(Tiểu luận) operational analysis and valuation of financial institutions insurance company

NATIONAL ECONOMICS UNIVERSITY SCHOOL OF ADVANCED EDUCATION PROGRAMS -*** - OPERATIONAL ANALYSIS AND VALUATION OF FINANCIAL INSTITUTIONS: INSURANCE COMPANY Supervisor: Đang Anh Tuan, PhD Students: Group 6: Nguyễn Trần Thuỷ Tiên Đoàn Thái Hoàng Nguyễn Hồng Minh Nguyễn Đắc Vinh Từ Gia Bảo Class: Advanced Finance 63A Hanoi, October 2023 Table of Contents Income Summary Business Model Macroeconomics The Competitive Factors Current Business Situation Equity Valuation 7 Recommendation 8 Risks 9 Appendix 11 BAO VIET HOLDING (HOSE:BVH) Development opportunities outweigh the risks Income Summary Group FIN360 – THỊ TRƯỜNG VỐN, NEU 04/10/2023 Stable Income from Deposits and Financial Activities: Income from deposits increased by 77%, reaching 1.16 trillion Vietnamese dong (an 11% increase YoY) in the first half of 2023 Bank deposits accounted for 61% of BVH's total investment portfolio, approximately 197 trillion Vietnamese dong Income from bank deposits constituted around 85% of the company's financial operation profits during the period Less Negative Impact on BVH's Life Insurance Activities Compared to Industry Peers BVH recorded a smaller decline compared to other competitors, with NBP and GWP decreasing by 28% and 1%, respectively BVH's market share improved after years of decline BVH's contract retention rate decreased to approximately 80% in the first half of 2023 (compared to over 90% in recent years) BVH's Non-Life Insurance Revenue Growth: BVH's non-life insurance revenue saw a growth of 1.9%, in line with the overall industry, while the entire market increased by 1.3% compared to the previous year BVH maintained its market share in the health and personal accident insurance sector Financial Performance: BVH reported a gross loss of nearly 759 billion Vietnamese dong in insurance business operations in Q2/2023 Profits from financial activities saw significant growth, primarily contributed by interest income from deposits and investments in bonds, equities, and securities Market Leadership: BVH maintained the highest market share in the life insurance sector, with a market share of 20.6% and total insurance fee revenue of VND 16,036 billion Recommendation: A HOLD rating is recommended for BVH stocks The estimated net profit for BVH in 2023 is 2,742 billion Vietnamese dong (+17.2% YoY) The fair price range for BVH shares is between 33,372 and 44,624 dong per share HOLD Key performance ra-o (Billion dong) Net Revenue from Insurance Business Activities Gross profit from insurance business activities EBIT from insurance activities EBIT from finance activities Total EBIT Investment portfolio yield Total assets Total Equity Category Financial investment ROA ROE Combination Ratio Payout Ratio Business Management Expense Ratio 2019 33,309 -765 -4,282 5,687 1,512 4.6% 128 19,903 108,761 1.0% 6.7% 112.9% 83.0% 29.9% 2020 34,524 -2,041 -5,797 7,654 1,953 5.9% 146,413 20,822 125,592 1.2% 7.8% 116.8% 86.1% 30.7% 2021 36,830 614 -5,649 7,852 2,398 5.5% 169,505 22,031 149,391 1.2% 8.9% 109.2% 85.5% 23.7% 2022 40,688 105 -6,197 8,082 2,010 4.4% 201,664 21,271 184,045 0.8% 7.2% 109.6% 88.8% 20.8% 2023F 45,359 232 -6,936 9,079 2,357 4.9% 207,219 23,000 190,121 0.9% 8.2% 109.8% 89.1% 20.7% Source: BVH Business Model Products and services Insurance: Bảo$Việt$Group$operates$in$the$2ields$of$Insurance,$Investment,$Finance,$ and$Banking,$offering$a$diverse$range$of$products$and$services,$ including:$ $ -Non-life insurance business: Property insurance, damage insurance, aviation insurance, motor vehicle insurance, health insurance, life insurance, agricultural insurance, and more -Life insurance business: Whole life insurance, term life insurance, endowment insurance, mixed insurance, group insurance, retirement insurance -Reinsurance business Investment: - Investment in subsidiary and affiliate companies -Portfolio management outsourcing and management of investment funds -Management of securities investment funds and real estate investment and business Finance: -Securities brokerage, proprietary trading, securities underwriting, and custody services -Financial service business and other fields as prescribed by law -Securities investment advisory Banking: -Fund mobilization: Accepting deposits, issuing certificates of deposit, bonds, and other valuable papers to raise capital -Credit activities: Providing credit in the form of loans, discounting, guarantees, and financial leasing -Payment and treasury services Table 1: Supply chain Source: BVH Conclusion The two most profitable services for the group are insurance and finance, and notably, finance has yielded strong profits for the company in 2022 and the first two quarters of 2023 In 2020, Bảo Việt celebrated 55 years as a leading Financial and Insurance Group in Vietnam With the motto "Solid Trust - Sustainable Commitment," it serves around 20 million customers annually, contributing significantly to Vietnam's economy Bảo Việt offers diverse services in insurance, investment, finance, and banking and has attracted foreign investment, notably Sumitomo Life of Japan, owning 22.09% It's also Vietnam's top insurance brand with a value of 267 million USD, per a 2019 Brand Finance (UK) survey Macroeconomics Positive Impact GDP Growth: The third-quarter GDP growth of 5.33% year-on-year, along with the 4.24% year-on-year growth in the first nine months of 2023, indicates a recovering economy This can be positive for insurance companies as it suggests increased economic activity, potentially leading to higher demand for various insurance products Retail Sales and Services: The Retail Sales Index (RSI) showing a 7.5% year-on-year increase in September and a 9.7% year-on-year increase over the first nine months of the year indicates robust consumer spending This can positively affect insurance companies, particularly those offering retail-oriented insurance products, as increased consumer spending may lead to higher demand for insurance coverage Foreign Direct Investment (FDI) FDI reaching $15.91 billion in the first nine months of 2023, a 2.2% year-onyear increase and the highest in five years, can benefit both insurance companies and investments This inflow of foreign capital can drive economic growth, create jobs, and boost the overall investment climate Negative Impact Inflation The rising Consumer Price Index (CPI) at 3.66% year-on-year, along with a core inflation rate of 3.8%, is a concern High inflation can erode the purchasing power of consumers and affect the profitability of insurance companies Additionally, it can lead to uncertainty in investment decisions Currency and Monetary Policy The State Bank of Vietnam's measures to manage currency and monetary policy, such as reducing short-term capital for medium- and long-term loans, can have mixed effects While these actions aim to stabilize the financial sector, they may result in increased borrowing costs for businesses, potentially impacting their financial health and investment plans Growth Forecasts Downward revisions in GDP growth forecasts by organizations like the ADB and IMF (decreased to 4.7%) may create uncertainty among investors Lower growth expectations could lead to reevaluations of investment strategies, potentially affecting investment flows Credit Market Challenges The challenges in the credit market, particularly in real estate and bonds, are a concern If credit issues persist, it may impact the stability of investments and affect the performance of insurance companies' investment portfolios Conclusion In summary, the economic factors in Vietnam present a mixed picture for insurance companies and investors While positive indicators such as GDP growth, retail sales, and FDI can drive opportunities, challenges like inflation, currency policies, and growth forecast revisions need to be carefully monitored and managed to mitigate potential risks The Competitive Factors Bao Viet Group (BVH) is in a better business position compared to many other non-life insurance companies in the second quarter of 2023 and the first six months of 2023 Here are some key points to assess BVH's situation: Table 2: Results of insurance business operations in 6M2023 Source: VietstockFinance Table 3: Results of finance business operations in 6M2023 Source: VietstockFinance Profit Growth Despite BVH reporting a gross loss of VND 870 billion from insurance business operations, their total pre-tax profit increased by 12% to VND 1,169 billion This was achieved primarily due to a strong 33% increase in financial investment profit Strong Financial Operations BVH earned over VND 4,450 billion from interest on deposits, a 77% increase compared to the same period last year This indicates their effective utilization of high deposit interest rates since 2022 Increased Financial Investment Profits BVH's financial investment profit increased by 33%, reaching VND 5,193 billion, compensating for the 39% decrease in insurance business profit Market Leadership BVH still maintains the highest market share in the life insurance sector, with a total insurance fee revenue of VND 16,036 billion and a market share of 20.6% However, it's important to note that the life insurance market, in general, is experiencing fluctuations and challenges in the first half of 2023 The decline in the number of new policies issued and insurance fee revenue is a common issue in the industry An overview of the situation of other non-life insurance companies also reveals various possibilities and risks: • Profit Growth: Some companies, such as Military Insurance Corporation (MIG), have reported pre-tax profit growth in the second quarter of 2023 Document continues below Discover more from: Thị trường vốn fin350 Đại học Kinh tế Quố… 16 documents Go to course TC B Thị trường vốn Syllabus Thi truong… Thị trường vốn None Brasil Crisis 2014 - FIn 21 Thị trường vốn None Fin 360 nhóm evnfinance Thị trường vốn None Group Iceland Financial Crisis Thị trường vốn 15 None Trắc nghiệm thương mại điện tử Thương mại điện tử 100% (1) Correctional Administration Losses and Reduced Growth: Other companies, like AIC, have reported reduced profits or even losses in the second quarter of96% 2023.(113) Criminology • Reduced Actuarial Reserve Pressure: Life insurance companies are benefiting from reduced actuarial reserve pressure as technical interest rates align with government bond interest rates In summary, BVH seems to be in a better position compared to some competitors in the non-life insurance industry, particularly in financial investment activities However, industry-wide fluctuations and a decrease in the number of new policies issued are common challenges that the entire sector is facing • Conclusion Current Business Situation Stable Income from Deposits and Financial Activities: -Income from deposits surged by 77%, reaching 1.16 trillion Vietnamese dong (an 11% increase YoY) in the first half of 2023 -Bank deposits accounted for 61% of BVH's total investment portfolio, approximately 197 trillion Vietnamese dong -Income from bank deposits constituted around 85% of the company's financial operation profits during the period We believe this trend will continue into the second half of 2023 as BVH continues to benefit from higher interest-rate deposit contracts signed earlier this year Meanwhile, insurance business activities may not thrive immediately, as consumers may need time to regain trust in insurance products Table 4: Comparison of business performance ratio for 6M2023 and 6M2022 Gross Insurance Revenue Life Insurance Non-Life Insurance Net profit from insurance activities Net profit from financial activities Rate of Return on Investment EBIT NPATMI Q2/23 10.294 8.059 2.235 -2.093 2.735 5,50% 507 405 Q2/22 10.704 8.494 2.211 -1.327 1.872 4,50% 423 321 %yoy -4% -5% 1% -58% 46% 20% 26% 6M23 20.878 16.036 4.841 -3.825 5.229 5,50% 1.164 930 6M22 20.974 16.222 4.752 -2.615 3.899 4,80% 1.048 803 %yoy 0% -1% 2% -46% 34% 11% 16% Source: BVH Less Negative Impact on BVH's Life Insurance Activities Compared to Industry Peers from Recent Challenges: -The domestic life insurance industry faced its most significant challenges in 30 years due to mis-selling cases through bancassurance channels -Banks encouraged borrowers to purchase life insurance products when applying for loans and persuaded savers to switch from savings accounts to life insurance -Regulatory authorities inspected the sales activities of major life insurance companies in the first half of 2023, making selling new life insurance contracts more challenging 6 -New Business Premium (NBP) revenue for the entire life insurance market decreased by 38% compared to the same period last year, and Gross Written Premium (GWP) decreased by 8% -Bao Viet Group (BVH) recorded a smaller decline compared to other competitors, with NBP and GWP decreasing by 28% and 1%, respectively -BVH's market share improved after years of decline -BVH's contract retention rate was negatively impacted, decreasing to approximately 80% in the first half of 2023 (compared to over 90% in recent years) -Retention rates for bancassurance contracts ranged from 27% to 67% -BVH had an advantage with cautious sales through its agent channel (97% of new business revenue) -However, BVH's benefit potential was constrained by the company's limited capital and the near-minimum solvency margin of its life insurance subsidiary, BVH Life Table 5: Life insurance market share Source: AVI, SSI Research BVH's Non-Life Insurance Revenue Growth Positively Aligns with Market Conditions: Table 6: Revenue from new product fees Source: AVI, SSI Research -Bao Viet Group's (BVH) non-life insurance revenue saw a growth of 1.9%, in line with the overall industry, while the entire market increased by 1.3% compared to the previous year -BVH maintained its market share thanks to its core strengths in the health and personal accident insurance sector The company continued to lead in this segment, surpassing competitors such as BIC, PVI, and PTI -However, BVH's claims ratio remained higher than that of its largest competitors (excluding PTI) and above the industry average In the first half of 2023, BVH's claims ratio increased to 48.2%, compared to 45% in 2022 and 43.7% in 2021 -While there is no detailed information available regarding sales and business management costs for each of BVH's life and non-life insurance activities, the combined ratio for the company's non-life insurance was above 100% during the period due to the cost ratio in BVH's non-life insurance segment typically ranging from 50% to 53% 7 Table 7: Growth in revenue from new product fees yoy Table 8: Non-life insurance market share Source: AVI, SSI Research Conclusion Source: AVI, SSI Research -In Q2 2023, BVH's net insurance business revenue decreased by 4%, primarily due to a 4% decline in original insurance premium revenue -Insurance claims costs increased by 6%, and the total insurance business expenses rose by 4%, resulting in a gross loss of nearly 759 billion Vietnamese dong in insurance business operations -However, profits from financial activities saw significant growth, primarily contributed by interest income from deposits and investments in bonds, equities, and securities Overall, BVH demonstrated stability in its financial activities and capitalized on opportunities from deposit income to offset challenges in its insurance business operations While insurance revenue decreased in Q2 2023, the company's overall profitability increased substantially due to gains from financial activities BVH continues to maintain stability in the insurance sector and has plans to boost profits in the future, particularly with the upcoming IPO of its life insurance segment Equity Valuation Cash Flows to Firm Method In 2023, we es0mate that the net profit will reach 2.7 trillion Vietnamese dong (+6.05% YoY) due to the reinvestment of high-interest deposit contracts at a lower interest rate environment and a decrease in technical interest rates, which will result in higher actuarial provisions Applying the Discounted Cash flow method, We have results: DCF Revenue 2020 34,524 % growth EBIT Taxes EBIAT D&A CapEx Change in NWC Unlevered FCF Present value of UFCF 2021 36,828 2022 40,699 2023 45,359 2024 50,123 2025 54,011 2026 57,344 2027 59,973 6.67% 10.51% 11.45% 10.50% 7.76% 6.17% 4.59% 2,742 462 2,280 352 227 1,062 1,342 1,342 3,077 519 2,558 1,002 251 1,086 2,224 1,649 1,953 303 2,376 373 1,988 385 191 231 12,344 205 238 5,667 180 116 7,013 Terminal Value Present value of Terminal Value Value per share 3,631 612 3,019 1,080 270 350 3,479 1,912 7,922 1,336 6,586 1,147 287 598 6,848 2,790 12,539 2,114 10,425 1,199 300 477 10,847 3,276 2028 61,772 3.00% 17,296 2,917 14,380 1,235 309 305 15,001 3,359 46,519 10,416 33.372 P/B Method We employ a comparative model, including publicly traded non-life insurance companies with similar business efficiency, to perform pricing With a sector median P/B ratio of 1.5x, the fair valuation of BVH is 44,624 Vietnamese dong per share Combining valuation methods: Utilizing a combination of two valuation methods, P/B and Cash Flows to Firm Method (DCF), with a balanced weighting, the fair price for BMI stock is in a range from 33,372 to 44,624 dong per share Recommendation BVH is a long-established insurance conglomerate in the Vietnamese insurance market under state management Recently, BVH has actively transformed its operations, diversified its product offerings, and achieved significant milestones However, its core business operations need improvement due to a combined ratio consistently exceeding 100% and growth rates lower than the industry average Therefore, we estimate that BVH could achieve 2,742 billion Vietnamese dong in net profit in 2023 (+17.2% YoY) In 2024, we estimate that the Net Profit will reach 2.3 trillion VND (+3.3% YoY) due to the re-investment of high-interest deposit contracts at lower interest rates and a decrease in technical interest rates, which will result in higher actuarial provisions Revenue in the insurance business segment is expected to achieve better growth compared to 2022 (life insurance is expected to grow by 9% YoY and non-life insurance by 7% YoY), but profit growth still faces significant challenges due to intense competition in the industry As we are not overly optimistic about BVH's prospects in 2024, we are downgrading our recommendation for BVH stock to HOLD.We recommend a HOLD rating for BVH stocks with a fair price is in a range from 33,372 to 44,624 dong per share Risks Insurance Management Risks Insurance accumulation risk Banking risks Investment and Financial risks For companies working in the insurance industry in general and Bao Viet in specific, the most significant risk is the risks related to the insurance activities -This risk is the risk that the business will be unable to cover the compensation costs for covered occurrences under the company's life and non-life insurance policies -Preventive measures of the business: -Possessing a synchronous and unified risk management framework throughout the system -Focus on identifying, measuring, reviewing and monitoring insurance risks in the business process -Diversify products and services, have limits, rules, and approval processes for new and old contracts -This risk can arise from insurance activities (property insurance, personal insurance, aviation insurance, cargo insurance, etc.) focused on a specific geographical area/location, and a disaster, natural or other event occurring in that area/location, the company may face a large number of claims resulting in significant damages -Preventive measures of the business: -Regulate on cumulative risk management and purchasing protective reinsurance contracts to limit liability when an insurance event occurs For Bao Viet, the company also has to face banking risks, investment risks and financial risks, competitors risks -These risks occur from margin trading activities -Preventive measures of the business: -Evaluate and rate customers to grant deposit limits appropriate to the customer's financial capacity and collateral assets -Periodically review the group of customers with accumulated risks, complying with the risk limits issued by BVSC -Regularly update stock information on the market to quickly identify and issue early warnings for codes showing signs of loss of liquidity and prolonged price declines -Build a set of safe margin ratios, carry out additional monitoring of margin to soon warn customers about the status of junk items, and carry out collateral handling work to preserve capital for BVSC in the margin loan process -This risk is primarily derived from the company's stock and bond holdings However, this risk is low for bond investments as Government bonds constitute the majority of the investment portfolio -Preventive measures of the business: -Bond investments: Bao Viet has risk management regulations in place for corporate bond investment operations, approving investment limits for each form of bond based on the investment strategy and total asset structure -They also diversify its investment portfolio with many types of investment assets (for example, invest in stocks, bonds, deposits, fund certificates ); one type of asset (for example, bond investment includes Government bonds, corporate bonds or local government bonds ); industries: expanding the scope of investment in companies and fields that are not linked or crossowned ; or by market capitalization: Allocate portfolio to stocks of companies of different sizes 10 Competitors Risks The market is seeing an increase in the number of international insurance firms with big capital and extensive experience in product design and development, enhancing market rivalry Therefore, Bao Viet has to compete with more companies to attract more customers 11 Appendix