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

04 10 2023/ /BAO VIET HOLDING HOSE:BVH Development opportunities outweigh the risks Income Summary Group 6 FIN360 – TH TRƯỜNG VỐN, NEU Ị Stable Income from Deposits and Financial Acti

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 Tr n ầ Thuỷ Tiên Nguyễ Hồn ng Minh

Từ Gia Bảo

Đoàn Thái Hoàng Nguyễn Đắc Vinh

Class: Advanced Finance 63A

Hanoi, October 2023

1 Income Summary 1

2 Business Model 2

3 Macroeconomics 3

4 The Competitive Factors 4

5 Current Business Situation 5

6 Equity Valuation 7

7 Recommendation 8

8 Risks 9

9 Appendix 11

04 10 2023/ /

BAO VIET HOLDING ( HOSE:BVH )

Development opportunities outweigh the risks Income Summary

Group 6 FIN360 – TH TRƯỜNG VỐN, NEU Ị

Stable Income from Deposits

and Financial Activities:

Less Negative Impact on

BVH's Life Insurance

Activities Compared to

Industry Peers

-Revenue Growth:

Financial Performance:

Market Leadership:

Recommendation:

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

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 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

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

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

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

Source: BVH

(Billion dong) 2019 2020 2021 2022 2023F

Table 1: Supply chain

Source: BVH

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,

Products and services

1 Insurance:

2 Investment:

3 Finance:

4 Banking:

Business Model

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 in subsidiary and affiliate companies

-Portfolio management outsourcing and management of investment funds -Management of securities investment funds and real estate investment and business

-Securities brokerage, proprietary trading, securities underwriting, and custody services

-Financial service business and other fields as prescribed by law

-Securities investment advisory

-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

Positive Impact

GDP Growth:

Retail Sales and

Services:

Foreign Direct

Investment (FDI)

Negative Impact

Inflation

Currency and

Monetary Policy

Growth Forecasts

Credit Market

Challenges

Conclusion

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

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

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

FDI reaching $15.91 billion in the first nine months of 2023, a 2.2% year- -on year 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

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 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

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

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

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

Table 3 : Results of finance business operations in 6M2023

Profit Growth

Strong Financial

Operations

Increased Financial

Investment Profits

Market Leadership

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

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

BVH's financial investment profit increased by 33%, reaching VND 5,193 billion, compensating for the 39% decrease in insurance business profit

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:

Corporation (MIG), have reported pre-tax profit growth in the second quarter of 2023

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Conclusion

Stable Income from

Deposits and Financial

Activities:

reported reduced profits or even losses in the second quarter of 2023

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

Current Business Situation

-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

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

Q2/23 Q2/22 %yoy 6M23 6M22 %yoy

Administration

Criminology 96% (113)

8

-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

Source: AVI, SSI Research Source: AVI, SSI Research

-Revenue Growth Positively

Aligns with Market

Conditions:

-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%

Table 7: Growth in revenue from new product fees

yoy

Source: AVI, SSI Research Source: AVI, SSI Research

Conclusion

-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

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:

P/B Method

Combining valuation

methods:

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

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

Revenue 34,524 36,828 40,699 45,359 50,123 54,011 57,344 59,973 61,772

EBIT 1,953 2,376 1,988 2,742 3,077 3,631 7,922 12,539 17,296 Taxes 303 373 385 462 519 612 1,336 2,114 2,917 EBIAT 2,280 2,558 3,019 6,586 10,425 14,380 D&A 191 205 180 352 1,002 1,080 1,147 1,199 1,235 CapEx 231 238 116 227 251 270 287 300 309 Change in NWC 12,344 5,667 7,013 1,062 1,086 350 598 477 305 Unlevered FCF 1,342 2,224 3,479 6,848 10,847 15,001 Present value of UFCF 1,342 1,649 1,912 2,790 3,276 3,359

Present value of Terminal Value 10,416