Manulife Vietnam financial performance analysis

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
internal equity. The theory explains the variation in premiums and insurance contracts
over the “insurance cycle” and is supported by tests on postwar data.
Negative shocks to industry capital and significant capital adjustment costs have
been offered as an explanation of periodic “crises” in the property-liability insurance
market. According to these capacity constraint models, in which post-shock production
mustmeet a solvency constraint, increases in price can cause some or perhaps all of the
cost of a negative shock to capital to be shifted to policyholders. Cagle and Harrington
(1995)develop a model of insurance supply with capacity constraints and endogenous
insolvency risk that incorporates limited liability and potential loss of insurer intangible

capital. If industry demand is inelastic with respect to price and capital, the model
predicts that price will increase following a negative shock to capital, but by less than the
amount needed to fully offset the shock. Equity value and the expected recovery by
policyholders for post-shock production are predicted to decline. Elastic demand
mitigates shockinduced price increases.
Chung and Weiss (2004)investigate the determinants of reinsurance prices in an
attempt to shed light on the role of reinsurance in observed underwriting cycles in the
primary market. Nonproportional reinsurance is highlighted, since it is designed to cover
the tail ofthe loss distribution and is therefore considered to be relatively riskier than
proportional reinsurance. The results support both the capacity constraint hypothesis and
the risky debt hypothesis. Under the capacity constraint hypothesis, insurance prices are
bid-up when capital is scarce and fall when capital is plentiful. Equilibrium price also
might be affected if policyholders and/or (re)insurers change their loss expectations after
events such as catastrophes(probability updating), leading to increased prices. Thus, the
price increases follow the loss shocks because of constriction in supply andincreased
demand. The risky debt hypothesis predicts that policyholders are willing to pay higher
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 of a business, person, or other entity.All the relevant financial information,
presented in a structured manner and in a form easy to understand, are called the financial
statements. In Vietnam, there are typically 3 basic financial statements:
- Balance sheet: a reports on a company's assets, liabilities, and ownership
equity at a given point in time.
- Profit and loss (P&L) statement: a report on a company's income, expenses, and
profits over a period of time. A profit and loss statement provides information on the

operation of the enterprise. These include sales and the various expenses incurred during
the processing state.
- Cash flow statement: a reports on a company's cash flow activities, particularly
its operating, investing and financing activities.
The objective of financial statements is to provide information about the
financial position, performance and changes in financial position of an enterprise that is
useful to a wide range of users in making economic decisions." Financial statements
should be understandable, relevant, reliable and comparable. Reported assets, liabilities,
equity, income and expenses are directly related to an organization's financial position.
Financial statements are intended to be understandable by readers who have a
reasonable knowledge of business and economic activities and accounting and who are
willing to study the information diligently. Financial statements may be used by users for
different purposes:
- Owners and managers require financial statements to make important business
decisions that affect its continued operations. Financial analysis is then performed on
these statements to provide management with a more detailed understanding of the
figures. These statements are also used as part of management's annual report to the
stockholders.
- Employees also need these reports in making collective bargaining agreements
(CBA) with the management, in the case of labor unions or for individuals in discussing
their compensation, promotion and rankings.
- Prospective investors make use of financial statements to assess the viability of
investing in a business. Financial analyses are often used by investors and are prepared
by professionals (financial analysts), thus providing them with the basis for making
investment decisions.
- Financial institutions (banks and other lending companies) use them to decide
whether to grant a company with fresh working capital or extend debt securities (such as
a long-term bank loan or debentures) to finance expansion and other significant
expenditures.
Different countries have developed their own accounting principles over time,

making international comparisons of companies difficult. To ensure uniformity and
comparability between financial statements prepared by different companies, a set of
guidelines and rules are used. Commonly referred to as Generally Accepted Accounting
Principles (GAAP), these set of guidelines provide the basis in the preparation of
financial statements.
Recently there has been a push towards standardizing accounting rules made by
the International Accounting Standards Board ("IASB"). IASB develops International
Financial Reporting Standards (IFRS) that have been adopted by Australia, Canada and
the European Union (for publicly quoted companies only), are under consideration
in South Africa and other countries. The United States Financial Accounting Standards
Board has made a commitment to converge the U.S. GAAP and IFRS over time.
Vietnamese accounting standard (VAS) implemented by The Ministry of 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 statements and other reports. These reports are
usually presented to top management as one of their bases in making business
decisions.Financial analysts often assess the following elements of a firm:
- Profitability Analysis:assess the company’s ability to earn income and sustain
growth in both the short- and long-term. A company's degree of profitability is usually
based on the income statement, which reports on the company's results of operations;
- Solvency analysis: assess the company’s ability to pay its obligation to creditors
and other third parties in the long-term;
- Liquidity analysis:assess the company’s ability to maintain positive cash flow,
while satisfying immediate obligations;
1.3.2. CAMEL framework
The Uniform Financial Institution Rating system (UFIR), commonly referred to

the acronym CAMEL framework, was adopted by the Federal Financial Institution
Examination Council on November 13 1979, and then adopted by the National Credit
Union Administration in October 1987. It has proven to be an effective internal
supervisory tool for evaluating the soundness of a financial firm, on the basis of
identifying those institutions requiring special attention or concern. (The Uniform
Financial Institutions Rating System 1997, p.1).
Barr et al. (2002 p.19) states that “CAMEL rating has become a concise and
indispensable tool for examiners and regulators”. This framework ensures a company’s
healthy conditions by reviewing different aspects of an insurer based on variety of
information sources such as financial statement, funding sources, macroeconomic data,
budget and cash flow. Nevertheless, Hirtle and Lopez (1999, p. 4) stress that the
company’s CAMEL framework is highly confidential, and only exposed to the
company’s senior management for the purpose of projecting the business strategies, and
to appropriate supervisory staff. Its rating is never made publicly available, even on a
lagged basis.
CAMEL is an acronym for five components of insurer safety and soundness:
1.3.2.1. Capital Adequacy:
Capital adequacy is the capital expected to maintain balance with the risks
exposure of the insurer such as market risk and operational risk, in order to absorb the
potential losses and protect the insurer's debt holder. “Meeting statutory minimum capital
requirement is the key factor in deciding the capital adequacy, and maintaining an
adequate level of capital is a critical element” (The United States. Uniform Financial
Institutions Rating System 1997, p. 4).
Udaibir S. Das, Nigel Davies and Richard Podpiera (2003) – “Insurance and
Issue in Financial Soundness” included two indicators within capital adequacy core set:
Capital/Technical reserves and Capital/Total assets. The life insurance business is long
term and generally more asset intensive than non-life insurance. Moreover, one of the
major operation differences between life and non-life insurance business is that in the
former, the term of the policy and the premium paying period are both short and typically
one year, while liabilities are generally long term.

Capital Adequacy can be viewed as the key indicator of an insurer’s financial
soundness. However, there are no internationally accepted standards for capital adequacy
of insurer. The greater risk to the financial stability of an insurer is either too great in
volume or too volatile for its capital base or otherwise whose proper result is too difficult
to determine. Analysis of capital adequacy depends critically on realistic valuation of
both assets and liabilities of the insurance companies. Capital is seen as a cushion to
protect insured and promote the stability and efficiency of financial system, it also
indicates whether the insurance company has enough capital to absorb losses arising from
claims. For the purpose of calculation of capital adequacy of companies under study, two
ratios have been used, prescribed by IMF and World Bank (2005). First is the ratio of
Capital to Technical reserves and second ratio is Capital to Total Assets.
1.3.2.2. Asset Quality:
Asset quality is one of the most critical areas in determining the overall financial
health of an insurance company. The primary factor effecting overall asset quality is the
quality of the real estate investment and the credit administration program. Ratio of
equities to total assets and ratio of Real Estate + Unquoted Equities + Debtors to Total
Assets has been used, prescribed by IMF and World Bank.
In fact, this indicator is for both life and non-life insurers, they need to be
evaluated on connection with the associated liabilities and in the context of business.
With the life insurance, it would be reasonable with long tail liabilities to have a
relatively larger proportion of asset invested in more risky.
With life insurance companies, which sometimes assimilate banking activities on
the asset side of the balance sheet by direct lending to financial and nonfinancial
companies, indicator of loan quality might be included.
1.3.2.3. Management efficiency:
Management efficiency is crucial for financial stability of insurer. It is very
difficult, however, to find any direct quantitative measure of management
efficiency.Udaibir S. Das, Nigel Davies and Richard Podpiera (2003) proposed the use of
two indicators of operational efficiency because the efficiency of operation is likely to be
correlated with general management efficiency.

The two indicators are gross premium per employee and assets per employee.
Gross premium are used because they are a reflection of the overall volume of business
activity. The analysis needs to reflect the difference in results that single premium versus
annual premium business will have on this indicator. It’s also needs to take into account
that insurers may use different distribution channels to sell their products and sometimes
may spin off their distribution into subsidiary or other companies in a group. In general,
internet and call center distribution is cheaper than using broker or agent, and if possible,
these factors should be borne in mind when interpreting the results.
The ratio reflects the efficiency in operations, which ultimately indicates the
management efficiency and soundness. The indicator prescribed is operating expenses to
Gross Premiums
1.3.2.4. Earnings and Profitability:
Earnings are the key and arguably the only long term source of capital. Low
profitability may signal fundamental problem of the insurer and may be considered a
leading indicator for solvency problem. Therefore, considerable attention is given to this
area so that seven indicators of earnings and profitability are included in the core set.
The combined ratio, defined as the sum of the loss and expense ratios, is a basic,
commonly used measure of profitability. This indicator measures the performance of the
underwriting operation but does not take into account the investment income. It is not
uncommon to see combined ratios of over 100 percent and this may indicate that
investment income is used as a factor in the setting of premium rates. Another indicator,
investment income/net premium, focused on this second major revenue source -
investment income. Return on equity then indicates the overall level of profitability.
The expense ratio (expense/net premium) can be used very well, with different
benchmarks. Instead of the loss ratio, I include revisions to prior year technical
reserves/technical reserves for life insurers, effectively a charge to current profits due to
deviation of reality from past actuarial assumption. This measures the extent to which the
company or sector is able to measure output accurately. I look at investment income to
investment assets as in indicator of the success of the investment policy. Both investment
income and investment assets related to risk pass-through products need to be analyzed

separately. So I have chosen Return on Equity, again, as an indicator of the overall
profitability.
IMF prescribes five sub dimensions to this standard to limelight the earnings and
profitability of the insurance companies. The standard is two tiers, covering both
operational and non-operational efficiency of the insurance companies.
1.3.2.5. Liquidity (Liquidity Analysis):
The frequency, severity and timing of insurance claim or benefits is uncertain, so
insurers need to plan their liquidity carefully. Liquidity is usually a less pressing problem
for insurance companies, at least, as compared to bank, since the liquidity of their
liabilities is relatively predictable.
I have chosen this indicator, the ratio of liquid assets to current liabilities. All
liabilities with maturity shorter than one year, including insurance product liabilities
under which policyholder are able to surrender the policy and receive a cash payment,
should be included in current liabilities. Liquid assets include cash and cash equivalents,
government bonds, and quoted corporate bonds and equities.
Liquidity crises may turn to be serious in the concerns, where obligations are of
short duration nature, similarly for life insurers, the ratio is an important standard and is
current assets to current liabilities
Table 1. CAMEL indicators
Category Indicator
Ratio
Reference
Capital adequacy Capital/Technical reserves 1
Capital/Total assets 2
Asset quality
(Real estate + unquoted equities + debtors)/total
assets 3
Debtors/gross premium 4
Equities/Total assets 5
Management

soundness
Gross premium/number of employees 6
Total asset/number of employees 7
Earnings and
profitability
Expenses/net premium 8
Investment income/investment asset 9
ROE 10
Liquidity Liquid assets/current liabilities 11
Chaper 1 sumary:
In view of the above research literature, although various aspects of insurance
industry and the fundamental of financial analysis as well as CAMEL framework has
been discussed.However, no evidence is seen regarding such study in Vietnam. Similarly,
no such evidence which would have highlighted analyzing an insurer’s financial health
using CAMEL framework. In this backdrop, the present study is an inclusive attempt and
includes highlighting of those contents for Vietnamese insurer and more particularly for
life side of insurance business, which has received less attention in the economic
literature. Consequently, the next chapter of the study 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 and wealth management products and
services to millions of clients. We also provide asset management services to institutional
customers. Funds under management 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 Vietnam provides excellent services and commits to meet the financial
needs of customers through knowledge, skills and integrity of our employees, agents and
other representatives of The Company.
Financial Strength:
The selection of any financial partners also requires careful evaluation, especially
when the service requires long-term obligations such as life insurance products, pension
or annual allowances. Customers must feel confident that the partners they have chosen
will be with them in all essential circumstances. Manulife Vietnamunderstand that the
financial strength plays the most important part in the decision-making process of
customers.
With continuous growth since establishment more than 100 years ago, Manulife
Financial always strives to meet the increasing demands of customers. Because of diverse
financial protection products and wealth management services, high-quality portfoliosand
a diversified business background with prudent practical risk management experiences,
are the main reasons why millions of customers choose Manulife Financial and John
Hancock to serve their needs.
Over the past 10 years, besides the growth objective to build a stronger business,
Manulife has additionally focused focuses on community activities This is from the belief
that the success of a business is only meaningful and sustainable when it is shared with
the community and society. On July 25th 2009, Manulife Vietnam was honored with the
award “Community-oriented Enterprise" by the Ministry of Industry and Commerce. This
honorable Prize is a great motivation to encourage all employees and agents of Manulife
Vietnam to promote better social responsibility, demonstrate ethics in doing business, and
help The Company build prestige and reputation with customers and partners
2.2. Research phases
Thissectionintendstoapplythe CAMELframeworktoanalyze

severallifeinsurerswhichhelpsidentifythestrengthsandweaknessesofthemethod, as well as
figure out the position of Manulife Vietnam among the company's competitors.Theauthor
implementstheCAMELmodelinanalyzingtheinvestigated the 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 of those companies could be judged by different financial tools
but qualitative aspect identified in CAMEL framework has far reaching implications on
the overall performance of insurance companies. The analysis based on these parameters
is presently in infancy; therefore available media of using statistical tool, another
milestone in CAMEL framework has been used to evaluate performance of these life
insurers. The comparative performance is done on the basis of the capital adequacy, asset
quality, management soundness, earnings & profitability and lastly liquidity. Over and
above, the factors affecting solvency position of insurance companies is also being tested
using 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, it also indicates whether the insurance company has
enoughcapital to absorb losses arising from claims. For the capital adequacy analysis of
the insurers two capital adequacy ratios have been used: capital to technical reserves and

capital to total assets ratio. The former reflects the risk arising from business operations
and the latter reflects assets risk.
As of December 31, 2012, the capital of Manulife VN reached VND 2.6
trillion, an increase of 17.5% against the previous year. The bank shareholders’
equity remained unchanged at VND 788billion. Technical reserves rose along with gross
premium, reached VND 5.3 trillion. With rapid asset growth, Capital to total assets ratio
remained stable at around 31% for the past 3 years.Capital to technical reserves also stays
around 45%.The rise of Capital to technical reserves show that technical reserves grew
slower than capital infused. It may lead to an insufficient reserving and distorted finance
performance results.
Table 2. Manulife Capital Adequacy
2010 2011 2012
Capital mVND 1,903,681 2,209,250 2,595,835
Technical Reserves mVND 4,511,369 4,901,238 5,290,430
Total Asset mVND 6,415,050 7,110,489 7,886,265
Capital/Technical
reserves
% 42.20 45.08 49.07
Capital/Total assets % 29.68 31.07 32.92
Source: Annual report of companies under study
2.1.1.2. Capital adequacy comparison
By reviewing Manulife capital adequacy in comparison with other 4 life insurers,
we can assign Manulife, Bao Viet and Prudential in the same group for assessment.
With the result of capital to technical reserves ratio, Manulife has been leading in
the ratio, where it ranged from 42.2 percent to 49 percent during the period of study. This
wasfollowed by Bao Viet, where the ratio ranged from 15.66 percent to 30.95 percent.
Prudential recorded the ratio ranging from 19.51 percent to 23.58 percent. Bao Viet and
Prudential showed a decline in 2010 -2012, make an opposite way with Manulife.
The ratio of capital to total assets presented in Table 3 indicates decreasing trend
during the period of study for Bao Viet and Prudential. This may be as a result of

inclusion of borrowings in the liabilities side of the balance sheet by these two insurers.
Bao Viet witnessed the ratio raging between 13.54 percent to23.63 percent, marking a
steep decline of 10 percent, whereas in case of Prudential, the ratio ranged between16.33
and 19.08percent. Manulife keep the steady grow of the ratios from 29.68 percent to
32.92 percent. The analysis of ratios clearly indicates that these 3 insurers havebeen able
to maintain good capital adequacy ratio and they have infused morecapital over the
period of study, which might have enabled them to maintain required capital adequacy.
Further, the analysis reveals that the in comparison to capital, assets base has been
decreasing in the portfolios of the companies. For comparison of capital adequacy,
Manulife may take the first place among these 3 insurers.
The ratios ofPVI and Cathay Life stay different with the three others due to their
low technical reserves. Thus, we did not analyze them for comparison.
Table 3. Capital adequacy comparison
Figure in %
Ratio ref 2010 2011 2012
Manulife 1 42.20 45.08 49.07
Manulife 2 29.68 31.07 32.92
Baoviet 1 30.95 22.18 15.66
Baoviet 2 23.63 18.16 13.54
Prudential 1 23.58 23.56 19.51
Prudential 2 19.08 19.07 16.33
PVI
1 179.96 274.74
190.8
4
PVI 2 64.28 73.31 65.62
Cathay
1
1,175.8
7

545.94 400.72
Cathay 2 92.16 84.52 80.03
Source: Annual report of companies under study
Ratio reference: 1 - Capital/Technical reserves
2 - Capital/Total asset
2.3.2. Asset Quality Analysis
2.3.2.1. Manulife Asset quality
The primary factor effecting overall asset quality is the quality of the real
estateinvestment and the credit administration program. The asset quality analysis reflects
the quantum of existing and potential credit risk associated with the loan and investment
portfolios, real estate assets ownedand other assets, as well as off-balance sheet
transactions. The indicator “(Real Estate + Debtors)/Total Assets”, highlights the
exposure of insurers to credit risk because these assets classes have the largest probability
of being impaired. Table 4 present looks of the Asset quality of Manulife. By December,
2012, the total assets of Manulife reached VND 7,886 trillion and ranked the 5
th
biggest in
term of total assets, increased by 10% yearly.The real estate were around VND 143
billion from 2010 to 2012, proving Manulife’s 1
st
place in term of real estate among
foreign life insurers in Vietnam. Debtors also rose from VND 786 billion to VND 1.1
trillion from 2010 to 2012, moving forward the same trend with Gross premium (VND
1.44 trillion to VND 2.1 trillion) and Equity (VND 1.1 trillion to VND 1.44 trillion).
Those factors continued maintaining theuptrend of Manulife Asset quality analyzed by
CAMEL framework. The (Real estate + debtors)/total assets ratios rose from 14.45
percent to 16.36 percent in 2012. Debtor/Gross premium ratios went steady around 54
percent, showing the same result with Equity/Total assets ratios (around 17.41 percent).
Table 4. Manulife Asset quality
2010 2011 2012

Real estate mVND 140,316 149,640 142,407
Debtors mVND
786,602 967,013
1,147,93
8
Gross premium mVND
1,442,35
6
1,764,542
2,136,54
3
Equity mVND 1,117,07 1,242,237 1,447,89
9 6
Total assets mVND
6,415,050
7,110,48
9
7,886,265
(Real estate + debtors)/total
assets
% 14.45 15.70 16.36
Debtors/gross premium % 54.54 54.80 53.73
Equities/Total assets % 17.41 17.47 18.36
Source: Annual report of companies under study
2.3.2.2. Asset quality comparison
Table 5 present look of 5 insurer’s asset quality. Bao Viet, Cathay Lifehave
witnessed steep decrease in the 3
rd
asset quality ratio which ranged between 18.84
percentto7.86 percent and 5.66percent to2.52 percent respectively. Manulife and

Prudential witnessed slight decline in the ratio where it lied between 14.45to16.36
percent and 6.36to 6.65 percent respectively.For general, The 3
rd
ratio of the asset quality
reveals that asset base of these insurers witnessed gradual increase as the study
progresses. Besides other assets, the proportion of real estate and debtors in the total
assets position of almost all the insurers witnessed a considerable increase gradually,
which might be explained by mandatory investment in real estate by the companies.PVI
witnessed the highest increase in the ratio and it rangingbetween 13.34 and 18.72 percent.
(Real estate + debtors)/a total assets ratio is difficult to determine which is preferred
between low or high. Both trends have positive and negative side. High ratios may cause
the risk of asset impairment but real estate investments arenecessary to stabilize the
business. This ratio of Manulife ranged similarly with Bao Viet and PVI.
Table 5. Asset quality comparison
Figure in %
Ratio ref 2010 2011 2012
Manulife 3 14.45 15.70 16.36
Manulife 4 54.54 54.80 53.73
Manulife 5 17.41 17.47 18.36
Baoviet 3 18.84 12.74 7.86
Baoviet 4 81.27 45.05 19.21
Baoviet 5 7.71 7.95 8.55
Prudential 3 6.36 7.57 6.65
Prudential 4 28.85 33.72 31.87
Prudential 5 13.00 11.88 9.95
PVI 3 13.34 13.26 18.72
PVI 4 14.73 11.51 18.21
PVI 5 55.90 66.64 56.48
Cathay 3 5.66 4.99 2.52
Cathay 4 21.97 12.17 9.14

Cathay 5 90.20 82.56 79.08
Source: Annual report of companies under study
Ratio reference: 3 – (Real estate + debtors)/total asset
4 – Debtors/Gross premium
5 – Equity/total assets
2.3.3. Management efficiency
2.3.3.1. Manulife Management efficiency
Management efficiency is crucial for financial stability of insurers. It is very
difficultto find any direct quantitative measure of management efficiency, theindicator of
operational efficiency is likely to be correlated with general management efficiency.
Unsound efficiency indicators could flag potential problems in operation, including the
management of technical and investment risks. The indicator is optimizing human
resource by gross premiums and total asset to number of employees. Gross premiums are
used because they are a reflection of the overall volume of business activity. The analysis
reflects the efficiency in operations, which ultimately indicates the
managementefficiency. The analysis of Manulife management efficiency is presented in
the Table 6 below:
Table 6.Manulife Management efficiency
2010 2011 2012
Number of employees persons 11,018 12,674 10,845
Gross premium mVND 1,442,35 1,764,542 2,136,54
6 3
Total asset
mVND 6,415,050
7,110,48
9
7,886,265
Gross premium/number of
employees
mVND 131 139 197

Total asset/number of employees mVND 582 561 727
Source: Annual report of companies under study
Gross premium to number of employees show the amount of premium which
produced by one employees in average term. Total asset to number of employees present
the average amount of total asset by number of employees, marking the role of each
employees in creating the company assets. These ratios preferred to be high one.
Management efficiency ratios of Manulife rose gradually from 2010 to 2012, reached
VND 197 million Gross premium per one employees and VND 727 million Total asset
per employees in 31 Dec 2012. Table 7 present how good Manulife management
efficiency was in comparison with other insurers.
2.3.3.2. Management efficiency comparison
Prudential reported the highest ratio of management efficiency witnessing
continuous growth with Gross premium to number of employees reached VND 430
million, Total asset to number of employees reached VND 2151 in 2012. Manulife
reported Gross premium to number of employees of VND 197 million and Total asset to
number of employees of VND 727 million in 2012. PVI and Bao Viet came right after
with the ratios of VND 177 million, VND 353 million and VND 166 million, VND 640
million respectively.
Table 7.Management efficiency comparison
Figure inmVND
Ratio ref 2010 2011 2012
Manulife 6 131 139 197
Manulife 7 582 561 727
Baoviet 6 185 172 166