Manulife Vietnam financial performance analysis VU CONG THANG Faculty of International Training Ha noi, Aug 13 ACKNOWLEDGEMENT I would like to give my sincere thanks to all those who helped me during the period of my research. First, I put on record a deep sense of gratitude to Dr. VũMạnhChiên, Vietnam University of Commerce, under whose supervision, I completed this research work. He gave me the liberty to encroach in his precious time as and when I approached him for discussing the matters pertaining to this research work. During my research, I received enlightenment, inspiration and encouragement through his guidance. My thanks are due to the entire teaching faculty and the non- teaching staff for their co-operation and the academic environment they used to create in the university.I am thankful to all my friends who always kept me nudging to complete this study successfully. I owe everything to my parents. This is beyond the scope of words to express their care, support, affection and right guidance provided by them. Apart from home and my family members I am bound to thank the staffs of Manulife Vietnam, the experience I got in the company of different scholars from different areas of research is priceless. I express my best wishes and thank them for their contribution in completing this study. This master dissertation is a beginning to this fascinating area of research in finance and more particularly insurance area, which I think I have been able to comprehend to some extent, in which I am contemplating to contribute my own bit during my professional career. Table of content Chapter 1: Introduction and literature review 4 1.1.Introduction 4 1.2.Review of other major areas 5 1.2.1.The role of insurance in economic growth and development 5 1.2.2.Activities and organization of an insurance company 8 1.3.Financial performance analysis and CAMEL framework 11 Chaper 1 sumary: 17 Chapter 2:Research conduction 18 2.1.Instruction to Manulife Vietnam 18 2.2.Research phases 19 2.3.Manulife financial performance analysis using CAMEL 20 2.3.1.Capital Adequacy Analysis 20 2.3.2.Asset Quality Analysis 22 2.3.4.Earnings and Profitability analysis 26 2.3.5.Liquidity Analysis 29 List of table Chapter 1: Introduction and literature review 4 1.1.Introduction 4 1.2.Review of other major areas 5 1.2.1.The role of insurance in economic growth and development 5 1.2.2.Activities and organization of an insurance company 8 1.3.Financial performance analysis and CAMEL framework 11 Table 1. CAMEL indicators 16 Chaper 1 sumary: 17 Chapter 2:Research conduction 18 2.1.Instruction to Manulife Vietnam 18 2.2.Research phases 19 2.3.Manulife financial performance analysis using CAMEL 20 2.3.1.Capital Adequacy Analysis 20 Table 2. Manulife Capital Adequacy 20 Table 3. Capital adequacy comparison 21 2.3.2.Asset Quality Analysis 22 Table 4. Manulife Asset quality 22 Table 5. Asset quality comparison 23 2.3.4.Earnings and Profitability analysis 26 Table 8. Manulife Earnings and profitability 27 Table 9. Earnings and profitability comparison 28 2.3.5.Liquidity Analysis 29 Table 10. Manulife Liquidity 29 Table 11. Liquidity comparison 29 Chapter 1: Introduction and literature review 1.1. Introduction Insurance is an important growing part of the financial sector in virtually all the developed and developing countries. Insurance reduces the investment risk faced by companies and the government. Moreover, Insurance cover is crucial for people to insure themselves against inability to work, set aside money for retirement or protect themselves against the loss of their assets. This is where insurance comes in as a key component in ensuring the healthy development of small and medium-sized enterprises. Despite the world economic downturn from 2008, Vietnam’s insurance market has grown rapidly in recent years and continues to be considered a promising market; resulted of strong, double-digit premium growth in recent years, and despite the ongoing economic uncertainties around the globe. Life insurance segment registered a strong compound annual growth rate (CAGR) of 15.2% during the period 2009-2012. At the same time, the majority of life insurance policies sold in Vietnam were endowment policies, with such polices accounting for a 70.9% share of the segment's total written premiums in 2011. Meanwhile, individual life insurance products accounted for a 22% share, and supplementary insurance products accounted for a 5.1% share [1]. This growth was the result of Vietnam’s efficient macroeconomic and microeconomic policies, as well as an increase in consumer awareness of life insurance products regarding the benefits of insurance products. The life insurance segment is expected to continue to expand, driven by the country’s economic growth, increasing annual disposable income levels, and expanding middle-class population. According to Association of Vietnamese insurer’s reports in 2012, there are currently about 58 insurance companies are operating in Vietnam, among these 29 non- life insurers, 15 life insurers, 12 insurance brokers and 2 re-insurance companies. The non-life insurance market is still largely dominated by domestic insurers. There are about 11 foreign-invested non-life insurers out of a total of 29. With respect to life insurance, foreign invested insurers make up 14 of the 15 life insurers, clearly dominating the market. Manulife Vietnam is one of the largest firms in 14 foreign invested life insurers take part in Vietnam. In today’s challenging global economy, business opportunities and risk are constantly changing, affecting Manulife Vietnam and other life insurers in Viet Nam. There is a need for identifying, assessing, managing and monitoring the company’s business opportunity and risk. Financial performance analysis is an importance and effective tool for the company to approach this target. However, financial performance analysis activity has not received a proper attention in Vietnam, particularly for the insurance company. Only a little number of studies addressing the financial performance analysis have found in recent years in Vietnam, none of them focus in Life Insurance Company. For these reasons, I chose the research topic as “Manulife Vietnam financial performance analysis” 1.2. Review of other major areas 1.2.1. The role of insurance in economic growth and development Insurance is an important growing part of the financial sector in all the developed and developing countries (Das et al., 2003). A resilient and well regulated insurance industry can significantly contribute to economic growth and efficient resource allocation through transfer of risk and mobilization of savings. In addition, it can enhance financial system efficiency by reducing transaction costs, creating liquidity and facilitating economies of scale in investment. (Bodla et al., 2003) Ward and Zurbruegg (2000) examine the casual relationship between growth in the insurance industry and economic development by recognizing that the economic benefits of insurance are conditioned by national regulations, economic systems and culture. Further, Ward and Zurbruegg (2000) argue that an examination of the interrelationship between insurance and economic growth needs to be conducted on a country-by-country basis. The study is important because in contrast to the available evidence on the importance of banks-typified by the work of Levine and Zervos (1998) little is known about Insurance. The work of Outreville (1990, 1996) is notable for identifying links between an economy’s financial development and insurance market development. Patrick, (1966) discusses that economic growth can be either supply-led through growth in financial development or alternatively financial development can be demand-led throughgrowth in the economy. Whereas several studies establish that financial development is an important determinant of countries’ economic growth, the aspect of understanding the casual relationship between insurance market growth and economic development is still lacking. Researchers (See for example Arestis and Demetriades (1997), Demetriades and Hussain, (1996), and Pesaran et al., (2002) have pointed out that it is important to accommodate the casual relationships to differences in size and direction across countries. The issue of “heterogeneity” is crucial in gauging the role of insurance in the economy across different countries. Similarly Outreville (1990) investigated the economic significance of insurance in developing countries. He compares 45 developed and developing countries and concludes that there is a positive but non-linear relationship between general insurance premiums per capita and GDP per capita. Although there is undoubtly a positive link between insurance and economic growth, the direction of causation between the two is unclear. Research by Ward and Zurbruegg (2000) suggest that in some countries, the insurance industry plays a key role in economic growth. From the demand perspective, Beenstock, et al., (1986) and Browne and Kim (1993) found that the role of the state in providing insurance services is a determinant of the demand for life insurance, because the level of education and the age dependency ratio are likely to differ across countries. According to Hofstede (1995) the level of insurance within an economy will depend on the national culture and the willingness of individuals to use insurance contracts as a means of dealing with risk. Fukuyama (1995) confirms that the finding of heterogeneity is likely to be conditional on the culture context of a given economy. Insurance will offer important economic benefits when the activities are generally seen as risky and risks are optimally managed through insurance contracts rather than by other risk transfer mechanisms. In this context, Fukuyama connects these cultural differences with the level of trust in the economy. Others (see for example Skipper Jr., 2000) highlight the role of insurance in individual and corporate risk management and their contribution to economic development. Webb (2000) investigated the mechanism by which insurance and banking jointly stimulate economic growth. Webb (2000) by adding banking and insurance to existing models asked whether it might explain economic growth. The more developed and efficient a country’s financial market the greater will be its contribution to economic prosperity. Skipper (2000) argues for insurance as simple pass through mechanism for diversifying risks and indemnification. He highlights insurance as a fundamental contributor of prosperity and greater economic opportunities. While the role of insurance as contributor to the process of economic development has not been properly appreciated and examined in economic literature. Among IndianauthorsShrivastava and Shrivastava (2002) hold the view that there is dearth of material inter linkage between economic development on one hand and insurance services on the other, whereas role played by other services like banking, transport, communication, public administration, defenceetc in accelerating the national income of an economy has been properly highlighted. To understand the relationship between the two it is necessary to have clear concept of insurance and more importantly the economic development, as the latter has undergone a paradigm shift. The definition of insurance, however, has been same without any ambiguity and difference of opinion. Insurance may be defined as a contract between insurer and insured under which insurer indemnifies the loss of the insured against the identified perils for which mutually agreed upon premium has been paid by the insured. The contract lays down the time framework within which the losses will be met by the insurer. Samuel (2001) defines the term insurance by referring to the two important Schools of thoughts on the subject viz, i) Transfer School and ii) Pooling School. According to Transfer School, “insurance is a device for the reduction of uncertainty of one party, called the insured, through the transfer of particular risks to another party ; called theinsured, who offers a restoration, at least in part, of economic losses suffered by the insured” (Irving, 1956). On the other hand, according to Pooling School “the essence of insurance lies in the elimination of uncertainty or risk of loss for the individual through the combination of large number of similarly exposed individuals” (Alfred, 1935) Various economists have identified various factors which contribute towards increasing the wealth, prosperity and welfare of the masses. Smith (1776) observed that capital is the main determinant of the number of useful and productive laborers, who can be set to work. His literature has been titled “inquiry into the nature and causes of the wealth of nation”,. Economists, however, believe that there are a number of determinants of economic growth of a society. “If a country is going to restructure and liberalize its insurance regulatory environment, it should do so to maximize the opportunities for growth and development. Growth is consistent with certain structures for education, the public sector, savings and investment opportunities, private property rights, and proper fiscal and monetary policies (Skipper et al.,(2000). These are the standards of IMF prescriptive for market development (IMF, 1996). In most of the economic literature, the prosperity of nation was however measured through the yard stick of increase in the national income of the economy; measured through different variants such as Gross Domestic Product (GDP) or Net Domestic Product (NDP), at current or constant prices. Normally in order to assess the real pace of development, the growth of GDP at constant prices was taken into account (Shrivastava and Shrivastava, 2002). They observe that the writing did not consider the qualitative changes such as structural and institutional transformation of the productive system within the ambit of the concept of economic development. The issues such as alleviation of poverty, reduction in inequalities of income and unemployment were assumed to be taken care of the mere growth of the GDP (Shrivastava and Shrivastava, 2002). 1.2.2. Activities and organization of an insurance company Numerous studies investigate various aspects of insurer’s activities including operating, investing, and financing activities. Another area of research explores differences across organizational structures, primarily stock versus mutual companies. I discuss these studies in separate categories by main focus. However, many of the studies provide evidence relevant to multiple categories relating to activities and organization of an insurer. 1.2.2.1. Efficiency and Profitability This area of research concerns the success of insurance companies in conducting their operating activities, primarily in terms of efficiency and profitability. Studies examining efficiency consider several dimensions, including cost efficiency, technical efficiency, allocate efficiency, and revenue efficiency. Cost efficiency measures the insurer’s success in minimizing costs by comparing the costs that would be incurred by a fully efficient firm to the costs actually incurred by the firm. Cost efficiency can be decomposed into technical efficiency and allocate efficiency. Technical efficiency measures the firm’s success in using its inputs to produce outputs. Allocateefficiency measures the firm’s success in choosing the cost minimizing combination of inputs conditional on output quantities and input prices. To be fully cost efficient, a firm must operate with full technical and allocate efficiency. Revenue efficiency measures the firm’s success in maximizing revenues by comparing the firm’s actual revenues to the revenues of a fully efficient firm with the same quantity of inputs. Primary factors that affect revenue efficiency include product-line diversification and geographic diversification. Cummins and Xie (2008)examine efficiency, productivity and scale economies in the US PC insurance industry over the period 1993-2006. They find that the majority of firms below median size in the industry are operating with increasing returns to scale, and the majority of firms above median size are operating with decreasing returns to scale. However, a significant number of firms of top 10% in each size have achieved constant returns to scale. Over the sample period, the industry experienced significant gains in total factor productivity, and there is an upward trend in scale and allocateefficiency. However, cost efficiency and revenue efficiency did not improve significantly over the sample period. Regression analysis shows that efficiency and productivity gains have been distributed unevenly across the industry. More diversified firms, stock insurers, and insurance groups were more likely to achieve efficiency and productivity gains than less diversified firms, mutual, and unaffiliated single insurers. Higher technology expenditures increase the probability of achieving optimal scale for direct writing insurers but not for independent agency firms. 1.2.2.2. Economies of scale Operating efficiency—the focus of the previous section—is affected by the scale of operations. Thus, studies examining efficiency often provide evidence on the relationship between performance and size. Cummins and Weiss (1993) investigate the efficiency of PC insurers by estimating stochastic cost frontiers for three size-stratified samples of property-liability insurers over the period 1980–1988. A translog cost function and input share equations are estimated using maximum likelihood techniques. The results show that large insurers operate in a narrow range around an average efficiency level of about 90 percent relative to their cost frontier. Efficiency levels for medium and small insurers are about 80 and 88 percent in relation to their respective frontiers. Wider variations in efficiency are present for these two groups in comparison with large insurers. Large insurers slightly over- produce loss settlement services, while small and medium-size insurer’s under-produce this output. The small and intermediate size groups are characterized by economies of scale, suggesting the potential for cost reductions from consolidations in the industry. 1.2.2.3. Investment Although investment income constitutes a large share of insurers’ income (about 30% of total income, according to ManulifeVietnamyearly report), relatively few studies investigate the investing activities of insurance companies. This is likely due to the fact that insurers’ investment activities are not particularly different from those of other financial institutions. I review here research thatexplores investment policies specifically relevant for insurers. Pottier (2007) examine the determinants of private debt holdings in the life insurance industry. The results suggest that larger insurers, insurers with higher financial quality, mutual insurers, publicly traded insurers, insurers facing stringent regulation, and insurers with greatercash holdings are more prevalent lenders in the private debt market. Chen, Yao, and Yu (2007)find that active equity mutual funds managed by insurance companies underperform peer funds by over 1% per year. The lower returns of insurance fundsare not due to less risky investments; instead insurance funds have lower risk-adjusted returns, and their fund flows are less sensitive to performance when they perform poorly. Across insurance funds, those with heavy advertising, directly established by insurers, using parent firms’ brandnames, or whose managers simultaneously manage substantial non-mutual-fund assets, are more likely to underperform. The authors conclude that insurers’ efforts to cross-sell mutual funds aggravate agency problems that erode fund performance. 1.2.2.4. Organization form A significant number of studies examine differences between stock and mutual companies, primarily as they relate to efficiency of operations and risk-taking.Also, several studies investigate the initial and subsequent pricing and performance ofdemutualization IPOs. Fukuyama (1997)investigates productive efficiency and productivity changes of Japanese life insurance companies by focusing primarily on the ownership structures (mutual and stock) and economic conditions (expansion and recession). This research indicates that mutual and stock companies possess identical technologies despite differences in incentives of managers and in legal form, but productive efficiency and productivity performances differ from time to time across the two ownership types under different economic conditions. Jeng, Lai, and McNamara (2007)examine the efficiency changes of US life insurers before and after demutualization in the 1980s and 1990s. The authors use two frontier approaches –the value-added approach and the financial intermediary approach— to measure the efficiency changes. The results using the value-added approach indicate that demutualized life insurers improve their efficiency before demutualization. On the other hand, the evidence using the financial intermediary approach shows the efficiency of the demutualized life insurers relative to mutual control insurers deteriorates before demutualization and improves after conversion. The difference in the results between the two approaches is due to the fact that the financial intermediaryapproach considers financial conditions. The results of both approaches suggest thatthere is no efficiencyimprovement after demutualization relative to stock control insurers. There is, however, efficiency improvement relative to mutual control insurers when the financial intermediary approach is used. 1.2.2.5. Underwriting circle The underwriting cycleis the tendency of PC insurance premiums, profits, and availability of coverage to rise and fall with some regularity over time. A cycle begins when insurers tighten their underwriting standards and sharply raise premiums after a period of severe underwriting losses or other negative shocks tocapital (e.g., investment losses). Stricter standards and higher premium rates lead to an increase in profits and accumulation ofcapital. The increase in underwriting capacity increases competition, which in turn drives premium rates down and relaxes underwriting standards, thereby causing underwriting losses and setting the stage for the cycle to begin again. The underwriting cycle has been the focus of many academic papers. Some recent ones are described next. According to conventional theory, insurance premiums should be efficient predictors of the present value of policy claims and expenses. Bourgeon, Picard, and Pouyet (2008)develop an alternative theory of insurance market dynamics based on two assumptions. First, insured risks are dependent. Under this assumption, insurer’s net worth determines the market capacity since it is necessary to back the contractual promises to pay claims. Second, in raising net worth, external equity is more costly than [...]... multiple regression analysis The life insurers which have financial performance tested in this study, besides Manulife Vietnam are: - Bao Viet Life - Prudential - Cathay Life - PVI 2.3 Manulife financial performance analysis using CAMEL 2.3.1 Capital Adequacy Analysis 2.1.1.1 Manulife Capital adequacy Capital is seen as a cushion to protect insured and promote the stability and efficiencyof financial system,... premiums for greater financial quality; loss shocks that deplete the capital (surplus) of the firm are hypothesized to affect prices by driving insurers away from their optimal capital structures 1.3 Financial performance analysis and CAMEL framework 1.3.1 Financial performance analysis 1.3.1.1 Financial statement A financial statement (or financial report) is a formal record of the financial activities... underwriting losses for both the sectors In study period, Manulife kept maintaining the company tops position in life insurance sector However, Manulife need to pay unstopped effort to enhance the company financial performance Chapter 3.Finding and suggestion 3.1 Finding in implementingtheCAMEL model at Manulife Vietnam TheanalysisofManulife Vietnam' s financial performance asaboveisanoutstandingexampletodiscoverhowwell... by Manulife Financial and its subsidiaries were C$500 billion (US$491 billion) as at December 31, 2011 The Company operates as Manulife Financial in Canada and Asia and primarily as John Hancock in the United States Manulife Financial Corporation trades as ‘MFC’ on the TSX, NYSE and PSE, and under ‘945’ on the SEHK .Manulife Financial can be found on the Internet at manulife. com Company’s Objective: Manulife. .. Finance of Vietnam are based on IFRS 1.3.1.2 Financial analysis Financialanalysis (also referred to as financial statementanalysis or accounting analysis or Analysis of finance) refers to an assessment of the viability, stability and profitabilityof a business, sub-business or project It is performed by professionals who prepare reports using ratios that make use of information taken from financial. .. is devoted to the analysis of financial performance of public sector insurance companies on the basis of CAMEL framework Chapter 2:Research conduction 2.1 Instruction to Manulife Vietnam Manulife Financial is Canada-based financial services group with principal operations in Asia, Canada and the United States In 2012, Manulife celebrate 125 years of providing services, offering financial protection... in this section Chapter 2 Summary The purpose of this chapter was to analyze financial performance Manulife in comparison with 4 other life insurers The analysis under the CAMEL framework has been quite interesting, highlighting various unaddressed issues in financial performance analysis of the insurers It is explainedwhy Manulifeis doing well in gaining the market share, which is reflected incontinuous... aimedto findoutwhethertheCAMELassessmentframeworkisausefultoolininsurer financial analysis Then, he continued to explore the benefits as well as drawbacks which theCAMELframeworkbringstoManulife Vietnam. Thepracticalpartwasexploredbyanalyzing5 insurer'soverallperformance Inordertoascertainthecurrentfinancial crisis and the insurer financial method,the author conducted anin-depth interview with some expert... threechapters’ of the study, an individual analysis of the financial performance of the insurance companies has been attempted.In view of the growing skeptism regarding working of insurance companies in Vietnam, it has become imperative to appraise the performance of insurer in the light of CAMEL framework The performance of companies could be judged bydifferent financial tools but qualitative aspect identified... company’soverall performance from 2010 to 2012 Commonly, the result of CAMEL framework should be assessed based on a standard framework approach for a specific case or field of industry However, there's no CAMEL framework approach for life insurer in Vietnam so far Thus, the author implemented CAMEL framework toanalyze severallife insurers, focused on Manulife Vietnam for analysis and comparison The performance . Manulife Vietnam financial performance analysis VU CONG THANG Faculty of International Training Ha noi, Aug 13 ACKNOWLEDGEMENT I