine Insurance Group Corporation Limited, Sino Life Insurance
Co., Ltd., PICC Property and Casualty Co., Ltd., and Cathay Property Insurance Co., Ltd. Among them,
Taikang
Life Insurance Co., Ltd. accounted for 23.72% of Anhou’stotal net revenues from commissions and fees in the Transition Period.
Competition
A number of industry players are involved
in the distribution of insurance products in Taiwan and PRC. We compete for customers on the basis of product offerings, customer
services and reputation. Because we primarily distribute individual insurance products, our principal competitors include:
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Professional insurance intermediaries.
Life insurance is our core business and has a strong regional feature. Through years of business development, we believe
that we can compete effectively with other insurance intermediary companies as we have a longer operational history and over
the years have assembled a strong and stable team of managers and sales professionals. With the implementation of our unified
operating platform, we believe that we could strengthen our lead in our developed local regions and expand our operation to
our newly selected areas. However, with increasing consolidation expected in the insurance intermediary sector in the coming
years, we expect competition within this sector to intensify.
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·
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Insurance companies.
The distribution
of individual life insurance products in Taiwan and China historically has been dominated by insurance companies, which usually
use both in-house sales force and exclusive sales agents to distribute their own products. We believe that we can compete
effectively with insurance companies because we focus only on distribution and offer our customers a broad range of insurance
products underwritten by multiple insurance companies.
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·
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Other business entities.
In
recent years, business entities that distribute insurance products as an ancillary business, primarily commercial banks and
postal offices have been playing an increasingly important role in the distribution of insurance products, especially life
insurance products. However, the insurance products distributed by these entities are usually confined to those related to
their main lines of business, such as investment-related life insurance products. We believe that we can compete effectively
with these business entities because we offer our customers a broader variety of products.
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Law Broker is one of the leading insurance
brokerage firms in Taiwan. During the past two decades, Law Broker has expanded its business across Taiwan, with 24 sales and
service outlets (including the headquarter) and 1,594 full time sales professionals and 406 part-time sales professionals and
149 administrative staffs spread over the four regions of Taiwan. Other than insurance companies and commercial banks, Law Broker’s
primary competitors are Taiwan insurance brokerage companies of relatively large size, in particular, Everpro Insurance Brokers
Co., Ltd. and Genius Insurance Brokers Co., Ltd. Through years of operation, Law Broker has won numerous awards from various Taiwan
government authorities for its excellence in the insurance brokerage industry. Among which, from year 2005 to year 2008, Law Broker
has won the “Taiwan Insurance Excellence Award - Talent Training” for four consecutive years, the “Taiwan Insurance
Excellence Award - E-commerce” in 2009, the "Taiwan Insurance Excellence Award - Customer Service and Personal Training”
in 2011,the“Taiwan Insurance Excellence Award - Golden Medal for Information Application, Silver Medal for Personnel Training
and Silver Medal for Customer Service” in 2013, the“Insurance Dragon and Phoenix Award” in 2012 and 2013 as
well as the Most Desirable Insurance Brokerage Company of Finance Insurance Graduates in 2013. The “Taiwan Insurance Excellence
Award" is one of most prestigious as well as well-participated insurance events in Taiwan, co-sponsored by the Taiwan Insurance
Institute, Taiwan Financial Supervisory Committee and Taiwan Consumer Protection Committee, to encourage the insurance industry
participants to actively enhance insurance service quality as well as to improve customer services.
During the past 10 years, Anhou has expanded
its business across 39 cities within Henan, Sichuan and Jiangsu provinces with 954 full time sales professionals and 37 part-time
sales professionals and 82 administrative staffs. Based on the insurance products Anhou is offering and the geographic areas of
its branch offices, Anhou’s primary competitors are small-sized and middle-sized insurance agency companies. Anhou is relatively
larger in terms of the number of salesmen as well as the sales revenue comparing to those competing insurance agency companies.
On April 20, 2012, Anhou obtained the nationwide license from CIRC, pursuant to which Anhou may set up its branch office across
the PRC, to carry out the insurance agency business, with no further approval requirement from CIRC other than filing with the
local CIRC at the provincial level.
On March 26, 2012, CIRC issued the Notice
on Suspension of Market Entry Approval of Regional Insurance Agencies and Certain Part-time Insurance Agencies (“2012 Notice”).
Pursuant to the 2012 Notice, CIRC and its local counterparts will suspend granting any new license to full-time insurance agencies
operating on a regional basis (“Regional Insurance Agencies”) as well as to branch offices of existing Regional Insurance
Agencies. In addition, no new license for part-time insurance agency businesses will be granted unless such applicant is a financial
institution or a China Post office. However, CIRC emphasized in the 2012 Notice that its local counterparts shall continue to
support the establishment of insurance intermediary groups and full-time insurance agencies operating on a nationwide basis, as
well as continue to support their respective branch offices.
As indicated in the 2012 Notice, it appears
that CIRC is aiming to increase the entry thresholds of Regional Insurance Agencies and part-time insurance agencies with a view
to reducing the number, as well as, enhancing the quality of insurance agencies in the market. CIRC has also indicated in the
2012 Notice that it intends to further amend related rules and regulations to improve the market entry and exit mechanism for
insurance agencies, and promote the professionalism as well as enhance the quality of insurance agencies in the market.
On April 27, 2013, CIRC issued the Decision
on Revising the Provisions of the Supervision and Administration of Specialized Insurance Agencies (the “Decision on Revising
the Agency Provisions”), pursuant to which, CIRC has mandated any insurance agency established subsequent to the Decision
on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million ($8.1 million).
On May 16, 2013, CIRC issued Notice for
Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “2013 Notice”),
pursuant to which, professional insurance agencies established prior to the issuance of the Decision on Revising the Agency Provisions,
with registered capital less than RMB50 million ($8.1 million), can continuously operate their existing business within the provinces
where they have the registered office or branch office, but shall not set up any new branches in any province where they do not
have the registered office or any branch office.
With the promulgation and implementation
of the above-mentioned regulations, we expect a better regulated insurance agency market in China with orderly competition and
pursuit for professional excellence, which will accentuate our competitive advantage due to our continuous commitment to quality
service. Also, as of the date of filing of this Transition Report on Form 10-K, Anhou is one of 108 insurance agencies with a
PRC nationwide license and has increased its registered capital to RMB50 million ($8,165,890) on October 24, 2013. We believe
that we will be in a better position to obtain the full support expressly provided in the 2012 Notice from the local CIRC on our
expansion strategy nationwide.
Intellectual Property
To protect our intellectual property,
we rely on a combination of trademark, copyright and trade secret laws as well as confidentiality agreements with our employees,
sales agents, contractors and others.
Law Enterprise, Law Broker and Law Agent
jointly own the following registered trademarks in Taiwan:
the Service Mark of Law Insurance Broker Co., Ltd.
under the registration number 01462327, with a 10-year validity from June 16, 2011 to June 15, 2021;
the logo of Law Insurance Broker Co., Ltd. under
the registration number 01604254, with a 10-year validity from October 16, 2013 to October 15, 2023;
the logo of Blue Magpie, with a 10-year validity
from June 16, 2011 to June 15, 2021;
the logo of Law (定律) under the registration
number 01462328, with a 10-year validity from June 16, 2011 to June 15, 2021;
the logo of Law (定律) under the registration
number 01611772, with a 10-year validity from December 1, 2013 to November 30, 2023;
the logo of Bao Xian Tong and INS, with a 10-year
validity from May 16, 2013 to May 15, 2023; and
the logo of Magpie Baby, with a 10-year validity
from May 16, 2012 to May 15, 2022.
Law Broker has the following registered
trademarks in Taiwan:
the logo of Blue Magpie Fleet, with a 10-year validity
from December 1, 2008 to November 30, 2018;
the logo of Law Insurance Broker, with a 10-year
validity from December 1, 2008 to November 30, 2018;
the logo of Law Blue Magpie, with a 10-year validity
from December 1, 2008 to November 30, 2018;
the logo of Symbiosis, Co-cultivation
Co-Prosperity and Law Blue Magpie Picture, with a 10-year validity from July 1, 2008 to June 30, 2018;
the logo of Education Training Blue Magpie,
with a 10-year validity from June 1, 2008 to May 31, 2018;
the logo of Cartoon Blue Magpie, with
a 10-year validity from June 1, 2008 to May 31, 2018;
the logo of Little Blue Magpie, with a
10-year validity from June 1, 2008 to May 31, 2018;
the logo of Triumph Blue Magpie, with
a 10-year validity from June 1, 2008 to May 31, 2018;
the logo of Blue Magpie Fleet Picture,
with a 10-year validity from May 1, 2008 to April 30, 2018; and
the logo of Fighting Blue Magpie, with
a 10-year validity from June 1, 2008 to May 31, 2018.
Jiangsu Law has one registered trademark
in China, the logo of Jiangsu Law:
Employees
As of December 31, 2013, Law Broker has
a total of 149 full-time employees and Anhou has 82 full-time employees. Our employees are not represented by any collective bargaining
agreement. We believe that we have good relations with our employees and we have never experienced a work stoppage.
Regulation
Taiwan Regulations of the Insurance
Industry
The insurance industry in Taiwan is highly
regulated. Financial Supervisory Committee of Republic of China, the FSC, is the regulatory authority responsible for the supervision
of the insurance industry in Taiwan. Insurance activities undertaken within Taiwan are primarily governed by the Insurance Law
and the related rules and regulations.
Insurance Law
The current principal regulation governing
insurance in Taiwan is Insurance Law, latest amended on January 8, 2014 by Legislative Yuan, which provided the initial framework
for regulating the insurance industry.
The Insurance Law defines several subjects
of insurance industry, such as insurer, insurance agency, insurance brokerage and insurance adjustor. It established requirements
for form of organization, and qualifications and procedures to establish an insurance organization as well as separation of property
insurance businesses and life insurance businesses. The Insurance Law distinguishes insurance between fire disaster, marine, land
and air, liability, surety , and other casualty and property insurance businesses on the one hand, and life insurance, health
insurance, casualty insurance and annuity businesses on the other. Unless permitted by the FSC, insurance companies are not allowed
to engage in both types of insurance businesses.
The insurers, insurance agencies, insurance
brokerages and insurance adjustors must join the related industry associations, or they are prohibited from conducting business
operation.
FSC
The FSC is in charge of the financial
market and financial service industries, among the insurance industry and has the power to control the following items:
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1.
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Financial system and supervision policy.
|
|
2.
|
The preparation, amendment and abolishment of financial laws and
regulations.
|
|
3.
|
Supervision and management of the financial institutions, include
its establishment, revocation, abolishment, change, merger, dissolution, and business scope.
|
|
4.
|
Development, supervision and management of financial market.
|
|
5.
|
Inspection of financial institution.
|
|
6.
|
Inspection on public listing company related to their securities
market-related matters.
|
|
7.
|
Foreign financial matters.
|
|
8.
|
Protection of financial customers.
|
|
9.
|
Dealing and penalizing the violation of related laws and regulations
of finance.
|
|
10.
|
Collection of and analysis on relevant statistic data related to
financial supervision, management and inspection.
|
|
11.
|
Other matters related to financial supervision, management and
inspection.
|
Regulation of Insurance Agents and
Agencies
The current principal regulation governing
insurance agents and agencies is the Rules on the Administration of Insurance Agent latest amended on December 28, 2012 by Insurance
Bureau of FSC (the “Agent Rule”). An insurance agent stipulated under the Insurance Law refers to a person who is
on behalf of the insurer to conduct agency business pursuant to the agency contract or the power of attorney and charges fees
from the insurer. Depending on their focused insurance areas, i.e. property insurance and life insurance, insurance agents can
be divided into property insurance agents and life insurance agents. No matter what insurance industry an insurance agent is engaged
in, it must have one of the following qualifications: (1) having passed the insurance agency examination for professional and
technical staff; (2) having passed the insurance agency qualification test; or (3) having obtained the agency practitioner certificate
and practiced the same business. Those who have agent qualifications required by the Agent Rule may conduct business after they
obtain the practitioner certificates under the name of themselves or the company they work for. An agency company must hire more
than one agent to act as signatory(ies), and registered with the administrative authority, the number of whom can be adjusted
appropriately in accordance with the scale of business. If necessary, the administrative authority may, in its discretion, require
the company to add more signatories. An insurance agent may only work for one insurance agency company as signatory at one time.
There are special requirements for agency
companies, such as the name of an agent company must contain the words "insurance agency", and when an agency company
applies to operate agency business, the minimum registered capital must be at least NT$3 million ($99,920) fully paid up in cash.
The Practitioner Certificate
The practitioner certificate has a duration
of five years, and must be renewed before expiration. In case an agent has the qualifications for both of property and life insurance,
unless otherwise approved by the administrative authority, only one kind of insurance agency practitioner certificate may be obtained
upon his selection.
Education and Training
There’re two types of education
and training for an insurance agent, pre-vocational and on-the-job education and training. An insurance agent must attend in pre-vocational education and training for at least 32 hours during the two years before applying for practicing insurance agency business
and on-the-job education and training for at least 24 hours during the two years before the renewal of the practitioner certificate.
Management of Insurance Agencies
The rules describing how to conduct insurance
agency business concentrate on the concept that the agencies must take care of customers' matters in good faith. To ensure this
concept is properly carried out, the rules require insurance agency companies must have legal compliance officers with one of
the following qualifications: (1) are qualified to be insurance agents or brokers and have worked as actual signatories; (2) have
five years working experience in the insurance industry, insurance agency or insurance brokerage; or (3) having graduated from
departments related to insurance or law departments of colleges and universities with more than three years working experience
in insurance industry, insurance agency or insurance brokerage.
Regulation of Insurance Brokers and
Brokerage Companies
The current principal regulation governing
insurance brokers and brokerage companies is the Rules on the Administration of Insurance Broker last amended on December 28,
2012 by Insurance Bureau of FSC (the “Broker Rule”). An insurance broker stipulated under the Insurance Law refers
to a person who negotiates to conclude an insurance contract on behalf of the insured and charges fees from the insured. Depending
on their focused insurance areas, i.e. property or life insurance, insurance brokers can be divided into property insurance brokers
and life insurance brokers. No matter what insurance industry an insurance broker is engaged in, it must have one of the following
qualifications: (1) have passed the insurance brokerage examination for professional and technical staff; (2) have passed the
insurance brokerage qualification test; or (3) have obtained the insurance brokerage practitioner certificate and practiced the
same business.
Those who have brokerage qualifications
required by the Broker Rule may conduct business after they obtain the practitioner certificates under their own name or the company
they work for. A brokerage company must hire more than one broker to act as signatory(ies), and registered with the administrative
authority, the number of whom can be adjusted appropriately in accordance with the scale of business. If necessary, the administrative
authority may, in its discretion, require the company to add signatories. An insurance agent may only work for one insurance brokerage
company as signatory at one time.
There are special requirements for brokerage
companies, such as the name of an brokerage company must contain the words "insurance broker"; when an brokerage company
applies to operate brokerage business, the minimum registered capital must be at least NT$3 million ($
99,920
)
fully paid up in cash.
The Practitioner Certificate
The insurance broker practitioner certificate
has a validation duration of five years, and must be renewed before expiration. In case a broker has the qualifications for both
property insurance and life insurance, he may obtain both insurance brokerage practitioner certificates.
Education and Training
There’re two types of education
and training for an insurance broker, pre-vocational and on-the-job education and training. An insurance broker must attend pre-vocational
education and training for at least 32 hours during the two years before applying for practicing insurance broker business and
on-the-job education and training for at least 24 hours during the two years before the renewal of the practitioner certificate.
Management of Insurance Brokerages
The rules describing how to conduct brokerage
business concentrate on the concept that the brokerages must take care of customers' matters in good faith. To ensure that this
concept is properly carried out, the rules require insurance brokerage companies must have legal compliance officers who have
one of the following qualifications: (1) are qualified to be insurance agents or brokers and have worked as actual signatories;
(2) have five years working experience in the insurance industry, insurance agency or insurance brokerage; or (3) have graduated
from college and university departments related to insurance or law with more than three years working experience in insurance
industry, insurance agency or insurance brokerage.
Regulation of Insurance Salespersons
The current principal regulation governing
individual insurance salespersons is the Rules on the Administration of Insurance Salespersons latest amended on September 14,
2010 by Insurance Bureau of FSC (the “Salesperson Rule”). An insurance salesperson falling under the Insurance Law
refers to a person who is engaged in attracting insurance business for insurance companies, insurance brokerage companies and
insurance agency companies. A salesperson is not allowed to attract business for the company he belongs unless he has completed
the registration in accordance with the Salesperson Rules and has obtained the registration certificate. In order to obtain the
registration certificate, an insurance salesperson must be at least 20 years old and has at least graduated from a senior high
school or a senior vocational school or have an equivalent educational background. In addition, the salesperson must meet one
of the following requirements: (1) passed the salesperson qualification examination held by relevant associations; or (2) have
a valid the registration certificate. Once the salespersons passed the qualification examination, the relevant association will
notify the company where the salesperson works, then the company will issue a registration certificate for the salesperson and
file such registration certificate with the relevant authorities. The registration certificate is valid for five years and must
be renewed before expiration. The salesperson must present the registration certificate before they start attracting insurance
business. Unless approved by the company, the salesperson may not work for any other insurance company, insurance brokerage company
or insurance agency company. The company supervises the work of the salesperson and is joint and severally liable for any damage
caused by its salesperson.
Education and Training
Salespersons must attend in education
and training held by their companies every year, or the companies shall revoke the registration certificates of those who fail
to attend such education and training.
The Salesperson Rule also stipulates the
proper ways and manners to be followed by the salespersons in conducting their businesses and specifies the penalties in case
of their violation of the Salesperson Rule.
Taiwan Regulations on Foreign Exchange
Foreign exchange regulation in Taiwan
is primarily governed by the Ordinance of Foreign Exchange Administration, latest amended on April 29, 2009 (the “Foreign
Exchange Ordinance”). Under the Foreign Exchange Ordinance, foreign exchange refers to foreign currency, bills and marketable
securities. The authority managing the administration of foreign exchange is Ministry of Finance of Republic of China, while the
authority managing the practical operation of foreign exchange business is Central Bank of Republic of China. The Foreign Exchange
Ordinance also specifies the allocated power of Ministry of Finance and Central Bank, respectively. To the extent that any foreign
exchange receipts, payments or transactions reaches the threshold of NT$500,000 ($16,653) or equivalent in foreign currency, it
must be reported to the Central Bank or its designated authorities. Upon incurrence of any of the following events, the State
Council of Republic of China may determine and announce that for a period of time, to close the foreign exchange market, suspend
or restrict all or partial foreign exchange payment, order a mandatory sale or deposit of all or partial foreign exchange into
a designed bank, or dispose in any other manner as it deems necessary:
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the disorder in domestic or international economy to the detriment
of the stability of Taiwan’s economy; or
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Taiwan suffers serious trade deficit.
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Taiwan Regulation on Foreign Investment
The current principal regulation governing
foreign investment is Foreign Investment Regulation latest amended on November 19, 1997 (the “Investment Regulation”).
Under the Investment Regulation, investment refers to any activities involving (1) holding share capital of a company incorporated
in Taiwan; (2) establishing branches, wholly-owned or partnership enterprises in Taiwan; or (3) providing more than one-year term
loan to the above-mentioned investee enterprises. The authority in charge of foreign investment is Ministry of Economic Affairs
of Republic of China. The industries in Taiwan are categorized into permitted, restricted and prohibited foreign investment areas.
Investors may apply for settlement of exchange in accordance with the annual yield of their investment or the allocation of surplus.
Eminent Domain
When the investment made by an investor
constitutes less than 45% of the total amount of capital of the investee enterprise, and the investee enterprise has been expropriated
or acquired by the government for the purpose of national defense, reasonable government compensation shall be paid to the investors.
However, if the capital contribution made by the investor constitutes at least 45% of the total amount of capital of the investee
enterprise and continues remaining above 45% for two decades since its establishment, then the government may not exercise its
eminent domain power over such investee enterprise.
Taiwan Regulations on Tax
The current principal regulations governing
tax in Taiwan include the following:
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Income Tax Law, latest amended on January 8, 2014;
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The Implementation Rules of Income Tax Law, latest amended on August
26, 2013;
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Value-Added and Non-Value-Added Business Tax Law, latest amended
on January8, 2014; and
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The Implementation Rules of Value-Added And Non-Value-Added Business
Tax Law, latest amended on March 6, 2012.
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Under the Income Tax Law, there are two
kinds of income tax, comprehensive income tax for individuals and income tax for enterprises operating for profit, respectively.
Individuals who have income with a source
within Taiwan must pay comprehensive income tax on their income sourced within Taiwan; while non-resident individuals having income
with a source within Taiwan, except otherwise provided in the Income Tax Law, shall pay tax based on the amount attributable to
the sources of their income.
The enterprise with head office located
in Taiwan shall pay profit-seeking income tax on its global income both within and outside Taiwan; while the enterprises with
head office outside Taiwan shall only pay profit-seeking income tax on its business income sourced from within Taiwan.
Rate of Income Tax
The individual comprehensive income tax
exemption threshold is NT$60,000 ($1,998) per person per year. Any income beyond such exemption threshold is subject to a progressive
tax rate ranging from 5% to 40%.
With respect to enterprises operating
for profit, the exemption threshold is NT$120,000 ($3,997). Any income beyond such exemption threshold is subject to 17% tax rate
on its taxable income.
Sale of goods or service, import of goods
in Taiwan are subject to a Value-Added or Non-Value-Added Business Tax. The Rate of business tax, except as otherwise stipulated
in the relevant tax law, ranges from 5% to 10% as determined by the State Council of Taiwan.
PRC Regulations of the Insurance
Industry
The insurance industry in the PRC is highly
regulated. CIRC is the regulatory authority responsible for the supervision of the Chinese insurance industry. Insurance activities
undertaken within the PRC are primarily governed by the Insurance Law and the related rules and regulations.
Initial Development of Regulatory Framework
The Chinese Insurance Law was enacted
in 1995. This original insurance law, which we refer to as the 1995 Insurance Law, provided the initial framework for regulating
the domestic insurance industry. Among the steps taken under the 1995 Insurance Law were the following:
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(a)
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Licensing of insurance companies and
insurance intermediaries, such as agencies and brokerages. The 1995 Insurance Law established requirements for minimum registered
capital levels, form of organization, qualification of senior management and adequacy of the information systems for insurance
companies, insurance agencies and brokerages.
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(b)
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Separation of property and casualty
insurance and life insurance businesses. The 1995 Insurance Law distinguished insurance between property, casualty, liability
and credit insurance businesses, on the one hand, and life, accident and health insurance businesses on the other, and prohibited
insurance companies from engaging in both types of businesses.
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(c)
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Regulation of market conduct by participants.
The 1995 Insurance Law prohibited fraudulent and other unlawful conduct by insurance companies, agencies and brokerages.
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(d)
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Substantive regulation of insurance
products. The 1995 Insurance Law gave insurance regulators the authority to approve the policy terms and premium rates for
certain insurance products.
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(e)
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Financial condition and performance
of insurance companies. The 1995 Insurance Law established reserve and solvency standards for insurance companies, imposed
restrictions on investment powers and established mandatory reinsurance requirements, and put in place a reporting regime
to facilitate monitoring by insurance regulators.
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(f)
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Supervisory and enforcement powers
of the principal regulatory authority. The principal regulatory authority, then the People’s Bank of China, was given
broad powers under the 1995 Insurance Law to regulate the insurance industry.
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Establishment of the CIRC and 2002
Amendments to the Insurance Law
China’s insurance regulatory regime
was further strengthened with the establishment of the CIRC in 1998. The CIRC was given the mandate to implement reform in the
insurance industry, minimize insolvency risk for Chinese insurers and promote the development of the insurance market.
The 1995 Insurance Law was amended in
2002 and the amended insurance law, which we refer to as the 2002 Insurance Law, became effective on January 1, 2003. The major
amendments to the 1995 Insurance Law include:
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(a)
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Authorizing the CIRC to be the insurance
supervisory and regulatory body nationwide. The 2002 Insurance Law expressly grants the CIRC the authority to supervise and
administer the insurance industry nationwide.
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(b)
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Expanding the permitted scope of business
of property and casualty insurers. Under the 2002 Insurance Law, property and casualty insurance companies may engage in the
short-term health insurance and accident insurance businesses upon the CIRC’s approval.
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(c)
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Providing additional guidelines for
the relationship between insurance companies and insurance agents. The 2002 Insurance Law requires an insurance company to
enter into an agent agreement with each insurance agent that will act as an agent for such insurance company. The agent agreement
sets forth the rights and obligations of the parties to the agreement as well as other matters pursuant to law. An insurance
company is responsible for the acts of its agents when the acts are within the scope authorized by the insurance company.
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(d)
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Relaxing restrictions on the use of
funds by insurance companies. Under the 2002 Insurance Law, an insurance company may use its funds to make equity investments
in insurance-related enterprises, such as asset management companies.
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(e)
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Allowing greater freedom for insurance
companies to develop insurance products. The 2002 Insurance Law allowed insurance companies to set their own policy terms
and premium rates, subject to the approval of, or a filing with, the CIRC.
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2009 Amendments to the Insurance Law
The 2002 Insurance Law was amended again
in 2009 and the amended insurance law, which we refer to as the 2009 Insurance Law, became effective on October 1, 2009. The major
amendments to the 2009 Insurance Law include:
(a)
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Strengthening protection of the insured’s
interests. The 2009 Insurance Law added a variety of clauses such as incontestable clause, abstained and estoppel clause,
common disaster clause and amending immunity clause, claims-settlement prescription clause, reasons for claims rejection and
contract modification clause.
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(b)
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Strengthening supervision on the qualification of the shareholders
of the insurance companies and setting forth specific qualification requirements for the major shareholders, directors, supervisors
and senior managers of insurance companies.
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(c)
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Expanding the business scope of insurers and further relaxing restriction
on the use of fund by insurers.
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(d)
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Strengthening supervision on solvency of insurers with stricter
measures.
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(e)
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Tightening regulations governing the administration of insurance
intermediary companies, especially those relating to behaviors of insurance agents.
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According to the 2009 Insurance Law, the
minimum registered capital required to establish an insurance agency or insurance brokerage as a company must comply with the
PRC Company Law. The registered capital or the capital contribution of insurance agencies or insurance brokerages must be paid-up
capital in cash. The 2009 Insurance Law also sets forth some specific qualification requirements for insurance agency and brokerage
practitioners. The senior managers of insurance agencies or insurance brokerages must meet specific qualification requirements,
and their appointments are subject to approval of the CIRC. Personnel of an insurance agency or insurance brokerage engaging in
the sales of insurance products must meet the qualification requirements set by the CIRC and obtain a qualification certificate
issued by the CIRC. Under the 2009 Insurance Law, the parties to an insurance transaction may engage insurance adjusting firms
or other independent appraisal firms that are established in accordance with applicable laws, or persons who possess the requisite
professional expertise, to conduct assessment and adjustment of the insured subject matters. Additionally, the 2009 Insurance
Law specifies additional legal obligations for insurance agencies and brokerages.
The CIRC
The CIRC has extensive authority to supervise
insurance companies and insurance intermediaries operating in the PRC, including the power to:
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(a)
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promulgate regulations applicable to the Chinese insurance industry;
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(b)
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investigate insurance companies and insurance intermediaries;
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(c)
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establish investment regulations;
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(d)
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approve policy terms and premium rates for certain insurance products;
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(e)
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set the standards for measuring the financial soundness of insurance
companies and insurance intermediaries;
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(f)
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require insurance companies and insurance intermediaries to submit
reports concerning their business operations and condition of assets; order the suspension of all or part of an insurance
company or an insurance intermediary’s business;
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(g)
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approve the establishment, change and dissolution of an insurance
company, an insurance intermediary or their branches;
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(h)
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review and approve the appointment of senior managers of an insurance
company, an insurance intermediary or their branches; and
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(i)
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punish improper behaviors or misconducts of an insurance company
or an insurance intermediary.
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Regulation of Insurance Agencies
The principal regulation governing insurance
agencies is the Provisions on the Supervision and Administration of Specialized Insurance Agencies (the “Agency Provisions”)
promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009, which replaced the Provisions on the Administration
of Insurance Agencies issued by the CIRC on December 1, 2004 and effective on January 1, 2005. According to the Agency Provisions,
the establishment of an insurance agency is subject to minimum registered capital requirement and other requirements and the approval
of the CIRC. The term “insurance agency” refers to an entity that engages in insurance agency business within the
authorization of, and collects commissions from, insurance companies, including the professional insurance agency companies and
their branches. The insurance agency shall meet the qualification requirements specified by the CIRC, obtain the license to conduct
an insurance agency business with the approval of the CIRC. An insurance agency may take any of the following forms: (i) a LLC;
or (ii) a joint stock limited company. An insurance agency must have a registered capital of at least RMB2 million ($313,332).
Where it is established as a nationwide company, its registered capital must be at least RMB10 million ($1,566,661). The registered
capital must be paid up in cash. On April 27, 2013, CIRC issued the Decision on Revising the Agency Provisions, pursuant to which,
CIRC has mandated any insurance agency established subsequent to the Decision on Revising the Agency Provisions to meet a minimum
registered capital requirement of RMB50 million ($8.1 million).
On May 16, 2013, CIRC issued Notice for
Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “2013 Notice”),
pursuant to which, professional insurance agency established prior to the issuance of the Decision on Revising the Agency Provisions,
with registered capital less than RMB50 million ($8.1 million), can operate their existing business within the provinces where
they have the registered office or branch office, but shall not set up any new branches in any province where they do not have
the registered office or any branch office.
An insurance agency may engage in the
following insurance agency businesses:
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(a)
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selling insurance products on behalf of the
insurer principal;
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(b)
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collecting insurance premiums on behalf of the insurer principal;
and
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(c)
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conducting loss surveys and handling
claims of insurance businesses on behalf of the insurer principal; and other business activities specified by the CIRC.
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The name of an insurance agency must contain
the words “insurance agency” or “insurance sales.” The license of an insurance agency is valid for a period
of three years and may be renewed with due application 30 days prior to its expiration. An insurance agency must report to the
CIRC when it (i) changes its registered name or the name of its branches; (ii) changes its registered address or the operating
address of its branches; (iii) the sponsors or major shareholders change their respective name; (iv) changes its major shareholders;
(v) change its registered capital; (vi) materially change its equity structure; (vii) amends its articles of association; or (viii)
closes its branches. Personnel of an insurance agency, including those of its branches engaging in the sales of insurance products
or relevant loss survey and claim settlement, must pass a qualification examination for insurance agency practitioners organized
by the CIRC and obtain a “Qualification Certificate for Insurance Agency Practitioners.” The senior managers of an
insurance agency including its branches must meet specific qualification requirements set forth in the Agency Provisions. The
appointment of the senior managers of an insurance agency including its branches is subject to review and approval of the CIRC.
Regulation of Insurance Brokerages
The principal regulation governing insurance
brokerages is the Provisions on the Supervision and Administration of Insurance Brokerage Institutions (the “Brokerage Provisions”)
promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009, which replaced the Provisions on the Administration
of Insurance Brokerages issued by the CIRC on December 15, 2004 and effective on January 1, 2005. According to this Brokerage
Provisions, the establishment of an insurance brokerage is subject to the approval of the CIRC. The term “insurance brokerage”
refers to an entity provides brokerages service on the execution of the insurance contract between the insured and the insurance
company based on the interests of the insured and collects commission as agreed, including the insurance brokerage companies and
their branches, The insurance brokerage shall meet the qualification requirements specified by the CIRC and obtain the license
to operate an insurance brokering business with the approval of the CIRC. Insurance brokering business includes both direct insurance
brokering, which refers to brokering activities on behalf of insurance applicants or the insured in their dealings with the insurance
companies, and reinsurance brokering, which refers to brokering activities on behalf of insurance companies in their dealings
with reinsurance companies. An insurance brokerage may take any of the following forms: (i) a LLC; or (ii) a joint stock limited
company. An insurance brokerage company must have a registered capital or capital contribution of at least RMB10 million ($1,566,661).
The registered capital must be paid up in cash. On April 27, 2013, CIRC issued the Decision on Revising the Brokerage Provisions
(the “Decision on Revising the Brokerage Provisions”), pursuant to which, CIRC has mandated any insurance brokerage
established subsequent to the Decision on Revising the Brokerage Provisions to meet a minimum registered capital requirement of
RMB50 million ($8.1 million).
On May 16, 2013, CIRC issued Notice for
Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “2013 Notice”),
pursuant to which, professional insurance brokerage established prior to the issuance of the Decision on Revising the Brokerage
Provisions, with registered capital less than RMB50 million ($8.1 million), can operate their existing business within the provinces
where they have the registered office or branch office, but shall not set up any new branches in any province where they do not
have the registered office or any branch office.
An insurance brokerage may conduct the
following insurance brokering businesses:
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(a)
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making insurance proposals, selecting insurance
companies and handling the insurance application procedures for the insurance applicants;
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(b)
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assisting the insured or the beneficiary to claim compensation;
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(c)
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reinsurance brokering business; and
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(d)
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providing consulting services to clients with respect to disaster
and damage prevention, risk assessment and risk management; and other business activities specified by the CIRC.
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The name of an insurance brokerage must
contain the words “insurance brokerage.” The license of an insurance brokerage is valid for three years and may be
renewed with due application 30 days prior to its expiration. An insurance brokerage must report to the CIRC when it (i) changes
its registered name or the name of its branches; (ii) change its registered address or the operating address of its branches;
(iii) the sponsors or the major shareholders change their respective name; (iv) changes its major shareholders; (v) changes its
registered capital; (vi) materially changes its equity structure; (vii) amends its articles of association; or (viii) closes its
branches. Personnel of an insurance brokerage, including those of its branches engaging in any of the insurance brokering businesses
described above, must pass a qualification examination for insurance brokering practitioners organized by the CIRC and obtain
a “Qualification Certificate for Insurance Brokerage Practitioners”. The senior managers of an insurance brokerage
including its branches must meet specific qualification requirements set forth in the Brokerage Provisions. Appointment of the
senior managers of an insurance brokerage including its branches is subject to review and approval by the CIRC.
Regulation of Insurance Salespersons
The principal regulation governing individual
insurance salespersons is the Measures on the Supervision of Insurance Salespersons issued by the CIRC on January 6, 2013 and
effective on July 1, 2013, which replaced the Provisions on the Administration of Insurance Salespersons promulgated on April
6, 2006 and effective on July 1, 2006. Under this regulation, the term “insurance salesperson” refers to an individual
who sells insurance products for an insurance company, including those who are engaged by insurance companies or by insurance
agencies. To engage in insurance sales activities as an insurance salesperson, a person first must pass the qualification examination
for the insurance agency practitioners organized by the CIRC to obtain a “Qualification Certificate of Insurance Agency
Practitioners”. The person must have a junior high school education or above to be qualified for the examination. In addition
to the qualification certificate, a person must be registered with the CIRC’s Insurance Intermediary Supervision Information
System and obtain a “Practice Certificate of Insurance Salespersons” issued by the insurance company or insurance
agency to which he or she belongs in order to conduct insurance sales activities.
Regulation of Insurance Brokerage Practitioner
and Insurance Adjustment Practitioners
The principal regulation governing insurance
brokerage practitioners and insurance adjustment practitioners is the Measures on the Supervision of Insurance Brokerage Practitioners
and Insurance Adjustment Practitioners issued by the CIRC on January 6, 2013 and effective on July 1, 2013. To engage in the insurance
brokerage activities as an insurance brokerage practitioner, or in the insurance adjustment activities as an insurance adjustment
practitioner, a person first must pass the qualification examination organized by the CIRC for the insurance brokerage practitioners
or for the insurance adjustment practitioners to obtain a “Qualification Certificate of Insurance Brokerage Practitioners”
or a “Qualification Certificate of Insurance Adjustment Practitioners”. The person must have a tertiary education
or above to be qualified for the examination. In addition to the qualification certificate, a person also must be registered with
the CIRC’s Insurance Intermediary Supervision Information System and obtain a “Practice Certificate of Insurance Brokerage
Practitioners” or “Practice Certificate of Insurance Adjustment Practitioners” issued by the insurance brokerage
firm or insurance claims adjusting company to which he or she belongs in order to conduct insurance brokerage or claims adjustment
activities. An insurance brokerage practitioner is not allowed to conduct insurance brokerage activities on behalf of himself
or herself.
Content Related to Insurance Industry
in the Legal Documents of China’s Accession to the WTO
According to the Circular of the CIRC on
Distributing the Content Related to Insurance Industry in the Legal Documents of China’s Accession to the WTO, for the life
insurance sector, within three years of China’s accession to the WTO on December 11, 2001, geographical restrictions were
to be lifted, equity joint venture companies allowed to provide health insurance, group insurance, and pension/annuity services
to Chinese citizens and foreign citizens, and no other restrictions allowed except those on the proportion of foreign investment
(no more than 50%) and establishment conditions. For the non-life insurance sector, within three years of China’s accession,
the geographical restrictions were to be lifted and no restrictions allowed other than establishment conditions. For the insurance
brokerage sector, within five years of China’s accession, the establishment of wholly foreign-funded subsidiary companies
was to be allowed, and no restrictions allowed other than establishment conditions and restrictions on business scope.
PRC Regulations on Foreign Exchange
Foreign Currency Exchange
Foreign exchange regulation in China is
primarily governed by the following rules:
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Foreign Currency Administration Rules (2008 Revision), as amended or revised, or the Exchange Rules; and
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Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), as amended or revised, or the Administration Rules.
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Under the Exchange Rules, the RMB is convertible
for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange
transactions. Conversion of RMB for capital account items, such as direct investment, loan, security investment and repatriation
of investment, however, is still subject to the approval of the SAFE or relevant authorities.
Under the Administration Rules, foreign-invested
enterprises may only buy, sell or remit foreign currencies at those banks authorized to conduct foreign exchange business after
providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the SAFE. Capital
investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the Ministry
of Commerce, the SAFE and the State Development and Reform Commission.
PRC Regulations on Dividend Distribution
The principal regulations governing dividend
distributions of wholly foreign-owned companies include:
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Wholly Foreign-Owned Enterprise Law (1986), as amended or revised; and
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Wholly Foreign-Owned Enterprise Law Implementing Rules (2001 Revision), as amended or revised.
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Under these regulations, wholly foreign-owned
companies in the PRC may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards.
In addition, these wholly foreign-owned companies are required to set aside at least 10% of their respective accumulated profits
each year, if any, to fund certain reserve funds, until the accumulative amount of such fund reaches 50% of its registered capital.
These reserve funds are not distributable as cash dividends.
PRC Regulations on Tax
PRC Enterprise Income Tax
The PRC EIT is calculated base on the taxable
income determined under the PRC accounting standards and regulations, as well as the EIT law. On March 16, 2007, the National People’s
Congress of China enacted the EIT Law, a new EIT law which became effective on January 1, 2008. On December 6, 2007, the State
Council promulgated the Implementation Rules which also became effective on January 1, 2008. On December 26, 2007, the State Council
issued the Notice on Implementation of Enterprise Income Tax Transition Preferential Policy under the EIT Law, or the Transition
Preferential Policy Circular, which became effective simultaneously with the EIT Law. The EIT Law imposes a uniform EIT rate of
25% on all domestic enterprises and foreign-invested enterprises unless they qualify under certain exceptions. Under the EIT Law,
as further clarified by the Implementation Rules, the Transition Preferential Policy Circular and other related regulations, enterprises
that were established and already enjoyed preferential tax treatments before March 16, 2007 will continue to enjoy them in the
following manners: (i) in the case of preferential tax rates, for a five-year period starting from January 1, 2008, during which
the tax rate will gradually increase to 25%; or (ii) in the case of preferential tax exemption or reduction for a specified term,
until the expiration of such term. However, if such an enterprise has not enjoyed the preferential treatments yet because of its
failure to make a profit, its term for preferential treatment will be deemed to start from 2008.
PRC Business Tax
Taxpayers providing taxable services in
China are required to pay a business tax at a normal tax rate of 5% of their revenues, unless otherwise provided. According to
the Announcement on the VAT Reform Pilot Program of the Transportation and Selected Modern Service Sectors issued by the State
Tax Bureau in July 2012, the transportation and some selected modern service sectors, including research and development and technical
services, information technology services, cultural creative services, logistics support services, tangible personal property leasing
services, and assurance and consulting service sectors, should pay value-added tax instead of business tax based on a predetermined
timetable (hereinafter referred to as the “VAT Reform”), effective September 1, 2012 for entities in Beijing and October
1, 2012 for entities in Jiangsu. As of September 23, 2013 none of our Consolidated Affiliated Entities has been requested to convert
into the VAT system.
Dividend Withholding Tax
Under the PRC tax laws effective prior
to January 1, 2008, dividends paid to foreign investors by foreign-invested enterprises are exempt from PRC withholding tax. Pursuant
to the EIT Law and the Implementation Rules, dividends generated after January 1, 2008 and distributed to us by our PRC subsidiaries
are under a 5% withholding tax subject to PRC laws and regulations, provided that we are determined by the relevant PRC tax authorities
to be a “non-resident enterprise” under the EIT Law.
PRC regulations relating to the establishment
of offshore SPVs by PRC residents
SAFE has promulgated several regulations,
including the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Round-trip Investment Activities
of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular No. 75, effective on November 1, 2005.
The regulation requires PRC residents and PRC corporate entities to register with local branches of SAFE in connection with their
direct or indirect offshore investment activities. These regulations apply to our shareholders who are PRC residents and may apply
to any offshore acquisitions that we make in the future.
Under these foreign exchange regulations,
PRC residents who make, or have previously made prior to the implementation of these foreign exchange regulations, direct or indirect
investments in Special Purpose vehicles or SPVs will be required to register those investments. In addition, any PRC resident who
is a direct or indirect shareholder of a SPV, is required to update the previously filed registration with the local branch of
SAFE, with respect to that SPV, to reflect any material change. Moreover, the PRC subsidiaries of that SPV are required to urge
the PRC resident shareholders to update their registration with the local branch of SAFE. If any PRC shareholder fails to make
the required registration or update the previously filed registration, the PRC subsidiaries of that SPV may be prohibited from
distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to their SPV parent, and
the SPV may also be prohibited from injecting additional capital into its PRC subsidiaries. Moreover, failure to comply with the
various foreign exchange registration requirements described above could result in liabilities for such PRC subsidiaries under
PRC laws for evasion of applicable foreign exchange restrictions. Furthermore, the persons-in-charge and other persons at such
PRC subsidiaries who are held directly liable for the violations may be subject to administrative sanctions.
These foreign exchange regulations provide
that PRC residents include both PRC citizens, meaning any individual who holds a PRC passport or resident identification card,
and individuals who are non-PRC citizens but primarily reside in the PRC due to their economic ties to China. SAFE Circular No.
19 further defines individuals who are non-PRC citizens but primarily reside in the PRC due to their economic ties to the PRC.
ITEM 1A. RISK FACTORS.
You should carefully consider the risks
described below together with all of the other information included in this Form 10-K. The statements contained in or incorporated
herein that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause
actual results to differ materially from those set forth in or implied by forward-looking statements. See “Cautionary Statement
Regarding Forward-Looking Statements.” If any of the following risks actually occurs, our business, financial condition or
results of operations could be harmed. In that case, you may lose all or part of your investment.
Risks Relating to Our Business
The recent global macroeconomic events
could cause disruptions to our customers and their demand for insurance services. Demand for our products has been, and will continue
to be, adversely affected by overall macroeconomic conditions.
The recent global macroeconomic events
could have a negative impact on businesses around the world. For example, on August 5, 2011, Standard & Poor’s lowered
its long term sovereign credit rating on the United States of America from AAA to AA+. In addition, the ongoing European sovereign
debt crisis that started in 2009 has also had a negative impact on the credit ratings of several European countries and general
market sentiment. Furthermore, from May 2013, emerging markets in Asia are facing a capital flight as funds flow back into Europe
and the United States. Emerging markets from Thailand to India plunged into the red amid a heavy sell-off, as investors reassessed
the implications of another shift in the global economy. These downgrades could have material adverse impacts on financial markets
and economic conditions throughout the world. In general, the recent global economic crisis has caused weak consumer confidence
and diminished consumer and business spending, which have had a negative impact on the general market demand for insurance services
around the world.
Volatility in the financial markets and
overall economic uncertainty increases the risk of substantial quarterly and annual fluctuations in our earnings. Given the current
economic environment, we remain cautious and we expect our customers to be cautious as well, which could affect our future results.
If the economic recovery slows down or dissipates, our business, financial condition, results of operations and cash flows could
be materially and adversely affected.
If we are unable to obtain and maintain
the licenses to operate our business, our business prospects and future results of operations would be adversely affected.
We operate our businesses with approvals
and licenses granted by the government. If these approvals or licenses are revoked or suspended or are not renewed, or if we are
unable to obtain any additional licenses that we may need to operate or expand our business in the manner we desire, then our financial
condition and results of operations, as well as our prospects, will suffer.
We face substantial political risks
associated with doing business in Taiwan, particularly due to domestic political events and the tense relationship between Taiwan
and the People’s Republic of China, which could adversely affect our financial condition and results of operations.
Law Broker’s executive office and
substantial assets are located in Taiwan and most of our revenues are derived from our operations in Taiwan currently. Accordingly,
our business, financial condition and results of operations and the market price of our common shares may be affected by changes
in Taiwan governmental policies, taxation, inflation or interest rates and by social instability and diplomatic and social developments
in or affecting Taiwan which are outside of our control. Taiwan has a unique international political status. Since 1949, Taiwan
and the Chinese mainland have been separately governed. The PRC claims it is the sole government in China and that Taiwan is part
of China. Although significant economic and cultural relations have been established between Taiwan and the PRC, such as the engagement
of Economic Cooperation Framework Agreement (“ECFA”) in 2010 and Cross-strait Investment Protection and Promotion Agreement
in 2012, relations may become strained again. On June 21, 2013, Association for Relations Across the Taiwan Straits of the PRC
and Straits Exchange Foundation of Taiwan entered into the Cross-Strait Agreement on Trade in Services, with the aim of smoothing
and extending the cooperation between Mainland China and Taiwan accordingly. However, as of the date of this Transition Report
on Form 10-K, the Taiwan government has not approved Cross-Strait Agreement on Trade in Services while the PRC government has been
acting positively in response by making different relevant departments push forward the preparation to carry it out. The PRC government
has refused to renounce the use of military force to gain control over Taiwan. Past developments in relations between the Taiwan
and the PRC have on occasion depressed the market prices of the securities of companies in Taiwan. Relations between the Taiwan
and the PRC and other factors affecting military, political or economic conditions in Taiwan could materially and adversely affect
our financial condition and results of operations, as well as the market price and the liquidity of our securities. In addition,
the complexities of the relationship between the Taiwan and PRC require companies involved in cross-strait business operations
to carefully monitor its actions and manage its relationships with both Taiwan and PRC governments. We cannot assure you that we
will be able to successfully manage our relationships with the Taiwan and PRC governments for our cross-strait business operations,
which could have an adverse effect on our ability to expand our business and conduct cross-strait business operations.
Any future outbreak of contagious
diseases may materially and adversely affect our business and operations, as well as our financial condition and results of operations.
Any future outbreak of contagious diseases,
such as severe acute respiratory syndrome or avian influenza, may disrupt our ability to adequately staff our business and may
generally disrupt our operations. If any of our employees is suspected of having contracted any contagious disease, we may under
certain circumstances be required to quarantine such employees and the affected areas of our premises. As a result, we may have
to temporarily suspend part or all of our operations. Furthermore, any future outbreak may restrict the level of economic activity
in affected regions, which may adversely affect our business and prospects. As a result, we cannot assure you that any future outbreak
of contagious diseases would not have a material adverse effect on our financial condition and results of operations.
If we fail to attract and retain
productive sales professionals or agents, our business could suffer.
Our entire sales of life, property and
casualty insurance products are conducted through its individual sales professionals or agents, who are not our employees. Some
of these sales professionals or sales agents are significantly more productive than others in generating sales. If we are unable
to attract and retain the core group of highly productive sales professionals or sales agents, our business could be materially
and adversely affected. Competition for sales personnel from insurance companies and other insurance intermediaries may also force
us to increase the compensation of our sales professionals or sales agents, which would increase operating costs and reduce our
profitability.
Our business and prospects could
be materially and adversely affected if we are not able to manage our growth successfully.
Law Broker commenced its insurance intermediary
business in 1992. During the past two decades, Law Broker has expanded its distribution and service networks across Taiwan, with
24 sales and service outlets (including the headquarters) and 2,149 employees and sales professionals. Anhou commenced its insurance
intermediary business in 2003 and has expanded its operations substantially in recent years. Anhou’s distribution and service
networks expanded from one company in one province to two insurance agencies and one brokerage in 3 provinces and 39 service outlets
as of December 31, 2013. Meanwhile, we broadened our service offerings from the distribution of only life insurance products to
cover a wide variety of property and casualty insurance and automobile insurance products. We anticipate continued growth in the
future through multiple means. Our expansion has placed, and will continue to place, substantial demands on our managerial, operational,
technological and other resources. To manage and support our continued growth, we must continue to improve our operational, administrative,
financial and technological systems, procedures and controls, and expand, train and manage our growing employee and agent base.
Furthermore, our management will be required to maintain and expand our relationships with insurance companies, other insurance
intermediaries, regulators and other third parties. We cannot assure you that our current and planned personnel, systems, procedures
and controls will be adequate to support our future operations. Any failure to effectively and efficiently manage our expansion
could materially and adversely affect our ability to capitalize on new business opportunities, which in turn could have a material
adverse effect on our results of operations.
We may be unsuccessful in identifying
and acquiring suitable acquisition candidates, which could adversely affect our growth.
We expect our future growth to come from
acquisitions of high-quality independent insurance agencies and brokerages as well as establishment of new insurance agencies and
brokerages. There is no assurance we can successfully identify suitable acquisition candidates, especially in those areas where
we do not yet have a presence. Even if we identify suitable candidates, we may not be able to complete an acquisition on terms
that are commercially acceptable to us. In addition, we compete with other entities to acquire high-quality independent insurance
agencies and brokerages. Many of our competitors may have substantially greater financial resources than we do and may be able
to outbid us for these acquisition targets. If we are unable to complete acquisitions, our growth strategy may be impeded and our
earnings or revenue growth may be negatively affected.
If we fail to integrate acquired
companies efficiently, or if the acquired companies do not perform to our expectations, our business and results of operations
may be adversely affected.
Even if we succeed in acquiring other insurance
agencies and brokerages, our ability to integrate an acquired entity and its operations is subject to a number of factors. These
factors include difficulties in the integration of acquired operations and retention of personnel, especially the sales professionals
and sales agents who are not employees of the acquired company, entry into unfamiliar markets, unanticipated problems or legal
liabilities, and tax and accounting issues. The need to address these factors may divert management’s attention from other
aspects of our business and materially and adversely affect our business prospects. In addition, costs associated with integrating
newly acquired companies could negatively affect our operating margins.
Furthermore, the acquired companies may
not perform to our expectations for various reasons, including legislative or regulatory changes that affect the insurance products
in which a company specializes, the loss of key clients after the acquisition closes, general economic factors that impact a company
in a direct way and the cultural incompatibility of an acquired company’s management team with us. If an acquired company
cannot be operated at the same profitability level as our existing operations, the acquisition would have a negative impact on
our operating margin. Our inability to successfully integrate an acquired entity or its failure to perform to our expectations
may materially and adversely affect our business, prospects, results of operations and financial condition.
Because the commission and fee revenue
we earn on the sale of insurance products is based on premiums and commission and fee rates set by insurance companies, any decrease
in these premiums or commission and fee rates may have an adverse effect on our results of operations.
We are engaged in the insurance agency
and brokerage business and derive revenues primarily from commissions and fees paid by the insurance companies whose policies our
customers purchase. The commission and fee rates are set by insurance companies and are based on the premiums that the insurance
companies charge. Commission and fee rates and premiums can change based on the prevailing economic, regulatory, taxation-related
and competitive factors that affect insurance companies. These factors, which are not within our control, include the ability of
insurance companies to place new business, underwriting and non-underwriting profits of insurance companies, consumer demand for
insurance products, the availability of comparable products from other insurance companies at a lower cost, the availability of
alternative insurance products such as government benefits and self-insurance plans, as well as the tax deductibility of commissions
and fees and the consumers themselves. In addition, premium rates for certain insurance products, such as the mandatory automobile
liability insurance that each automobile owner in Taiwan and the PRC is legally required to purchase, are tightly regulated by
Insurance Bureau of Financial Supervisory Commission, Republic of China, or the FSC in Taiwan and China Insurance Regulatory Commission,
or the CIRC in China.
Because we do not determine, and cannot
predict, the timing or extent of premium or commission and fee rate changes, we cannot predict the effect any of these changes
may have on our operations. Intense competition among insurance companies has led to a gradual decline in premium rate levels of
some property and casualty insurance products. Although such decline may stimulate demand for insurance products and increase our
total sales volume, it also reduces the commissions and fees we earn on each policy sold. Any decrease in premiums or commission
and fee rates may significantly affect our profitability. In addition, our budget for future acquisitions, capital expenditures
and other expenditures may be disrupted by unexpected decreases in revenues caused by decreases in premiums or commission and fee
rates, thereby adversely affecting our operations.
Competition in our industry is intense
and, if we are unable to compete effectively, we may lose customers and our financial results may be negatively affected.
The insurance intermediary industry in
Taiwan and China is highly competitive, and we expect competition to persist and intensify. In insurance product distribution,
we face competition from insurance companies that use their in-house sales force and exclusive sales agents to distribute their
products, and from business entities that distribute insurance products on an ancillary basis, such as commercial banks, postal
offices and automobile dealerships, as well as from other professional insurance intermediaries. We sell insurance products through
our exclusive sales professionals and sales agents pursuant to agency contracts entered into with our subsidiaries or Consolidated
Affiliated Entities in Taiwan and China, as applicable. The term of these agency contracts with Law Broker generally is for three
years and will be re-signed upon expiration, while the term of these agency contracts with Anhou generally is for one year with
automatic extension in case neither party objects at the end of the term. These sales professionals and sales agents are not our
employees and we cannot assure you that they will continue their services subsequent to the expiration of such agency contracts.
We compete for customers on the basis of product offerings, customer services and reputation. Many of our competitors have greater
financial and marketing resources than we do and may be able to offer products and services that we do not currently offer and
may not offer in the future. If we are unable to compete effectively against those competitors, we may lose customers and our financial
results may be negatively affected.
Quarterly and annual variations in
our commission and fee revenue may have unexpected impacts on our results of operations.
Our commission and fee revenue is subject
to both quarterly and annual fluctuations as a result of the seasonality of its business, the timing of policy renewals and the
net effect of new and lost business. Historically, Law Broker’s commission and fee revenue, particularly revenue derived
from distribution of life insurance products, for the second and fourth quarters of any given year have been higher than the first
and third quarters. Anhou’s commission and fee revenue, particularly revenue derived from distribution of life insurance
products, for the fourth quarter of any given year has been the highest among all four quarters, while Anhou’s commission
and fee revenue for the first quarter of any given year has been the lowest among all four quarters. The factors that cause the
quarterly and annual variations are not within our control. Specifically, consumer demand for insurance products can influence
the timing of renewals, new business and lost business, which generally includes policies that are not renewed, and cancellations.
As a result, you may not be able to rely on quarterly or annual comparisons of our operating results as an indication of our future
performance.
If our contracts with insurance companies
are terminated or changed, our business and operating results could be adversely affected.
We primarily act as agents for insurance
companies in distributing their products to retail customers. Our relationships with the insurance companies are governed by agreements
between Law Broker or Anhou and the insurance companies. See “Corporate History and Structure - Insurance Company Partners.”
These contracts establish, among other things, the scope of authority, the pricing of the insurance products we distributes and
its fee rates. These contracts typically have a term of one year and will be automatically extended for successive one-year term
unless terminated earlier with at least 30 days or 60 days advance notice prior to its expiration.
During the Transition Period, Law
Broker’s top five insurance company partners, after aggregating the business conducted between Law Broker and the
various local branches of the insurance companies were Farglory Life Insurance Co., Ltd., Fubon Life Insurance Co., Ltd.,
TransGlobe Life Insurance Company, AIA International Limited, Taiwan Branchand China Life Insurance Co., Ltd. Among them,
Farglory Life Insurance Co., Ltd. accounted for 29.69% of Law Broker’s total net revenues from commissions and fees in
the Transition Period.
During the Transition Period, Anhou’s
top five insurance company partners, after aggregating the business conducted between Anhou and the various local branches of the
insurance companies, were Taikang Life Insurance Co., Ltd., Sunshine Insurance Group Corporation Limited, Sino Life Insurance Co.,
Ltd., PICC Property and Casualty Co., Ltd., and Cathay Property Insurance Co., Ltd. Among them, Taikang Life Insurance Co., Ltd.
accounted for 23.72% of Anhou’s total net revenues from commissions and fees in the Transition Period.
The termination of our contracts with insurance
companies that in aggregate account for a significant portion of our business, or changes to material terms of these contracts,
could adversely affect our business and operating results.
Our future success depends on the
continuing efforts of our senior management team and other key personnel, and our business may be harmed if we lose their services.
Our future success depends heavily upon
the continuing services of the members of our senior management team and other key personnel, in particular Mr. Lo Chung Mei, the
Chief Executive Officer, Ms. Chuang Yung Chi, the Chief Financial Officer, Mr. Hsu Wen Yuan, the Chief Marketing Officer, Mr. Hsieh
Tung Chi, the Chief Operating Officer, and Mr. Chiang Te-Yun, the Chief Technology Officer. If one or more of our senior executives
or other key personnel, are unable or unwilling to continue in their present positions, we may not be able to replace them easily,
or at all. As such, our business may be disrupted and our financial condition and results of operations may be materially and adversely
affected. Competition for senior management and key personnel is intense, the pool of qualified candidates is very limited, and
we may not be able to retain the services of our senior executives or key personnel, or attract and retain high-quality senior
executives or key personnel in the future. As is customary in the PRC and Taiwan, we do not have insurance coverage for the loss
of our senior management team or other key personnel.
In addition, if any member of our senior
management team or any of our other key personnel joins a competitor or forms a competing company, we may lose customers, sensitive
trade information and key professionals and staff members. Each of our executive officers and key employees has entered into an
employment agreement with our subsidiaries or Consolidated Affiliated Entities, respectively. If any disputes arise between any
of our senior executives or key personnel and us, we cannot assure you of the extent to which any of these agreements may be enforced.
Sales professionals or sales agent
and employee misconduct is difficult to detect and deter and could harm our reputation or lead to regulatory sanctions or litigation
costs.
Sales professionals or sales agent and
employee misconduct could result in violations of law by us, regulatory sanctions, litigation or serious reputational or financial
harm. Misconduct could include:
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making misrepresentation when marketing or selling insurance products to customers;
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hindering insurance applicants from making full and accurate mandatory disclosures or inducing applicants into making misrepresentations;
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hiding or falsifying material information in relation to the insurance contracts;
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fabricating or altering insurance contracts without authorization from relevant parties, selling false policies, or providing false documents on behalf of the applicants;
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falsifying insurance agency business or fraudulently returning insurance policies to obtain commissions;
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colluding with applicants, insured, or beneficiaries to obtain insurance benefits;
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engaging in false claims; or
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otherwise not complying with laws and regulations or our control policies or procedures.
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We cannot always deter sales professionals
or sales agent or employee misconduct, and the precautions we take to prevent and detect these activities may not be effective
in all cases. We cannot assure you, therefore, that sales professionals or sales agent or employee misconduct will not lead to
a material adverse effect on our business, results of operations or financial condition.
All of our personnel engaging in insurance agency or brokering are required under relevant regulations
to have a qualification certificate issued by the relevant government authorities in Taiwan or PRC. If these qualification requirements
are strictly enforced in the future, our business may be materially and adversely affected.
All of Law Broker’s personnel who
engage in insurance agency and brokering are required under relevant Taiwan regulations to obtain a registration certificate. To
obtain the registration certificate, the sale professionals have to pass the insurance sales professionals qualification test sponsored
by the Life Insurance Association of the Republic of China or Property Insurance Association of the Republic of China (collectively
the “Associations”, each a “Association”). Once the applicants passed such test, the Associations will
notify Law Broker of those applicants who passed the test and Law Broker is obligated to issue the registration certificate to
them. The registration certificate is valid for five years and the holder shall renew the registration certificate prior to its
expiration date. See “Corporate History and Structure —Regulation.” As of December 31, 2013, all of Law Broker’s
sales professionals had received and held a valid registration certificate.
All of Anhou’s personnel who engage
in insurance agency and brokering are required under relevant PRC regulations to obtain a qualification certificate from the CIRC
in order to conduct insurance agency or brokering. To obtain the qualification certificate, the sale professionals have to pass
the insurance agency or brokerage practitioner qualification test sponsored by the CIRC. Once the applicants passed such test,
the CIRC may, subject to certain other conditions set forth in Measures on the Supervision of Insurance Salespersons and Measures
on the Supervision of Insurance Brokerage Practitioners and Insurance Adjustment Practitioners, determine whether to grant such
qualification certificate to the applicants. According to related regulations published by CIRC, qualification certificates obtained
before July 1, 2013 have a validity period of three years, starting from the issuance date of such certificates. Holders of those
qualification certificates must apply for renewal in local Insurance Regulatory Bureau at least 30 days before the validity period
expires. Qualification certificates for insurance intermediaries practitioners (agency, brokerage and adjustment practitioners)
obtained after July 1, 2013 are not subject to any validity period. In addition, we understand that the CIRC requires every individual
agent carry the qualification certificate and other credentials showing specific information when conducting agency business. Under
the relevant PRC regulations, an insurance agency or brokerage that retains unqualified personnel to engage in insurance intermediary
activities may be imposed a fine up to RMB100,000 ($16,077). As of December 31, 2013, all of Anhou’s sales professionals
had received and held a valid qualification certificate. If more local CIRC agencies were to strictly enforce these regulations
in the future, and if a substantial number of our sales forces become unqualified, our business may be adversely affected. Moreover,
we may be subject to fines and other administrative proceedings for the failure of our insurance professionals to obtain the necessary
CIRC qualification certificate. Any such fines or administrative proceedings could materially and adversely affect our business,
financial condition and results of operations.
If we fail to maintain an effective
system of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent
fraud.
As a public company, we are subject to
reporting obligations under U.S. securities laws. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules
adopted by the Securities and Exchange Commission, every public company is required to include a management report on the Company’s
internal controls over financial reporting (“ICFR”) in its annual report, which contains management’s assessment
of the effectiveness of the company’s internal controls over financial reporting.
While we believe our ICFR is currently
effective, there is no assurance we will be able to maintain effective ICFR in the future. If we fail to do so, we may not be able
to produce reliable financial reports and prevent fraud. Moreover, if we were not able to conclude we have effective ICFR, investors
may lose confidence in the reliability of our financial statements, which would negatively impact the trading price of our shares.
Our reporting obligations as a public company, including our efforts to comply with Section 404 of the Sarbanes-Oxley Act, will
continue to place a significant strain on our management, operational and financial resources and systems for the foreseeable future.
Any significant failure in our information
technology systems could have a material adverse effect on our business and profitability.
Our business is highly dependent on the
ability of our information technology systems to timely process a large number of transactions across different markets and products
at a time when transaction processes have become increasingly complex and the volume of such transactions is growing rapidly. The
proper functioning of our financial control, accounting, customer database, customer service and other data processing systems,
together with the communication systems of our Taiwan Subsidiaries and Consolidated Affiliated Entities and our main offices in
Taiwan and Henan, are critical to our business and to our ability to compete effectively. We cannot assure you that our business
activities would not be materially disrupted in the event of a partial or complete failure of any of these primary information
technology or communication systems, which could be caused by, among other things, software malfunction, computer virus attacks
or conversion errors due to system upgrading. In addition, a prolonged failure of our information technology system could damage
our reputation and materially and adversely affect our future prospects and profitability.
If we are unable to respond in a
timely and cost-effective manner to rapid technological change in the insurance intermediary industry, there may be a resulting
adverse effect on business and operating results.
The insurance industry is increasingly
influenced by rapid technological change, frequent new product and service introductions and evolving industry standards. For example,
the insurance intermediary industry has increased use of the Internet to communicate benefits and related information to consumers
and to facilitate information exchange and transactions. We believe that our future success will depend on our ability to continue
to anticipate technological changes and to offer additional product and service opportunities that meet evolving standards on a
timely and cost-effective basis. There is a risk that we may not successfully identify new product and service opportunities or
develop and introduce these opportunities in a timely and cost-effective manner. In addition, product and service opportunities
that our competitors develop or introduce may render our products and services uncompetitive. As a result, we can give no assurances
that technological changes that may affect our industry in the future will not have a material adverse effect on our business and
results of operations.
The Company’s affiliates have
significant control over matters requiring approval by shareholders.
The affiliates to the Company will hold
100% of the Company’s outstanding preferred shares, 42.60% of the Company’s outstanding common shares, and 57.28% of
the voting power of the Company as of April 14, 2014 (calculated in accordance with Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended).
As a result, the Company’s affiliates, in view of their ownership percentage of
our common stock and voting power, have significant control over matters requiring approval by our shareholders, including the
selection of our Board of Directors, approval or rejection of mergers, sales or licenses of all or substantially all of our assets,
or other business combination transactions. The interests of the Company’s affiliates may not always coincide with the interests
of our other shareholders and as such the Company may take action in advancement of its affiliates’ interests to the detriment
of our other shareholders, including you. Accordingly, you may not be able to influence any action we take or consider taking,
even if it requires a shareholder vote.
Risks Related to Our Corporate Structure
in the PRC
If the PRC government finds that
the agreements that establish the structure for operating our China business do not comply with applicable PRC laws and regulations,
we could be subject to severe penalties.
PRC laws and regulations place certain
restrictions on foreign ownership of companies that engage in insurance agencies and brokerages business, especially those on qualifications
as well as capital requirement of the investors. We conduct our operations in China principally through contractual arrangements
among our wholly-owned PRC subsidiary, CU WFOE and our operating company in the PRC, namely, Anhou and its shareholders, where
Anhou directly holds 100% equity interests in one PRC insurance agency, namely Sichuan Kangzhuang and one insurance brokerage,
namely Jiangsu Law. Anhou, Sichuan Kangzhuang and Jiangsu Law hold the licenses and permits necessary to conduct our insurance
intermediary business and related businesses in China.
Our contractual arrangements with Anhou,
its shareholders enable us to:
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exercise effective control over Anhou and its subsidiaries;
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receive a substantial portion of the economic benefits of Anhou and its subsidiaries in consideration for the services provided by our wholly- owned subsidiary in China; and
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have an exclusive option to purchase all or part of the equity interests in Anhou when and to the extent permitted by PRC law.
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Because of these contractual arrangements,
we are the primary beneficiary of Anhou and its subsidiaries and have consolidated them into our consolidated financial statements.
Although we believe that these agreements are in compliance with current PRC regulations, we cannot assure you that the PRC government
would agree that these contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with
existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations governing the validity
of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these
laws and regulations. If the PRC government determines that our contractual arrangements do not comply with applicable laws and
regulations, it could revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict
our right to collect revenues, block our website, require us to restructure our operations, impose additional conditions or requirements
with which we may not be able to comply, or take other regulatory or enforcement actions against us that could be harmful to our
business. The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our
business.
If the PRC government finds that
we, our PRC subsidiary and Consolidated Affiliated Entities do not comply with applicable PRC laws and regulations, we could be
subject to severe penalties.
If we, our Consolidated Affiliated Entity,
Anhou or any of the existing and future subsidiaries of Anhou are found to be in violation of any existing or future PRC laws or
regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities, including
the CIRC, will have broad discretion in dealing with such violations, including:
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revoking the business and operating licenses of our PRC subsidiary and Consolidated Affiliated Entities;
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restricting or prohibiting any related-party transactions among our PRC subsidiary and Consolidated Affiliated Entities;
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imposing fines or other requirements with which we, our PRC subsidiary or our Consolidated Affiliated Entities may not be able to comply;
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requiring us, our PRC subsidiary or our Consolidated Affiliated Entities to restructure the relevant ownership structure or operations; or
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restricting or prohibiting us from providing additional funding for our business and operations in China.
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The imposition of any of these penalties
could result in a material and adverse effect on our ability to conduct our business in the PRC.
We rely on contractual arrangements
with Anhou and its shareholders for our China operations, which may not be as effective in providing operational control as direct
ownership.
We have relied and expect to continue to
rely on contractual arrangements with our PRC Consolidated Affiliated Entity, Anhou, and its shareholders to operate our business
in China. For a description of these contractual arrangements, see “Corporate History and Structure” These contractual
arrangements may not be as effective in providing us with control over Anhou and its subsidiaries as direct ownership. We have
no direct or indirect equity interests in Anhou or any of its subsidiaries.
Since PRC laws restrict foreign equity
ownership in companies engaged in insurance agencies and brokerages businesses in China, especially those on qualifications as
well as capital requirement of the investors, we rely on contractual arrangements with Anhou to operate our business in China.
If we had direct ownership of Anhou and its subsidiaries, we would be able to exercise our rights as a shareholder to effect changes
in the board of directors of Anhou and its subsidiaries, which in turn could effect changes, subject to any applicable fiduciary
obligations, at the management level. However, under the current contractual arrangements, we rely on Anhou and its shareholders’
performance of their contractual obligations to exercise effective control. In addition, our contractual arrangements generally
have a term of ten-year with an automatic extension of another ten-year term unless our PRC subsidiary, CU WFOE, determines otherwise.
Though neither Anhou nor its shareholders has any right under these agreements to terminate such agreements prior to the expiration
date, we may not be able to strictly enforce these agreements in case they choose to do so, due to the uncertainty associated with
PRC government’s determination on the validity of these contractual arrangements or the lack of assets enforceable outside
PRC. Affiliates of the Company are also directors and executive officers of our Consolidated Affiliated Entities
.
In addition,
though Anhou is under the effective control of CU WFOE through these contractual arrangements, the shareholders and officers of
Anhou may not act in the best interests of our company or may not perform their obligations under these agreements, including the
obligation to renew these agreements when their initial ten-year term expires. Furthermore, as all of Anhou’s assets are
located in China, if Anhou or its shareholders determine to terminate the VIE agreements, the unaffiliated investors will have
little or no recourse against them. Such risks exist throughout the period in which we intend to operate our business through the
contractual arrangements with Anhou. Therefore, these contractual arrangements may not be as effective as direct ownership in providing
us with control over these Consolidated Affiliated Entities.
If Anhou and its shareholders fail to perform
their obligations under these contractual arrangements, we may have to incur substantial costs and other resources to enforce such
arrangements and rely on legal remedies under PRC law, including seeking specific performance or injunctive relief and claiming
damages, which may not be effective. For example, if the shareholders and officers of Anhou were to refuse to transfer their equity
interest in Anhou to us or our designee when we exercise the call option pursuant to these contractual arrangements, or if they
were otherwise to act in bad faith toward us, then we may have to take legal action to compel them to fulfill their contractual
obligations. However, due to the uncertainty associated with PRC government’s determination on the validity of these contractual
arrangements or the lack of assets enforceable against Anhou outside PRC, we may not be able to effectively enforce our right under
these agreements.
Neither Anhou nor Sichuan Kangzhuang has
made any profits to date. The PRC taxable income of Jiangsu Law is calculated as the total revenue of Jiangsu Law times 10%. Jiangsu
Law shall pay enterprise income tax calculated as 25% times its PRC taxable income. No service fees has been paid to the PRC subsidiary
pursuant to the Exclusive Cooperation Agreement and it has not made any profit to date, thus, it has no accumulated profits available
for the purposes of dividend distribution. Even though we expect the PRC subsidiary to make profit in the year of 2016, we intend
to use all of the revenues and profits to fund our business operations or expansion in China.
All of our contractual arrangements with
Anhou and shareholders are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly,
these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal
procedures. The legal environment in the PRC is not as developed as in some other jurisdictions, such as the United States. As
a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event
we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our Consolidated Affiliated
Entities, and our ability to conduct our business in the PRC may be negatively affected.
Contractual arrangements we have
entered into with Anhou may be subject to scrutiny by the PRC tax authorities. A finding that we owe additional taxes could substantially
reduce our consolidated net income and the value of your investment.
Under PRC laws and regulations, arrangements
and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. Since both of CU WFOE and
Anhou are under our common control, either under direct ownership or through contractual arrangements, and certain our officers
and directors used to be and are currently the employees of Anhou and its subsidiaries (for example, Lo Chung Mei, our Chief Executive
Officer, also act as the General Manager of Anhou, Hsieh Tung Chi and Chiang Te Yun, our Chief Operating Officer and Chief Technology
Officer, also act as Division Chief of Management and Manager of Jiangsu Law respectively, and Hus Wen Yuan, our Chief Marketing
Officer, also acts as the General Manager of Sichuan Kangzhuang), the VIE Agreements are likely to be deemed as arrangements between
related parties. In addition, CU WFOE has been granted substantial unilateral right under the VIE Agreements. We could face material
and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between our PRC subsidiary
and Anhou are not on an arm’s-length basis and adjust the income of Anhou in the form of a transfer pricing adjustment, where
the relevant PRC tax authorities may, in their discretion, disregard the tax filing of Anhou and impose a different tax amount
payable by Anhou. A transfer pricing adjustment could among other things, result in a reduction, for PRC tax purposes, of expense
deductions recorded by Anhou, which could in turn increase their respective tax liabilities. Moreover, the PRC tax authorities
may impose interest and other penalties on Anhou for underpayment of taxes. Though we have not encountered any challenge or transfer
pricing adjustment by the PRC tax authorities so far, we could not assure you that the PRC tax authorities will not do so in the
future. Our consolidated net income may be materially and adversely affected by the occurrence of any of the foregoing.
PRC regulation of direct investment
by offshore holding companies to PRC entities may delay or prevent us from making additional capital contributions to our PRC subsidiary,
which could materially and adversely affect our liquidity and our ability to fund and expand our business.
We are an offshore holding company conducting
our operations in China through our PRC subsidiary and Consolidated Affiliated Entities. In order to provide additional funding
to our PRC subsidiary and Consolidated Affiliated Entities, we may make additional capital contributions to our PRC subsidiary.
Any capital contributions we make to our
PRC subsidiary, must be approved by the PRC Ministry of Commerce or its local counterparts, which usually takes approximately 30
days or longer, and registered with the SAFE or its local counterparts. Such applications and registrations could be time consuming
and their outcomes would be uncertain. The registered capital of CU WFOE is $300,000 and has been contributed.
We cannot assure you that we will be able
to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with
respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals,
our ability to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely and materially
affect our liquidity and our ability to fund and expand our business.
Risks Related to Doing Business in Taiwan
Extensive regulation of our industry
may limit our flexibility to respond to market conditions and competition, and our business may suffer.
Subsequent to our acquisition of AHFL on
August 24, 2012, we operate our insurance agency and brokerage business in Taiwan through our operating entity Law Broker. As an
insurance agency and brokerage service provider in Taiwan, Law Broker is subject to extensive regulation. See “Item 1.Business—Regulation”
for a discussion of the regulatory environment applicable to Law Broker. As revenue generated by Law Broker constitutes a substantial
part of our revenue, any changes in the regulatory environment applicable to Law Broker may adversely affect our business, financial
condition and results of operations.
Currently, Law Broker’s principal
regulator is the Financial Supervisory Committee of Republic of China, or the FSC, which was formed on July 1, 2004 in accordance
with the Financial Supervisory Organization Act, which was intended to grant regulatory authority over the Taiwan insurance industry
to the FSC.
Our operations and financial results
could be severely harmed by natural disasters.
Law Broker’s executive office is
located in Taiwan, which suffered a severe earthquake during fiscal year of 2000. We did not experience significant disruption
to our operations as a result of that earthquake. Taiwan is also exposed to typhoons and tsunamis. If a major earthquake, typhoon,
tsunami or other natural disaster were to affect our operations, which would seriously harm our business.
Stockholders may have more difficulty
protecting their interests under the laws of the Taiwan than they would under the laws of the United States.
Our corporate affairs are governed by our
articles of incorporation, the Company Law, and by the laws governing corporations incorporated in Taiwan. In addition, our corporate
affairs may remain governed by the Statute of Law Broker. The rights of stockholders and the responsibilities of management and
the members of the board of directors of Taiwan companies are different from those applicable to a corporation incorporated in
the United States. For example, controlling or major stockholders of Taiwan companies do not owe fiduciary duties to minority stockholders.
As a result, holders of our common shares may have more difficulty in protecting their interests in connection with actions taken
by our management or members of our board of directors than they would as public stockholders of a United States corporation.
Fluctuation in the value of the New
Taiwanese Dollar may have a material adverse effect on your investment.
The value of the New Taiwanese Dollar (“NTD”
or “NT$”) against the US dollar (“USD”) and other currencies may fluctuate and is affected by, among other
things, changes in political and economic conditions. As of April 14, 2014, the exchange rate of NT$ to the USD was 1NT$=0.03USD.
In Taiwan, our revenues and costs are denominated
in the NT$, and a significant portion of our financial assets are also denominated in NT$. We rely substantially on dividends and
other fees paid to us by our Taiwan Subsidiary. Any significant appreciation or depreciation of the NT$ against the USD may affect
our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our shares in USD. For
example, a further appreciation of the NT$ against the USD would make any new NT$-denominated investments or expenditures more
costly to us, to the extent that we need to convert USD into the NT$ for such purposes. An appreciation of the NT$ against the
USD would also result in foreign currency translation losses for financial reporting purposes when we translate our USD denominated
financial assets into the NT$, as the NT$ is our reporting currency in Taiwan. Conversely, a significant depreciation of the NT$
against the USD may significantly reduce the USD equivalent of our reported earnings, and may adversely affect the price of our
shares.
Risks Related to Doing Business in China
Our limited operating history in
China, especially our limited experience in distributing property and casualty insurance products may not provide an adequate basis
to judge our future prospects and results of operations.
We have a limited operating history in
China. Anhou commenced our insurance intermediary business in 2003 by distributing life insurance products and expanded our offerings
to other types of property and casualty insurance products in 2009. Anhou started distributing automobile insurance business in
2010. Life insurance products distributed by Anhou accounted for 73.95% of Anhou’s total net revenues in the Transition Period.
Property and casualty insurance products distributed by Anhou accounted for 26.05% of Anhou’s total net revenues in the Transition
Period. While life insurance and property and casualty insurance distribution are two major areas of our future growth strategy
in China, we cannot assure you that our efforts to further develop these businesses will be successful. If Anhou’s life insurance
distribution and property and casualty insurance distribution fail to grow, our future growth in China will be significantly affected.
In addition, our limited operating history in China, especially our limited experience in selling property and casualty insurance
products, may not provide a meaningful basis for you to evaluate our business, financial performance and prospects.
PRC regulations relating to the establishment
of offshore SPVs by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary to liability or penalties,
limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to increase their registered
capital or distribute profits to us, or may otherwise adversely affect us.
SAFE has promulgated several regulations,
including the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Round-trip Investment Activities
of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular No. 75, effective on November 1, 2005.
The regulation requires PRC residents and PRC corporate entities to register with local branches of SAFE in connection with their
direct or indirect offshore investment activities. These regulations apply to our shareholders who are PRC residents and may apply
to any offshore acquisitions that we make in the future.
Under these foreign exchange regulations,
PRC residents who make, or have previously made prior to the implementation of these foreign exchange regulations, direct or indirect
investments in Special Purpose Vehicles or SPVs will be required to register those investments. In addition, any PRC resident who
is a direct or indirect shareholder of a SPV, is required to update the previously filed registration with the local branch of
SAFE, with respect to that SPV, to reflect any material change. Moreover, the PRC subsidiaries of that SPV are required to urge
the PRC resident shareholders to update their registration with the local branch of SAFE. If any PRC shareholder fails to make
the required registration or update the previously filed registration, the PRC subsidiaries of that SPV may be prohibited from
distributing its profits and the proceeds from any reduction in capital, share transfer or liquidation to their SPV parent, and
the SPV may also be prohibited from injecting additional capital into its PRC subsidiaries. Moreover, failure to comply with the
various foreign exchange registration requirements described above could result in liabilities for such PRC subsidiaries under
PRC laws for evasion of applicable foreign exchange restrictions, including (i) the requirement by SAFE to return the foreign exchange
remitted overseas within a period specified by SAFE, with a fine of up to 30% of the total amount of foreign exchange remitted
overseas and deemed to have been evasive and (ii) in circumstances involving serious violations, a fine of no less than 30% of
and up to the total amount of remitted foreign exchange deemed evasive. Furthermore, the persons-in-charge and other persons at
such PRC subsidiaries who are held directly liable for the violations may be subject to administrative sanctions.
These foreign exchange regulations provide
that PRC residents include both PRC citizens, meaning any individual who holds a PRC passport or resident identification card,
and individuals who are non-PRC citizens but primarily reside in the PRC due to their economic ties to China.
Li Fu Chang, Lo Chung Mei, Hsieh Tung Chi
and Chiang Te Yun, our shareholders, who do not directly hold any interests in the Consolidated Affiliated Entities, are permanent
residents of Taiwan, stay in Mainland China for over 183 days per annum. However, as a result of our inquiries with the local branch
of SAFE responsible for our PRC subsidiary’s foreign exchange registrations, we were informed that, given the lack of any
publicly-available implementing rules or official interpretations issued by the SAFE regarding the issue of whether the registration
and amendment filing requirements under SAFE Circular No. 75 and related rules should apply to non-PRC citizens, Li Fu Chang, Lo
Chung Mei, Hsieh Tung Chi and Chiang Te Yun should not be deemed a PRC resident for these purposes, and any attempt to submit an
application to such local SAFE branch with respect to Li Fu Chang, Lo Chung Mei, Hsieh Tung Chi and Chiang Te Yun’s investment
and shareholdings in our offshore SPV will not be officially accepted or examined.
However, we cannot conclude the SAFE or
the local branch responsible for our PRC subsidiary’s foreign exchange registrations will not later alter its position on
and interpretation of the applicability of these foreign exchange regulations to Mr. Li Fu Chang, Lo Chung Mei, Hsieh Tung Chi
and Chiang Te Yun. If the registration procedures set forth in these foreign exchange regulations become applicable to Mr. Li Fu
Chang, Lo Chung Mei, Hsieh Tung Chi and Chiang Te Yun, we will urge these individuals to, and believe they will, file necessary
registrations and amendments as required under SAFE Circular No. 75 and related rules. However, as SAFE regulations and policies
have been evolving rapidly in the past few years, we cannot assure that all of these individuals can successfully make or update
any applicable registration or obtain the necessary approval required by these foreign exchange regulations as these individuals
may not be able to fully satisfy the new requirements or interpretations that SAFE or its local branch may impose or adopt from
time to time. The failure or inability of such individuals to comply with the registration procedures set forth in these regulations
may subject us to fines or legal sanctions, restrictions on our cross-border investment activities or our PRC subsidiary’s
ability to distribute dividends to, or obtain foreign-exchange-dominated loans from, the Company, or prevent us from making distributions
or paying dividends. As a result, our business operations and our ability to make distributions to our stockholders could be materially
and adversely affected.
Furthermore, as these foreign exchange
regulations are still relatively new and there is uncertainty concerning the reconciliation of the new regulations with the approval
requirements under other existing PRC laws and regulations, such as tax laws, it is unclear how these regulations, and any future
regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government
authorities. We cannot predict how these regulations will affect our business operations or future strategy. For example, we may
be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance
of dividends and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations.
In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the
case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the
foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our
business and prospects.
Our businesses in China are highly
regulated, and the administration, interpretation and enforcement of the laws and regulations currently applicable to us involve
uncertainties, which could materially and adversely affect our business and results of operations.
Anhou operates in a highly regulated industry.
The CIRC has authority to supervise and regulate the insurance industry in China. In exercising its authority, the CIRC has wide
discretion, and the administration, interpretation and enforcement of the laws and regulations applicable to us involve uncertainties
that could materially and adversely affect our business and results of operations. For example, it is not clear when the CIRC will
start strictly enforcing the qualification requirements for sales professionals affiliated with professional insurance intermediaries
like our Consolidated Affiliated Entities. Although we have not had any material violations to date, we cannot assure you that
our operations will always be consistent with the interpretation and enforcement of the laws and regulations by the CIRC from time
to time.
The principal regulation governing insurance
agencies in China is the Provisions on the Supervision and Administration of Specialized Insurance Agencies (the “Agency
Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009, which replaced the Provisions
on the Administration of Insurance Agencies issued by the CIRC on December 1, 2004 and effective on January 1, 2005. The Agency
Provisions have not only set forth the market entrance standards for applicants to establish an insurance agency, but also stipulate
the qualification criteria of senior management for such insurance agency. The Agency Provisions have also provided general rules
on business operations as well as granted relatively broad supervision rights to the CIRC. The principal regulation governing insurance
brokerages in China is the Provisions on the Supervision and Administration of Insurance Brokerage Institutions (the “Brokerage
Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009, which replaced the Provisions
on the Administration of Insurance Brokerages issued by the CIRC on December 15, 2004 and effective on January 1, 2005. The Brokerage
Provisions have not only set forth the market entrance standards for applicants to establish a brokerage firm, but also stipulate
the qualification criteria of senior management for such brokerage firm. The Brokerage Provisions have also provided general rules
on business operations as well as granted relatively broad supervision rights to the CIRC. On January 6, 2013, CIRC issued Measures
on the Supervision of Insurance Salespersons and Measures on the Supervision of Insurance Brokerage Practitioners and Insurance
Adjustment Practitioners, which sets forth a higher academic requirement for candidates to take the qualification examination for
the insurance agency and brokerage practitioners organized by the CIRC. The enactment of any new laws and regulations in replacement
of the above-mentioned laws or the change of interpretations of any such current laws and regulations may have a significant impact
on the operation and financial results of the Company.
For an expanded discussion of the material
regulations affecting the Company, please review the discussion located under the “Regulation” heading in the “Corporate
History and Structure” section of this annual report.
Further development of regulations
in China may impose additional costs and restrictions on our activities.
China’s insurance regulatory regime
is undergoing significant changes. Some of these changes and the further development of regulations applicable to us may result
in additional restrictions on our activities or more intensive competition in this industry. For example, under the provisions
for administration of professional insurance agencies and brokerages promulgated on September 25, 2009, insurance agencies and
brokerage companies are required to increase their guaranty deposit, which generally cannot be withdrawn without the CIRC’s
approval, when they open any new branches. Furthermore, pursuant to the provisions, the minimum registered capital requirements
for insurance agencies and brokerages were increased substantially. On April 27, 2013, CIRC issued the Decision on Revising the
Agency Provisions and Decision on Revising the Brokerage Provisions, pursuant to which, CIRC has mandated any insurance agency
and insurance brokerage established subsequent to the Decisions to meet a minimum registered capital requirement of RMB50 million
($8.1 million). On May 16, 2013, CIRC issued Notice for Further Clarification on Related Issues of Access to Professional Insurance
Intermediary Market (the “2013 Notice”), pursuant to which, professional insurance agencies and insurance brokerages
established prior to the issuance of the Decisions, with registered capital less than RMB50 million($8.1 million), can continuously
operate their existing business within the provinces where they have the registered office or branch office, but shall not set
up any new branches in any province where they do not have the registered office or any branch office. See “Corporate History
and Structure - Regulation.” Such increase would reduce the amount of cash available for other business purposes. In addition,
the CIRC issued an Opinion of CIRC on Reforming and Improving the Management System of Insurance Salespersons in September 2010
(the “Reforming Opinion”), which requires the insurance companies and insurance intermediaries to build up a clear
legal relationship with the insurance salespersons, improve the fundamental protection rights of the insurance salespersons, and
encourage the insurance companies and insurance intermediaries to actively explore new models and marketing channels for insurance
sales system. On September 14, 2013, CIRC issued another opinion to reiterate and push forward the Reforming Opinion above.
Adverse changes in economic and political
policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely
affect our business.
We conduct our business in China primarily
through our PRC subsidiary and Consolidated Affiliated Entities. Accordingly, our results of operations, financial condition and
prospects are subject to a significant degree to economic, political and legal developments in China. China’s economy differs
from the economies of most developed countries in many respects, including with respect to the amount of government involvement,
level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced
significant growth in the past 30 years or so, growth has been uneven across different regions and among various economic sectors
of China and has been slowed down during the past few years. The PRC government has implemented various measures to encourage economic
development and guide the allocation of resources. While some of these measures benefit the overall PRC economy, they may also
have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government
control over capital investments or changes in tax regulations that are applicable to us.
Although the PRC government has implemented
measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership
of productive assets and the establishment of improved corporate governance in business enterprises, the PRC government still owns
a substantial portion of productive assets in China. In addition, the PRC government continues to play a significant role in regulating
industry development by imposing industrial policies. The PRC government also exercises significant control over China’s
economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary
policy and providing preferential treatment to particular industries or companies. Actions and policies of the PRC government could
materially affect our ability to operate our business.
Uncertainties with respect to the
PRC legal system could adversely affect us.
We conduct our business in China primarily
through our PRC subsidiary and Consolidated Affiliated Entities. The business conducted by our PRC subsidiary and Consolidated
Affiliated Entities in China are governed by PRC laws and regulations. Our PRC subsidiary is generally subject to laws and regulations
applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises. The PRC legal
system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value.
Although, since 1979, PRC legislation and
regulations have significantly enhanced the protections afforded to various forms of foreign investments in China, China has not
developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of
economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited
volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve
uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are
not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation
of these policies and rules until some time after the violation. In addition, any litigation in China may be protracted and result
in substantial costs and diversion of resources and management attention.
Governmental control of currency
conversion may affect the value of your investment.
The PRC government imposes controls on
the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. Under existing
PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures
from trade-related transactions, can be made in foreign currencies without prior approval from the SAFE by complying with certain
procedural requirements. But approval from appropriate government authorities is required where RMB is to be converted into foreign
currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The
PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions.
Under our current corporate structure in the PRC, the primary source of our income at the holding company level from our PRC operations
is dividend payments from our PRC subsidiary. Shortages in the availability of foreign currency may restrict the ability of our
PRC subsidiary and our Consolidated Affiliated Entities to remit sufficient foreign currency to pay dividends or other payments
to us, or otherwise satisfy their foreign currency denominated obligations. If the foreign exchange control system in China prevents
us from obtaining sufficient foreign currency to satisfy our currency needs, we may not be able to pay dividends in foreign currencies
to our shareholders.
We rely principally on dividends
and other distributions on equity paid by our subsidiary to fund any cash and financing requirements we may have, and any limitation
on the ability of our subsidiary to make payments to us could have a material adverse effect on our ability to conduct our business.
We are a holding company, and in PRC we
rely principally on dividends from our PRC subsidiary in China and service, license and other fees paid to our PRC subsidiary by
our Consolidated Affiliated Entities for our cash requirements, including any debt we may incur. Current PRC regulations permit
our PRC subsidiary to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. In addition, our PRC subsidiary is required to set aside at least 10% of its after-tax profits each
year as reported in its PRC statutory financial statements, if any, to fund a statutory reserve until such reserve reaches 50%
of its registered capital, and our PRC subsidiary that is considered foreign-invested enterprises is required to further set aside
a portion of its after-tax profits as reported in its PRC statutory financial statements to fund the employee welfare fund at the
discretion of the board. These reserves are not distributable as cash dividends. Furthermore, if our PRC subsidiary and Consolidated
Affiliated Entities in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their
ability to pay dividends or make other payments to us. In addition, the PRC tax authorities may require us to adjust our taxable
income under the contractual arrangements we currently have in place in a manner that would materially and adversely affect our
PRC subsidiary’s ability to pay dividends and other distributions to us.
The PRC subsidiary has not made any profits
to date and as a result has no accumulated profits available for the purposes of dividend distribution. Even though we expect the
PRC subsidiary to become profitable in 2016, we intend to use any profits to fund our business operations or expansion of our business.
Any limitation on the ability of our subsidiary
and Consolidated Affiliated Entities to distribute dividends or other payments to us could materially and adversely limit our ability
to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, or otherwise fund and conduct
our business.
Fluctuation in the value of NTD
may have a material adverse effect on your investment.
The value of the NTD against the USD and
other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions.
During the six months ended December
31, 2013 and 2012, our revenues and costs are denominated in the NTD, and a significant portion of our financial assets are
also denominated in NTD. Any significant appreciation or depreciation of
the NTD against the USD may affect our cash flows, revenues, earnings and financial position, and the value of, and any
dividends payable on, our ordinary shares in USD. For example, an appreciation of the NTD against the USD would make any new
NTD-denominated investments or expenditures more costly to us, to the extent that we need to convert USD into the NTD for
such purposes. An appreciation of the NTD against the USD would also result in foreign currency translation losses for
financial reporting purposes when we translate our USD denominated financial assets into the NTD, as the NTD is our reporting
currency in Taiwan. Conversely, a significant depreciation of the NTD against the USD may significantly reduce the USD
equivalent of our reported earnings, and may adversely affect the price of our shares.
Sensitivity analysis
The following table indicates the instantaneous
change in the Company's (loss) / profit after tax (and accumulated losses) that would arise if foreign exchange rates at the reporting
date had changed at that date, assuming all other risk variables remained constant.
For the six months ended December 31, 2013
|
|
|
For the six months ended December 31, 2012
|
|
Appreciation in NTD
|
|
|
Decrease in net income
|
|
|
Decrease in retained
earnings
|
|
|
Appreciation in RMB
|
|
|
Decrease in net loss
|
|
|
Decrease in
accumulated losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
%
|
|
$
|
2,684
|
|
|
$
|
3,175
|
|
|
|
3
|
%
|
|
$
|
4,750
|
|
|
$
|
4,750
|
|
The weakening of the NTD against the above currencies by the
same percentages would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis
that all other variables remain constant.
The sensitivity analysis assumes that the
change in foreign exchange rates had been applied to re-measure those financial instruments held by the Company which expose the
Company to foreign currency risk at the reporting date. The analysis excludes differences that would result from the translation
of the financial statements of foreign operations into the Company's presentation currency.
The PRC Labor Contract Law and its
implementing rules may adversely affect our business and results of operations.
On June 29, 2007, the Standing Committee
of the National People’s Congress of China promulgated the Labor Contract Law, which became effective on January 1, 2008.
On September 18, 2008, the State Council promulgated the implementing rules for the Labor Contract Law, which became effective
upon adoption. This new labor law and its implementing rules have reinforced the protection for employees, who, under the existing
PRC Labor Law, already have certain rights, such as the right to have written labor contracts, the right to enter into labor contracts
with indefinite terms under specific circumstances, the right to receive overtime wages when working overtime, and the right to
terminate in the labor contracts. In addition, the Labor Contract Law and its implementing rules have made some amendments to the
existing PRC Labor Law and added some clauses that could increase cost of labor to employers. In the event that we decide to significantly
reduce our workforce, the Labor Contract Law and its implementing rules could adversely affect our ability to effect these changes
cost-effectively or in the manner we desire, which could lead to a negative impact on our business and results of operations in
the PRC.
We may have difficulty establishing
adequate management, legal and financial controls in the People’s Republic of China.
The PRC historically has been deficient
in Western style management and financial reporting concepts and practices, as well as in modern banking, computer and other control
systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. Currently,
we do not have any employees that are formally trained in US GAAP or in ICFR in the PRC. As a result of these factors, we may experience
difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements,
books of account and corporate records and instituting business practices that meet Western standards.
It may be difficult to affect service
of process and enforcement of legal judgments upon us and our officers and directors because they reside outside the United States.
To better operate our business in PRC,
some of our directors and officers reside in PRC, our service of process on such directors and officers may be difficult to effect
within the United States. Also, with respect to the assets for PRC operation located in PRC, any judgment obtained in the United
States against us may not be enforceable outside the United States.
The PRC legal system contains uncertainties
which could limit the legal protections available to us and you, or could lead to penalties on us.
The PRC legal system is a civil law system
based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little precedential value.
In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general.
Our PRC subsidiary is subject to laws and regulations applicable to foreign investment in China. In addition, our PRC subsidiary
and Consolidated Affiliated Entities are incorporated in China and subject to all applicable PRC laws and regulations. Because
of the relatively short period for enacting such a comprehensive legal system, it is possible that the laws, regulations and legal
requirements are relatively recent, and their interpretation and enforcement involve uncertainties. These uncertainties could limit
the legal protections available to us and our stockholders, and may lead to penalties imposed on us because of the different understanding
between the relevant authority and us. In addition, we cannot predict the effect of future developments in the PRC legal system,
including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption
of local regulations by national laws.
We may have limited legal recourse
under the PRC laws if disputes arise under our contracts with parties in China.
The Chinese government has enacted significant
laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation
and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our
ability to enforce commercial claims or to resolve commercial disputes is unpredictable. The Company faces the risk that the parties
to contracts may seek ways to terminate the transactions. For example, management of our Consolidated Affiliated Entities may hinder
or prevent us from accessing important information regarding the financial and business operations of the Consolidated Affiliated
Entities or refuse to pay us contractual consideration due under the VIE Agreements. The resolution of these matters may be subject
to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a
particular matter or dispute may influence their determination. Any rights we may have to specific performance, or to seek an injunction
under the PRC laws, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal
system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse
effect on our business, financial condition and results of operations. Although legislation in China over the past 30 years has
significantly improved the protection afforded to various forms of foreign investment and contractual arrangements in China, these
laws, regulations and legal requirements are relatively new and their interpretation and enforcement involve uncertainties, which
could limit the legal protection available to us, and our stockholders. The inability to enforce or obtain a remedy under any of
our existing or future agreements could result in a significant loss of business, business opportunities or capital and could have
a material adverse impact on our operations.
Certain affiliates of ours are also directors
and executive officers of our Consolidated Affiliated Entities. PRC laws provide that a director or certain members of senior management
owes a fiduciary duty to the company he/ she directs or manages. These individuals must therefore act in good faith and in the
best interests of the relevant PRC company pursuant PRC laws and must not use their respective positions for personal gains. These
laws do not require them to consider our best interests when making decisions as a director or member of management of the relevant
PRC company. For example, it may be possible for management of Anhou to breach the VIE agreements and while their actions may be
in violation of US laws they could be legal in the PRC. Any judgment for violation of fiduciary duty under US law may not be enforceable
outside the United States. It may not be possible to effect service of process within the United States or elsewhere outside China
upon certain our directors or senior executive officers residing in China, irrespective of matters arising under U.S. federal securities
laws or applicable state securities laws. Any court judgment of United States for violation of fiduciary duty under US law may
not be enforceable in the PRC due to the lack of bilateral treaties between PRC and the United States providing for the reciprocal
recognition and enforcement of judgment of courts.
Risks Relating to Ownership of Our Shares
You may not be able to liquidate
your investment since there is no assurance that a public market will develop for our common stock or that our common stock will
ever be approved for trading on a recognized exchange.
There is no established public trading
market for our securities. Though we have engaged a market maker to apply for a quotation on the OTCBB in the United States and
obtained the approval for trading, our shares are not and have not been listed on any recognized exchange. We cannot assure you
that a regular trading market will develop or that if developed, will be sustained. In the absence of a regular trading market,
you may be unable to liquidate its investment, which will result in the loss of your investment.
We have no plans to declare any dividends
to shareholders in the near future.
We currently intend to retain our future
earnings, if any, to support our operations and to finance expansion. The declaration, and amount of any future dividends will
be made at the discretion of the Board of Directors (“BOD”), and will depend upon, among other things, the results
of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the BOD considers
relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect
to the amount of any such dividend. If you require dividend income, you should not rely on an investment in the Company. Income
received from an investment in the Company will only come from a rise in the market price in the Company’s stock, which is
uncertain and unpredictable.