Source: Brokerage China Author: Qu Hongyan Recently, China Yangtze Power hit a historical high and once again showed the slow bull stock trend of "tripling in ten years". The slow bull market has left behind many passers-by and brought good returns to the steadfast investors. It is "rare for those who triple in one year to be like carp jumping over the dragon gate, while those who double in three years are few and far between." On the other end of the investment world, however, violent collapses are also deafening, with many financial products suspected of "Ponzi schemes" ceasing payments, leaving investors with no hope of recovering their investments. Both positive and negative cases illustrate the importance of forming a suitable mentality towards money in one's lifetime; otherwise, sooner or later, you will divorce yourself from your money. "I call this the money mind, a person's IQ can reach 120, 140, or even higher levels, and perhaps some people's minds are good at doing one thing, while others are good at doing another. They can do things that most ordinary people can't do. But I know some very smart people who make very foolish decisions because they lack the money mind." Buffett once said so. The so-called money mind refers to believing in common sense, believing in compound interest, being cautious and rational, thinking independently, prioritizing security over return, not dealing with people with questionable character, not easily guaranteeing for others, not believing in windfall profits, and not trying to cross legal norms for extra benefits. In today's world of ubiquitous information, everyone's wealth may become the "prey" of those with ulterior motives. Only with the money mind, can one form good behavior habits and shield oneself from separating from one's wealth. Do not entrust your wealth easily. Wealth is easy to lose but hard to accumulate, and trust is a vital reason leading to the rapid loss of wealth. "Do not allow anyone else to manage your business unless you can watch their every move closely and understand their behavior; or you have strong reasons to believe in their character and ability. For investors, this criterion determines when you can let someone else make investment decisions for you." Graham's criterion written eighty years ago is so clear. Almost all the investors who lost their wealth in the financial products have violated the above two criteria. They did not have the ability to closely supervise the whereabouts of their funds, nor did they have sufficient reasons to believe in the character of the product issuers. They easily invested their own wealth solely based on others' glib tongue and a piece of commitment paper. They did not act as gatekeepers of their own wealth and ended up with nothing left even if the government punished the wrongdoers. "An ounce of prevention is worth a pound of cure." This is a phrase Munger often says. Destiny must be in one's own hands, and investors with a suitable money mind will try their best to find suspicious points in their investments to protect the safety of their principal. For example, whether the manager is trustworthy, whether the underlying assets are profitable, whether oneself can timely monitor the risks in the investment process, and whether the sales staff is obtaining large commissions. As long as any unreliable signs are found, these investors firmly will not invest their money. Do not desire to get rich quick. As in the capital market and anywhere else, making money is not easy, and desiring to get rich quick will lead to quick loss of wealth. In the capital market, the desire to get rich quickly often leads to investors over-allocating specific stocks, industries, or assets at the worst time. For example, buying high-risk stocks that can gain huge returns once an adventure succeeds, but the chance of success is very small, also known as "whispering stocks" by legendary fund manager Peter Lynch. "They often tell investors a story with explosive effects. These 'whispering stocks' have a hypnotic effect on people, and it is easy for you to believe that the story the company tells has an emotional appeal that can easily confuse you." This is like hearing a very tempting "sizzling" sound, making you salivate, but you did not notice that there is no steak on the grill. In the eyes of investors who lack the money mind, stable yield provided by blue chips such as China Yangtze Power cannot meet their demands. However, historical experience clearly shows that buying stocks lacking in safety solely based on imagined high yields is unwise. The long-term average investment return of general stocks is 9%-10%, which is also the average investment return of stock indexes in history, a benchmark to measure one's investment performance and the benchmark to measure fund investment performance.

Exclusive news from China Securities Journalist: $Luckin Coffee (LKNCY.US)$Before going public, it purchased a total limit of 25 million US dollars of director liability insurance, of which the basic layer policy amount was 10 million US dollars, co-insured by 8 domestic insurance companies. Due to the complexity of personnel involved in financial fraud and the case, how to compensate for this director liability insurance has always been an industry focus. Finally, the basic policy layer entered the arbitration stage, and has now made a ruling, with the ruling result being that the co-insured body is compensated for 7 million US dollars, with a deductible of 3 million US dollars.

China Securities Journalist asked Luckin Coffee and Ping An Property Insurance, the main insurer of the basic layer, about whether they have received relevant arbitration, whether they accept the arbitration result and the progress of claims settlement. Ping An Property Insurance replied to China Securities Journalist that the company has completed relevant claims settlement matters in accordance with the insurance contract and co-insurance agreement.

The ruling co-insured body is compensated for 7 million US dollars.

In recent years, under the influence of Luckin Coffee case, Kangmei Pharmaceutical case and the implementation of the new Securities Law, the attention to director liability insurance has rapidly increased.

Director and Officer's Liability Insurance (D&O Insurance), originates from Europe and the United States, has a development history of more than 20 years in China, and mainly protects the losses incurred to individuals due to improper behavior or negligence at work by company directors and senior management when exercising their management responsibilities. Scope of coverage generally includes out-of-court settlements, judgments or settlements losses, legal fees, defense costs, etc.

Before listing in the United States, Luckin Coffee purchased a director liability insurance policy with a total coverage of 25 million US dollars, equivalent to nearly 200 million yuan. After the Luckin Coffee fraud incident in 2020 was exposed, Luckin Coffee filed a claim with the insurance company.

It is understood that the director liability insurance policy purchased by Luckin Coffee has four layers, covering basic and excess liability layers, the structure of which is very complex. If the amount of compensation exceeds the range that the layer can bear, it triggers the previous layer to pay, therefore involving multiple insurance companies.

The basic layer policy amount in the policy is 10 million US dollars, and each excess layer is 5 million US dollars. The basic layer is co-insured by 8 domestic companies. Ping An Property Insurance is the main insurer of the basic layer, with a coverage of 30%, and the company adopts 1 million US dollars of reinsurance and 2 million US dollars of self-retention. In addition, Tai Ping Insurance, PICC Property and Casualty, China United Property Insurance, PICC Reinsurance, Taiping Life Insurance, China Continent Insurance, and Qianhai Reinsurance have coverage shares of 17.5%, 15%, 15%, 10%, 5%, 5%, and 2.5%, respectively.

After Luckin Coffee filed a claim in 2020, Ping An Property Insurance responded at that time that the company attached great importance to it, and established a special group for the case, and the claims work is still in progress.

Recently, China Securities Journalist learned that due to disputes, the basic layer of the director liability insurance finally entered the arbitration process and has now made a ruling that the co-insured body is compensated for 7 million US dollars, with a deductible of 3 million US dollars.

According to relevant regulations, the arbitration adopts a one-arbitration-final system. After the ruling is made, if the parties apply for another arbitration or file a lawsuit with the people's court on the same dispute, the arbitration commission or the people's court will not accept it. If they are not satisfied with the arbitration ruling, the parties may apply for the revocation of the ruling within six months from the date of receipt of the ruling.

China Securities Journalist asked Luckin Coffee and Ping An Property Insurance, the main insurer of the basic layer, about whether they have received relevant arbitration, whether they accept the arbitration result and the progress of claims settlement. Ping An Property Insurance replied to China Securities Journalist that the company has completed relevant claims settlement matters in accordance with the insurance contract and co-insurance agreement.

China Securities Journalist learned that after the main insurer of the basic layer confirmed the case was an accident, it issued an insurance notice to the other co-insurance companies to follow up the claims settlement. The reporter asked some of the co-insurance companies whether they received the insurance notice and how the claims settlement progress was, and as of the time of publication no reply has been received.

Does financial fraud affect claims settlement?

The Luckin Coffee case also reflects a widely concerned problem of director liability insurance: Can director liability insurance cover listed companies involved in financial "fraud" or fraud?

On May 17, 2019, Luckin Coffee went public on the Nasdaq in the United States and became one of the fastest global IPOs. On April 2, 2020, Luckin Coffee announced that it had admitted to falsely reporting transactions of 2.2 billion yuan, causing the stock price to plummet. In December 2020, Luckin Coffee reached a settlement with the U.S. Securities and Exchange Commission (SEC) over allegations of former employees' financial fraud, agreeing to pay a fine of $ 180 million (about RMB 1.175 billion) to exempt the SEC from allegations of financial fraud.

According to brokerage China reporters, Luckin has filed a claim with an insurance company after the fraud incident was revealed. However, due to the complexity of the Luckin case, especially the dispute over the deductible of 3 million US dollars, the two parties have not been able to reach an agreement, and the case was finally settled through arbitration.

It is generally believed that directors and officers liability insurance can protect the insured against some risks caused by improper behavior, but does not pay for intentional fraud. In fact, the assessment of "intentional fraud" by insurance companies is also very cautious.

According to analysis by senior professionals in the insurance industry, the most core issue of this problem is how to determine the so-called financial fraud. It cannot be simply assumed that when a listed company and its directors and executives are "accused" or "suspected" of financial fraud, the policy is excluded from coverage. For the definition of fraud, the exclusion clause can only be activated when there is a "final and irrevocable judgment or ruling determining it as an intentional act."

In addition, even if a listed company itself recognizes that some employees have committed fraud, it involves issues such as the separability of coverage and presumed knowledge, and cannot be simply judged as whether the policy covers or excludes all insured persons.

The details of the Luckin directors and officers liability insurance clause are not yet known. However, for US-listed companies, under the US securities law system, many securities litigation cases are resolved through settlements, and there are very few cases that need to be finally judged by the court, so the payment of directors and officers liability insurance for civil settlement payments is still very important.

Editor/tolk