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LFC China Life Insurance

Table of Contents

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

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM20-F

 

 

 

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

OR

 

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

For the fiscal year ended December 31, 2019

OR

 

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

For the transition period from                to                

OR

 

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

Date of event requiring this shell company report                

 

 

Commission file number001-31914

 

 

中国人寿保险股份有限公司

(Exact name of Registrant as specified in its charter)

 

 

China Life Insurance Company Limited

(Translation of Registrant’s name into English)

People’s Republic of China

(Jurisdiction of incorporation or organization)

 

 

16 Financial Street

Xicheng District

Beijing 100033, China

(Address of principal executive offices)

Yinghui Li

16 Financial Street

Xicheng District

Beijing 100033, China

Tel:(86-10) 6363 1191

Fax:(86-10) 6657 5112

Email:liyh@e-chinalife.com

(Name, Telephone, Email and/or Facsimile Number and Address of Company Contact Person)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

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

 

 

 

*

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

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None.

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None.

(Title of Class)

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     ☒  Yes    ☐  No

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule12b-2 of the Exchange Act.

 

Large accelerated filer  ☒                       Accelerated filer  ☐                       Non-accelerated filer  ☐                        Emerging growth company  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.    ☒  Yes    ☐  No

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S.GAAP  ☐  

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ☒

 Other  ☐

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

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    ☐  Yes    ☒  No

 

 

 


Table of Contents

CHINA LIFE INSURANCE COMPANY LIMITED

TABLE OF CONTENTS

 

FORWARD-LOOKING STATEMENTS

   1 

CERTAIN TERMS AND CONVENTIONS

   2 
PART I    4 

Item 1.

 

Identity of Directors, Senior Management and Advisers

   4 

Item 2.

 

Offer Statistics and Expected Timetable

   4 

Item 3.

 

Key Information

   4 

A.

 

Selected Financial Data

   4 

B.

 

Capitalization and Indebtedness

   9 

C.

 

Reasons for the Offer and Use of Proceeds

   9 

D.

 

Risk Factors

   9 

Item 4.

 

Information on the Company

   32 

A.

 

History and Development of the Company

   32 

B.

 

Business Overview

   36 

C.

 

Organizational Structure

   93 

D.

 

Property, Plants and Equipment

   95 

Item 4A.

 

Unresolved Staff Comments

   95 

Item 5.

 

Operating and Financial Review and Prospects

   95 

A.

 

Operating Results

   117 

B.

 

Liquidity and Capital Resources

   134 

C.

 

Research and Development, Patents and Licenses

   137 

D.

 

Trend Information

   138 

E.

 

Off-Balance Sheet Arrangements

   138 

F.

 

Tabular Disclosure of Contractual Obligations

   138 

Item 6.

 

Directors, Senior Management and Employees

   138 

A.

 

Directors and Senior Management

   138 

B.

 

Compensation

   146 

C.

 

Board Practices

   149 

D.

 

Employees

   150 

E.

 

Share Ownership

   151 

Item 7.

 

Major Shareholders and Related Party Transactions

   151 

A.

 

Major Shareholders

   151 

B.

 

Related Party Transactions

   152 

C.

 

Interests of Experts and Counsel

   167 

Item 8.

 

Financial Information

   168 

A.

 

Consolidated Financial Statements and Other Financial Information

   168 

B.

 

Significant Changes

   170 

C.

 

Embedded Value

   170 

Item 9.

 

The Offer and Listing.

   176 

Item10.

 

Additional Information.

   176 

A.

 

Share Capital

   176 

 

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Table of Contents

FORWARD-LOOKING STATEMENTS

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

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

 

  

future developments in the insurance industry in China;

 

  

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

 

  

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

 

  

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

 

  

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

 

  

our business strategy and plan of operations;

 

  

the prospective financial information regarding our business;

 

  

our dividend policy; and

 

  

information regarding our embedded value.

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

 

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Table of Contents

CERTAIN TERMS AND CONVENTIONS

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

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

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

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

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

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

 

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Table of Contents

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

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

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

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

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

 

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Table of Contents

PART I

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

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.

Not applicable.

ITEM 3. KEY INFORMATION.

A. SELECTED FINANCIAL DATA

Selected Historical Consolidated Financial Data

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

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

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

 

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

Revenues

       

Gross written premiums

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

Less: premiums ceded to reinsurers

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net written premiums

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

Net change in unearned premium reserves

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net premiums earned

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Investment income

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

Net realized gains on financial assets

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

Net fair value gains through profit or loss

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

Other income

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total revenues

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Benefits, claims and expenses

       

Insurance benefits and claims expenses

       

Life insurance death and other benefits

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

Accident and health claims and claim adjustment expenses

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

Increase in insurance contract liabilities

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

Investment contract benefits

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

Policyholder dividends resulting from participation in profits

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

Underwriting and policy acquisition costs

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

Finance costs

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

Administrative expenses

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

Other expenses

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

Statutory insurance fund contribution

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total benefits, claims and expenses

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net gains on investments of associates and joint ventures

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

Including: share of profit of associates and joint ventures

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

Profit before income tax

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

Income tax

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net profit

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Attributable to:

       

- Equity holders of the Company

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

-Non-controlling interests

   488   458   499   541   727   105 

Basic and diluted earnings per share(1)

   1.22   0.66   1.13   0.39   2.05   0.29 

 

(1) 

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

 

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

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

       

Fair value gains/(losses) onavailable-for-sale securities

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

Amount transferred to net profit from other comprehensive income

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

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

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

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

   353   (864  20   735   599   86 

Exchange differences on translating foreign operations

   10   21   (865  598   237   35 

Income tax relating to components of other comprehensive income

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

       

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

               (76  (11

Other comprehensive income for the year, net of tax

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income for the year, net of tax

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

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Attributable to:

       

- Equity holders of the Company

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

-Non-controlling interests

   549   456   485   586   792   114 

 

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

Assets

            

Property, plant and equipment

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

Right-of-use assets

                   3,520    506 

Investment properties

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

Investments in associates and joint ventures

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

Held-to-maturity securities

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

Loans

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

Term deposits

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

Statutory deposits - restricted

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

Available-for-sale securities

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

Securities at fair value through profit or loss

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

Derivative financial assets

                   428    61 

Securities purchased under agreements to resell

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

Accrued investment income

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

Premiums receivable

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

Reinsurance assets

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

Other assets

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

Deferred tax assets

               1,257    128    18 

Cash and cash equivalents

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and equity

            

Liabilities

            

Insurance contracts

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

Investment contracts

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

Policyholder dividends payable

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

Interest-bearing loans and borrowings

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

Lease liabilities

                   3,091    444 

Bonds payable

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

Financial liabilities at fair value through profit or loss

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

Derivative financial liabilities

               1,877         

Securities sold under agreements to repurchase

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

Annuity and other insurance balances payable

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

Premiums received in advance

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

Other liabilities

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

Deferred tax liabilities

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

Current income tax liabilities

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

Statutory insurance fund

   217    491    282    558    602    86 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity

    

Share capital

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

Other equity instruments

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

Reserves

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

Retained earnings

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to equity holders of the Company

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-controlling interests

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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Exchange Rate Information

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

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

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

 

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

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

B. CAPITALIZATION AND INDEBTEDNESS

Not Applicable.

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

Not Applicable.

D. RISK FACTORS

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

Risks Relating to Our Business

Our investments are subject to risks.

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

Until November 2006, we were only permitted to invest the premiums and other income we receive in investments in China. We obtained the approval to invest overseas with our foreign currency denominated funds in November 2006. See “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters—Insurance Company Regulation—Regulation of investments”. However, we have continued to make our investments mainly in China and, as of December 31, 2019, approximately97.99% of our total investment assets were in China. In particular, as of December 31, 2019, approximately 42.65% of our total investment assets consisted of debt securities including Chinese government bonds, government agency bonds, corporate bonds, subordinated bonds and other debt securities as permitted by relevant government agencies; approximately 14.98% of our total investment assets consisted of term deposits with Chinese banks, of which 43.61% were placed with the five largest Chinese state-owned commercial banks; and approximately 17.04% of our total investment assets consisted of loans provided to Chinese entities and individuals, including policy loans, investment in debt investment plans and trust schemes. A serious downturn in the Chinese economy may lead to investment losses, which would reduce our earnings.

 

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

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

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

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

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

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

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

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

 

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

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

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

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

 

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We are exposed to changes in interest rates.

Changes in interest rates may affect our profitability.

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

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

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

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

 

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

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

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

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

 

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

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

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

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

 

  

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

 

  

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

 

  

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

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

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

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

 

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

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

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

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

 

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

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

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

Catastrophes could materially reduce our earnings and cash flow.

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

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

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

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

 

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

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

A computer system failure, cyber-attacks or other security breaches may disrupt our business, damage our reputation and adversely affect our results of operations and financial condition.

We use computer systems to store, retrieve, evaluate and utilize customer and company data and information. Our business is highly dependent on our ability to access these systems to perform necessary business functions such as developing and selling insurance products, providing customer support, policy management, filing and paying claims, managing our investment portfolios and producing financial statements. Although we have designed and implemented a variety of security measures and backup plans to prevent or limit the effect of failure, our computer systems may be vulnerable to disruptions as a result of natural disasters,man-made disasters, criminal activities, pandemics or other events beyond our control. In addition, our computer systems may be subject to computer viruses or other malicious codes, unauthorized access, cyber-attacks or other computer-related penetrations. The failure of our computer systems for any reason could disrupt our operations and may adversely affect our business, results of operations and financial condition. Although we have not experienced such a computer system failure or security breach in the past, we cannot assure you that we will not encounter a failure or security breach in the future.

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

 

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United States Foreign Account Tax Compliance Act

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

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

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

 

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

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

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

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

 

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

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

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

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

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

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

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

 

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

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

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

Risks Relating to the PRC Life Insurance Industry

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

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

Competition among domestic life insurance companies is increasing.

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

 

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

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

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

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

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

 

  

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

 

  

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

 

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

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

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

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

 

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

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

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

 

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

Risks Relating to the Restructuring

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

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

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

 

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

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

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

 

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

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

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

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

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

 

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CLIC may direct business opportunities elsewhere.

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

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

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

Risks Relating to the People’s Republic of China

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

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

 

  

the extent of government involvement;

 

  

its level of development;

 

  

its growth rate; and

 

  

its control of foreign exchange.

 

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

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

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

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

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

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

 

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

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

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

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

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

 

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Holders of H shares may be subject to PRC taxation.

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

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

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

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

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

 

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Payment of dividends is subject to restrictions under Chinese law.

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

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

ITEM 4. INFORMATION ON THE COMPANY

A. HISTORY AND DEVELOPMENT OF THE COMPANY

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

General Information

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

Our Restructuring

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

 

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In connection with the restructuring:

 

  

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

 

  

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

 

  

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

 

  

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

 

  

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

 

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

 

  

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

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

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

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

 

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

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

Developments After Restructuring

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

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

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

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

 

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In March 2019, we issued bonds in the principal amount of RMB 35 billion for capital replenishment in the national inter-bank bond market. The bonds have a10-year maturity and a fixed coupon rate of 4.28% per annum. We have a conditional right to redeem the bonds on the fifth anniversary of issuance. The proceeds from the issuance of the bonds will be used to replenish our capital so as to enhance our solvency according to applicable laws and approvals from regulatory authorities.

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

SEC’s Website and Our Website

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

B. BUSINESS OVERVIEW

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

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

Life Insurance

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

 

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

 

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

Gross written premiums

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

Liabilities of insurance contracts

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

Liabilities of investment contracts

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

Products

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

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

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

 

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

Gross written premiums

          

Whole life and term life insurance

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

Endowment

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

Annuities

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

Whole Life and Term Life Insurance

Non-participating whole life and term life insurance

We offernon-participating whole life and term life insurance products.

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

 

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

Participating whole life insurance

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

Endowment

Non-participating endowment products

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

Participating endowment products

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

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

We offer endowment products only to individual customers.

 

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Annuities

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

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

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

Universal Insurance Products

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

PersonalTax-deferred Pension Insurance Products

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

Marketing and Distribution

Individual

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

 

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

Group

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

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

Health Insurance

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

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

 

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

 

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

Gross written premiums

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

Liabilities of insurance contracts

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

Liabilities of investment contracts

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

Products

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

Defined health benefit plans

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

Medical expense reimbursement plans

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

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

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

 

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Care insurance plans

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

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

Disease-specific plans

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

Marketing and Distribution

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

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

Accident Insurance

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

 

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

 

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

Gross written premiums

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

Liabilities of insurance contracts

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

Products

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

Individual accident insurance

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

Group accident insurance

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

Marketing and Distribution

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

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

 

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Product Development

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

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

 

  

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

 

  

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

 

  

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

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

 

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Distribution Channels

We believe we have the largest distribution force with the most extensive geographic reach compared with any of our competitors.Our distribution network reaches almost every county in China.Throughout China, we have approximately1,613,000exclusive agents operating in approximately 16,000field offices for our individual products and approximately 65,500direct sales representatives for group products. We have a multi-channel distribution network selling individual and group insurance products through intermediaries, primarilynon-dedicated agencies located in approximately 42,600outlets of commercial banks as of the end of 2019.Commission rates vary by product, based on such factors as the payment terms and period over which the premiums are paid for the product, as well as CIRC regulations. We support our agents and representatives through training programs, sales materials and information technology systems.

Exclusive agent force

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

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

 

   As of December 31, 
   2017   2018   2019 

Number of exclusive agents (approximately)

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

Number of field offices (approximately)

   17,100    17,451    16,000 

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

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

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

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

 

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

 

  

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

 

  

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

 

  

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

 

  

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

 

  

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

 

  

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

Group distribution channel

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

Direct sales force

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

 

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

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

Intermediaries

We also offer individual and group products through intermediaries.

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

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

Bancassurance channel

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

Other distribution channels

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

 

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Gross written premiums attributable to each distribution channel

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

 

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

Exclusive agent force

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

First-year business of long-term insurance

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

First-year regular

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

Single

   389    272    277    40 

Renewal business

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

Short-term insurance business

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

Group distribution channel

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

First-year business of long-term insurance

   4,368    3,487    3,018    433 

First-year regular

   943    1,004    968    139 

Single

   3,425    2,483    2,050    294 

Renewal business

   999    1,649    1,995    287 

Short-term insurance business

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

Bancassurance channel

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

First-year business of long-term insurance

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

First-year regular

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

Single

   59,777    8,642    31    4 

Renewal business

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

Short-term insurance business

   894    1,175    1,586    228 

Other distribution channels

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

First-year business of long-term insurance

   1,064    937    763    110 

First-year regular

   984    935    763    110 

Single

   80    2    —      —   

Renewal business

   1,641    2,314    2,503    360 

Short-term insurance business

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

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

 

Competition

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

 

  

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

 

  

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

 

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

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

 

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

China Life

   20.8  22.3  17.2  20.4

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

   15.5  27.0  21.2  17.0

China Pacific Life Insurance Co., Ltd.

   7.3  9.2  8.6  7.7

Huaxia Life Insurance Co., Ltd.

   6.8  1.2  3.1  6.0

Taiping Life Insurance Co., Ltd

   4.4  3.4  6.1  4.7

Others(2)

   45.2  37.0  43.8  44.1
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

   100  100  100  100
  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

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

(2)

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

Source: China Insurance Yearbook 2019

 

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

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

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

Business Management

Customer Support Management

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

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

Customer service centers

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

 

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Customer contact centers

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

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

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

Notification services

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

Internet-based services

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

 

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

Supplementary services

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

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

Underwriting and Pricing

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

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

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

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

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

We primarily offer products denominated in Renminbi.

 

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Claims Management

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

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

Reinsurance

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

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

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

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

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

 

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Investments

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

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

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

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

 

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

 

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

Cash and cash equivalents

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

Term deposits

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

Statutory deposits—restricted

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

Debt securities,held-to-maturity

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

Debt securities,available-for-sale

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

Debt securities, securities at fair value through profit or loss

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

Debt securities

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Loans

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

Equity securities, available for sale

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

Equity securities, securities at fair value through profit or loss

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

Equity securities

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Derivative financial assets

   —      —     —      —     428    0.0

Resale agreements

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

Investment properties

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

Investments in associates and joint ventures

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total investment assets

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Average investment assets balance

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

Risk management

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

 

  

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

 

  

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

 

  

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

 

  

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

 

  

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

 

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

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

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

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

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

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

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

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

 

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Investment results

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

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

 

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

Cash, cash equivalents, statutory deposits and term deposits:

 

    

Investment income

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

Ending assets: cash and cash equivalents

    48,586    50,809    53,306 

Ending assets: statutory deposits—restricted

    6,333    6,333    6,333 

Ending assets: term deposits

    449,400    559,341    535,260 
   

 

 

   

 

 

   

 

 

 

Ending assets

    504,319    616,483    594,899 

Debt securities:

       

Investment income

    53,895    61,517    63,148 

Net realized gains on financial assets

    (123   357    (35

Net fair value gains through profit or loss

    (1,542   2,006    778 
   

 

 

   

 

 

   

 

 

 

Total

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

Ending assets

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

Loans:

       

Investment income

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

Ending assets

    383,504    450,251    608,920 

Equity securities:

       

Investment income

    27,939    17,776    22,804 

Net realized gains on financial assets

    165    (19,948   1,866 

Net fair value gains through profit or loss

    8,179    (18,938   18,279 
   

 

 

   

 

 

   

 

 

 

Total

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

Ending assets

    409,528    424,657    605,568 

Resale agreements:

       

Investment income

   1.9  746   1.2  281   2.2  161 

Ending assets

    36,185    9,905    4,467 

Investments properties:

       

Income of investments properties

   3.2  69   1.6  105   0.3  31 

Ending assets

    3,064    9,747    12,141 

Investments in associates and joint ventures:

       

Net gains on investments of associates and joint ventures

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

Ending assets

    161,472    201,661    222,983 

Securities sold under agreements to repurchase:

       

Interest expense

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

Ending liabilities

    87,309    192,141    118,088 

Total investments:

       

Investment income

    122,727    125,167    139,919 

Net realized gains on financial assets

    42    (19,591   1,831 

Net fair value gains through profit or loss

    6,183    (18,278   19,251 

Income of Investments properties

    69    105    31 

Net gains on investments of associates and joint ventures

    7,143    7,745    8,011 

Interest expense of securities sold under agreements to repurchase

    (3,144   (3,565   (2,392

Total

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

Ending assets excluding securities sold under agreements to repurchase

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

 

(1)

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

 

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Table of Contents

Term deposits

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

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

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

 

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

Due in one year or less

   97,076    158,920    107,039 

Due after one year and through five years

   349,524    323,021    420,191 

Due after five years and through ten years

   2,800    77,400    8,030 
  

 

 

   

 

 

   

 

 

 

Total term deposits

   449,400    559,341    535,260 
  

 

 

   

 

 

   

 

 

 

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

 

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

Industrial & Commercial Bank of China

   10,819    5,378    3,205 

Agriculture Bank of China

   50,819    42,264    49,089 

Bank of China

   43,625    40,000    40,000 

China Construction Bank

   26,070    25,200    5,200 

Bank of Communications

   132,922    200,534    135,950 

Other banks

   185,145    245,965    301,816 
  

 

 

   

 

 

   

 

 

 

Total term deposits

   449,400    559,341    535,260 
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Debt securities

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

 

  

Chinese government bonds;

 

  

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

 

  

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

 

  

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

 

  

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

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

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

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

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

 

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

 

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

Debt securities,available-for-sale:

 

              

Government bonds

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

Government agency bonds

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

Corporate bonds

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

Subordinated bonds/debt

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

Others

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total debt securities,available-for-sale

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Debt securities, held to maturity:

                   

Government bonds

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

Government agency bonds

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

Corporate bonds

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

Subordinated bonds/debt

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total debt securities, held to maturity

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Debt securities, securities at fair value through profit or loss

                   

Government bonds

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

Government agency bonds

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

Corporate bonds

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

Others

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

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

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total debt securities

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

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

 

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

Due in one year or less

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

Due after one year and through five years

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

Due after five years and through ten years

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

Due after ten years

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

Loans

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

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

 

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Securities investment funds

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

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

The following table presents the carrying values of investments inopen-end andclosed-end securities investment funds as of the dates indicated.

 

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

Open-end

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

Closed-end

   2,224    2.2  2,164    2.0       
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total

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

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Stocks

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

Resale agreements

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

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

 

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Equity interests innon-listed enterprises and related financial products

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

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

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

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

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

 

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

 

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

China Life Property and Casualty Insurance Company Limited

   8,185    7,963    9,332 

China Guangfa Bank Co., Ltd.

   53,459    72,655    75,180 

Sinopec Sales Co., Ltd.

   10,172    10,219    10,232 

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

           21,347            21,387            21,433 

Ningbo Meishan Bonded Port Area Baishan Investment Management Partnership

   1,680    1,698    1,751 

China Power Investment Nuclear Power Co., Ltd.

   —      8,036    8,607 

Qinghai Huanghe Hydropower Development Co., Ltd.

   —      —      9,007 

Asset Management Business

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

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

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

Property and Casualty Business

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

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

Pension Insurance Business

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

 

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

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

Information Technology

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

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

 

  

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

 

  

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

 

  

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

 

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

 

  

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

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

Trademarks

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

 

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Regulatory and Related Matters

Overview

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

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

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

Insurance Company Regulation

Licensing requirements

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

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

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

 

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Minimum capital requirements

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

Restriction of ownership in joint stock insurance companies

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

Fundamental changes

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

 

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Regulation of products

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

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

 

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

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

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

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

 

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

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

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

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

 

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

Regulation of investments

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

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

 

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

 

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

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

 

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

Equity assets  

Equity assets include both listed and unlisted equity assets.

 

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

 

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

  

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

 

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

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

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

 

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

 

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

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

 

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

  

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

 

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

 

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

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

 

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

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

 

(1)

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

(2)

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

(3)

Total assets exclude the balance of the funds raised from bond repurchases and the amount of assets under independent accounts (including investment-linked life insurance products, variable annuity products, health care entrusted management products, pension insurance entrusted management products and investment-orientednon-life insurance products withoutpre-agreed returns).

(4)

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

(5)

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

 

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(6)

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

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

 

  

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

 

  

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

 

  

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

 

  

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

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

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

 

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

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

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

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

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

Solvency requirements

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

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

 

  

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

 

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

 

  

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

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

 

  

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

 

  

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

 

  

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

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

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

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

Quantifiable risks include the following:

 

  

Insurance risk, which includes life insurance risk andnon-life insurance risk;

 

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

 

  

Credit risk, which includes spread risk and default risk.

Unquantifiable risks include the following:

 

  

Operation risk;

 

  

Reputation risk;

 

  

Strategy risk; and

 

  

Liquidity risk.

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

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

 

  

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

 

  

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

 

  

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

 

  

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

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

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

 

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

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

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

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

Statutory deposits

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

Statutory insurance fund

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

 

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Statutory reinsurance

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

Actuaries

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

Regulation of corporate governance

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

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

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

 

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

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

 

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

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

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

 

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

Market conduct

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

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

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

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

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

 

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Regulation of issuance of subordinated debt

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

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

Regulation of issuance of capital replenishment bonds by insurance companies

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

 

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Regulation of merger and acquisition of insurance companies

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

Regulation of establishment and management ofnon-insurance subsidiaries

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

Regulation of establishment of overseas insurance institutions

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

 

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Compliance with regulatory requirements

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

Regulation of Foreign-Invested Insurance Companies

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

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

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

 

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Regulation of Insurance Asset Management Companies

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

Minimum capital requirements

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

Business operations

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

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

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

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

 

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Shareholding restrictions

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

Investment risk control

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

Major emergency response management

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

Regulation of Insurance Agencies, Insurance Brokers and Other Intermediaries

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

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

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

 

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

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

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

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

 

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Regulation of Internet Insurance Businesses

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

No.2 Interpretation of Accounting Standard for Business Enterprises

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

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

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

 

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Implementation of VAT

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

Policy onpre-tax deduction of underwriting and policy acquisition costs

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

Administrative Penalty by the PBOC

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

 

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C. ORGANIZATIONAL STRUCTURE

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

 

 

LOGO

 

 

 

(1)

Wholly owned by CLIC

(2)

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

 

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List of Significant Subsidiaries

 

Name of Subsidiary

  

Jurisdiction of Incorporation

  

Proportion of Ownership Interest

Owned by China Life

中国人寿资产管理有限公司

China Life Asset Management Company Limited

  The People’s Republic of China  

60%

(directly)

中国人寿富兰克林资产管理有限公司

China Life Franklin Asset Management Company Limited(1)

  Hong Kong  

50%(2)

(indirectly through affiliate)

中国人寿养老保险股份有限公司

China Life Pension Company Limited

  The People’s Republic of China  

74.27%(3)

(directly and indirectly through affiliate)

国寿安保基金管理有限公司

China Life AMP Asset Management Co., Ltd.

  The People’s Republic of China  

85.03%(4)

(indirectly through affiliate)

国寿财富管理有限公司

China Life Wealth Management Company Limited

  The People’s Republic of China  

100%(5)

(indirectly through affiliate)

 

 

(1)

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

(2)

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

(3)

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

(4)

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

(5)

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

 

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D. PROPERTY, PLANTS AND EQUIPMENT

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

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

ITEM 4A. UNRESOLVED STAFF COMMENTS.

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.

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

Overview of Our Business

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

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

 

  

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

 

  

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

 

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

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

Financial Overview of Our Business

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

 

  

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

 

  

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

 

  

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

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

Factors Affecting Our Results of Operations

Revenues, Expenses and Profitability

We earn our revenues primarily from:

 

  

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

 

  

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

 

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

Our operating expenses primarily include:

 

  

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

 

  

increase in insurance contracts liabilities;

 

  

investment contract benefits;

 

  

policyholder dividends resulting from participation in profits;

 

  

underwriting and policy acquisition costs; and

 

  

administrative and other expenses.

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

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

 

  

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

 

  

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

 

  

our returns on investment assets;

 

  

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

 

  

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

 

  

our cost of administering insurance contracts and providing customer services;

 

  

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

 

  

changes in regulations.

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

 

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Interest Rates

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

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

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

Investments

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

 

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

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

 

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

Debt securities

   (114   (42   (3,749   (539

Equity securities

   (2,643   (8,163   (2,638   (379

Associates and joint ventures

   —      —      (1,500   (215
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

 

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

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

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

 

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

 

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

Debt securities

            

Government bonds

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

Government agency bonds

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

Corporate bonds

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

Subordinated bonds/debt

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

Other

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

            

Funds

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

Common stocks

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

Other

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

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As of December 31, 2019

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

Debt securities

     

Unrealized losses

   374   141   531   1,046 

Carrying amounts

   28,298   2,794   25,884   56,976 

Unrealized losses as a percentage of carrying amounts

   1.32  5.05  2.05  1.84

Equity securities

     

Unrealized losses

   2,084   1,029   896   4,009 

Carrying amounts

   50,291   26,006   3,175   79,472 

Unrealized losses as a percentage of carrying amounts

   4.14  3.96  28.22  5.04

Total

     

Total unrealized losses

   2,458   1,170   1,427   5,055 

Total carrying amounts

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

Unrealized losses as a percentage of carrying amounts

   3.13  4.06  4.91  3.70

As of December 31, 2018

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

Debt securities

     

Unrealized losses

   126   473   1,046   1,645 

Carrying amounts

   9,665   11,075   41,365   62,105 

Unrealized losses as a percentage of carrying amounts

   1.30  4.27  2.53  2.65

Equity securities

     

Unrealized losses

   7,445   21,813   12,981   42,239 

Carrying amounts

   50,073   92,845   52,549   195,467 

Unrealized losses as a percentage of carrying amounts

   14.87  23.49  24.70  21.61

Total

     

Total unrealized losses

   7,571   22,286   14,027   43,884 

Total carrying amounts

   59,738   103,920   93,914   257,572 

Unrealized losses as a percentage of carrying amounts

   12.67  21.45  14.94  17.04

As of December 31, 2017

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

Debt securities

     

Unrealized losses

   3,670   2,128   5,274   11,072 

Carrying amounts

   181,504   52,795   45,788   280,087 

Unrealized losses as a percentage of carrying amounts

   2.02  4.03  11.52  3.95

Equity securities

     

Unrealized losses

   12,342   3,391   32   15,765 

Carrying amounts

   132,893   25,982   786   159,661 

Unrealized losses as a percentage of carrying amounts

   9.29  13.05  4.07  9.87

Total

     

Total unrealized losses

   16,012   5,519   5,306   26,837 

Total carrying amounts

   314,397   78,777   46,574   439,748 

Unrealized losses as a percentage of carrying amounts

   5.09  7.01  11.39  6.10

Financial assets other than those accounted for as at fair value through profit or loss are adjusted for impairments.

 

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In evaluating whether a decline in value is an impairment for these financial assets, we consider several factors including, but not limited to, the following:

 

  

significant financial difficulty of the issuer or debtor;

 

  

a breach of contract, such as a default or delinquency in payments;

 

  

it becomes probable that the issuer or debtor will enter into bankruptcy or other financial reorganization; and

 

  

the disappearance of an active market for that financial asset because of financial difficulties.

In evaluating whether a decline in value is impairment for equity securities, we also consider the extent or the duration of the decline. The quantitative factors include the following:

 

  

the market price of the equity securities was more than 50% below their cost at the reporting date;

 

  

the market price of the equity securities was more than 20% below their cost for a period of at least six months at the reporting date; and

 

  

the market price of the equity securities was below their cost for a period of more than one year (including one year) at the reporting date.

When the decline in value is considered an impairment,held-to-maturity debt securities are written down to their present value of estimated future cash flows discounted at the securities’ effective interest rates, andavailable-for-sale debt securities and equity securities are written down to their fair value, and the change is recorded in net realized gains on financial assets in the period the impairment is recognized. The impairment loss is reversed through the net profit if in a subsequent period the fair value of a debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognized through net profit. The impairment losses recognized in net profit on equity investments are not reversed. See “—Critical Accounting Policies”.

As of December 31, 2019, our total investment assets were RMB 3,573,154 million (US$ 513,251million) and the investment yield for the year ended December 31, 2019 was 5.24%. The investment yield primarily reflected the increase in spread income and fair value through profit or loss of equity investments we have invested in. As of December 31, 2018, our total investment assets were RMB 3,104,014 million and the investment yield for the year ended December 31, 2018 was 3.29%.    As of December 31, 2017, our total investment assets were RMB 2,753,124 million and the investment yield for the year ended December 31, 2017 was 5.16%.

We calculate the investment yields for a given year by dividing the gross investment income for that year by the average of the ending balance of investment assets of that year and the previous year. Beginning in 2018, we revised the formula to calculate our investment yield to consider the impact of investments in associates and joint ventures on our investment yield. The investment yield for the fiscal year ended December 31, 2017 has also been revised to conform to the revised formula.

 

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Mix of Products

The following table sets forth premium information as of or for the years ended December 31, 2019, 2018 and 2017 by type of product in our life insurance business, health insurance business and accident insurance business.

 

   As of or for the year ended
December 31,
   Compound
annual
growth rate
 
   2017   2018   2019   2019   (2017-2019) 
   RMB   RMB   RMB   USD     

Life insurance business

          

Whole life and term life insurance:

          

Gross written premiums

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

Endowment:

          

Gross written premiums

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

Annuities:

          

Gross written premiums

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

Health insurance business(1)

          

Gross written insurance premiums

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

Accident insurance business(2)

          

Gross written insurance premiums

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

 

(1)

Including long-term and short-term health products.

(2)

Including long-term and short-term accident products.

Under guidelines issued by the CBIRC, we are required to pay to our participating policyholders dividends which are no less than 70% of the distributable earnings on participating products. Participating products tend to present us with less market risk, since we have more flexibility to set the level of dividends and participating products are subject to guaranteed interest rates which are generally lower than those ofnon-participating products. In addition, changes in interest rates have less of impact on their lapse rates than on those ofnon-participating policies. Conversely, participating products tend to be less profitable for us thannon-participating products, largely because the terms of these contracts effectively commit us to sharing a portion of our earnings from participating products with our policyholders. However, participating products still provide us with attractive profit contributions given the growing level of sales volume they produce.

 

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Products classified as investment contracts also affect our revenues, since only a portion of the payments we received under such products are recorded in our consolidated income statement as policy fees, and the majority of such payments are recorded as investment contracts under financial liabilities on our balance sheet.

We have adjusted our premium structure to focus more on sales of products with regular premiums, especially products with regular premiums for ten years or more, which has reduced the proportion of single written premiums of our total first-year gross written premiums. We believe that this strategy could contribute to a more steady development of our business and enhance the loyalty of our customers and the retention rate of our sales agent force.

Regulation

We operate in a highly regulated industry. Changes in regulation can have a significant impact on our revenues, expenses and profitability. China’s insurance regulatory regime is undergoing significant changes toward a more transparent regulatory process and a convergent movement toward international standards.Among other things, recent changes to permitted investment channels for insurance companies have impacted our investment portfolio and returns. See “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters”.

Critical Accounting Policies

We prepared the consolidated financial statements under the historical cost convention, except for financial assets and financial liabilities at fair value through profit or loss,available-for-sale financial assets, insurance contract liabilities and certain property, plant and equipment at deemed cost during restructuring process. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires our management to exercise its judgments in the process of applying our accounting policies. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our businesses and operations. The following sections discuss the accounting policies applied in preparing our consolidated financial statements that we believe are most dependent on the application of these judgments and estimates. However, uncertainty about these judgments and estimates could result in outcomes that require a material adjustment to the carrying amounts of assets and liabilities in the future periods.

 

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Liability for Long-term Insurance Contracts

Long-term insurance contracts include whole life insurance, term life insurance, endowment insurance and annuity policies with significant life contingency risk. Premiums are recognized as revenue when the insurance contracts are recognized and premiums are due from policyholders.

We use the discounted cash flow method to estimate the reserve of long-term insurance contracts. The reserve of long-term insurance contracts consists of a reasonable estimate of liability, a risk margin and a residual margin. The long-term insurance contracts liabilities are calculated using various assumptions, including assumptions on mortality rates, morbidity rates, lapse rates, discount rates and expense assumptions, and based on the following principles:

 

  

The reasonable estimate for liability of long-term insurance contracts is the present value of reasonable estimates of future cash outflows less future cash inflows. The expected future cash inflows include cash inflows of future premiums arising from the undertaking of insurance obligations, with consideration of decrement mostly from death and surrenders. The expected future cash outflows are cash outflows incurred to fulfill contractual obligations, consisting of the following:

 

 (i)

Guaranteed benefits based on contractual terms, including payments for deaths, disabilities, diseases, survivals, maturities and surrenders;

 

 (ii)

Additionalnon-guaranteed benefits, such as policyholder dividends; and

 

 (iii)

Reasonable expenses incurred to manage insurance contracts or to process claims, including maintenance expenses and claim settlement expenses. Future administration expenses are included in the maintenance expense. Expenses are determined based on expense analysis with consideration of future inflation and our expense management control.

On each reporting date, we review the assumptions for reasonable estimates of liability and risk margins, with consideration of all available information, taking into account our historical experience and expectation of future events. Changes in assumptions are recognized in net profit. Assumptions for the amortization of residual margin are locked in at policy issuance date and are not adjusted at each reporting date. We incorporate the potential impact of future risk factors on our operating results in the determination of assumptions. The sensitivity analysis disclosed in the Note 4.1.3 onpage F-42 of this annual report provides a detailed analysis of impact of assumption changes on our operating results.

 

  

Margins have been taken into consideration while computing the reserves of insurance contracts, measured separately and recognized in net profit in each period over the life of the contracts. At the inception of the contracts, we do not recognize Day One gain, whereas on the other hand, Day One loss is recognized in profit immediately.

 

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Margins comprise risk margin and residual margin. Risk margin is the reserve accrued to compensate for the uncertain amount and timing of future cash flows. At the inception of the contract, the residual margin is calculated net of certain acquisition costs, mainly consist of underwriting and policy acquisition costs, by us representing Day One gain and will be amortized over the life of contracts. For insurance contracts of which future returns are affected by investment yields of corresponding investment portfolios, their related residual margins are amortized based on estimated future participating dividends payable to the policyholders. For insurance contracts in which future returns are not affected by investment yields of corresponding investment portfolios, their related residual margins are amortized based on sum assured of outstanding policies. The subsequent measurement of residual margin is independent from the reasonable estimate of future discounted cash flows and risk margin. The assumption changes have no effect on the subsequent measurement of the residual margin.

 

  

We have considered the impact of time value on the reserve calculation for insurance contracts.

We establish liabilities for long-term traditional insurance contracts based on the following assumptions:

 

  

For the insurance contracts of which future insurance benefits are affected by investment yields of corresponding investment portfolios, the discount rate assumption is based on expected investment returns of the asset portfolio backing these liabilities, considering the impact of time value on liabilities. In developing discount rate assumptions, we consider investment experience, current investment portfolio and trend of the relevant yield curve. The assumed discount rates reflect the future economic outlook as well as our investment strategy. The assumed discount rates with risk margin was 4.85% as at December 31, 2017, 2018 and 2019.

For the insurance contracts of which the future insurance benefits are not affected by the investment yields of the corresponding investment portfolios, the discount rate assumption is based on the “yield curve of reserve computation benchmark for insurance contracts”, published on the “China Bond” website, with consideration of liquidity spreads, taxation and other relevant factors. The assumed spot discount rates with risk margin ranged from 3.31% to4.86%as at December 31, 2017, from 3.47% to 4.86% as at December 31, 2018 and from 3.52% to 4.83% as at December 31, 2019,respectively.

There is uncertainty relating to the discount rate assumption, which is affected by factors such as future macro-economy, monetary and foreign exchange policies, capital market and availability of investment channels of insurance funds. We determine the discount rate assumption based on the information obtained at the end of each reporting period, including consideration of risk margin.

 

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The mortality and morbidity assumptions are based on the historical mortality and morbidity experience. The assumed mortality rates and morbidity rates vary by age of the insured and contract type.

We base our mortality assumptions on the China Life Insurance Mortality Table (2000-2003), adjusted where appropriate to reflect our recent historical mortality experience. The main source of uncertainty with life insurance contracts is that epidemics and wide-ranging lifestyle changes could result in deterioration in future mortality experience, thus leading to an inadequate reserve. Similarly, improvements in longevity due to continuing advancements in medical care and social conditions could expose us to longevity risk.

We base our morbidity assumptions for critical illness products on analysis of historical experience and expectations of future developments. There are two main sources of uncertainty. First, wide-ranging lifestyle changes could result in future deterioration in morbidity experience. Second, future development of medical technologies and improved coverage of medical facilities available to the policyholders may bring forward the timing of diagnosing critical illness, which demands earlier payment of the critical illness benefits. Both could ultimately result in an inadequate reserving of liability if current morbidity assumptions do not properly reflect such trends.

Risk margin is considered in our mortality and morbidity assumptions.

 

  

The expense assumptions are based on expected unit costs with the consideration of previous expenses study and future trends. Our expense assumptions are affected by certain factors, such as future inflation and market competition which bring uncertainty to these assumptions. We consider risk margin for expense assumptions based on the information obtained at the end of each reporting period. Components of expense assumptions include cost per policy and percentage of premium.Our expense assumptions for each of the past three years were as follows: the percentage of premiums costs of 0.85% to 0.90% of premiums for individual life products and 0.90% for group life products, in each case plus a fixedper-policy expense.

 

  

The lapse rates and other assumptions are affected by certain factors, such as the future macro economy, availability of financial substitutions and market competition, which bring uncertainty to lapse rates and other assumptions. The lapse rates and other assumptions are determined with reference to creditable past experience, current conditions, future expectations and other information.

The method used to determine risk margin has been consistently applied. We consider risk margin for each of the discount rate, mortality and morbidity and expense assumptions to compensate for the uncertain amount and timing of future cash flow. When determining risk margin, we consider historical experience, future expectations and other factors. Risk margin is determined by us and does not include any elements imposed by regulators.

We adopted a consistent process to determine assumptions for the insurance contracts, which are detailed in Note 15 to our consolidated financial statements included elsewhere in this annual report. On each reporting date, we review the assumptions for reasonable estimates of liability and risk margin, with consideration of all available information, and taking into account our historical experience and expectation of future events.

 

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Universal Life Contracts and Unit-linked Contracts

Universal life contracts and unit-linked contracts are unbundled into the following components:

 

  

Insurance components; and

 

  

Non-insurance components.

The insurance components are accounted for as insurance contracts, and thenon-insurance components are accounted for as investment contracts, which are stated in the investment contract liabilities.

Investment Contracts

For investment contracts with or without discretionary participating feature, our policy fee income mainly consists of acquisition cost and various fee incomes (including handling fees and management fees) over the period during which the service is provided. Policy fee income net of certain acquisition cost is amortized over the expected life of the contracts by period and recognized in revenue.

Except for unit-linked contracts, of which the liabilities for transferred financial risks are carried at fair value, the liabilities of investment contracts are carried at amortized cost.

Valuation of Investments

We classify our financial assets into the following categories: securities at fair value through profit or loss,held-to-maturity securities, loans and receivables andavailable-for-sale securities. Management determines the classification of our financial assets at initial recognition, with the classification depending on the purpose for which the assets are acquired. The following are the policies used:

Securities at fair value through profit or loss. This category has twosub-categories: securities held for trading and those designated as at fair value through profit or loss at inception. Securities are classified as held for trading at inception if acquired principally for the purpose of selling in the short-term or if they form part of a portfolio of financial assets in which there is evidence of short term profit-taking. Other financial assets are classified as at fair value through profit or loss if they meet the criteria in IAS 39 and designated as such at inception by us.

Held-to-maturity securities.Held-to-maturity securities arenon-derivative financial assets with fixed or determinable payments and fixed maturities that we have the positive intention and ability to hold to maturity and do not meet the definition of loans and receivables nor designated asavailable-for-sale securities or securities at fair value through profit or loss. These investments are carried at amortized cost.

 

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Loans and receivables. Loans and receivables arenon-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than those that we intend to sell in the short term or held asavailable-for-sale. Loans and receivables mainly comprise term deposits, loans, securities purchased under agreements to resell, accrued investment income and premium receivables as presented separately in the statement of financial position. These investments are carried at amortized cost.

Available-for-sale securities.Available-for-sale securities arenon-derivative financial assets that are either designated in this category or not classified in any of the other categories.

Impairment of financial assets other than securities at fair value through profit or loss.Financial assets other than those accounted for as at fair value through profit or loss are adjusted for impairments, where there are declines in value that are considered to be impairment. In evaluating whether a decline in value is an impairment for these financial assets, we consider several factors including, but not limited to, the following:

 

  

significant financial difficulty of the issuer or debtor;

 

  

a breach of contract, such as a default or delinquency in payments;

 

  

it becomes probable that the issuer or debtor will enter into bankruptcy or other financial reorganization; and

 

  

the disappearance of an active market for that financial asset because of financial difficulties.

In evaluating whether a decline in value is impairment for equity securities, we also consider the extent or the duration of the decline. The quantitative factors include the following:

 

  

the market price of the equity securities was more than 50% below their cost at the reporting date;

 

  

the market price of the equity securities was more than 20% below their cost for a period of at least six months at the reporting date; and

 

  

the market price of the equity securities was below their cost for a period of more than one year (including one year) at the reporting date.

When the decline in value is considered impairment,held-to-maturity debt securities are written down to their present value of estimated future cash flows discounted at the securities effective interest rates;available-for-sale debt securities and equity securities are written down to their fair value, and the change is recorded in net realized gains on financial assets in the period the impairment is recognized. The impairment loss is reversed through net profit if in a subsequent period the fair value of a debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognized through net profit. The impairment losses recognized in net profit on equity instruments are not reversed through net profit.

 

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As of December 31, 2019, debt securities of RMB 181,617 million (US$ 26,088 million) contained guarantees issued by third parties and, of those, 86.49% were guaranteed by either the Chinese government or a Chinese government controlled financial institution. Of the guarantees issued by government or government controlled financial institutions, 92.90% related to debt securities issued by a government railway infrastructure entity. We monitor the credit worthiness of the third parties which have issued these guarantees using local Chinese credit ratings which are generally only utilized within China.

The methods and assumptions used by us in measuring the fair value of the financial instruments are as follows:

Debt securities. The fair values of debt securities are generally based on current bid prices. Where current bid prices are not readily available, fair values are estimated using either prices observed in recent transactions, values obtained from current bid prices of comparable investments or valuation techniques when the market is not active.

Equity securities. The fair values of equity securities are generally based on current bid prices. Where current bid prices are not readily available, fair values are estimated using either prices observed in recent transactions or commonly used market pricing model. Equity securities, for which fair values cannot be measured reliably, are recognized at cost less impairment.

Securities purchased under agreements to resell, policy loans, term deposits, interest-bearing loans and borrowings, and securities sold under agreements to repurchase.The carrying amounts of these assets in the consolidated statement of financial position approximate fair value. Fair values of other loans are obtained from valuation techniques.

Valuations are generally obtained from third party pricing services for identical or comparable assets, or through the use of valuation methodologies using observable market inputs, or recent quoted market prices. Valuation service providers typically gather, analyze and interpret information related to market transactions and other key valuation model inputs from multiple sources, and, through the use of widely accepted valuation models, provide a theoretical quote on various securities.

We utilize one pricing service for substantially all of our Chinese domestic debt securities. This pricing service provider is the only publicly-recognized pricing service provider in China, and its pricing information is used by the mutual fund industry and almost all companies in China. We utilize international pricing services for our overseas debt securities. These pricing service providers are internationally-recognized, and their pricing information is commonly used by international companies. The prices obtained from the pricing service arenon-binding. Our review and testing have shown the prices obtained from our pricing service to be appropriate. As such, during the year ended December 31, 2019, we did not consider it necessary to adjust the prices obtained from our pricing service.

 

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As at December 31, 2019, RMB 936,372 million of RMB 1,025,989 million debt securities with prices obtained from our pricing service were issued by the Chinese government and government controlled organizations. This pricing service utilized a discounted cash flow valuation model using market observable inputs, mainly interest rates, to determine a fair value. There are no other significant market inputs. As such, we have classified these debt securities as Level 2 in the fair value hierarchy.

Management subjects the fair values provided by valuation service providers to a number of validation procedures. These procedures include a review of the valuation models utilized, as well as our own test recalculation of the prices obtained from the pricing service at each reporting date.

We consider a combination of many factors in determining whether we believe a market for a financial instrument is active or inactive. Among these factors include:

 

  

whether there has been any trades within past 30 days of the reporting date;

 

  

the volume of the trades within this 30 day period; and

 

  

the degree which the implied yields for a debt security for observed transactions differs from our understanding of the current relevant market rates and information.

Associates and joint ventures

Associates are entities on which we have significant influence, generally together with a shareholding of between 20% and 50% of the voting rights. Significant influence is the power to participate in the financial and operating policy decisions of such entities but without control or joint control over these decisions.

Joint ventures are joint arrangements whereby the parties have joint control of the arrangement and have rights to the net assets of the joint arrangement. Joint control is the contractually-agreed sharing of control of an arrangement, which exists only when decisions on relevant activities require unanimous consent of the parties sharing control.

We determine at each reporting date whether there is any objective evidence that the investments in associates and joint ventures are impaired. If this is the case, an impairment loss is recognized at the amount of the carrying amount of investment less its recoverable amount. The recoverable amount is the higher of the fair value of investment less costs of disposal and value in use. The impairment of investment in associates and joint ventures is reviewed for possible reversal at each reporting date.

Revenue Recognition

Premiums.Premiums from long-term insurance contracts are recognized as revenue when due from the policyholders.

Premiums from the sale of short-term accident and health insurance contracts are recorded when written and are accreted to earnings on apro-rata basis over the term of the related policy coverage.

Policy fee income.The policy fee income for investment contracts mainly consists of acquisition costs and various fee incomes (including handling fees and management fees) over the period during which service is provided. Policy fee income net of certain acquisition costs is amortized over the expected life of the contracts and recognized as other income.

Investment income. Investment income is comprised of interest income from term deposits, cash and cash equivalents, debt securities, securities purchased under agreements to resell, loans and dividend income from equity securities. Interest income is recorded on an accrual basis using the effective interest rate method. Dividend income is recognized when the right to receive a dividend payment is established.

Deferred taxation

Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Substantively enacted tax rates are used in the determination of deferred income tax.

 

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Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the reversal of temporary differences can be recognized.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

Recently Issued Accounting Standards

The following standards and amendments are adopted by us for the first time for the financial year beginning on January 1, 2019.

 

Standards/Amendments  Content  

Effective for annual

periods beginning on or after

IFRS 16  Leases  January 1, 2019
IAS 28 Amendments  Long-term Interests in Associates and Joint Ventures  January 1, 2019
IAS 19 Amendments  Plan Amendment, Curtailment or Settlement  January 1, 2019
IFRIC 23  Uncertainty over Income Tax Treatments  January 1, 2019
Annual Improvements to IFRSs 2015-2017 Cycle  Amendments to IFRS 3, IFRS 11, IAS 12 and IAS 23  January 1, 2019

IFRS 16 – Leases

IFRS 16 supersedes IAS 17 Leases, and related interpretations from International Financial Reporting Interpretation Committee and Standard Interpretation Committee. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a singleon-balance sheet model. Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors continue to classify leases as either operating or finance leases using similar principles as in IAS 17. Therefore, IFRS 16 did not have any financial impact on leases where we are the lessor.

We have adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of January 1, 2019. Under this method, the standard has been applied retrospectively with the cumulative effect of initial adoption as an adjustment to the opening balance of retained earnings as at January 1, 2019, and the comparative information for 2018 was not restated and continues to be reported under IAS 17.

New definition of a lease

Under IFRS 16, at inception of a contract, an entity shall assess whether the contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration. Control is conveyed where the customer has both the right to obtain substantially all of the economic benefits from use of the identified asset and the right to direct the use of the identified asset. We elected to use the transition practical expedient allowing the standard to be applied only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. Contracts that were not identified as leases under IAS 17 and IFRIC 4 were not reassessed. Therefore, the definition of a lease under IFRS 16 has been applied only to contracts entered or changed on or after January 1, 2019.

 

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At inception or on reassessment of a contract that contains a lease component, we allocate the consideration in the contract to each lease andnon-lease component on the basis of their stand-alone prices. A practical expedient is available to a lessee, which we have adopted, not to separatenon-lease components and to account for the lease and the associatednon-lease components as a single lease component.

As a lessee – Leases previously classified as operating leases

As a lessee, we previously classified leases as either finance leases or operating leases based on the assessment of whether the lease transferred substantially all the rewards and risks of ownership of assets to us. Under IFRS 16, we apply a single approach to recognize and measureright-of-use assets and lease liabilities for all leases, except for two elective exemptions for leases oflow-value assets (elected on a lease by lease basis) and short-term leases (elected by class of underlying asset). We have elected not to recognizeright-of-use assets and lease liabilities for (i) leases oflow-value assets; and (ii) leases, that at the commencement date, have a lease term of 12 months or less. Instead, we recognize the lease payments associated with those leases as an expense on a straight-line basis over the lease term.

Lease liabilities as at January 1, 2019 were recognized based on the present value of the remaining lease payments, discounted using the incremental borrowing rate as at January 1, 2019.

Theright-of-use assets were measured at the amount of the lease liabilities, adjusted by the amount of any prepaid or accrued lease payments relating to the leases recognized in the statement of financial position immediately before January 1, 2019. All these assets were assessed for any impairment based on IAS 36 – Impairment of Assets on that date.

We have used the following elective practical expedients when applying IFRS 16 as at January 1, 2019:

 

  

Applied the recognition exemptions for leases of low value assets and leases with lease term that ends within 12 months from the date of initial application;

 

  

Applied a single discount rate to a portfolio of leases with reasonably similar characteristics on the measurement of the lease liability;

 

  

Excluded the initial direct costs from the measurement of theright-of-use asset at the date of initial application;

 

  

Used hindsight in determining the lease term where the contract contains options to extend or terminate the lease; and

 

  

Relied on its assessment of whether leases are onerous immediately before the date of initial application. We adjusted theright-of-use asset at the date of initial application by the amount of any provision for onerous leases recognized in the statement of financial position immediately before the date of initial application.

 

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In addition to land use rights, we recognized otherright-of-use assets of RMB 2,555 million and lease liabilities of RMB2,185 million at the date of initial application. Compared to the end of 2018, after the relative adjustments, total assets and total liabilities at the group level as at January 1, 2019 both increased by RMB 2,194 million. The reconciliation between the minimum unpaid lease payments of the operating leases disclosed in our financial statements for the year ended December 31, 2018, and the lease liabilities recognized in the consolidated statement of financial position at the date of initial application are as follows:

 

    RMB million 

Operating lease commitments as at December 31, 2018

   2,474 

Less: short-term leases, those leases with a remaining lease term less than 12 months from the date of initial application and leases oflow-value assets

   (132

impact of discounting at the incremental borrowing rate as at January 1, 2019

   (157
  

 

 

 

Lease liabilities as at January 1, 2019

   2,185 
  

 

 

 
      

The weighted average incremental borrowing rate we adopted as at January 1, 2019 in calculating the lease liabilities in the consolidated statement of financial position was 3.76%.

Refer to Note 2.7 to our consolidated financial statements included elsewhere in this annual report for relevant accounting policies.

IAS 28 Amendments – Long-term interests in associates and joint ventures

In October 2017, the IASB issued the amendments to IAS 28 which indicates that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). The amendments also clarify that for the entity that applies the temporary exemption from IFRS 9, IAS 39 applies to the long-term interests, and those entities are not required to restate prior periods to reflect the application of amendments. The amendments are effective for annual periods beginning on or after January 1, 2019.

Our accounting treatment in the previous years is in line with the amendments, thus there has been no impact on our consolidated financial statements as a result of the amendments.

IAS 19 Amendments - Plan Amendment, Curtailment or Settlement

In February 2018, the IASB issued the amendments to IAS 19 which addresses the accounting when a plan amendment, curtailment or settlement occurs during a reporting period. The amendments are effective for annual periods beginning on or after January 1, 2019 and apply retrospectively.

We have no defined benefit plans. The amendments under IAS 19 have had no impact on our consolidated financial statements. We will adopt the amendments if such business occurs in the future.

 

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IFRIC 23 - Uncertainty over Income Tax Treatments

In June 2017, the IASB issued IFRIC Interpretation 23, which clarifies application of the recognition and measurement requirements in IAS 12 Income Taxes when there is uncertainty over income tax treatments. The interpretation mainly addresses the following four areas: whether an entity separately considers the uncertainty of tax treatments; assumptions adopted by an entity to address the examination of tax treatments by taxation authorities; how an entity determines taxable profit/(tax loss), tax bases, unused tax losses, unused tax credits and tax rates; and how an entity considers changes in facts and circumstances. The interpretation is effective for annual reporting periods beginning on or after January 1, 2019.

Our accounting treatment in the previous years is in line with the clarification of the interpretation. The clarification has had no significant impact on our consolidated financial statements.

In addition, theAnnual Improvements 2015-2017 Cycle issued in December 2017 set out amendments to IFRS 3, IFRS 11, IAS 12 and IAS 23, which are effective for annual periods beginning on or after January 1, 2019. There has been no significant impact on our consolidated financial statements as a result of these amendments.

New accounting standards and amendments that are effective but a temporary exemption is applied by us for the financial year beginning on January 1, 2019:

 

Standards/Amendments  Content  Effective for annual periods
beginning on or after
IFRS 9  Financial Instruments  January 1, 2018

IFRS 9 – Financial Instruments

In July 2014, the IASB issued the final version of IFRS 9, bringing together all phases of the financial instruments project to replace IAS 39 and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. Based on the current assessment, we expect the adoption of IFRS 9 will have a significant impact on our consolidated financial statements. We have adopted and will continue to adopt the temporary exemption permitted in Amendments to IFRS 4 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (“IFRS 4 Amendment”) to apply IAS 39 rather than IFRS 9, until the effective date of IFRS 17. Refer to Note 33 to our consolidated financial statements included elsewhere in this annual report for more details.

Classification and measurement

IFRS 9 requires that we classify debt instruments based on the combined effect of application of business models (hold to collect contractual cash flows, hold to collect contractual cash flows and sell financial assets or other business models) and contractual cash flow characteristics (solely payments of principal and interest on the principal amount outstanding or not). Debt instruments not giving rise to cash flows that are solely payments of principal and interest on the principal amount outstanding are to be measured at fair value through profit or loss. Other debt instruments giving rise to cash flows that are solely payments of principal and interest on the principal amount outstanding are to be measured at amortized cost, fair value through other comprehensive income or fair value through profit or loss, based on their respective business models. We analyzed the contractual cash flow characteristics of financial assets as at December 31, 2019 and made relevant disclosures in Note 33 to our consolidated financial statements included elsewhere in this annual report in accordance with the IFRS 4 Amendments.

 

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Equity instruments would generally be measured at fair value through profit or loss unless we elect to measure at fair value through other comprehensive income for certain equity investments not held for trading. This will result in unrealized gains and losses on equity instruments currently classified asavailable-for-sale securities being recorded in income going forward. Currently, these unrealized gains and losses are recognized in other comprehensive income. If we elect to record equity investments at fair value through other comprehensive income, gains and losses would never be recognized in income except for the received dividends which do not represent a recovery of part of the investment cost.

Impairment

IFRS 9 replaces the “incurred loss” model with the “expected credit loss” model which is designed to include forward-looking information. We are in the process of developing and testing the key models required under IFRS 9 and analyzing the impact on the expected loss provision; we believe that the provision for our debt instruments under the “expected credit loss” model would be larger than that under the previous “incurred loss” model.

Hedge accounting

We do not apply the hedge accounting currently, so we expect that the new hedge accounting model under IFRS 9 will have no impact on our consolidated financial statements.

The following standards and amendments are not yet effective and have not been early adopted by us for the financial year beginning on January 1, 2019.

 

Standards/Amendments  Content  Effective for annual periods
beginning on or after
IFRS 3 Amendments  Definition of a Business  January 1, 2020
IAS 1 and IAS 8 Amendments  Definition of Material  January 1, 2020
IFRS 9, IAS 39 and IFRS 7 Amendments  Interest Rate Benchmark Reform  January 1, 2020
IFRS 17  Insurance Contracts  January 1, 2021
IFRS 10 and IAS 28 Amendments  Sale or Contribution of Assets between an Investor and its Associate or Joint Venture  

No mandatory effective

date yet determined but

available for adoption

For a detailed discussion of the recently issued accounting standards, see Note 2.1.1, Note 2.1.2 and Note 2.1.3 to our consolidated financial statements included elsewhere in this annual report.

Inflation

According to the National Statistics Bureau of China, China’s overall national inflation rates, as represented by the general consumer price index, were approximately 2.9%,2.1%, 1.6%, 2.0% and 1.4% in 2019, 2018, 2017, 2016 and 2015, respectively.Inflation has not had a significant effect on our business during the past three years.

Foreign Currency Fluctuation

See “Item 3. Key Information—Risk Factors—Risks Relating to the People’s Republic of China—Government control of currency conversion and the fluctuation of the Renminbi may materially and adversely affect our operations and financial results” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Foreign Exchange Risk”.

 

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A. OPERATING RESULTS

Year Ended December 31, 2019 Compared with Year Ended December 31, 2018

 

Total Revenues  For the year ended December 31, 
   2018   2019 
   RMB   RMB 
   (in millions) 

Net premiums earned

   532,023    560,278 

Life insurance business

   436,863    445,719 

Health insurance business

   80,279    99,575 

Accident insurance business

   14,881    14,984 

Investment income

   125,167    139,919 

Investment income from securities at fair value through profit or loss

   5,153    4,527 

Investment income fromavailable-for-sale securities

   39,483    43,196 

Investment income fromheld-to-maturity securities

   34,657    38,229 

Investment income from bank deposits

   22,699    26,695 

Investment income from loans

   22,894    27,111 

Other investment income

   281    161 

Net realized gains on financial assets

   (19,591   1,831 

Net fair value gains through profit or loss

   (18,278   19,251 

Other income

   8,098    8,195 
  

 

 

   

 

 

 

Total

   627,419    729,474 
  

 

 

   

 

 

 

Net Premiums Earned

Net premiums earned increased by RMB 28,255 million, or 5.3%, to RMB 560,278 million in 2019 from RMB 532,023 million in 2018.

Life Insurance Business

Net premiums earned from life insurance business increased by RMB 8,856 million, or 2.0%, to RMB 445,719 million in 2019 from RMB 436,863 million in 2018. This was primarily due to the steady growth of our life insurance business.

Health Insurance Business

Net premiums earned from health insurance business increased by RMB 19,296 million, or 24.0%, to RMB 99,575 million in 2019 from RMB 80,279 million in 2018. This was primarily due to our increased efforts to develop our health insurance business.

Accident Insurance Business

Net premiums earned from accident insurance business increased by RMB 103 million, or 0.7%, to RMB 14,984 million in 2019 from RMB 14,881 million in 2018. This was primarily due to the steady growth of our accident insurance business.

 

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Investment Income

Investment income increased by RMB 14,752 million, or 11.8%, from RMB 125,167 million in 2018 to RMB 139,919 million in 2019.

Investment Income from Securities at Fair Value through Profit or Loss

Investment income from securities at fair value through profit or loss decreased by RMB 626 million, or 12.1%, to RMB 4,527 million in 2019 from RMB 5,153 million in 2018. This was primarily due to a decrease in interest income resulting from a decrease in investments in commercial paper at fair value through profit or loss.

Investment Income fromAvailable-for-Sale Securities

Investment income fromavailable-for-sale securities increased by RMB 3,713 million, or 9.4%, to RMB 43,196 million in 2019 from RMB 39,483 million in 2018. This was primarily due to an increase in dividends fromavailable-for-sale equity securities investment stocks.

Investment Income fromHeld-to-Maturity Securities

Investment income fromheld-to-maturity securities increased by RMB 3,572 million, or 10.3%, to RMB 38,229 million in 2019 from RMB 34,657 million in 2018. This was primarily due to an increase in interest income resulting from the increase in the allocation in government agency bonds.

Investment Income from Bank Deposits

Investment income from bank deposits increased by RMB 3,996 million, or 17.6%, to RMB 26,695 million in 2019 from RMB 22,699 million in 2018. This was primarily due to an increase in interest income resulting from the increase in the allocation in negotiated deposits.

Investment Income from Loans

Investment income from loans increased by RMB 4,217 million, or 18.4%, to RMB 27,111 million in 2019 from RMB 22,894 million in 2018. This was primarily due to an increase in interest income from trust schemes.

Net Realized Gains on Financial Assets

Net realized gains on financial assets increased by RMB 21,422 million to gains of RMB 1,831 million in 2019 from losses of RMB 19,591 million in 2018. This was primarily due to an increase in spread income of stocks and funds inavailable-for-sale securities.

 

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Net Fair Value Gains through Profit or Loss

Net fair value gains through profit or loss increased by RMB 37,529 million to gains of RMB 19,251 million in 2019 from losses of RMB 18,278 million in 2018. This was primarily due to an increase in spread income and fair value of stocks in securities at fair value through profit or loss.

Other Income

Other income increased by RMB 97 million, or 1.2%, to RMB 8,195 million in 2019 from RMB 8,098 million in 2018. This was primarily due to the business growth of China Life Pension.

 

Benefits, Claims and Expenses  For the year ended December 31, 
   2018   2019 
   RMB   RMB 
   (in millions) 

Insurance benefits and claims expenses

    

Life insurance death and other benefits

   248,736    127,877 

Accident and health claims and claim adjustment expenses

   40,552    50,783 

Increase in insurance contracts liabilities

   189,931    330,807 

Investment contracts benefits

   9,332    9,157 

Policyholder dividends resulting from participation in profits

   19,646    22,375 

Underwriting and policy acquisition costs

   62,705    81,396 

Finance costs

   4,116    4,255 

Administrative expenses

   37,486    40,275 

Other expenses

   7,642    9,602 

Statutory insurance fund contribution

   1,097    1,163 
  

 

 

   

 

 

 

Total

   621,243    677,690 
  

 

 

   

 

 

 

Segment information of insurance benefits and claims expenses

    

Life insurance business

   412,876    427,673 

Health insurance business

   59,689    75,471 

Accident insurance business

   6,654    6,323 
  

 

 

   

 

 

 

Total

   479,219    509,467 
  

 

 

   

 

 

 

Insurance Benefits and Claims Expenses

Insurance benefits and claims, net of amounts ceded through reinsurance, increased by RMB 30,248 million, or 6.3%, to RMB 509,467 million in 2019 from RMB 479,219 million in 2018.

Life insurance death and other benefits payouts decreased by RMB 120,859 million, or 48.6%, to RMB 127,877 million in 2019 from RMB 248,736 million in 2018. This was primarily due to a decrease in maturities payable. Accident and health claims and claim adjustment expenses increased by RMB 10,231 million, or 25.2%, to RMB 50,783 million in 2019 from RMB 40,552 million in 2018. This was primarily due to an increase in the volume of short-term health insurance and accident insurance business. Increase in insurance contracts liabilities increased by RMB 140,876 million, or 74.2%, to RMB 330,807 million in 2019 from RMB 189,931 million in 2018. This was primarily due to an increase in the scale of insurance business.

 

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Life Insurance Business

Insurance benefits and claims expenses attributable to life insurance business increased by RMB 14,797 million, or 3.6%, to RMB 427,673 million in 2019 from RMB 412,876 million in 2018. This was primarily due to an increase in the scale of life insurance business.

Health Insurance Business

Insurance benefits and claims expenses attributable to health insurance business increased by RMB 15,782 million, or 26.4%, to RMB 75,471 million in 2019 from RMB 59,689 million in 2018. This was primarily due to the growth in our health insurance business.

Accident Insurance Business

Insurance benefits and claims expenses attributable to accident insurance business decreased by RMB 331 million, or 5.0%, to RMB 6,323 million in 2019 from RMB 6,654 million in 2018. This was primarily due to a decrease in claims expenses of certain businesses.

Investment Contract Benefits

Investment contract benefits decreased by RMB 175 million, or 1.9%, to RMB 9,157 million in 2019 from RMB 9,332 million in 2018. This was primarily due to a decrease in the settlement interest rate of universal insurance accounts.

Policyholder Dividends Resulting from Participation in Profits

Policyholder dividends resulting from participation in profits increased by RMB 2,729 million, or 13.9%, to RMB 22,375 million in 2019 from RMB 19,646 million in 2018. This was primarily due to an increase in investment yields from participating accounts.

Underwriting and Policy Acquisition Costs

Underwriting and policy acquisition costs increased by RMB 18,691 million, or 29.8%, to RMB 81,396 million in 2019 from RMB 62,705 million in 2018. This was primarily due to an increase in commissions of regular business due to the growth of our business and the optimization of our business structure.

Finance Costs

Finance costs increased by RMB 139 million, or 3.4%, to RMB 4,255 million in 2019 from RMB 4,116 million in 2018. This was primarily due to an increase in interest paid for bonds payable.

Administrative Expenses

Administrative expenses include employees’ remuneration and other administrative expenses. Administrative expenses increased by RMB 2,789 million, or 7.4%, to RMB 40,275 million in 2019 from RMB 37,486 million in 2018. This was primarily due to the growth of our business.

 

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Other Expenses

Other expenses increased by RMB 1,960 million, or 25.6%, to RMB 9,602 million in 2019 from RMB 7,642 million in 2018. This was primarily due to the increase in interest from dividends.

 

Profit  For the year ended December 31, 
   2018   2019 
   RMB   RMB 
   (in millions) 

Profit before income tax

   13,921    59,795 

Life insurance business

   1,630    42,418 

Health insurance business

   4,100    5,875 

Accident insurance business

   495    489 

Other businesses

   7,696    11,013 

Income tax

   1,985    781 

Net profit attributable to equity holders of the company

   11,395    58,287 

Profit before Income Tax

Our profit before income tax increased by RMB 45,874 million, or 329.5%, to RMB 59,795 million in 2019 from RMB 13,921 million in 2018.

Life Insurance Business

Profit before income tax in the life insurance business increased by RMB 40,788 million, or 2,502.3%, to RMB 42,418 million in 2019 from RMB 1,630 million in 2018. This was primarily due to an increase in our gross investment income.

Health Insurance Business

Profit before income tax in the health insurance business increased by RMB 1,775 million, or 43.3%, to RMB 5,875 million in 2019 from RMB 4,100 million in 2018. This was primarily due to an increase in our gross investment income.

Accident Insurance Business

Profit before income tax in the accident insurance business decreased by RMB 6 million, or 1.2%, to RMB 489 million in 2019 from RMB 495 million in 2018. This was primarily due to an increase in underwriting and policy acquisition costs resulting from structure adjustment of certain of our businesses.

Other Businesses

Profit before income tax in other businesses increased by RMB 3,317 million, or 43.1%, to RMB 11,013 million in 2019 from RMB 7,696 million in 2018. This was primarily due to an increase in our gross investment income.

 

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Income Tax

We pay income tax according to applicable Chinese enterprise income tax regulations and rules. Income tax decreased by RMB 1,204 million, or 60.7%, to RMB 781 million in 2019 from RMB 1,985 million in 2018. This was primarily due to the impact of the new policy onpre-tax deduction of underwriting and policy acquisition costs. See “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters—Policy on pre-tax deduction of underwriting and policy acquisition costs”.

Net Profit Attributable to Equity Holders of the Company

For the reasons set forth above, net profit attributable to equity holders of the Company increased by RMB 46,892 million, or 411.5%, to RMB 58,287 million in 2019 from RMB 11,395 million in 2018. This was primarily due to an increase in our gross investment income and the impact of the new policy onpre-tax deduction of underwriting and policy acquisition costs.

 

Major Assets  As of December 31, 
   2018   2019 
   RMB   RMB 
   (in millions) 

Investment assets1

   3,104,014    3,573,154 

Term deposits

   559,341    535,260 

Held-to-maturity securities

   806,717    928,751 

Available-for-sale securities

   870,533    1,058,957 

Securities at fair value through profit or loss

   138,717    141,608 

Derivative financial assets

   —      428 

Securities purchased under agreements to resell

   9,905    4,467 

Cash and cash equivalents

   50,809    53,306 

Loans

   450,251    608,920 

Statutory deposits—restricted

   6,333    6,333 

Investment properties

   9,747    12,141 

Investment in associates and joint ventures

   201,661    222,983 

Other assets

   150,389    153,580 
  

 

 

   

 

 

 

Total

   3,254,403    3,726,734 
  

 

 

   

 

 

 

 

1.

Beginning in 2018, the scope of investment assets has been revised to include investments in associates and joint ventures.

Investment Assets

Our total investment assets increased by RMB 469,140 million, or 15.1%, to RMB 3,573,154 million as of December 31, 2019 from RMB 3,104,014 million as of December 31, 2018.

Term Deposits

Term deposits decreased by RMB 24,081 million, or 4.3%, to RMB 535,260 million as of December 31, 2019 from RMB 559,341 million as of December 31, 2018. This was primarily due to the maturity of term deposits.

Held-to-Maturity Securities

Held-to-maturity securities increased by RMB 122,034 million, or 15.1%, to RMB 928,751 million as of December 31, 2019 from RMB 806,717 million as of December 31, 2018. This was primarily due to an increase in the allocation of government agency bonds.

 

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Available-for-Sale Securities

Available-for-sale securities increased by RMB 188,424 million, or 21.6%, to RMB 1,058,957 million as of December 31, 2019 from RMB 870,533 million as of December 31, 2018. This was primarily due to an increase in the allocation of stocks inavailable-for-sale securities.

Securities at Fair Value Through Profit or Loss

Securities at fair value through profit or loss increased by RMB 2,891 million, or 2.1%, to RMB 141,608 million as of December 31, 2019 from RMB 138,717 million as of December 31, 2018. This was primarily due to an increase in the fair value of stocks in securities at fair value through profit or loss.

Securities Purchased under Agreements to Resell

Securities purchased under agreements to resell decreased by RMB 5,438 million, or 54.9%, to RMB 4,467 million as of December 31, 2019 from RMB 9,905 million as of December 31, 2018. This was primarily due to the needs for liquidity management.

Cash and Cash Equivalents

Cash and cash equivalents increased by RMB 2,497 million, or 4.9%, to RMB 53,306 million as of December 31, 2019 from RMB 50,809 million as of December 31, 2018. This was primarily due to the needs for liquidity management.

Loans

Loans increased by RMB 158,669 million, or 35.2%, to RMB 608,920 million as of December 31, 2019 from RMB 450,251 million as of December 31, 2018. This was primarily due to an increase in policy loans and certificates of deposit.

Investment Properties

Investment properties increased by RMB 2,394 million, or 24.6%, to RMB 12,141 million as of December 31, 2019 from RMB 9,747 million as of December 31, 2018. This was primarily due to new investments in investment properties.

Investments in associates and joint ventures

Our investments in associates and joint ventures increased by RMB 21,322 million, or 10.6%, to RMB 222,983 million as of December 31, 2019 from RMB 201,661 million as of December 31, 2018. This was primarily due to new investments in associates and joint ventures.

 

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Major Liabilities  As of December 31, 
   2018   2019 
   RMB   RMB 
   (in millions) 

Liabilities

    

Insurance contracts

   2,216,031    2,552,736 

Investment contracts

   255,434    267,804 

Securities sold under agreements to repurchase

   192,141    118,088 

Policyholder dividends payable

   85,071    112,593 

Annuity and other insurance balances payable

   49,465    51,019 

Interest-bearing loans and borrowings

   20,150    20,045 

Deferred tax liabilities

   –      10,330 

Other liabilities

   112,821    184,777 
  

 

 

   

 

 

 

Total

   2,931,113    3,317,392 
  

 

 

   

 

 

 

Liabilities

Our total liabilities increased by RMB 386,279 million, or 13.2%, to RMB 3,317,392 million as of December 31, 2019 from RMB 2,931,113 million as of December 31, 2018.

Insurance Contracts

Liabilities of insurance contracts increased by RMB 336,705 million, or 15.2%, to RMB 2,552,736 million as of December 31, 2019 from RMB 2,216,031 million as of December 31, 2018 . This was primarily due to the accumulation of insurance liabilities from new insurance business and renewal business. As at the date of the statement of financial position, our insurance contracts reserves passed liability adequacy testing.

Investment Contracts

The account balance of investment contracts increased by RMB 12,370 million, or 4.8%, to RMB 267,804 million as of December 31, 2019 from RMB 255,434 million as of December 31, 2018. This was primarily due to an increase in the scale of universal insurance accounts.

Securities Sold under Agreements to Repurchase

Securities sold under agreements to repurchase decreased by RMB 74,053 million, or 38.5%, to RMB 118,088 million as of December 31, 2019 from RMB 192,141 million as of December 31, 2018. This was primarily due to the needs for liquidity management.

Policyholder Dividends Payable

Policyholder dividends payable increased by RMB 27,522 million, or 32.4%, to RMB 112,593 million as of December 31, 2019 from RMB 85,071 million as of December 31, 2018. This was primarily due to an increase in investment yields from participating accounts.

 

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Annuity and Other Insurance Balances Payable

Annuity and other insurance balances payable increased by RMB 1,554 million, or 3.1%, to RMB 51,019 million as of December 31, 2019 from RMB 49,465 million as of December 31, 2018. This was primarily due to an increase in maturities and annuities payable.

Interest-bearing Loans and Borrowings

Our borrowings in foreign currency decreased in 2019. Interest-bearing loans and other borrowings include a three-year bank loan of EUR 67 million with a maturity date on January 18, 2021, a five-year bank loan of GBP 275 million with a maturity date on June 25, 2024, a five-year bank loan of US$ 860 million with a maturity date on September 16, 2024, and asix-month bank loan of EUR 127 million with a maturity date on January 11, 2020 which is automatically renewed upon maturity pursuant to the terms of the agreement, all of which are fixed rate loans, and a five-year bank loan of US$ 970 million with a maturity date on September 27, 2024, a three-year loan of EUR 400 million with a maturity date on December 6, 2020, and aone-year bank loan of US$ 18 million with a maturity date on November 6, 2020, all of which are floating rate loans.

Deferred Tax Liabilities

Deferred tax liabilities as of December 31, 2019 were RMB 10,330 million, and there were no deferred tax liabilities as of December 31, 2018. This change was primarily due to the increase in the fair value ofavailable-for-sale securities.

Equity Attributable to Equity Holders of the Company

As of December 31, 2019, equity attributable to our equity holders was RMB 403,764 million, an increase of RMB 85,393 million, or 26.8%, from RMB 318,371 million as of December 31, 2018. This was primarily due to the combined impact of total comprehensive income and profit distributions during 2019.

Year Ended December 31, 2018 Compared with Year Ended December 31, 2017

 

Total Revenues  For the year ended December 31, 
   2017   2018 
   RMB   RMB 
   (in millions) 

Net premiums earned

   506,910    532,023 

Life insurance business

   429,267    436,863 

Health insurance business

   63,323    80,279 

Accident insurance business

   14,320    14,881 

Investment income

   122,727    125,167 

Investment income from securities at fair value through profit or loss

   4,538    5,153 

Investment income fromavailable-for-sale securities

   46,627    39,483 

Investment income fromheld-to-maturity securities

   30,669    34,657 

Investment income from bank deposits

   23,827    22,699 

Investment income from loans

   16,320    22,894 

Other investment income

   746    281 

Net realized gains on financial assets

   42    (19,591

Net fair value gains through profit or loss

   6,183    (18,278

Other income

   7,493    8,098 
  

 

 

   

 

 

 

Total

   643,355    627,419 
  

 

 

   

 

 

 

 

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Net Premiums Earned

Net premiums earned increased by RMB 25,113 million, or 5.0%, to RMB 532,023 million in 2018 from RMB 506,910 million in 2017.

Life Insurance Business

Net premiums earned from life insurance business increased by RMB 7,596 million, or 1.8%, to RMB 436,863 million in 2018 from RMB 429,267 in 2017. This was primarily due to the steady growth of our life insurance business.

Health Insurance Business

Net premiums earned from health insurance business increased by RMB 16,956 million, or 26.8%, to RMB 80,279 million in 2018 from RMB 63,323 million in 2017. This was primarily due to the expansion of our health insurance business.

Accident Insurance Business

Net premiums earned from accident insurance business increased by RMB 561 million, or 3.9%, to RMB 14,881 million in 2018 from RMB 14,320 million in 2017. This was primarily due to the steady growth of our accident insurance business.

Investment Income

Investment income increased by RMB 2,440 million, or 2.0%, from RMB 122,727 million in 2017 to RMB 125,167 million in 2018.

Investment Income from Securities at Fair Value through Profit or Loss

Investment income from securities at fair value through profit or loss increased by RMB 615 million, or 13.6%, to RMB 5,153 million in 2018 from RMB 4,538 million in 2017. This was primarily due to an increase in interest income resulting from an increase in investments in corporate bonds at fair value through profit or loss.

Investment Income fromAvailable-for-Sale Securities

Investment income fromavailable-for-sale securities decreased by RMB 7,144 million, or 15.3%, to RMB 39,483 million in 2018 from RMB 46,627 million in 2017. This was primarily due to a decrease in dividends fromavailable-for-sale equity securities investment funds.

 

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Investment Income fromHeld-to-Maturity Securities

Investment income fromheld-to-maturity securities increased by RMB 3,988 million, or 13.0%, to RMB 34,657 million in 2018 from RMB 30,669 million in 2017. This was primarily due to an increase in interest income resulting from the increase in the allocation in government bonds.

Investment Income from Bank Deposits

Investment income from bank deposits decreased by RMB 1,128 million, or 4.7%, to RMB 22,699 million in 2018 from RMB 23,827 million in 2017. This was primarily due to a decrease in interest income resulting from the fact that new negotiated deposits were mainly made toward the end of 2018 and the decrease in the allocation in deposits other than negotiated deposits.

Investment Income from Loans

Investment income from loans increased by RMB 6,574 million, or 40.3%, to RMB 22,894 million in 2018 from RMB 16,320 million in 2017. This was primarily due to an increase in interest income from trust schemes.

Net Realized Gains on Financial Assets

Net realized gains on financial assets decreased by RMB 19,633 million to losses of RMB 19,591 million in 2018 from gains of RMB 42 million in 2017. This was primarily due to a decrease in spread income of stocks inavailable-for-sale securities and an increase in equity investment assets qualified for impairment.

Net Fair Value Gains through Profit or Loss

Net fair value gains through profit or loss decreased by RMB 24,461 million to losses of RMB 18,278 million in 2018 from gains of RMB 6,183 million in 2017. This was primarily due to a decrease in spread income and fair value of stocks in securities at fair value through profit or loss.

 

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Other Income

Other income increased by RMB 605 million, or 8.1%, to RMB 8,098 million in 2018 from RMB 7,493 million in 2017. This was primarily due to the business growth of China Life Pension.

 

Benefits, Claims and Expenses  For the year ended December 31, 
   2017   2018 
   RMB   RMB 
   (in millions) 

Insurance benefits and claims expenses

    

Life insurance death and other benefits

   259,708    248,736 

Accident and health claims and claim adjustment expenses

   33,818    40,552 

Increase in insurance contracts liabilities

   172,517    189,931 

Investment contracts benefits

   8,076    9,332 

Policyholder dividends resulting from participation in profits

   21,871    19,646 

Underwriting and policy acquisition costs

   64,789    62,705 

Finance costs

   4,601    4,116 

Administrative expenses

   35,953    37,486 

Other expenses

   6,426    7,642 

Statutory insurance fund contribution

   1,068    1,097 
  

 

 

   

 

 

 

Total

   608,827    621,243 
  

 

 

   

 

 

 

Segment information of insurance benefits and claims expenses

    

Life insurance business

   409,410    412,876 

Health insurance business

   50,624    59,689 

Accident insurance business

   6,009    6,654 
  

 

 

   

 

 

 

Total

   466,043    479,219 
  

 

 

   

 

 

 

Insurance Benefits and Claims Expenses

Insurance benefits and claims, net of amounts ceded through reinsurance, increased by RMB 13,176 million, or 2.8%, to RMB 479,219 million in 2018 from RMB 466,043 million in 2017.

Life insurance death and other benefits payouts decreased by RMB 10,972 million, or 4.2%, to RMB 248,736 million in 2018 from RMB 259,708 million in 2017. This was primarily due to a decrease in maturities payable. Accident and health claims and claim adjustment expenses increased by RMB 6,734 million, or 19.9%, to RMB 40,552 million in 2018 from RMB 33,818 million in 2017. This was primarily due to an increase in the volume of short-term health insurance and accident insurance business. Increase in insurance contracts liabilities increased by RMB 17,414 million, or 10.1%, to RMB 189,931 million in 2018 from RMB 172,517million in 2017. This was primarily due to an increase in the scale of insurance business.

Life Insurance Business

Insurance benefits and claims expenses attributable to life insurance business increased by RMB 3,466 million, or 0.8%, to RMB 412,876 million in 2018 from RMB 409,410 million in 2017. This was primarily due to an increase in the scale of life insurance business.

Health Insurance Business

Insurance benefits and claims expenses attributable to health insurance business increased by RMB 9,065 million, or 17.9%, to RMB 59,689 million in 2018 from RMB 50,624 million in 2017. This was primarily due to the growth in our health insurance business.

Accident Insurance Business

Insurance benefits and claims expenses attributable to accident insurance business increased by RMB 645 million, or 10.7%, to RMB 6,654 million in 2018 from RMB 6,009 million in 2017. This was primarily due to an increase in claims expenses of certain businesses.

 

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Investment Contract Benefits

Investment contract benefits increased by RMB 1,256 million, or 15.6%, to RMB 9,332 million in 2018 from RMB 8,076 million in 2017. This was primarily due to an increase in the scale of universal insurance accounts.

Policyholder Dividends Resulting from Participation in Profits

Policyholder dividends resulting from participation in profits decreased by RMB 2,225 million, or 10.2%, to RMB 19,646 million in 2018 from RMB 21,871 million in 2017. This was primarily due to a decrease in investment yields from participating accounts.

Underwriting and Policy Acquisition Costs

Underwriting and policy acquisition costs decreased by RMB 2,084 million, or 3.2%, to RMB 62,705 million in 2018 from RMB 64,789 million in 2017. This was primarily due to the increase in the percentage of renewal premiums in gross written premiums as a result of our enhanced efforts in the adjustment of our business structure.

Finance Costs

Finance costs decreased by RMB 485 million, or 10.5%, to RMB 4,116 million in 2018 from RMB 4,601 million in 2017. This was primarily due to a decrease in interest paid due to redemptions of subordinated debts.

Administrative Expenses

Administrative expenses include employees’ remuneration and other administrative expenses. Administrative expenses increased by RMB 1,533 million, or 4.3%, to RMB 37,486 million in 2018 from RMB 35,953 million in 2017. This was primarily due to the growth of our business.

Other Expenses

Other expenses increased by RMB 1,216 million, or 18.9%, to RMB 7,642 million in 2018 from RMB 6,426 million in 2017. This was primarily due to the change in foreign exchange rates applicable to our assets and liabilities held in foreign currencies and interest from dividends.

 

Profit  For the year ended December 31, 
   2017   2018 
   RMB   RMB 
   (in millions) 

Profit before income tax

   41,671    13,921 

Life insurance business

   29,315    1,630 

Health insurance business

   3,246    4,100 

Accident insurance business

   528    495 

Other businesses

   8,582    7,696 

Income tax

   8,919    1,985 

Net profit attributable to equity holders of the company

   32,253    11,395 

 

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Profit before Income Tax

Our profit before income tax decreased by RMB 27,750 million, or 66.6%, to RMB 13,921 million in 2018 from RMB 41,671 million in 2017.

Life Insurance Business

Profit before income tax in the life insurance business decreased by RMB 27,685 million, or 94.4%, to RMB 1,630 million in 2018 from RMB 29,315 million in 2017. This was primarily due to a significant decrease in the gross investment income from public market equity investments due to the overall volatility and downward trend in equity markets.

Health Insurance Business

Profit before income tax in the health insurance business increased by RMB 854 million, or 26.3%, to RMB 4,100 million in 2018 from RMB 3,246 million in 2017. This was primarily due to the growth and quality improvement in the short-term health insurance business.

Accident Insurance Business

Profit before income tax in the accident insurance business decreased by RMB 33 million, or 6.3%, to RMB 495 million in 2018 from RMB 528 million in 2017. This was primarily due to fluctuation in claims expenses of certain accident insurance businesses.

Other Business

Profit before income tax in other business decreased by RMB 886 million, or 10.3%, to RMB 7,696 million in 2018 from RMB 8,582 million in 2017. This was primarily due to fluctuation in exchange rates for liabilities of our subsidiaries held in foreign currencies.

Income Tax

We pay income tax according to applicable Chinese enterprise income tax regulations and rules. Income tax decreased by RMB 6,934 million, or 77.7%, to RMB 1,985 million in 2018 from RMB 8,919 million in 2017. This was primarily due to the combined impact of taxable income and deferred income tax.

Net Profit Attributable to Equity Holders of the Company

For the reasons set forth above, net profit attributable to equity holders of the Company decreased by RMB 20,858 million, or 64.7%, to RMB 11,395 million in 2018 from RMB 32,253 million in 2017. This was primarily due to a significant decrease in the gross investment income from public market equity investments due to the overall volatility and downward trend in equity markets.

 

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Major Assets  As of December 31, 
   2017   2018 
   RMB   RMB 
   (in millions) 

Investment assets1

   2,753,124    3,104,014 

Term deposits

   449,400    559,341 

Held-to-maturity securities

   717,037    806,717 

Available-for-sale securities

   810,734    870,533 

Securities at fair value through profit or loss

   136,809    138,717 

Securities purchased under agreements to resell

   36,185    9,905 

Cash and cash equivalents

   48,586    50,809 

Loans

   383,504    450,251 

Statutory deposits—restricted

   6,333    6,333 

Investment properties

   3,064    9,747 

Investment in associates and joint ventures

   161,472    201,661 

Other assets

   144,467    150,389 
  

 

 

   

 

 

 

Total

   2,897,591    3,254,403 
  

 

 

   

 

 

 

 

1.

Beginning in 2018, the scope of investment assets has been revised to include investments in associates and joint ventures, and the amounts of investment assets for 2017 and 2016 have also been revised to conform to this revised scope.

Investment Assets

Our total investment assets increased by RMB 350,890 million, or 12.7%, to RMB 3,104,014 million as of December 31, 2018 from RMB 2,753,124 million as of December 31, 2017.

Term Deposits

Term deposits increased by RMB 109,941 million, or 24.5%, to RMB 559,341 million as of December 31, 2018 from RMB 449,400 million as of December 31, 2017. This was primarily due to an increase in the scale of the negotiated deposits.

Held-to-Maturity Securities

Held-to-maturity securities increased by RMB 89,680 million, or 12.5%, to RMB 806,717 million as of December 31, 2018 from RMB 717,037 million as of December 31, 2017. This was primarily due to an increase in the allocation of government bonds.

Available-for-Sale Securities

Available-for-sale securities increased by RMB 59,799 million, or 7.4%, to RMB 870,533 million as of December 31, 2018 from RMB 810,734 million as of December 31, 2017. This was primarily due to an increase in the allocation of financial bonds inavailable-for-sale securities.

Securities at Fair Value Through Profit or Loss

Securities at fair value through profit or loss increased by RMB 1,908 million, or 1.4%, to RMB 138,717 million as of December 31, 2018 from RMB 136,809 million as of December 31, 2017. This was primarily due to an increase in the scale of corporate bonds in securities at fair value through profit or loss.

 

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Cash and Cash Equivalents

Cash and cash equivalents increased by RMB 2,223 million, or 4.6%, to RMB 50,809 million as of December 31, 2018 from RMB 48,586 million as of December 31, 2017. This was primarily due to the needs for liquidity management.

Loans

Loans increased by RMB 66,747 million, or 17.4%, to RMB 450,251 million as of December 31, 2018 from RMB 383,504 million as of December 31, 2017. This was primarily due to an increase in the scale of policy loans.

Investment Properties

Investment properties increased by RMB 6,683 million, or 218.1%, to RMB 9,747 million as of December 31, 2018 from RMB 3,064 million as of December 31, 2017. This was primarily due to new investments in investment properties.

Investments in associates and joint ventures

Our investments in associates and joint ventures increased by RMB 40,189 million, or 24.9%, to RMB 201,661 million as of December 31, 2018 from RMB 161,472 million as of December 31, 2017. This was primarily due to the fact that we increased our allocation in investments in associates and joint ventures, and that the equity of investments in associates and joint ventures increased.

 

Major Liabilities  As of December 31, 
   2017   2018 
   RMB   RMB 
   (in millions) 

Liabilities

    

Insurance contracts

   2,025,133    2,216,031 

Investment contracts

   232,500    255,434 

Securities sold under agreements to repurchase

   87,309    192,141 

Policyholder dividends payable

   83,910    85,071 

Annuity and other insurance balances payable

   44,820    49,465 

Interest-bearing loans and borrowings

   18,794    20,150 

Deferred tax liabilities

   4,871    —   

Other liabilities

   74,944    112,821 
  

 

 

   

 

 

 

Total

   2,572,281    2,931,113 
  

 

 

   

 

 

 

Liabilities

Our total liabilities increased by RMB 358,832 million, or 13.9%, to RMB 2,931,113 million as of December 31, 2018 from RMB 2,572,281 million as of December 31, 2017.

Insurance Contracts

Liabilities of insurance contracts increased by RMB 190,898 million, or 9.4%, to RMB 2,216,031 million as of December 31, 2018 from RMB 2,025,133 million as of December 31, 2017. This was primarily due to the accumulation of insurance liabilities from new policies and renewal business. As at the date of the statement of financial position, our insurance contracts reserves passed liability adequacy testing.

 

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Investment Contracts

The account balance of investment contracts increased by RMB 22,934 million, or 9.9%, to RMB 255,434 million as of December 31, 2018 from RMB 232,500 million as of December 31, 2017. This was primarily due to an increase in the scale of universal insurance accounts.

Securities Sold under Agreements to Repurchase

Securities sold under agreements to repurchase increased by RMB 104,832 million, or 120.1%, to RMB 192,141 million as of December 31, 2018 from RMB 87,309 million as of December 31, 2017. This was primarily due to the needs for liquidity management.

Policyholder Dividends Payable

Policyholder dividends payable increased by RMB 1,161 million, or 1.4%, to RMB 85,071 million as of December 31, 2018 from RMB 83,910 million as of December 31, 2017. This was primarily due to the increase of dividend on deposit.

Annuity and Other Insurance Balances Payable

Annuity and other insurance balances payable increased by RMB 4,645 million, or 10.4%, to RMB 49,465 million as of December 31, 2018 from RMB 44,820 million as of December 31, 2017. This was primarily due to an increase in maturities payable.

Interest-bearing Loans and Borrowings

Our borrowings in foreign currency increased in 2018. Interest-bearing loans and other borrowings include a five-year bank loan of GBP 275 million with a maturity date on June 17, 2019, a three-year bank loan of US$ 970 million with a maturity date on September 27, 2019, a three-year bank loan of US$ 940 million with a maturity date on September 30, 2019, a three-year bank loan of EUR 67 million with a maturity date on January 18, 2021, asix-month bank loan of EUR 127 million with a maturity date on January 11, 2019 and to be automatically renewed upon maturity, all of which are fixed rate loans, and a three-year loan of EUR 400 million with a maturity date on December 6, 2020, which is a floating rate loan.

Deferred Tax Liabilities

Deferred tax liabilities as of December 31, 2017 were RMB 4,871 million, and there were no deferred tax liabilities as of December 31, 2018. This change was primarily due to the decrease in the fair value ofavailable-for-sale securities.

 

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Equity Attributable to Equity Holders of the Company

As of December 31, 2018, equity attributable to our equity holders was RMB 318,371 million, a decrease of RMB 2,562 million, or 0.8%, from RMB 320,933 million as of December 31, 2017. This was primarily due to the combined impact of total comprehensive income and profit distributions during 2018.

B. LIQUIDITY AND CAPITAL RESOURCES

Liquidity Sources

Our principal cash inflows come from insurance premiums, deposits from investment contracts, proceeds from sales and maturity of investment assets and investment income. The primary liquidity risks with respect to these cash inflows are the risk of surrenders by contract holders and policyholders, as well as the risks of default by debtors, interest rate changes and other market volatilities. We closely monitor and manage these risks. See “Item 4. Information on the Company—Business Overview—Investments”.

Our cash and bank deposits provide us with a source of liquidity to meet normal cash outflows. As of December 31, 2019, the amount of cash and cash equivalents was RMB 53,306 million. In addition, substantially all of our term deposits with banks allow us to withdraw funds on deposit, subject to a penalty interest charge. As of December 31, 2019, the amount of term deposits was RMB 535,260 million.

Our investment portfolio also provides us with a source of liquidity to meet unexpected cash outflows. We are also subject to market liquidity risk due to the large size of our investments in some of the markets in which we invest. In some circumstances, some of our holdings of investment securities may be large enough to have an influence on the market value. These factors may adversely affect our ability to sell these investments at an adequate price, or at all.

Liquidity Uses

Our principal cash outflows primarily relate to the payables for the liabilities associated with our various life insurance, annuity, accident insurance and health insurance products, operating expenses, income taxes and dividends that may be declared and paid to our shareholders. Cash outflows arising from our insurance activities primarily relate to benefit payments under these insurance products, as well as payments for policy surrenders, policy withdrawals and policy loans.

We believe that our sources of liquidity are sufficient to meet our current cash requirements.

Consolidated Cash Flows

We have established a cash flow testing system and conduct regular tests to monitor the cash inflows and outflows under various changing circumstances and adjust accordingly the asset portfolio to ensure sufficient sources of liquidity.

 

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Net cash flow from operating activities amounted to a net inflow of RMB 286,032 million (US$ 41,086 million) in 2019. Net cash flow from operating activities amounted to a net inflow of RMB 147,552 million in 2018. The change was primarily due to a decrease in surrender payments and maturity payments.

Net cash flow from investing activities amounted to a net outflow of RMB 247,515 million (US$ 35,553 million) in 2019. Net cash flow from investing activities amounted to a net outflow of RMB 238,373 million in 2018. This change was primarily due to the needs for investment management.

Net cash flow from financing activities amounted to net outflow of RMB 36,075 million (US$ 5,182 million) in 2019. Net cash flow from financing activities amounted to net inflow of RMB 92,963 million in 2018. This change was primarily due to the needs for liquidity management.

Our global share offering in December 2003 provided cash proceeds of approximately RMB 24,707 million which are held in Hong Kong dollars or U.S dollars. As of the date of this annual report, a part of the cash proceeds from our global offering was held in bank deposit accounts denominated in foreign currencies in China, and part of the cash proceeds was invested in securities listed on overseas stock exchanges, multi-asset portfolios and private equity funds. We invested approximately US$ 433 million, in addition to RMB 2,282 million, in Guangdong Development Bank in December 2006. We used a total of approximately HK$ 12 billion for investments in Sino-Ocean Group Holding Limited in 2009, 2010 and 2013.As of December 31, 2019, we had engaged 10 third party overseas investment managers to manage US$ 1,363 million for investment in overseas public markets.

Our A share offering in December 2006 provided cash proceeds of approximately RMB 27,810 million. As at the end of 2019, the cash proceeds from our A share offering were used to increase our share capital.

Our issuance of Core Tier 2 Capital Securities in July 2015 provided cash proceeds of approximately US$ 1,274 million. As at the end of 2019, cash proceeds from the issuance of Core Tier 2 Capital Securities were used to replenish our capital and raise our solvency ratio in accordance with applicable laws and approvals by regulatory authorities.

In March 2019, we issued bonds in the principal amount of RMB 35 billion in the national inter-bank bond market. The bonds have a10-year maturity and a fixed coupon rate of 4.28% per annum. We have a conditional right to redeem the bonds on the fifth anniversary of issuance. The proceeds from the issuance of the bonds will be used to replenish our capital so as to enhance our solvency according to applicable laws and approvals from regulatory authorities.

Ratio of Assets and Liabilities

Our ratio of assets and liabilities (total liabilities divided by total assets) as at December 31, 2019, 2018 and 2017 are as follows:

 

   As at December 31, 2017  As at December 31, 2018  As at December 31, 2019 

Ratio of assets and liabilities

   88.77  90.07  89.02

 

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Insurance Solvency Requirements

We are required to maintain our solvency at a level in excess of minimum solvency levels underC-ROSS solvency regulations, which have been effective from January 1, 2016. UnderC-ROSS, the core solvency adequacy ratio of an insurer is calculated by dividing the core capital of an insurer by the minimum capital it is required to meet, and the comprehensive solvency adequacy ratio of an insurer is calculated by dividing the sum of core capital and supplementary capital of an insurer by the minimum capital it is required to meet. See “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters—Insurance Company Regulation—Solvency requirements”. The following table shows our solvency as of December 31, 2017 2018 and 2019:

 

   As of December 31, 2019  As of December 31, 2018  As of December 31, 2017 
   (RMB in millions, except percentage data) 

Core capital

   952,030   761,353   706,516 

Actual capital

   987,067   761,367   706,623 

Minimum capital

   356,953   303,872   254,503 

Core solvency ratio

   266.71  250.55  277.61

Comprehensive solvency ratio

   276.53  250.56  277.65

The increase in our solvency ratio in 2019 was primarily due to the increase of our gross investment income, improvement of our business structure and the issuance of the capital replenishment bonds in the principal amount of RMB 35 billion.

In 2018, the CBIRC conducted a review under the Solvency Aligned Risk Management Requirements and Assessment framework, or SARMRA, on the solvency aligned risk management of some insurers, including ourselves, and we received one of the highest scores among life insurers that were reviewed. The SARMRA score links the risk management capacity of insurers with capital requirements. In 2019, the CBIRC did not conduct such a review on us, and pursuant to applicable regulatory requirements, we continued to determine our capital requirements based on the score we received in the 2018 review.

Contractual Obligations and Commitments

The following table sets out our contractual obligations and commitments as of December 31, 2019.

 

   Not
later
than
1 year
  Later than
1 year but
not later
than 3 years
  Later
than 3
years but
not later
than 5
years
  Later
than
5 years
   Total 

As of December 31, 2019

  (RMB in millions) 

Securities sold under agreements to repurchase

   118,088   —     —     —      118,088 

Bonds payable

   332   2,996   37,996   —      41,324 

Annuity and other insurance balances payable

   51,019   —     —     —      51,019 

Insurance contracts

   (179,925  (209,603  35,264   5,015,173    4,660,909 

Investment contracts

   24,020   29,900   (23,462  606,662    637,120 

Interest bearing loans and borrowings

   4,776   1,572   16,111   —      22,459 

Lease liabilities

   1,331   1,491   440   74    3,336 

Capital commitments

   35,635   15,598   6,775   10,799    68,807 
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Total

   55,276   (158,046  73,124   5,632,708    5,603,062 
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

 

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Capital commitments mainly represent our commitments with respect to the acquisition of property, plant and equipment, and our investments.

The amounts set forth in the table above for insurance contracts and investment contracts in each column represent expected future cash inflows and outflows on policies in force as at December 31, 2019. The estimate is affected by numerous assumptions, including assumptions related to mortality, morbidity, surrenders and other expense assumptions. Many of these estimates are inherently uncertain and the actual experience may differ from our estimates.

The expected net cash outflows for our insurance contracts are negative in the period not later than 1 year and later than 1 year but not later than 3 years in the above table. This is primarily because we have increased our sales of products with regular premiums, which has resulted in an increase in the proportion of insurance contracts that are in premium payment period. As premiums for products with regular premiums are paid by installments during the premium payment period, insurance future cash inflows occur at an earlier stage of the policy term, while benefits payments and other insurance future cash outflows occur gradually throughout the entire policy period.The expected net cash outflows for our investment contracts are negative in the period later than 3 years but not later than 5 years in the above table. This is primarily because under the terms of some of our insurance contracts, survival benefits payments under these contracts will be transferred to respective investment contracts during the next three to five years, and accordingly, there is expected to be a large amount of cash inflows for some of our investment contracts during the next three to five years. Furthermore, as the expected future cashflows reported in the table above are not discounted from the date of payment back to December 31, 2019, the sum of the expected future cashflows are different from the amount of corresponding liabilities in our consolidated balance sheet as of December 31, 2019. Policyholder dividends will not become a contractual obligation until the applicable policy anniversary is reached and the dividend amount is credited to the policy benefit liability or paid to the policyholder, and hence are not included in the table above. Reinsurance recoveries have not been taken into account.

Other than as set forth under capital commitments, we had no material, individually or in the aggregate, purchase obligations as of December 31, 2019.

C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES

None.

 

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D. TREND INFORMATION

Please refer to our discussion in each section under “—Overview of Our Business”, “—Factors Affecting Our Results of Operations”, “—Critical Accounting Policies” and “—Operating Results”.

We review assumptions used in establishing reserves for long term insurance contracts and the impact of changes in these assumptions on our net profit. Changes in these assumptions may have a significant impact on our operating results. Changes in these assumptions resulted ina decrease of RMB2,402 million in profit before income tax in 2019, an increase of RMB 3,074 million in profit before income tax in 2018 and a decrease of RMB 9,023 million in profit before income tax in 2017. The sensitivity analysis of these assumptions is as follows:

 

  

holding all other variables constant, if mortality rates and morbidity rates were to increase or decrease from the current best estimate by 10%,pre-tax profit for the year would have been RMB 28,045 million lower or RMB 29,286 million higher, respectively.

 

  

holding all other variables constant, if lapse rates were to increase or decrease from the current best estimate by 10%,pre-tax profit for the year would have been RMB 1,336 million lower or RMB 1,253 million higher, respectively.

 

  

holding all other variables constant, if the discount rates were 50 basis points higher or lower than the current best estimate,pre-tax profit for the year would have been RMB 96,131 million higher or RMB 108,946 million lower, respectively.

See also Note 4.1.3 and Note 15 to our consolidated financial statements included elsewhere in this annual report.

E.OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2019, there were nooff-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

See “—Liquidity and Capital Resources—Contractual Obligations and Commitments”.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. DIRECTORS AND SENIOR MANAGEMENT

The following table sets forth information regarding our current directors and executive officers. Unless otherwise indicated, their business address is c/o China Life Insurance Company Limited, 16 Financial Street, Xicheng District, Beijing 100033, China.

 

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Name

  

Date of Birth

  

Position

Wang Bin  November 1958  Chairman of the board of directors and executive director
Su Hengxuan  February 1963  Executive director and president
Li Mingguang  July 1969  Executive director, vice president, chief actuary and board secretary
Yuan Changqing  September 1961  Non-executive director
Liu Huimin  June 1965  Non-executive director
Yin Zhaojun  July 1965  Non-executive director
Wang Junhui  July 1971  Non-executive director
Chang Tso Tung Stephen  November 1948  Independent director
Robinson Drake Pike  October 1951  Independent director
Tang Xin  September 1971  Independent director
LeungOi-Sie Elsie  April 1939  Independent director
Ruan Qi  July 1966  Vice president
Zhan Zhong  April 1968  Vice President
Huang Xiumei  June, 1967  Vice president and person in charge of finance (subject to the approval of CBIRC)
Yang Hong  February 1967  Vice President
Zhao Guodong  November 1967  Assistant president
Xu Chongmiao  October 1969  Compliance officer

Directors

Wang Binhas been an executive director and the chairman of the board of directors of our company since December 2018, and the chairman of the board of directors and the secretary to the party committee of CLIC, the chairman of the board of directors of AMC, the chairman of the board of directors of China Life Insurance (Overseas) Company Limited and a director and the chairman of the board of directors of China Guangfa Bank Co., Ltd. Mr. Wang has successively been employed by government authorities and financial institutions with nearly 30 years of experience in financial management. He has worked at the People’s Bank of China, participating in the preparation and establishment of Agricultural Development Bank of China as an important member. Mr. Wang served as the general manager of Jiangxi Branch of Agricultural Development Bank of China, and the president of Tianjin Branch and Beijing Branch of the Bank of Communications Co., Ltd. (the “Bank of Communications”). He also served as the vice president of the Bank of Communications from 2005 to 2012 and concurrently served as an executive director of the Bank of Communications from 2010 to 2012. From March 2012 to August 2018, he served as the chairman of the board of directors and the secretary to the Party Committee of China Taiping Insurance Group Ltd. Mr. Wang holds a doctoral degree in economics. He is a researcher, a delegate to the 19th National Congress of the Communist Party of China and a member of the 12th and 13th National Committee of the Chinese People’s Political Consultative Conferences.

Su Hengxuan has been an executive director of our company since December 2018 and has been our president since April 2019. He has served as the vice president of CLIC since December 2017. He was the president of China Life Pension from March 2015 to February 2018. Mr. Su served various positions in our company from 2000 to 2015, including the deputy general manager of our Henan Branch, the general manager of the individual insurance department of our company, the general manager of the individual insurance sales department of our company and as an assistant to the president and the vice president of our company. Mr. Su graduated from Wuhan University and the University of Science and Technology of China and obtained a doctoral degree in management science and engineering from the University of Science and Technology of China in 2011. Mr. Su, a senior economist, has over 35 years of experience in the operation and management of life insurance businesses.

 

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Li Mingguang has been an executive director of our company since August 2019. He has been a vice president of our company since November 2014 and our chief actuary since March 2012. He has been the chief actuary of China Life Pension since May 2012. Mr. Li has been our board secretary since June 2017. Mr. Li joined our company in 1996 and subsequently served as deputy division chief, division chief, assistant to the general manager of product development department, responsible actuary of our company and general manager of our actuarial department. Mr. Li graduated from Shanghai Jiao Tong University with a bachelor’s degree in computer science in 1991, Central University of Finance and Economics majoring in monetary banking (actuarial science) with a master’s degree in 1996 and Tsinghua University with an EMBA in 2010, and also studied at the University of Pennsylvania in the United States in 2011. Mr. Li is a fellow of the China Association of Actuaries (FCAA) and a fellow of the Institute and Faculty of Actuaries (FIA). He was the chairman of the first session of the China Actuarial Working Committee and the secretary-general of the first and the second session of the China Association of Actuaries. He is currently an executive director of the China Association of Actuaries, and a member of the China National Master of Insurance Education Supervisory Committee.

Yuan Changqing has been anon-executive director of our company since February 2018. He serves as the vice chairman and president of CLIC and the deputy secretary to the party committee of CLIC. Mr. Yuan served as the chairman of the supervisory committee and the deputy secretary to the party committee of Agricultural Bank of China Limited from April 2015 to May 2017. He served as the deputy general manager and the secretary to the discipline inspection committee of China Everbright Group Corporation Limited from November 2014 to April 2015, the secretary to the discipline inspection committee of China Everbright Group Limited from December 2008 to August 2012, and an executive director, the deputy general manager and the secretary to the discipline inspection committee of China Everbright Group Limited from August 2012 to November 2014, during which he concurrently acted as the chairman of Everbright Securities Company Limited. During the period from 1995 to 2008, he served as the vice president, president and secretary to the party committee of Xinjiang branch, the president and secretary to the party committee of Henan branch, and the director of the organization department of the party committee and the general manager of the human resources department of the head office of Industrial and Commercial Bank of China Limited. During the period from 1981 to 1995, he held various professional and management positions in branch offices of the People’s Bank of China and Industrial and Commercial Bank of China. Mr. Yuan, a senior economist, graduated from the University of Hong Kong, majoring in international business administration with a master’s degree in business administration.

 

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Liu Huimin has been anon-executive director of our company since July 2017. He has been the vice president of CLIC since September 2013. He served as the vice president of AMC from 2004, and the president and director of the same company from 2006, during which he concurrently served as the chairman of China Life Franklin Asset Management Company Limited and the chairman of China Life AMP Asset Management Co., Ltd., etc. Mr. Liu graduated from Peking University with a doctoral degree in international law. Before that, he graduated from the School of Social Sciences of the University of Sussex in the United Kingdom with a master’s degree in development economics and the Peking University with a bachelor’s degree in national economic management, respectively.

Yin Zhaojun has been anon-executive director of our company since July 2017. He has been the president of CGB since September 2019 and the vice president of CLIC since October 2016. He joined the Bank of Communications in July 1990, and consecutively served as the assistant to the president of Beijing branch and the vice president of Shanxi branch of the Bank of Communications from 2005, and as the president of Shanxi branch, Hebei branch and Beijing branch of the Bank of Communications from 2011. Mr. Yin graduated from China University of Political Science and Law with a master’s degree in public administration. Before that, he graduated from the Faculty of Accounting of Beijing College of Finance and Commerce with a bachelor’s degree in economics.

Wang Junhui has been anon-executive director of our company since August 2019. He has been the chief investment officer of CLIC and president of China Life Asset Management Company Limited since August 2016, the chairman of China Life Franklin Asset Management Company Limited since September 2016, and the chairman of China Life AMP Asset Management Co., Ltd. since December 2016. From 2004 to 2016, he served as an assistant to the president and the vice president of China Life Asset Management Company Limited, and the president of China Life Investment Holding Company Limited. From 2002 to 2004, he served as the director of the investment department and an assistant to the general manager of Harvest Fund Management Co., Ltd. Mr. Wang graduated from the School of Computer Science of Beijing University of Technology with a bachelor’s degree in software in 1995, and Chinese Academy of Fiscal Sciences of the Ministry of Finance of the PRC with a doctoral degree in finance in 2008. He is a senior economist.

 

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Chang Tso TungStephenhas been an independent director of our company since October 2014. He served as the vice chairman of the Greater China Region of Ernst & Young, the managing partner for professional services and the chairman of auditing and consulting service of Ernst & Young until his retirement in 2004. From 2007 to 2013, Mr. Chang was an independentnon-executive director of China Pacific Insurance (Group) Co., Ltd. Mr. Chang is currently an independentnon-executive director of Kerry Properties Limited and Hua Hong Semiconductor Limited, all of which are listed on the Hong Kong Stock Exchange. Mr. Chang has been practicing as a certified public accountant in Hong Kong for approximately 30 years and has extensive experience in accounting, auditing and financial management. Mr. Chang holds a bachelor’s degree of science from the University of London, and is a fellow member of the Institute of Chartered Accountants in England and Wales.

Robinson Drake Pike has been an independent director of our company since July 2015. Before his retirement from Goldman Sachs in 2014, Mr. Pike served as the managing director of Goldman Sachs and the chief representative of the Beijing Representative Office of Goldman Sachs International Bank UK from August 2011 to May 2014, and the managing director of Goldman Sachs and a senior advisor and project coordinator seconded to the Industrial and Commercial Bank of China by Goldman Sachs from January 2007 to August 2011. From July 2000 to December 2006, he was Lehman Brothers’ senior vice president, deputy head and head of Asia Credit Risk Management. He has over 30 years of experience in Asian financial industry with a focus on risk management and China’s banking industry. He holds a bachelor’s degree of arts in Chinese Language and Literature from Yale University and a master’s degree of public affairs in development economics from Princeton University’s Woodrow Wilson School.

Tang Xin has been an independent director of our company since March 2016. He is a professor of the School of Law of Tsinghua University, the deputy head of the commercial law research center of Tsinghua University, an associate editor of “Tsinghua Law Review”, a member of the listing committee of the Shanghai Stock Exchange, the chairman of the independent director committee of the China Association for Public Companies, and an independent director of each of Harvest Fund Management Co., Ltd., GF Securities Co., Ltd. and Bank of Guizhou Co., Ltd. Mr. Tang was elected as a member of the first and second sessions of the merger, acquisition and reorganization review committee of the China Securities Regulatory Commission from 2008 to 2010. He served as an independent director of China Spacesat Co., Ltd. from 2008 to 2014, an independent director of each of SDIC Power Holdings Co., Ltd. and Changjiang Securities Company Limited from 2009 to 2013, and an independent director of Beijing Rural Commercial Bank Co., Ltd. from 2009 to 2015. Mr. Tang graduated from Renmin University of China with bachelor’s, master’s and doctorate degrees in law.

LeungOi-Sie Elsie has been an independent director of our company since July 2016. She was previously the first Secretary for Justice of Hong Kong as well as a member of the Executive Council of Hong Kong, the deputy director of the Hong Kong Basic Law Committee of the Standing Committee of the 2nd, 3rd and 4th National People’s Congress and a consultant of Iu, Lai & Li Solicitors & Notaries. Ms. Leung served as a member of the Social Welfare Advisory Committee and the Equal Opportunities Commission, an executive committee member and a council member of the Hong Kong Federation of Women, the Chairperson and President of the International Federation of Women Lawyers and the Honorary President of the Nanhai Worldwide Friendship Federation. She is a Justice of the Peace, a notary public and a China-appointed attesting officer. She has been awarded the “Grand Bauhinia Medal” and admitted as a solicitor by the Law Societies of Hong Kong and England. Ms. Leung graduated from the University of Hong Kong with a master’s degree in law, and is a fellow of the International Academy of Matrimonial Lawyers. She has been an independentnon-executive director of United Company RUSAL Plc since December 2009, an independentnon-executive director of China Resources Power Holdings Company Limited since April 2010. She has been an independentnon-executive director of PetroChina Company Limited since June 2017.

 

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Supervisors

The following table sets forth information regarding our current supervisors.

 

Name

  

Date of Birth

  

Position

Jia Yuzeng  June 1962  Chairperson of the board of supervisors
Luo Zhaohui  March 1974  Supervisor
Han Bing  November 1971  Supervisor
Cao Qingyang  May 1963  Employee representative supervisor
Wang Xiaoqing  October 1965  Employee representative supervisor

Jia Yuzeng has been the chairperson of our board of supervisors since July 2018. During the period from 2006 to March 2018, he served as a supervisor, the general manager of the human resources department, an assistant to the president, the vice president, the board secretary, an executive director and the compliance officer of China Life Pension Company Limited. During the period from 2004 to 2006, he served as the general manager of the work department of the Trade Union, the executive deputy director of the Trade Union and a supervisor of the company. During the period from 1988 to 2004, he successively served as the division head of the General Office and a secretary (at the deputy director level) of the PRC Ministry of Supervision, the deputy director (responsible for daily operation) of the minister office of the general supervision office under the supervision department of the Central Commission for Discipline Inspection, and an inspector (at the director level), supervisor, inspector (at the deputy bureau chief level) and special supervisor of the general office of the Central Commission for Discipline Inspection. Mr. Jia graduated from the Open University of Hong Kong in 2003, majoring in business administration with a master’s degree in business administration.

Luo Zhaohui has been a supervisor of our company since February 2018. Mr. Luo worked at the risk management department of China Life Insurance Company and the general office of CLIC from August 2002 to August 2013, and was appointed as the senior manager of the comprehensive information division of the general office of CLIC in May 2009 and an assistant to the general manager of the strategic planning department of CLIC in August 2013. Mr. Luo was seconded to our Shijiazhuang branch in Hebei Province as the deputy general manager during the period from November 2013 to October 2015, and was then appointed as the deputy general manager of the strategic planning department of CLIC in July 2016. He has served as the general manager of the strategic planning department of CLIC since November 2019. Mr. Luo has been long been involved in strategic management related work, with considerable working experience in such aspects as risk management, market analysis and research and life insurance operations, as well as strategic planning and management. Mr. Luo, a senior economist, graduated from Peking University, majoring in finance with a doctoral degree.

Han Bing has been a supervisor of our company since July 2019. He has been the general manager of the human resources department of our company since December 2018. He served as the general manager of the human resources department of China Life Pension Company Limited from March 2016 to December 2018. During the period from 2014 to 2016, he successively served as the deputy general manager and the secretary to the discipline inspection committee of Ningbo branch, and the deputy general manager and the secretary to the discipline inspection committee of Tibet Autonomous Region branch of our company. During the period from 2006 to 2014, he served as the deputy general manager of the human resources department of our company. Mr. Han graduated from Beijing College of Economics in 1994, majoring in labor economy with a bachelor’s degree in economics.

 

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Cao Qingyanghas been a supervisor of our company since July 2019. He has been the general manager of the product development department of our company since February 2011. From 2008 to 2011, he successively served as the deputy general manager of Tianjin branch and the group leader of the statistics working group of our company. From 2004 to 2008, he successively served as the general manager of the investor relations department, the deputy secretary-general of the board secretariat and concurrently the general manager of the investor relations department, and the deputy secretary-general of the board secretariat of our company. Mr. Cao Qingyang graduated from Nankai University in 2004, majoring in finance with a doctoral degree in economics.

Wang Xiaoqinghas been a supervisor of our company since December 2019. She has been serving as the deputy general manager of the risk management department of our company since April 2018. From May 2016 to April 2018, she served as the secretary to the discipline inspection committee of our Tibet branch. From 2008 to 2016, she successively served as an assistant to the general manager of the individual insurance sales department, the deputy general manager of No. 5 business management department in the Beijing branch, an assistant to the general manager and the deputy general manager of the county insurance management department, and the deputy general manager of the audit department of our company. From 2001 to 2008, she successively served as the deputy division chief of the agent training division and the deputy division chief of the sales inspection division, the division chief of the agent management division, and the division chief of the comprehensive development division of the individual insurance sales department of our company. Ms. Wang Xiaoqing graduated from Nanjing Communication Engineering College in 1988, majoring in radio communication engineering with a bachelor’s degree in engineering.

Senior Management

Su Hengxuan,see “—Directors and Senior Management—Directors” for his profile.

Li Mingguang see “—Directors and Senior Management—Directors” for his profile.

Ruan Qihas been a vice president of our company since April 2018. He has been the chief information technology officer of our company from January 2018 to April 2018. Mr. Ruan served as the chief information technology officer and the general manager (at the general manager level of the provincial branches) of the information technology department of our company from October 2016 to January 2018. He also served as the general manager (at the general manager level of the provincial branches) of the information technology department of our company from March 2016 to October 2016. He served as the general manager of China Life Data Center and the general manager (at the general manager level of the provincial branches) of the information technology department of our company from 2014 to 2016, and the deputy general manager and the general manager of the information technology department of our company from 2004 to 2014. He successively served as the deputy division chief of the computer division of our Fujian branch, and the deputy manager (responsible for daily operations) and the manager of the information technology department of our company from 2000 to 2004. Mr. Ruan is a senior engineer. He graduated from Beijing Institute of Posts and Telecommunications in August 1987, majoring in computer science and communications with a bachelor’s degree in engineering; and from Xiamen University with a master’s degree in business administration for senior management (EMBA) in December 2007.

 

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Zhan Zhong has been a vice president of our company since July 2019. He has been the marketing director of our company since August 2017. He has been the general manager (at the general manager level of the provincial branches) of the individual insurance division of our company since July 2014 and was an employee representative supervisor of our company from July 2015 to August 2017. Mr. Zhan served as the deputy general manager (responsible for daily operations) and the general manager of our Qinghai branch from 2013 to 2014. From 2009 to 2013, Mr. Zhan successively served as the deputy general manager (responsible for daily operations) and the general manager of the individual insurance division of our company. From 2005 to 2009, he successively served as the general manager of the individual insurance division of our Guangdong branch and an assistant to the general manager of our Guangdong branch. From 1996 to 2005, he successively served as the director of the marketing department of the Chengdu high-techsub-branch, and an assistant to the manager and the manager of the marketing department of the Chengdu branch of Zhongbao Life Insurance Company, and the deputy general manager of the Chengdu branch of Taikang Life Insurance Company. Mr. Zhan graduated from Kunming Institute of Technology in July 1989, majoring in industrial electric automation with a bachelor’s degree in engineering.

Huang Xiumeihas been appointed by our board of directors as our vice president and the person in charge of finance since April 23, 2020 (the qualification of her appointment is still subject to the approval of the CBIRC).Ms. Huang is currently the vice president, the board secretary and person in charge of finance of China Life Pension Company Limited. From 2014 to 2016, she served as the financial controller and the general manager of the financial management department of our company. From 2005 to 2014, Ms. Huang Xiumei held various positions at our Fujian branch, including the assistant to the general manager, the deputy general manager, the branch head, the deputy general manager (responsible for daily operations) and the general manager. From 1999 to 2005, she served as the deputy division chief of the planning and finance division, the manager of the planning and finance department and the manager of the finance department of our Fujian branch, and during the period from 2004 to 2005, she also served as the deputy general manager of our Fuzhou branch. Ms. Huang Xiumei graduated from Fuzhou University, majoring in accounting with a bachelor’s degree. She is a senior accountant.

Yang Hong has been a vice president of our company since July 2019. She has been the operating director of our company since March 2018. She has been the general manager of the operation service center of our company since January 2018. Ms. Yang successively served as the deputy general manager (responsible for daily operations) and general manager of the research and development center, the general manager (at the general manager level of the provincial branches) of the business management department and the general manager (at the general manager level of the provincial branches) of the business process management department of our company from 2011 to 2018. From 2002 to 2011, she successively served as an assistant to the general manager and the deputy general manager of the business management department, and the general manager of the customer service department of our company. Ms. Yang graduated from the Computer Science Department of Jilin University in 1989, majoring in system structure with a bachelor’s degree of science, and from the School of Economics and Management of Tsinghua University in 2013 with a master’s degree in business administration for senior management.

Zhao Guodong has been an assistant to the president of our company since October 2019. He served as the general manager of our Jiangsu branch from July 2018. During the period from 2016 to 2018, he successively served as the deputy general manager (responsible for daily operation) and the general manager of our Chongqing branch, and the general manager of our Hunan branch. From 2007 to 2016, he successively served as the deputy general manager of our Fujian branch and the deputy general manager of our Hunan branch. From 2001 to 2007, he was the deputy general manager of our Changde Branch in Hunan and the general manager of our Yiyang branch. Mr. Zhao graduated from Hunan College of Computer Science majoring in computer software in 1988, and from China Central Radio and TV University majoring in business administration in 2006.

 

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Xu Chongmiao has been the compliance officer of our company since July 2018. He has been the general manager of the legal and compliance department and the legal officer of our company since September 2014. From 2006 to 2014, he successively served as the deputy general manager of the legal affair department, the deputy general manager of the legal and compliance department and the legal officer at the general manager level of our company. From 2000 to 2006, he successively served as the deputy division chief of the regulations division of the development and research department and a senior regulations researcher of the legal affairs department of our company. Mr. Xu graduated from Fudan University in August 1991, majoring in economic law with a bachelor’s degree in law, and from Renmin University of China in July 1996 and July 2005, respectively, majoring in economic law with master’s and doctorate degrees in law. Mr. Xu is admitted as a lawyer and certified public accountant in the PRC.

B. COMPENSATION

Compensation of Directors, Supervisors and Officers

Our directors, supervisors and executive officers receive compensation in the form of salaries, bonuses and otherbenefits-in-kind, including our contribution to the pension plan on behalf of our directors, supervisors and executive officers. As required by PRC regulations, we participate in various defined contribution retirement plans organized by provincial and municipal governments for our employees, including employees who are directors, supervisors and executive officers.

The following table sets forth the amounts of compensation paid to each of our directors and supervisors for the fiscal year ended December 31, 2019.The total compensation package for our executive directors and chairman of the board of supervisors for the year ended December 31, 2019 has not yet been finalized in accordance with regulations of the relevant PRC authorities. The amount of the compensation not provided for is not expected to have a significant impact on our financial statements for the year ended December 31, 2019.We will make further disclosure of the amount of the final compensation when it is determined.

 

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Name

  Salaries/Fees   Inducement
Fees
   Other (1)
Benefits
   Compensation for
loss of office as
director
   Total 
   RMB in ten thousands 

Wang Bin

   0    —      0    —      0 

Su Hengxuan(2)

   0    —      0    —      0 

Li Mingguang(3)

   143.20    —      23.00    —      166.20 

Zhao Peng(4)

   —      —      —      —      —   

Yuan Changqing

   0    —      0    —      0 

Liu Huimin

   0    —      0    —      0 

Yin Zhaojun

   0    —      0    —      0 

Wang Junhui(5)

   0    —      0    —      0 

Xu Hengping(6)

   0.85    —      1.79    —      2.64 

Xu Haifeng(7)

   60.51    —      10.09    —      70.60 

Chang Tso Tung Stephen

   32    —      0    —      32 

Robinson Drake Pike

   32    —      0    —      32 

Tang Xin

   32    —      0    —      32 

LeungOi-Sie Elsie

   30    —      0    —      30 

Jia Yuzeng

   125.30    —      22.95    —      148.25 

Shi Xiangming(8)

   9.53    —      4.67    —      14.20 

Luo Zhaohui

   0    —      0    —      0 

Han Bing(9)

   25.28    —      16.94    —      42.22 

Cao Qingyang(10)

   28.58    —      15.41    —      43.99 

Wang Xiaoqing(11)

   3.96    —      2.82    —      6.78 

Tang Yong(12)

   4.74    —      2.78    —      7.52 

Song Ping(13)

   48.44    —      30.74    —      79.18 

Huang Xin(14)

   0    —      0    —      0 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   576.39    —      131.19    —      707.58 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includebenefits-in-kind, social insurance, housing fund and enterprise annuity to be paid by the employer.

 

(2)

Appointed as executive director on December 20, 2018 and as president on April 2, 2019.

 

(3)

Appointed as executive director on August 16, 2019.

 

(4) 

Appointed as executive director in February 2020 and resigned as executive director in April 2020. During 2019, Mr. Zhao served as a senior executive officer of our company but did not serve as a director. As a result, for the year of 2019, he did not receive compensation paid to directors. For details of the compensation we paid to him for serving as our senior executive officer, please see the table below on compensation we paid to our senior executive officers.

 

(5) 

Appointed asnon-executive director on August 16, 2019.

 

(6) 

Resigned as executive director on January 24, 2019.

 

(7) 

Resigned as executive director on June 28, 2019.

 

(8) 

Resigned as supervisor on February 18, 2019.

 

(9) 

Appointed as supervisor on July 12, 2019.

 

(10) 

Appointed as employee representative supervisor on July 12, 2019.

 

(11) 

Appointed as employee representative supervisor on December 27, 2019.

 

(12) 

Resigned as supervisor on July 22, 2019.

 

(13) 

Resigned as employee representative supervisor on January 3, 2020.

 

(14) 

Resigned as employee representative supervisor on July 22, 2019.

 

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The following table sets forth the amounts of compensation paid to each of our executive officers other than those disclosed in the table above, including vice presidents who are not our directors, our assistant president and our compliance officer, for the year ended December 31, 2019. The total compensation package for our executive officers for the year ended December 31, 2019 has not yet been finalized in accordance with regulations of the relevant PRC authorities. The amount of the compensation not provided for is not expected to have a significant impact on our financial statements for the year ended December 31, 2019. We will make further disclosure of the amount of the final compensation when it is determined.

 

Name

  Salaries/Fees   Inducement
Fees
   Other (1)
Benefits
   Compensation for
loss of office as
director
   Total 
   RMB in ten thousands 

Ruan Qi

   125.30    —      22.95    —      148.25 

Zhan Zhong

   119.33    —      26.48    —      145.81 

Yang Hong

   119.33    —      26.52    —      145.85 

Zhao Guodong(2)

   16.25    —      5.71    —      21.96 

Xu Chongmiao

   52.80    —      31.89    —      84.69 

Zhao Peng(3)

   93.98    —      17.38    —      111.36 

Zhao Lijun(4)

   95.47    —      15.19    —      110.66 

Xiao Jianyou(5)

   52.21    —      9.84    —      62.05 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   674.67    —      155.96    —      830.63 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includebenefits-in-kind, social insurance, housing fund and enterprise annuity to be paid by the employer.

 

(2) 

Appointed as assistant president on October 25, 2019.

 

(3) 

Resigned as vice president in April 2020.

 

(4) 

Resigned as vice president in August 2019.

 

(5)

Resigned as vice president in May 2019.

The aggregate amount of compensation we paid to our five highest paid individual employees, including one director who is also our executive officer, one supervisor and three members of senior management, during the year ended December 31, 2019,was approximately RMB 7.54 million (US$ 1.08 million). The amount of compensation we paid to our highest paid individual employee, during the year ended December 31, 2019, was approximately RMB 1.66 million.

Senior Management Compensation

Our senior management’s compensation consists of four components, including basic salaries, performance-based salaries, fringe benefits and mid to long-term incentive compensation.

We have established a comprehensive performance management system. A performance appraisal method for our officers is used to appraise the performance of the officers annually. Measures for such appraisal include a business performance index based on our budget and targets as approved by our board of directors; a management performance index based on the duties and functions of the office position; and a risk compliance index based on risk management and compliance management of our daily operation, establishing a connection between the achievement of our major business targets and the office performance appraisal.

In accordance with relevant policies of the PRC government, no stock appreciation rights of our company were granted or exercised in 2019.For other details of the stock appreciation rights which were previously granted by us, please refer to Note 31to our consolidated financial statements included elsewhere in this annual report.

 

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C. BOARD PRACTICES

General

Our board of directors consists of eleven members. Our directors are elected to serve a term of three years, which is renewable uponre-election. Our directors are elected at meetings of our shareholders, and, unless they resign at an earlier date, are deceased or removed, will serve three-year terms. The current term for our board of directors began in June 2018. Our directors are not currently entitled to severance benefits other than benefits provided by law upon termination of employment. In the event our Company is acquired, including an acquisition of control by another person, and a director leaves employment or retires following the acquisition, the director may receive severance and other payments upon approval by the shareholders in general meeting.

We have identified various board members as being “independent”, in accordance with Hong Kong laws and regulations. These requirements vary in certain respects from independence requirements under U.S. law. The members of our audit committee are independent as defined by the rules of the Securities and Exchange Act and the New York Stock Exchange which are applicable to us.

The PRC company law requires a joint stock company with limited liability to establish a board of supervisors. Our board of supervisors is responsible for monitoring our financial matters and supervising the actions of our board of directors and our management personnel. Our board of supervisors consists of five members. At leastone-third of our board of supervisors must be elected by our employees. The remaining members must be elected by our shareholders in a general meeting. One member of our board of supervisors is designated as the chairman. Members of our board of supervisors may not serve as director or member of senior management. The term of office for our supervisors is three years, which is renewable uponre-election.The current term for our board of supervisors began in June 2018.

Board Committees

We have established the following standing committees: an audit committee, a nomination and remuneration committee, a risk management and consumer rights protection committee, a strategy and assets and liabilities management committee, and a connected transactions control committee.

The primary duties of the audit committee are to review and supervise the financial reporting process, to assess the effectiveness of our internal control system, to supervise our internal audit system and its implementation and to implement and recommend the engagement or replacement of external auditors. Our audit committee is also responsible for communications between our internal and external auditors and our internal reporting system. Our audit committee is currently comprised of Robinson Drake Pike, Chang Tso Tung Stephen and Tang Xin. Mr. Robinson Drake Pike serves as the chairman.

The primary duties of the nomination and remuneration committee are to review the structure and components of our board of directors, to formulate the appointment and successors to our board of directors and senior management, to review and recommend the nomination of our directors and senior officers, as well as to propose to our board of directors the remuneration policy for our directors, supervisors and senior management. Our nomination and remuneration committee is currently comprised of Tang Xin, Robinson Drake Pike and Yuan Changqing. Mr. Tang Xin serves as the chairman.

 

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The primary duties of the risk management and consumer rights protection committee are to formulate our risk control benchmark system, to discuss with and assist the management in establishing and improving our risk management and internal control system, to supervise the management and the department in charge of consumer rights protection, to review our risk preference and tolerance policy, to formulate our risk management policy, to review the assessment reports with respect to our risk management and internal control, to conduct research on important findings from internal investigations with respect to risk management and internal control and management’s responses to such findings and to coordinate and handle disagreements on risk management and sudden and significant risks or crises. Our risk management and consumer rights protection committee is currently comprised of LeungOi-Sie Elsie, Li Mingguang, Liu Huimin and Yin Zhaojun.Ms. Leung-Oi-Sie Elsie serves as the chairman.

The primary duties of the strategy and assets and liabilities management committee are to formulate our long-term development strategies, and to conduct research and to make recommendations on significant matters and policies and systems in respect of the management of assets and liabilities, the management system for insurance fund usage and significant strategic investments. Our strategy and assets and liabilities management committee is currently comprised of Chang Tso Tung Stephen, Su Hengxuan, Wang Junhui and LeungOi-Sie Elsie.Mr. Chang Tso Tung Stephen serves as the chairman.

The primary duties of the connected transactions control committee are to determine our connected persons, to administer, examine and approve connected transactions, to conduct risk control of connected transactions, with a particular focus on compliance and the fairness and necessity of connected transactions, so as to provide a basis for the decision-making by the board of directors in respect of the management of connected transactions. Our connected transactions control committee is currently comprised of four independent directors including Tang Xin, Robinson Drake Pike, Chang Tso Tung Stephen and LeungOi-Sie Elsie.Mr. Tang Xin serves as the chairman.

D. EMPLOYEES

As of December 31, 2017, 2018 and 2019, we had approximately 102,297, 102,817 and 103,826employees, respectively. The following table sets forth the number of our employees by their functions as of December 31, 2017, 2018 and 2019.

 

   As of December 31 
   2017  2018  2019 
   Number
of
employees
   %
of
total
  Number
of
employees
   %
of
total
  Number
of
employees
   %
of
total
 

Management and administrative staff

   22,307    21.81  23,166    22.53  18,495    17.81

Financial and auditing staff

   5,122    5.01  5,140    5.00  4,911    4.73

Sales and sales management staff

   38,859    37.99  40,194    39.09  46,678    44.96

Insurance verification, claims processing and customer service staff

   27,960    27.33  26,695    25.96  25,622    24.68

Other professional and technical staff(1)

   4,106    4.01  4,274    4.16  4,749    4.57

Other

   3,943    3.85  3,348    3.26  3,371    3.25
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total(2)

   102,297    100  102,817    100.00  103,826    100
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

(1)

Includes actuaries, product development personnel, investment management personnel and information technology specialists.

(2)

Includes employees of our subsidiaries.

 

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As of December 31, 2017, 2018 and 2019, we had approximately1,578,000and 1,439,000 and 1,613,000exclusive agents, respectively. During 2019, we continued to improve both the quantity and quality of our agent force by taking advantage of the online recruitment channel. Our agent force has been an important driver of our business growth.See “Item 4. Information on the Company—Business Overview—Regulatory and Related Matters—Regulation of Insurance Agencies, Insurance Brokers and Other Intermediaries” and “Item 3. Key Information—Risk Factors—Risks Relating to Our Business—Our growth is dependent on our ability to attract and retain productive agents.”

None of our employees is subject to collective bargaining agreements governing employment with us. We believe that our employee relations are satisfactory.

E. SHARE OWNERSHIP

As of the date of this annual report, none of our directors, supervisors or senior managers is a legal or beneficial owner of any shares of our share capital.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.

A. MAJOR SHAREHOLDERS

The table below sets forth information regarding the ownership of our share capital as of April 10, 2020 by all persons who are known to us to be the beneficial owners of 5% or more of each class of our share capital.

 

Title of Class

 

Identity of Person or Group

 

Amount Owned

 Percentage
of Class
  Percentage of
Total Share
Capital
 

A Shares

 

China Life Insurance (Group) Company

 

19,323,530,000 (Long position)

  92.80  68.37

H Shares

 

BlackRock, Inc.(1)

 

659,561,395 (Long position)

644,000 (Short position)

  

8.86

0.01


  

2.33

0.00


 

 

Note (1):  

BlackRock, Inc. was interested in a total of 659,561,395 H shares in accordance with the provisions of Part XV of the SFO. Of these shares, BlackRock Investment Management, LLC, BlackRock Financial Management, Inc., BlackRock Institutional Trust Company, National Association, BlackRock Fund Advisors, BlackRock Advisors, LLC, BlackRock Japan Co., Ltd., BlackRock Asset Management Canada Limited, BlackRock Investment Management (Australia) Limited, BlackRock Asset Management North Asia Limited, BlackRock (Netherlands) B.V., BlackRock Advisors (UK) Limited, BlackRock International Limited, BlackRock Asset Management Ireland Limited, BLACKROCK (Luxembourg) S.A., BlackRock Investment Management (UK) Limited, BlackRock Asset Management Deutschland AG, BlackRock Fund Managers Limited, BlackRock Life Limited, BlackRock (Singapore) Limited, BlackRock Asset Management (Schweiz) AG and BlackRock Mexico Operadora were interested in 7,076,000 H shares, 12,931,000 H shares, 147,939,588 H shares, 195,346,000 H shares, 11,239,000 H shares, 12,208,241 H shares, 1,038,000 H shares, 7,500,000 H shares, 32,765,508 H shares, 1,086,000 H shares, 2,512,000 H shares, 1,254,000 H shares, 55,831,318 H shares, 90,590,000 H shares, 33,327,060 H shares, 458,000 H shares, 38,189,155 H shares, 5,154,800 H shares, 2,711,000 H shares, 60,000 H shares and 344,725 H shares respectively. All of these entities are either controlled or indirectly controlled subsidiaries of BlackRock, Inc. Of these 659,561,395 H shares, 11,038,000 H shares were cash settled unlisted derivatives.

 

BlackRock, Inc. held by way of attribution a short position as defined under Part XV of the SFO in 644,000 H shares (0.01%). Of these 644,000 H shares, 501,000 H shares were cash settled unlisted derivatives.

 

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Our A shares and H shares generally vote together as a single class, including in the election of directors. Each A share and each H share is entitled to one vote. In addition, in certain matters which affect the rights of the holders of H shares or A shares, the H shares or A shares, as the case may be, are entitled to vote as a separate class.

CLIC converted and sold 676,470,000 domestic shares in the form of H shares or ADSs in connection with our global offering in December 2003.

Based on the information provided by Deutsche Bank Trust Company Americas, our depositary bank, as of December 31, 2019 and April 10, 2020, there were, respectively, 25,347,810ADRs representing 126,739,050 H shares, with53 registered holders, and 24,529,235 ADRs representing 122,646,175 H shares, with 52 registered holders. Since certain of the ADSs are held by nominees, the above number may not be representative of the actual number of U.S. beneficial holders of ADSs or number of ADSs beneficially held by U.S. persons.

CLIC, our controlling shareholder, is a wholly state-owned enterprise controlled by the PRC government. See “Item 4. Information on the Company—History and Development of the Company”. None of our major shareholders has voting rights that differ from the voting rights of other shareholders, except that in certain matters which affect the rights of the holders of H shares or A shares, holders of H shares or A shares, as the case may be, are entitled to vote as a separate class. We are not aware of any arrangement which may at a subsequent date result in a change of control of our company.

B. RELATED PARTY TRANSACTIONS

As at the date of this annual report, CLIC owns approximately 68.37% of our issued share capital, a 40% equity interest in AMC, a 60% equity interest in CLPCIC, a 100% equity interest in China Life Overseas, a 100% equity interest in China Life Investment Holding Company Limited, or IHC, and a 100% equity interest in China LifeE-commerce Company Limited, or China LifeE-commerce. CLIC, AMC, CLPCIC, China Life Overseas, IHC and China LifeE-commerce are therefore considered as our connected persons under the HKSE Listing Rules. AMC owns a direct 48% equity interest and an indirect 52% equity interest in China Life Wealth Management Company Limited, or China Life Wealth, and approximately 85.03% equity interest in China Life AMP Asset Management Co., Ltd., or AMP. China Life Wealth and AMP are therefore also considered as our connected persons under the HKSE Listing Rules. Each of AMC, China Life Wealth and AMP is also a subsidiary of the Company. Chongqing International Trust Inc., or Chongqing Trust, is an associate of CLIC and CLPCIC by virtue of its acting as the trustee of a trust scheme of which CLPCIC is a beneficiary, and is therefore also a connected person of the Company under the HKSE Listing Rules. China Life Capital Investment Company Limited, or China Life Capital, an indirect wholly owned subsidiary of CLIC, is an associate of CLIC and also a connected person of the Company under the HKSE Listing Rules.

 

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During the reporting period, we entered into the following new related party transactions with these companies:

 

  

On May 29, 2019, we entered into a supplemental agreement to the insurance sales framework agreement with CLPCIC;

 

  

On December 31, 2019, we and China Life Capital entered into a new cooperation framework agreement for investment management with insurance funds;

 

  

On December 26, 2019, we entered into a new framework agreement for daily connected transaction with CGB;

 

  

On December 27, 2019, we entered into a new framework agreement with Chongqing Trust in relation to daily connected transactions; and

 

  

On December 31, 2019, September 6, 2019, December 3, 2019 and February 17, 2020, we, CLIC, CLPCIC and IHC each entered into a new framework agreement in relation to certain daily connected transactions with AMP.

We also continued to carry out certain other continuing related party transactions with CLIC, AMC, IHC, China Life Pension, CLPCIC, China Life Capital, China Life Wealth, AMP and Chongqing Trust in the reporting period. These transactions constitute connected transactions for us under the HKSE Listing Rules. Details of these transactions are set forth below.

As at the date of this annual report, we own a 43.686% equity interest in CGB and are the largest shareholder of CGB. Our chairman and executive director, Wang Bin, serves as the chairman of CGB. CGB is therefore considered as our related party under applicable PRC laws and regulations. On December 26, 2019, we entered into a new framework agreement with CGB for daily related party transactions. We also continued to carry out continuing related party transactions with CGB in the reporting period. These transactions are not regarded as connected transactions for us under the HKSE Listing Rules. Details of these transactions are set forth below.

As at the date of this annual report, we directly own a 70.74% equity interest in China Life Pension. China Life Pension is not considered as our related party under the HKSE Listing Rules or applicable PRC laws and regulations. As our subsidiary, China Life Pension also continued to carry out continuing related party transactions with CLIC, AMC, AMP and China Life Wealth in the reporting period. These transactions are regarded as connected transactions for us under the HKSE Listing Rules. Details of these transactions are set forth below.

Continuing Related Party Transactions with CLIC

During the reporting period, we engaged in continuing related party transactions with CLIC. These transactions are governed by several agreements between CLIC and us, including a restructuring agreement, a policy management agreement, a trademark license agreement and anon-competition agreement. A detailed discussion of these agreements is set forth in Note 34 to our consolidated financial statements included elsewhere in this annual report and under the heading “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions” in our annual report on Form20-F filed with the Securities and Exchange Commission on April 28, 2009.

 

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Our policy management agreement with CLIC expired on December 31, 2017. On December 26, 2017, we and CLIC entered into a new policy management agreement for a term of three years ending on December 31, 2020. During its term, this new agreement may be terminated by either party giving to the other party not less than 90 days’ prior written notice. Pursuant to this new policy management agreement, we continued to accept CLIC’s entrustment to provide policy administration services relating tonon-transferred policies, and CLIC will pay a service fee to us in cash on a semi-annual basis. The annual cap in respect of the service fees to be paid by CLIC to us under the new policy management agreement for each of the three years ending on December 31, 2020 is RMB 708 million. The service fees paid by CLIC to us under the new policy management agreement for the year ended on December 31, 2019 were RMB 574.58 million (US$ 82.5 million).

Continuing Related Party Transactions with AMC

Asset Management Agreement between AMC and Us

On December 28, 2018, we entered into an asset management agreement with AMC for a term of three years effective from January 1, 2019 and expiring on December 31, 2021. Under the asset management agreement, AMC agreed to invest and manage assets entrusted to it by us, on a discretionary basis, within the scope granted by us and in accordance with our investment guidelines. We retain the title of the entrusted assets and AMC is authorized to operate the accounts associated with the entrusted assets for and on behalf of us. We may add to or withdraw from the assets managed by AMC pursuant to the agreement. We have the right to establish, amend and change the investment guidelines and also have the right to monitor the investment management activities of AMC.

In consideration of AMC’s service in respect of investing and managing assets entrusted to it by us under the agreement, we agreed to pay service fees to AMC, which consist of a fixed service fee and a variable service fee. The fixed service fee is payable on a quarterly basis and is calculated according to the net asset value of the assets under management and a fixed management fee rate of 0.05% per annum. The variable service fee is payable on an annual basis and is determined after an appraisal has been conducted by us with respect to the assets under management and the relevant services provided by AMC each year. The variable service fee is calculated on the basis of 20% of the fixed service fee per annum, by multiplying a payment ratio determined by us based on the results of its annual appraisal of AMC. The management fee rate for directive operation investments or special projects will be separately negotiated by the parties and specified in the investment guidelines. The service fees under the agreement were determined by us and AMC based on an analysis of the cost of service, market practice, the rate charged by AMC to us in previous years, the rates charged by independent third parties for the provision of similar services, and the size and composition of the assets managed by AMC. The annual cap in respect of the service fees to be paid by us to AMC under the asset management agreement for each of the three years ending on December 31, 2021 is RMB 2,000 million. The service fees paid by us to AMC under the asset management agreement for the year ended December 31, 2019 were RMB 1,352.57 million (US$ 194.3million).

 

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Asset Management Agreement between AMC and CLIC

On December 29, 2018, AMC and CLIC entered into an asset management agreement for a term expiring on December 31, 2021. Under the asset management agreement, AMC agreed to invest and manage assets entrusted to it by CLIC, on a discretionary basis, subject to the investment guidelines and instructions given by CLIC. CLIC retains the title of the entrusted assets and AMC is authorized to operate the accounts associated with the entrusted assets for and on behalf of CLIC. CLIC may add to or withdraw from the assets managed by AMC pursuant to the agreement. CLIC has the right to establish, amend and change the investment guidelines and also has the right to monitor the investment management activities of AMC.

In consideration of AMC’s service in respect of investing and managing assets entrusted to it by CLIC under the agreement, CLIC agreed to pay AMC a base service fee for asset management at the rate of 0.05% per annum. Such service fee is calculated and payable on a monthly basis, by multiplying the average of book balance of the assets under management (after deducting the funds obtained and interests accrued from repurchase transactions, the principals and interest of debt investment plans, equity investment plans, project asset-backed plans and customizednon-standard products) at the beginning and at the end of any given month by the rate of 0.05%, divided by 12. After the end of each fiscal year, CLIC will evaluate the investment performance with respect to the assets entrusted to AMC in the previous year, and adjust the base service fee for asset management by reference to the actual and targeted investment returns. The service fees under the agreement will be determined by CLIC and AMC based on an analysis of the cost of service, market practice, the rate charged by AMC to CLIC in previous years, the rates charged by independent third parties for the provision of similar services, and the size and composition of the assets managed by AMC. The annual cap in respect of the service fees to be paid by CLIC to AMC under the asset management agreement for the three years ending on December 31, 2021 is RMB 320 million, RMB 310 million and RMB 300 million, respectively. The service fees paid by CLIC to AMC under the asset management agreement for the year ended on December 31, 2019 were RMB 89.27 million (US$ 12.8 million).

Continuing Related Party Transactions with IHC

Property Leasing Agreement with IHC

On December 29, 2017, we entered into a property leasing agreement with IHC for a term from January 1, 2018 to December 31, 2020. Under the property leasing agreement, IHC agreed to lease to us 1,893properties owned by it. The annual rent is determined by reference to market rent or, where there is no available comparison, by reference to the costs incurred by IHC in holding and maintaining the properties, plus a margin of approximately 5%.

The rent paid by us to IHC under the property leasing agreement for the year ended December 31, 2019 was approximately RMB 82.12 million (US$ 11.8 million).

 

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Asset Management Agreement with IHC

On December 31, 2018, we entered into an asset management agreement with IHC, which took effect from January 1, 2019 with a term of two years. Unless a party serves the other party a written notice fornon-renewal prior to 90 working days before the expiry date of the agreement, the agreement will be automatically renewed for one year from the expiry date thereof. Pursuant to the asset management agreement, IHC will invest, operate and manage the assets entrusted to it by us for investment in real property, equity interests of companies, related financial products and quasi-securitization financial products on a discretionary basis, subject to the investment guidelines and instructions given by us.

In consideration of the services provided by IHC under the asset management agreement, we agreed to pay IHC fees based on fixed return projects andnon-fixed return projects, respectively. With respect to the fixed return projects, we agreed to pay IHC a basic service fee which is determined based on the investment rate of return of the projects. With respect to thenon-fixed return projects, we agreed to pay IHC a basic service fee and also pay a performance-based fee at the time of exit from the projects with reference to the internal rate of return of the projects. In addition, we will make adjustments to the basic service fee for fixed return projects andnon-fixed return projects based on the result of our annual business evaluation on IHC (such adjusted amount is referred to as floating management fee). In consideration of the management services for real estate operation provided by IHC or its subsidiaries, we agreed to pay IHC a real estate operation management service fee.

The basic service fee is paid on a quarterly basis, calculated separately for the projects invested prior to the execution of the agreement and those newly invested during the term of the agreement. With respect to the projects invested prior to the execution of the agreement, the basic service fee is calculated by multiplying the total amount of assets invested by the applicable management fee rate (which is set forth in the relevant entrusted investment and management agreements for alternative investments with insurance funds then in force when such projects were entrusted). With respect to the projects newly invested during the term of the agreement, the basic service fee is calculated by multiplying the total annual amount of assets newly invested by the applicable management fee rate stipulated in the agreement and our investment guidelines. The floating management fee and the performance-based fee are calculated and confirmed by both parties annually, and then paid by us to IHC upon confirmation. The real estate operation management service fee is paid on a quarterly basis, calculated separately for the well-developed real estate projects and the new real estate projects. With respect to the well-developed real estate projects, the real estate operation management service fee is calculated by multiplying the earnings before interest, taxes, depreciation of fixed assets and amortization of intangible assets, long-term deferred assets and prepaid interest (“EBITDA”) derived from the relevant real estate project in a given year, by the fee rate of 3%. With respect to the new real estate projects, the real estate operation management service fee is calculated as follows: (i) the real estate operation management service fee for the first three years will be calculated by multiplying the estimated EBITDA derived from the relevant real estate project in the fourth year by the fee rate of 3%; and (ii) commencing from the fourth year, the real estate operation management service fee will be calculated in the same manner as the well-developed real estate projects as mentioned above. In addition, the assets entrusted by us to IHC will also be partially used for the subscription of the related financial products established and issued by IHC or of which IHC has participated in the establishment and issuance, and such related financial products will be limited to infrastructure investment plans and asset-backed plans. For each of the three years ending December 31, 2021, the annual cap on the amount of the basic service fee, floating management fee, performance-based fee and the real estate operation management service fee payable by us to IHC is RMB 1,391 million, RMB 1,982 million and RMB 2,266 million, respectively. For each of the three years ending December 31, 2021, the annual cap on the contractual amount of assets newly entrusted by us to IHC for investment and management is RMB 200,000 million, RMB 200,000 million and RMB 200,000 million, respectively. For the year ending December 31, 2019, the contractual amount of assets newly entrusted by us to IHC for investment and management was RMB 13,110.00 million (US$ 1,883.1 million) and the fees paid by us to IHC were RMB 652.75 million (US$ 93.8 million).

 

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Continuing Related Party Transaction with China Life Pension

On March 22, 2014, we, CLIC and AMC entered int