Vietnam Equity Research Strategy

Insurance Sector Report November 16, 2007

Vietnamese Insurers - An early case of globalization

 The Vietnamese Insurance sector offers a compelling growth story over the next 3 years although growth rates have slowed somewhat since 2003

 We believe that the sector is somewhat overvalued and would wait for weakness before buying

 Going forward we believe that growth in premiums and investment revenue will exceed 24% per year over the next 3 years

 Future growth will be led by new investment products as the exisiting mainline insurance products are maturing. Bancassurance is another exciting growth business

 We think profit growth will continue at the current pace of 30% per year led by new investment products

 However average forward P/E’s of 38.8x implies a large premium to the Asian average of less than 26x

 Our top sector pick is PVI due to its market postion, strong growth and niche strategy.

Fiachra Aodh MacCana  Head of Research Going forward we worry about dilution as insurers must raise Correspondence Adress: large amounts of new capital to meet new legal requirements Opera Business Center, 7th Floor 60 Ly Thai To Str., Hanoi, Vietnam Phone: +84 4 936-6436 Fax: +84 4 936-6430 [email protected]

Tran Luong Thanh Tung Analyst Phone: +84 8 8-278-278 MB: +84 907 79-39-81 [email protected]

Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Table of Contents

Bao Viet...... 3 Legal Capital of Non-life Insurance Sector - A Snapshot...... 6 Vietnam Insurance - A Snapshot...... 6 Characteristic of the Vietnamese Insurance Sector...... 10 Business Environment of the Insurance sector...... 18 - Macroeconomic Environment...... 18 - Interest Rates...... 18 - Stock Market...... 19 - Regulatory Environment...... 20 - The Vietnam Insurance Association...... 20 Industry Overview and Analysis...... 21 Business Model Analysis...... 25 - Consumer Behaviors...... 25 - Companies...... 26 - Products...... 27 - Agents...... 28 Challenges Facing The Insurance Sector...... 30 - Statistic...... 30 - Informatics...... 30 - Acturial Skills...... 31 - Insurers’ Ability Assessment...... 32 New line of Products...... 33 Insurance Industry Situtation...... 35 - Life insurance...... 36 - Non-life Insurance...... 38 - Brokerage...... 44 - Reinsurance...... 46 Company Analysis...... 48 - Bao Viet...... 48 - Prudential...... 53 - Bao Minh...... 55 - PetroVietnam Insurance (PVI)...... 58 - Bao Long...... 60 - Vien Dong (VASS)...... 61 Appendix...... 63

 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 1 - Earnings Model - Bao Viet Holdings FY 2005 FY 2006E yoy FY 2007E yoy FY 2008P yoy

Net Premium and Investment Income (VND mm) 6,156,197 5,764,519 -6.36% 6,425,950 11.47% 7,019,100 9.23% EBT (VND mm) 407,601 352,020 -13.64% 691,918 96.56% 642,937 -7.08% Net Profit (VND mm), including profit from subsidiaries 309,258 318,866 3.11% 597,944 87.52% 619,826 3.66% Pre-tax Profit Margin 6.62% 6.11% 10.77% 9.16% Net Profit Margin 5.02% 5.53% 9.31% 8.83% EPS NA NA 1,265 1,082 P/E NA NA 58.48 68.41 P/B NA NA 5.55 5.46 ROE 18.3% 16.6% 12.2% 8.0% Average Equity 1,687,004 1,917,809 4,896,238 7,705,845

Source : Companies’ Financial Statements and Forecast, VinaSecirities Bao Viet - Hold an offer price of VND30,500 (US$1.9 or 3.05 over book value), the registration for auction was over- • We initiate coverage on Bao Viet Holdings with subscribed 6.5 times overall. This gives Bao Viet a a HOLD rating total market capitalisation of US$3.1 billion which • However the stock is hardly cheap at a FY07 P/E makes it the largest equitised company so far in of 58.4x and 5.55x book value and at FY08 P/E Vietnam. of 68.4x and 5.46x book value. Bao Viet’s IPO set new records for the Vietnam- • The core business is maturing and future growth ese stock market in all respects. 20,386 investors depends on the successful launch of new prod- attended the auction, 277 institutional investors ucts such as unit linked products and bancas- (45 foreign institutions) and 20,091 local inves- surance tors. Within that, the foreign tranche of 13.6 mil- lion shares was oversubscribed by 12x while the • FY08 earnings growth will come largely from domestic tranche of shares was oversubscribed dividends from unconsolidated subsidiaries approximately 3 times. This result values Bao Viet such as Bao Viet Bank and the real estate op- Holdings at a heady 5.5 times book value and a erations. FY07E P/E of 58.4x using VinaSecurities fore- • We find management to be above average but casts. many challenges lie ahead Local strategic investors such as Vinashin, VNPT • The group has a window of only 2 years to build and Sasco were allocated 8.74% of the shares. a presence in new asset classes before the fi- Foreign strategic investors were to be allocated nancials markets are open to all. 18% of the total shares. Names such as Swiss Re, Munich Re, Goldman Sachs and Citigroup were Overall Bao Viet’s IPO auction on the 31st May bandied about but in the end none of them were was a qualified success. We say qualified in the prepared to pay the asking price. sense that until the money is collected and stra- tegic investors on board it is not over yet. The In the end HSBC Insurance stepped up, a new average accepted price in the auction was VND name that was not on the shortlist. HSBC agreed 73,900 (US$4.6) and bids as low as VND 67,800 to pay US$ 255 million to buy a 10% stake in Bao (US$4.23) were accepted. 59.44 million shares Viet. The transfer price was also the average ac- were offered amounting to an 8.74% stake. With cepted price in the auction. Vinashin also con- firmed it would buy a 3.56% stake. Chart 2 - Comparative for Asian insurers

Insurers Countries Price Share out. (mm) Mkt cap ($mm) P/E 2006 P/E 2007E P/B 2006 P/B 2007 ROE 2006 1 Ping An Insurance (Grp) Co of China Ltd. China 16.6 7,345.00 122,138 134.0 58.8 21.0 11.0 16.3% 2 Samsung Fire & Marine Insurance Co., Ltd* Korea 253.0 45.03 11,394 31.8 23.8 3.4 3.2 10.6% 3 PICC Property & Casualty Co., Ltd. China 1.8 11,141.80 19,543 69.9 33.4 7.0 5.7 10.8% 4 Dongbu Insurance Co., Ltd.* Korea 54.7 63.30 3,462 26.3 13.3 5.4 4.1 18.2% 6 LIG Insurance* Malaysia 27.1 54.11 1,468 132.0 10.8 3.8 2.7 2.6% 7 Fuji Fire & Marine Insurance Co., Ltd.* Japan 3.1 437.00 1,361 18.7 17.7 0.9 0.8 4.6% 8 Bao Viet Holdings Vietnam 4.6 573 2,650 NA 58.5 NA 5.5 16.6% 9 Bao Minh Vietnam 6.6 43 286 45.4 28.9 8.4 2.1 19.1% 10 PVI Vietnam 5.6 45 249 90.4 27.5 7.9 3.6 13.4% 11 Vien Dong Insurance Vietnam 3.4 30.0 103 48.3 38.0 7.5 6.9 10.7% 12 Bao Long Insurance Vietnam 2.0 16 32 47.9 41.5 3.0 3.2 8.5%

US$ 1 = VND 16,000 Source: Reuters, VinaSecurities *For the fiscal year ended 31 March annually  Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 3 - Selected insurers pre-tax profit margins 2004 2005 2006 2007E

Bao Viet Life 0.99% 3.98% 7.05% 9.06%

Bao Viet Non-life 10.94% 21.06% 10.51% 10.12%

Bao Minh 9.37% 11.71% 9.63% 8.13%

Bao Long 13.60% 12.18% 11.3% 10.9%

VASS 9.15% 12.94% 20.68% 27.35%

PVI 16.53% 17.32% 14.12% 31.89%

Source: Insurance Companies’ financial statements, VinaSecurities

VinaSecurities forecasts FY2008 EPS growth rate to boost the overall price. To add to this the lock in will decrease 15% mainly due to the large increase period for strategic investors is 5 years which is a in chartered capital, high operating costs and a low big ask given the stiff price and ungenerous terms. return on investment from new subsidiaries and How to justify the heady valuations? This is a projects such as Bao Viet Bank, Bao Viet Real es- tough one especially for medium term investors. tate and other subsidiaries. The dividends from un- The average accepted price of VND 73,900 may conslidated subsidiaries will contribute much of the seem reasonable for strategic partners who take net income. However, the increase in chartered an optimistic view on new business areas such as capital will far exceed expected income from these consumer banking and who are prepared to pay a newly established subsidiaries. substantial premium for Bao Viet’s brand name. We forecast investment and premium income will The forward strategy is clear. Bao Viet intends to increase only marginally as mainline products are leverage its brand name into as many different fi- maturing. Once unit linked products are launched, nancial services asset classes as it can ahead of which we hope will happen in 2008, core insur- WTO opening. It’s a familiar story and we have ance revenues will grow substantially again. We seen this in other more developed markets. Execu- think that core business growth rates of 25% over tion is always the devil in these things. In its core a three year period from 2008 would not be unrea- business Bao Viet Holdings will try to maximum sonable. We have seen the same pattern in oth- synergies with Bao Viet Bank and Bao Viet Fund er Asian markets once unit linked products were Manager to develop the two new products such as launched. bancassurance and unit-link products. This is not a moment too soon. Over the past two We see Bao Viet’s management as above average; years Bao Viet has fuelled earnings growth by sub- and they clearly have shown an understanding for stantially reducing reserve levels from 51% of net brand building and expanding into new fields. The premium in 2003 and 2004 to 39% and 11% of net securities operation is already a market leader and premium in 2005 and 2006 respectively. Hence the there is a clear market gap in consumer finance and quality of recent earnings growth has been quite fund management. Ironically the main challenge poor. Therefore, there is an urgent need to launch may be reviving the core insurance business. The new products and business lines to enable the company is still operating with a complicated agent group to keep growing. system which has proved cumbersome in the past. Bao Viet’s IPO is seen as a test case for other finan- The challenge is to streamline the core business cial sector IPO’s such as Vietcombank, Incombank in order to reduce operating costs whilst launch- and Mekong Housing Development Bank. The or- ing new products. IT and systems will also be a ganizers have taken a calculated risk, withdrawing challenge as the unit linked product environment the discount pricing incentive for strategic inves- requires a heavy IT investment and some actuarial tors whilst limiting the foreign tranche in an effort expertise to work it. Not an easy one.

Chart 4 - FY2006 Earnings (VNDmm) Direct Premiums y/y EBT y/y Net profit y/y Profit margin EPS y/y Bao Viet Life 3,091,365 0.9% 228,704 48% 174,824 57% 5% - - Bao Viet Non-life 2,229,590 6.4% 214,263 5% 156,127 5% 8% - - Bao Minh 1,386,716 18.7% 100,748 19% 100,748 19% 10% 2,321 19.2% PVI 1,163,877 66% 60,212 50% 44,039 52% 10% 162 - Pjico 669,907 -12% 23,131 80.1% 23,131 80.1% 4% 1,888 3% VASS 108,136 17% 32,177 137% 22,797 131% 14.6% 1,140 130.6% Bao Long 113,765 27.8% 14,443 -9.4% 10,697 -6.8% 8.41% 669 -6.8%

Source: Insurance Companies’ financial statements, VinaSecurities

 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report Chart 5 - Bao Viet Holdings’ Income Statement (US$mm)

2005 2006 2007E 2008P 2009P 2010P Direct Premium/Revenue 329.3 340.4 361.8 385.7 416.5 447.5 % growth 3.4% 6.3% 6.6% 8.0% 7.4% Reinsurance Assumed 6.5 9.7 13.5 18.3 22.8 26.2 % growth 48% 40% 35% 25% 15% Gross Premium 335.9 350.0 375.3 403.9 439.4 473.8 % growth 4.2% 7.2% 7.6% 8.8% 7.8% Deducted fees (34.7) (40.5) (46.92) (56.55) (58.00) (57.33) % gross premium 10.3% 11.6% 12.5% 14.0% 13.2% 12.1% (Incr.)/Decr. Unearned Premium Reserve. (60.7) (36.2) (31.9) (30.3) (26.4) (28.4) Commision and other from Reinsurance 5.4 7.7 10 11 13 14 Net Premium 246 281 306 328 368 402 % growth 14.3% 9.0% 7.2% 12.0% 9.3% % gross premium 73.2% 80.3% 81.6% 81.2% 83.7% 84.8% Bao Viet - Life 145.1 161.5 153.9 153.7 161.7 170.8 % growth 11.3% -4.7% -0.1% 5.2% 5.6% Bao Viet Non-Life 96.3 110.5 121.0 140.4 160.3 177.7 % growth 14.7% 9.6% 16.0% 14.1% 10.9% VIA 3.1 3.9 4.4 4.9 5.4 6.0 % growth 28.9% 12.5% 10.2% 11.0% 11.4% Bao Viet Securities 1.4 5.0 26.8 33.2 40.3 47.2 % growth 258.9% 431.9% 23.9% 21.2% 17.2% Direct claims and benefits paid (165.9) (197.1) (226.7) (257.3) (288.1) (319.8) % growth 19% 15% 14% 12% 11% % gross premium 67.5% 70.1% 74.0% 78.4% 78.4% 79.6% Reinsurance claims (2.7) (3.0) (4.6) (6.4) (8.5) (9.1) Other deducted 11.7 11.5 13.4 14.5 17.7 19.2 Net claims (157) (189) (218) (249) (279) (310) % net premium 63.8% 67.1% 71.2% 75.9% 75.9% 77.1% TotalSGA Expenses (79.4) (86.0) (85.1) (92.2) (101.1) (105.2) % net premium 32.4% 28.2% 27.8% 28.1% 27.5% 26.2% Net Profit from Insurance Act. 10 6.4 3 -13 -12 -13 % net premium 4% 2% 1% -4% -3% -3% Total Financial Income 16 24 40 53 70 79 % net premium 7% 8% 13% 16% 19% 20% Bao Viet - Life 5.2 12.2 20.3 27.2 33.7 36.8 % growth 135.2% 66.6% 34.4% 23.9% 9.0% Bao Viet Non-Life 10.0 10.1 14.8 20.8 28.7 32.0 % growth 0.8% 46.8% 40.7% 38.4% 11.3% VIA 0.7 0.7 0.9 1.2 1.6 1.9 % growth 5.3% 29.0% 28.8% 32.1% 22.2% Bao Viet Securities 0.3 0.8 3.8 4.8 6.3 8.3 % growth 157.4% 402.6% 24.8% 32.2% 30.9% Other profit 0.3 0.3 0.2 0.0 EBT 26 30 43 40 58 66 EBT margin 10% 11% 14% 12% 16% 16% % growth 16.9% 43.7% -7.3% 45.2% 13.3% Corporate Income Tax (6.0) (7.9) (9) (8) (16) (18) Net Group Income 19.8 22.2 34.6 32.1 41.9 47.5 Less minority interest (0.00) (0.75) (9.7) (9.0) (11.1) (12.5) Income for the parent company 20 21 25 23 31 35 Income from Bao Viet Bank - 2 5 10 Income received from other associates 12.5 14.2 14.9 15.6 Consolidated income for parent company 20 21 37 39 51 61

Source : Companies’ Financial Statements and Forecast, VinaSecirities, VinaCapital

 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 5B - Two level of Legal Capital of Non-life Insurers

Cur. Paid-in Legal No. of Capital Total Additional FY07P Capital Capital Branches* Required for Capital Capital Chartered current Branches Required Needed Capital

Pjico 140 300 48 380 680 540 300 Vien Dong 300 300 22 120 420 120 600 Bao Minh 742 300 57 470 770 28 755 Bao Viet 515 300 65 550 850 335 900 PVI 851 300 16 60 360 - 1,000 Bao Long 160 300 8 0 300 140 300

* Source: The Companies and Companies’ Websites

Legal Capital of Non-life Insurance Sector - A snapshot chartered capital. Accordingly, the revised target • MoF has raised the capital bar for insurance chartered capital will be VND 600bn instead of VND companies. 500bn as stated in the shareholder’s minutes back in March 2007. • Impact – short term negative for all, medium term positive for the market leaders such as Bao Viet, Bao PVI’s current branch network is quite small compared Minh and PVI as consolidation ensues. to the other major insurers. The current chartered capital will only allow it to open another 39 • Insurance companies will be coming to the market new branches. However, once chartered capital early and often to raise capital it seems. increases to VND 1trillion PVI would be able to open up to 54 new branches. PVI however is quite MoF is currently drafting a new regulation raising careful about opening more branches given its focus the capital required to open a new branch. MoF on high value added industrial segments. They care now requires at least VND 10 billion in legal capital little about retail customers and therefore need fewer per branch for the 11th branch onward. In addition, branches. the Government issued Decree No. 45/2007/ND- CP of March 27, 2007 which says that non-life Bao Viet and Bao Minh follow a more diversified insurance companies must have at least VND300bil strategy. They are the leaders in motor vehicles in legal capital. The previous requirement was only insurance, health and PA insurance, and other lines VND70bil. of products aimed at retail customers. These products line require human resources and a nationwide The required capital levels are still relatively low branch network to provide customer service. compared to the region. And insurers will need to increase their capital to cope with the new business Overall we believe the new regulation is good for the environment under WTO membership. top local non-life insurers. It raises the bar for new entrants and will allow market leaders to pull away In response to this Pjico will need to raise the most, from the chasing pack. followed by Bao Minh and then Vien Dong. However, Vien Dong and Bao Long have a small branch On the other hand, smaller insurers will be put under network. They need more capital to expand their a lot of pressure to meet the requirements. The operational network to other tier 3 cities and other problem is not simply how to mobilize capital but how provinces nationwide. Recently, the Vien Dong’s to increase earnings to satisfy its shareholders and shareholder meeting revised the plan to increase maintain a reasonable ROE. Not an easy task.

 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 6 - Projected life insurance market exploitation to 2010 2006 2007 2008 2009 2010 Saving over GDP 27% 28% 28% 29% 30% Potential market % saving 12% 13% 14% 14% 15% Potential premium (VNDbn) 22,560 28,009 31,791 36,478 43,250 Potential exploited premium (% potential premium) 69% 68% 72% 73% 71% Life insurance premium per capita (US$) 10.85 13.16 15.60 18.05 20.65 Life insurance premium/person (VND ‘ 000) 184.41 223.69 265.24 306.93 351.00 Exploited premium/savings 8% 9% 10% 10% 11%

Source: Vietnam insurance market development strategy by 2010

Vietnam Insurance - A snapshot and qualified human resources, as well as large capital demand, contribute to the attractiveness of Vietnam has been a growth story for a decade Vietnam as an investment target. already, posting GDP growth rates that only China and India had previously been capable of sustaining. One of the life insurance industry’s major advantages Vietnam also has a rapidly growing population is that it is not among the key industries protected of around 84 million people and its economy has by the Government, meaning that the granting of recently grown faster than the 7% average set over licenses by the Ministry of Finance (MoF) is based the last five years. VinaSecurities believes that the primarily on the company’s financial situation economic growth rate will be over 8% in the period and professional performance. This advantage 2006 to 2010. is reflected in the sheer number of foreign life insurance companies in Vietnam. Of the eight life Vietnam’s insurance market growth has outgrown insurers currently operating, only one is a local the economy by a factor of 7 over the last decade. company; Bao Viet, which holds a 38% market share The non-life sector grew by a CAGR of 26% and and is about to convert to a joint-stock company at the life-sector managed a whopping 61% CAGR the end of the month. between 1996-2006 period. Overall growth was 55% for the whole industry. In 1993, insurance Insurance Sector Summary revenue accounted for 0.37% of Vietnam’s GDP, this rose to 1.97% in 2006. In the last five years, The Vietnamese insurance market – the life total premiums increased six times from VND3,047 insurance market in particular – has developed billion (US$190 million) in 2000 to VND18,000 billion rapidly in recent years. This is the result of a more (US$1,125 million) in 2006. The Ministry of Finance transparent legal framework and the participation of expects insurance revenue to account for 4.2% of foreign players. The cake just got bigger and bigger. GDP by 2010. Potential customers have been quick to understand the importance of insurance coverage in protecting Currently, foreign companies are trying to diversify against unforeseen expenses. Existing insurers from huge markets like China and India, and have been extremely successful in converting market Vietnam presents an attractive alternative. Insurance potential into reality, but they have not been able to companies are part of this trend. Dai-ichi Mutual fully exploit the potential of the market. Vietnam has Life opened a representative office in Vietnam and a population of 84 million people, 60% are under 30 did a M&A deal by buying Bao Minh CMG for an years old. We expect the younger generations will undisclosed sum. And Nipponkoa has also teamed take advantage of insurance coverage in protecting up with Bao Viet, the country’s leading insurance their growing wealth. corporation, to sell insurance products. Vietnam’s insurance sector is very typical of Meanwhile, the two biggest life insurance players, former communist countries, with high levels of ACE and New York Life received licenses when the concentration and few players. With a shift from the Minister of Finance visited the US in 2005. To be fair centralised command economy to a market-oriented here New York life returned it after less than a year. economy, the monopoly model was no longer But don’t let that spoil a good story. According to a suitable for the development of the insurance sector. report on Vietnam’s insurance market released by On 18 December 1993, the Government issued Towers Perrin, a US consultancy, less than 10% of Decree No. 100/ND-CP on insurance business the country’s population uses life insurance services, operation which set up a solid legal base for the giving it huge growth potential. Lack of experienced

 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 7 - Number of Insurance Companies Chart 8 - Number of Insurers by Lines

24 20 22 Reinsurance Brokerage Life Non-Life 20 16 18 16 12 14

12 8

10 4 8

6 0 4 5 6 8 9 0 1 2 3 6 3 7 4 2 199 200 199 199 200 200 200 200 199 199 200 200 0 2001 2002 2003 2004 2005 2006 State JS Foreign JV

Source: VIA. VIE, VinaSecurities Source: MoF, VNEconomy, VinaSecurities development of the insurance sector and attracted The stability of the political environment has laid a foreign investment. Vietnam’s insurance sector has foundation for continued economic growth, and has mushroomed from one insurance enterprise in the been especially supportive of insurance activities past, to 37 insurance companies today. So whats since the industry is especially sensitive to political, there? Well of these, there are 7 life insurance regulatory, and social instability. companies, 21 non-life insurance companies, 8 brokerage companies, 1 reinsurance company, The Vietnamese Government has a positive outlook 100,000 life insurance career agents, 50,000 non-life on the development of the Vietnamese insurance agents and over 20 representative offices. While market, especially after the country joins the the number of insurance companies has gone up WTO. In August 2003, the Prime Minister issued since 2003, it is still very small compared to other Decision No.175/2003/QD-TTg, outlining strategies countries in the region, especially with respect to for insurance industry development to 2010. life insurance. Government projections for the industry’s growth include increases in total premium revenues of Moreover, local savings habits are another factor 24% per annum, non-life insurance growth of 16.5% supporting the insurance market. In 2006, savings per annum, and life insurance growth of 28% per over GDP was estimated at only 27%, which annum. The penetration rate over GDP is targeted compares poorly with other countries such as China at 4.2% by 2010. (40.1%), South Korea (33.6%), Singapore (51.7%), and Malaysia (47.3%). We think that there is a huge VinaSecurities has a positive view of the Vietnamese potential for the development of a savings market insurance sector going forward, and we accept official with product offerings such as unit linked savings. estimates expecting, life and non-life premiums to The framework is in place and the government is increase from VND15,678 billion (US$988 billion) in waiting for local players to get ready before giving 2005 to VND60,749 billion (US$3.8 million) by 2010 the green light. (or 4.2% GDP). The main drivers will be the very positive demographics, urbanisation, sharp growth A survey on income conducted by the Vietnam in the consumer class, high levels of FDI, and the General Statistics Office in 2004 found that the low penetration rate for insurance produts. difference between earning and expenses per capita was VND114,400 (US$7.15) per month. By the end of 2006, �������������������������the financial strength of The country’s estimated total savings was VND112 insurance companies had increased considerably. trillion (US$7 billion). Of this the capital markets Total industry chartered capital was over VND8,786 (including banking, insurance, securities, etc.) billion (US$ 549 million). Of that, Bao Viet Life has attracted VND70 trillion (US$ 4.4 billion). The VND1,500 billion (US$93.8 million), Prudential remaining VND42 trillion (US$2.7 billion) flowed VND1,200 billion (US$75 million), Bao Minh to other sources (land purchases and gold, for VND1.100 billion (US$68.3 million), and Bao Viet example). Since then this number has grown a lot, Vietnam VND900 billion (US$56.3 million). Total although no official figures are available. And of reserves of insurance companies amounted to course is lowballed anyway. VND28,263 billion (US$1.75 billion). Total assets were about VND39.5 billion (US$2.5 billion). Of Vietnam’s 200,000 business enterprises are another course these numbers are a little dated but they are source of future insurance market expansion. the latest available for the whole industry.

 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 9 - Number of Non Life Companies in 2004 Chart 10 - Number of Life Companies in 2004

Philipines 117 Indonesia 61 Indonesia 104 Japan 40 Thailand 78 Philipines 39 Japan 54 Taiw an 29 Thailand 26 Malaysia 37 India 13 Singapore 36 Singapore 13 Taiw an 23 Malaysia 8 Vietnam 14 Vietnam 5

0 50 100 150 0 10 20 30 40 50 60 70

Source: SwissRe, Sigma 2004 and statistics of each country, for Source: SwissRe, Sigma 2004 and statistics of each country, for Singapore, only insurance Fund is included Singapore, only insurance Fund is included

Bilateral and International Commitments

With average chartered capital of US$26 million The US-Vietnam Bilateral Trade Agreement for non-life and US$33.6 million for life insurance, (BTA) signed in 2001 and the WTO membership undercapitalisation remains a key challenge for the agreements commit Vietnam to open its financial sector and has led to a high rate of reinsurance services industries. overseas. Lack of management know how and poor risk management are other areas of concern. Current market restrictions have ensured the dominance of domestic companies in the non- The Vietnamese life insurance industry is quite life insurance sector, but this is set to change. open to foreign insurers, and local and foreign Beginning on 1 January 2008, some limitations players enjoy the same incentives and a competitive on foreign-invested insurance companies will be environment. Four foreign and joint-venture players lifted, allowing foreign insurers to offer the following have taken a 63.5% market share whilst Bao Viet types of coverage; third-party motor vehicle liability, Life – the only Vietnamese player – has kept the construction and installation, oil and gas, and for rest of the market. projects that are potentially detrimental to public security and the environment. For non-life insurance, the door is only half-open to foreign partners. Foreign-owned companies can In 2012 or five years after WTO accession, non-life only offer products to foreign-invested companies, branches of foreign insurance companies will also while local ones can freely sell their products to be permitted, subjected to regulations. both local and foreign individuals, organisations, and enterprises. Therefore, they hold over Currently, there are no limitations on insurance 94.9% market share whilst the other eight foreign services provided to enterprises with foreign- companies fight for the rest. invested capital and foreigners working in Vietnam, reinsurance services, insurance services in In some contrast to the non-life insurance sector, international transportation, insurance and in the brokerage segment foreign companies held reinsurance broking services, and consultancy, 83.77% market share in 2005. Local brokers are in actuarial, risk assessment and claim settlement stiff competition with their foreign competitors due services. Some big insurers already in Vietnam to their limited net work, experience, and financial include AIA, ACE, New York Life, AIG, Aon, and resources. Marsh. All have good track records in Vietnam. Aon Vietnam has been in Vietnam since 1993 and was the market leader in brokerage insurance in 2005 with over 46% market share and 36% share of total commission. Marsh came to Vietnam in 2004 and now ranks second in brokerage insurance.

 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Characteristics of the Vietnamese Similarly to the banking sector, there were about 6.8 million life insurance policy holders at the end Insurance Sector of 2005 representing a penetration rate of about 1. Low market penetration 8.1%. In reality, the effective potential market size is about 20m or treble the current penetration level. 2. Rate of growth in premiums far exceeding GDP That is the size of the AB socioeconomic class in growth Vietnam. 3. Highly concentrated but highly fragmented insurance market In comparison with the internet and mobile 4. No regulation on local companies; restrictions penetration rates of 17.5% and 17.6% this number on foreign players seems low. The reason is simple: the distribution and infrastructure of insurance services is very poor 5. Inexperienced consumers relative to the telecommunication industry, which has 6. Heavily undercapitalised virtually national coverage thank to the support of the government. 7. Narrow investment portfolio due to regulation and small capital market By contrast, insurance is almost unheard of in rural areas where the need is lowest. With an urban 1. Low market penetration and density population of only about 29%, insurance companies Thanks to the high growth rate for inward investment still find it difficult to access the more than 70% of in the economy and the effective operation of the population who live in the countryside. Vietnamese insurance companies, the insurance sector has developed impressively in the past few Non-life insurance sector years, with average annual growth of 55% in the 1996-2006 period and 23% in the 2002-2006 period. The non-life sector grew by an average annual rate Some insurance companies such as Prudential, 26% per year between 1999 and 2006 and the total Manulife, and Bao Viet diversified their financial spend has increased from 0.4% to 0.7% of GDP investment by setting up capitve fund management over the same period. Premiums grew in 2005 to subsidiaries. However, in comparison with other US$403 million. This is of course a small number countries in the region, the penetration rate for when compared to other countries with a similar insurance products in Vietnam is still very low. More population level, but then Vietnam remains one of importantly, the growth rate of life insurance has the poorest countries in the region. been slow – down in the last three years – which could adversely affect the penetration rate in the Other catategories kept in line with the development years to come. of the economy but the explanation for the low spend can be easily found in some insurance Vietnam’s insurance sector is small in terms of both transaction, especially in the construction, exports market penetration rate and density of premiums and agricultural sectors. Although an estimated 90% per capita compared with other countries in the of foreign-invested construction is insured, only region. Life insurance spending is twice that of about 7% of domestically funded projects have the non-life insurance, but the total is only US$13 per same level of coverage. This is not just a limitation capita which was the lowest in the region. This is on the insurance industry, but a tremendously under- less than a fifth of the average spend per capita hedged risk borne by society. for South East Asia at US$ 78. The spending rate in Vietnam reached 1.82% of GDP in 2006, also Most domestic investment in major construction significantly lower than the regional average spend and infrastructure is financed by the government, of over 5% of total GDP. municipal authorities, or by ODA. That these projects are not insured (or improperly insured) is a Life insurance sector considerable risk for the economy overall.

Growth in the life segment has been explosive. With The low rate of insurance in imports and exports an average annual growth rate of 61% between1999 can be explained by the habitual business practices and 2006, it is by far the fastest growing market in of Vietnamese import & export companies. For the region. Spending levels are low in comparison a variety of reasons, they generally opt for CIF to the wealthier countries in the region, but at 1.4% terms for imports, and FOB or CNF terms for of GDP life insurance spend (compared to 0.1% in exports, which transfers the responsibility to buy 1999) the sector is growing very quickly. insurance to the foreign partners. Additionally, the domestic insurance sector is just developing. Local

10 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 11 - Density and Penetration Rate in 2004 Chart 12 - Insurance Penetration, USD/Capita

300 6% 50.00 5.4% 250 Density US$ 5% 45.00 Non-Life Penetration. 40.00 200 4% Life 3.6% 35.00 150 2.3% 3% 30.00 Total Density 2.7% 25.00 100 2% 1.5% 1.5% 20.00 50 1% 15.00 10.00 - 0% s a d a a 5.00 i m n s i - h na t f f f f f e 8 9 0 1 2 3 4 C ie V Thailan Malaysi ndone 199 199 200 200 200 200 200 I 2006 2007 2009 2008 2010 2005 Philippine

Source: Swiss Re sigma Database, BMI Source: Swiss Re sigma Database; National Regulators; Trade Associations insurance providers lack the technical expertise of total main product premiums in 2005 and 2006, to sell insurance products for import and export respectively. Life insurers such as Prudential and transaction. As a result the consignors, both local Bao Viet, have been very successful in exploiting and foreign do not award insurance contracts to their two keys product lines such as saving plans Vietnamese insurers. and children education plans. These two product lines are big hits in urban areas where the emerging In 2006, Vietnam’s exports were valued at US$39.6 consumer class has a relatviely high income and billion, and imports were valued at US$44.4 billion. saving rate. With average insurance fees of 0.3% over the export and import turn-over of US$84 billion, the market Together with life insurance sector, the non-life size is about US$252 million. Local players captured insurance market has grown quickly but not uniformly premiums of just over US$33 million in 2006 or a across all segments. The annual growth rates are 13% total market share. The remaining 87% share mainly in small and less complicated niche markets was captured by foreign players overseas. such as motor vehicles (25% to 27%) and personal injury (21% to 22%). These types of risk are simple Vietnam has 100 sea ports nationwide, and annual and don’t require much re-insurance capacity. Local shipping traffic is about 55,000. With over 1,000 insurers prefer to expand the retained premiums registered vessels, Vietnam is the fourth most or to retain all the risk in country. Other product seaworthy country in the region, but only 20% segments also achieved high growth rates but made of those boats are ocean-going. The remaining a modest contribution to total premiums. 80% are used locally and much of Vietnam’s fleet is too old to compete with newer foreign fleets. With its breakneck pace of development in the past The older Vietnamese ships must pay higher few years, the insurance sector has contributed to insurance premiums, and their carrying revenue is the overall growth of the economy. Investment in the sub-standard because their slower speeds make sector increased from VND46 billion (US$2.9 million) for longer shipping times. Foreign consignors in 1993 to VND34.400 billion (US$2.15 billion) in prefer younger vessels and familiar insurance 2006 with a CAGR of 66% over this period. In 2006, companies. investment in the insurance industry accounted for 4.07% of GDP. 2. Growth in premiums and investment income far exceeding GDP growth Going forward, with the increase in investment and per capita income the Ministry of Finance (MoF) With its low starting point, Vietnam insurance expects that both life and non-life sectors will see industry experienced a high annual growth rate of continued double digit growth. MoF expects total about 44% in 2000-2004. The growth rate has been premium revenues to increase at an average of 24% falling off since reaching 20% in 2004, 10.8% in 2005 per annum, with non-life insurance to grow 16.5% and 13.2% in 2006. Total spend is now 1.82% GDP. per annum and life insurance to grow 28% per The industry is consolidating after a period of very annum. The total spend as a % of GDP is forecast rapid growth. to hit 4.2% by 2010. An aggressive forecast. This growth rate is three times higher than the annual In the life insurance segment, mixed products (or GDP growth , already the highest in Asia, after endowment insurance) generated 94% and 86% China. But this growth rate is only two thirds of the average growth rate over the 1999-2006 period.

11 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 13 - Exploitation of insurance products Chart 14 - Premium and GDP Growth Rate of use

70%

Life insurance 3.61% total saving 60% 62% Premium Non-life insurance GDP 50% 49% - Agriculture 1% of plant and animal 46% 40% 42% - Exports 6.55% of export value 30% - Construction 7.17% of investment by domestic 24% 20% 20% funds and 90.91% for foreign 9% 10.1% 10% 6.8% 6.9% 7.1% 7.3% 7.7% - Human accident 12% of labor 8.4% 8.17% 8.2% - Imports 30.67% of import value 0% 2000 2001 2002 2003 2004 2005 2006 2006 - - Property insurance 40.4% of automobiles 2010 - Passenger accident 41.15% of passengers - Petrolium 41.27% of investment in petrolium - Pupil accident 45.68% of pupils Source: Financial Publishing House, VinaSecurities

Source: Vietnam insurance market development strategy by 2010

Life insurers future growth to be driven by increases expand their exploitation and push the current in per capita income and a higher penetration in tier growth rate of fire insurance above the 15.3% y/y 2 cities and provinces outside the traditional key gorwth achieved in 2005. markets in big cities like Ho Chi Minh City, Ha Noi Similarly, under the Law on Tourisim, tourist and Da Nang . In addition, life insurers believe in insurance has become a statutory product as of 1st the growth potential of their newest lines of products January 2006. In 2006, there are around 3.6million - investment linked products and bancassurance. foreign visitors coming to Vietnam (up 9% compared These products have been well tested and we to 2005) and over 17.5 million Vietnamese domestic believe they could lead to a second wave of sharp tourists. Last year the total revenue of tourism sector sales growth in the sector. is estimated at VND 36.000bn (US$ 2.25bn) up 20% Non-life insurers also are pinning their hopes on y/y on 2005. However, a mere 2% of tourists carried strong growth rate for other lines of products other any travel insurance. There are many reasons for than motor vehicle and personal injury insurance the very low penetration with all parties to blame (the products. Shipping and trade insurance are two authorities, tourist agencies and tourists). Apathy key examples. is the key reason. The shipping industry has grown by 150-200% However with the new provision in the tourist law and since 2004, and a recent revaluation of ships led higher expectations from travellers, we believe in the to increases in annual premiums of 15% y/y to development and potential of this segment. VND526 billion (US$32.9 million). In 2006, for hull and P&I insurance, PVI����������������������������� �������������������������was the leader with a 36% 3. A highly concentrated market and market share, ��������������������������������Bao Viet Insurance �������������ranked second an imbalanced market structure with 31.1%, and Bao Minh and Pjico followed with Government policy has a critical influence on the 16.4% and 13.6% respectively. Local insurers have development and operation of the insurers. The improved their position in comparison with foreign impact of government policy can be clearly felt in insurers oversea. Vietnam’s insurance market in terms of growth rates, In 2006, export and import insurance premiums new segments, market share and concentration. (cargo insurance) topped US$33 million with local Life insurance players taking a lowly 13% of the total market premium in this segment. With trade flows growing Out of the eight insurers operating in Vietnam, by about 25% per annum this market will expand three were awarded licenses at the end of 2005. rapidly and the challenge is there for local players Therefore, the sector is dominated by five companies to increase their market share. This will be tough that hold nearly 100% of the market. Thanks to the as local players lost 1% of their market share in open door policy of the Government, there are up to 2006 . six wholly owned foreign invested life insurers, one joint venture and only one local player. Bao Viet, Other newer growth markets are being created by the only local company, ranked second in terms of tougher government legislation requiring business market share with 36.5% in 2006. Competition from owners to take out insurance. In November 2006, the foreign players, Prudential in particular, has been Government issued a guidline for implementation of very stiff, and Bao Viet has lost about 1.3% of its fire insurance as a statutory product. The regulation market share per year since 2003, dropping from is considered a good opportunity for insurers to

12 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 15 - Key comparative indicators in Asia

Vietnam Philipines Singapore Hongkong China S. Korea Population (million) 84 83 4 7 1,300 48 GDP growth (in 2005) 8.4% 6.1% 6.4% 7.3% 9.9% 4.7% Life insurance premium (US$mm) 500 800 6,500 13,000 35,500 48,500 Life insurance premium (as % of GDP) 1.0% 1.0% 6.0% 8.0% 2.0% 7.0%

Source : VinaSecurities

40.5% to 36.5% through 2006. Recently Bao Viet after WTO membership. In 2006, the market share has been fighting back and has now stabilised its of this second tier has increased to 60%, largely due market position. to the equitisation of Bao Minh in 2005 and PVI at the end of 2006. Bao Minh held 22% and 21.76% The only joint-venture between Bao Minh and market share in 2004 and 2005 respectively. PVI Commonwealth Bank of Australia (CBA), named for its part held 12.5% and 18% in 2005 and 2006 Bao Minh CMG, had a 4.4% market share. Under respectively. an M&A deal between Bao Minh CMG and DAI-ICHI (Japan), DAI-ICHI took over Bao Minh CMG late last The last two state-owned companies – Bao Viet and year for an undisclosed sum. BIC – are in the equitisation pipeline and expected to be equitised soon. Bao Viet is coming this month Approximately 90% of total market share is and BIC sometime next year ����������������������under the equitisation concentrated in the top three companies and over of BIDV.����������������������������������������� Once those companies are equitised, the 99% in the top five. These numbers are very high in state sector will cease to exist. comparison with other countries in the region, where the average concentration rate on the top five was With high market concentration in both life and non- only 69% in 2003. Vietnam’s top five concentration life insurance, there is an inherent risk that some big rate is also higher than that of China’s at 95%. players could collude together to control the market, which would be bad for customers and the industry Non-life insurance as a whole. The MoF has to pay more attention to the activities of the market in terms of agreements Unlike the life insurance sector, restrictions on on policy formation, premium rates, and cooperation foreign insurers have allowed top four local non- in key locations. life insurers to carve up 84.8% of the premium market in 2006, while 12 other companies fight for Brokerage and Reinsurance the remaining 15%. Concentration among the top four players is nearly unchanged from 2003, and In the insurance brokerage segment, foreign incidently this number is also much higher than the companies are the dominant players. In 2006, regional average of around 50% as of 2003. the top three foreign companies held 83.8% market share while the other four local companies Based on the types of ownership, non-life insurance held a humble 16.2%. Local brokers generally sector can be divided into three tiers. At the top, the face a stiff challenge due to their lack of capital, two state companies, including Bao Viet and BIC (a product expertise, management experience, and subsidiary of BIDV), control over 35% market share, international network. but have lost share to the joint-stock insurers since 2004. These joint-stock companies compete for VinaRe is currently the only reinsurance company what’s left by the state companies, but the market in Vietnam, but they are guaranteed by law 20% of is growing fast and they are gaining. all reinsurance contracts. Companies are free to fill the remaining 80% of any reinsurance contracts The second tier of joint-stock insurers, seems to be abroad. And they do. an ideal model for the Vietnamese insurance sector

13 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 16 - Non-life market Share Structure Chart 17 - Life Market Share Structure

100% 7.0% 5.0% 5.1% Foreign-owned 100.0% 90% companies 19% 40.5% 39.5% 38.0% 36.5% 80% 43% 80.0% 70% 60% Joint-stock 60% 60.0% companies 50% 40.0% 40% 74% 59.5% 60.5% 62.0% 63.5% 30% 52% State-owned 20.0% 20% 35% companies 10% 0.0% 0% 2003 2004 2005 2006 2004 2005 2006 Foreign Insurers Local Insurer (Bao Viet)

Source : AVI Source : MoF, AVI, VinaSecurities 4. No restrictions on foreign players in of cross-border supply, consumption abroad and life insurance, but still some barriers some common commitment on personnel presence. However, the Government still keeps some to foreign non-life insurers restrictions on commercial presence and foreign personnel . For foreign personnel, work permits The Life insurance sector in Vietnam started off issued by local labour authorities are required. in 1996 but began to grow significantly only when This requirement also applies to industries outside foreign insurers entered the market in 1999. Foreign insurance. companies enjoy the same incentives as local ones and they have eaten away steadily at Bao Viet’s There are two key commerical restrictions in the market share. non-life business. Foreign insurers are still limited to (1) engage in statutory insurance business, Under the Law on Insurance, it takes 60 days as including motor vehicle third party liability, insurance from the date of application to get the business in construction and installation, insurance for oil license. However, in practice, to get the license, life and gas projects and construction works with insurers have to set up their representative offices high risk to public security and environment; (2) first. The MoF will assess the ability of such insurers non-life branches of foreign enterprises are still before issuing the license. In general, it takes around not permitted. These restrictions have thrown up 5 years for these procedures. substantial barriers to foreign companies as they shut them out from doing business with the state Under the guidelines attached to the law on owned sector. Insurance, foreign insurance companies like to set up a wholly foreign invested enterprise, a joint- The BTA requires Vietnam to remove the first venture must have at least 10 years in operation up barrier from 1 January 2007 and the second from to the date of applying for the license. November 2011. Such insurers must have a total assets at least US$2 billion in the year prior to the date of application. 5. Inexperienced consumers Besides, foreign insurers have to comply with some technical regulations based on their track record. The Vietnamese insurance market is very young. Non-life insurance products were first offered from The same conditions also apply to insurance 1993 and life insurance from 1996, but the market brokerage except those on total assets. However, only took off in 1999. they have to show a profit in the previous three years up to the date of application. In the non-life sector, individuals only buy insurance when they are forced to do so. Motor and vehicles Under Vietnam’s legal framework, the non-life sector third party liability insurance is a clear example. is basically not open under WTO rules. However in Being a statutory insurance product, it has received practice, the non-life market has been partly opened support from some authorities, especially from the thanks to the inherent characteristic of reinsurance police. Motorists are obliged to buy insurance and activities which follow international practices rather are fined if they dont have a valid policy. The fine is than the regulations of each country. often equal to the insurance fees of motor vehicle products (currently VND 50.000 for motor bikes and Vietnam’s current regulations have opened up VND 500.000 for cars). A hefty sum in Vietnam . the market to meet BTA commitments in terms

14 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 18 - Life Market Share in 2006 Chart 19 - Non-life Market Share in 2006

DAI-ICHI (BaoMinh CMG), PTI, 4.30% AIA, 6.2% 4.4% Others, 0.8% UIC, 2.02% Others, 5.7%

Manulife, 10.6% VIA, 1.40% BaoViet, Bao Long, 34.90% 1.77% Pijico, 10.50%

Bao Viet, 36.5% Prudential, 41.6% PVIC, 18.10% BaoMinh, 21.30%

Source : MoF, AVI, VinaSecurities Source : AVI

However, statutory products are tightly controlled by 6. Heavily undercapitalised the authorities in terms of premium rates, contractual terms, and compensation. These terms are nearly Insurers tend to be poorly capitalised. As a result the same across all companies and locations. financial capacity tends to be low as capital raising Disputes are uncommon. options are still limited, especially among the joint- stock companies. The insurance industry’s total Institutional customers have more experience in chartered capital is approximately VND8,786 billion using non-life products, but they lack experience (US$549 million), in which the life sector accounts in using transnational insurance products. Many for over 49% or VND4,300 billion (US$269 million) customers fail to read the small print in their and non-life’s portion is VND4,486 billion (or US$280 contracts, and in many cases do not even file claims million). The problem of financial weakness and when an insured event takes place. lack of capital appears in all kinds of insurance enterprises, both state and non-state. In fact the In the life sector, customers do not deal directly chartered capital of many companies barely satisfies with the insurers, but rather with career agents legal requirements. who advise customers on the contractual terms. Many agents, paid by the volume they sell, do not After deducting the established expenses and fixed explain the terms clearly. It is quite common for assets investment cost, the remaining capital of policy holders to cancel contracts after signing, but insurance companies is rather small, sometimes the refund value is generally small. Complaints are leading to difficulties meeting client commitments. common and often well-founded because of agents’ Total compensation and repayment was 1.6 times poor product knowledge. Moreover, as disputes bigger than current total chartered capital in the arise, agents have often left the company. 2001-2005 period, reaching VND12,300 billion (US$768 million). Agent turnover is very high. In the early growth stage of the industry, life insurers wanted to expand The current level chartered capital is not nearly their market share as fast as possible. Companies enough to invest in future development, which were never picky in recruiting agents and ready to is a major hindrance for improving competitive accept a high agent turnover. Recruitment is easy. advantages. As a result, many insurance companies After all the Government does not require agents have to reinsure overseas, thereby lowering premium to have operating licenses. After taking a short retention rates albeit increasing market stability due training course providing by insurers, a person to the link with the international market. can become an agent of that company. The lack of experienced and trained agents leads directly to The government rides to the rescue. According to poor agent productivity and a large number of exits. a new decree to supplement Decree No. 43/2001/ Low productivity, leads to low income and they cant ND-CP on the financial regime of insurance and make a decent living. As a result, they quit the job. insurance brokerage companies, the current legal

15 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 20 - Chartered Capital of Non-Life Insurance Companies (VNDbn) Chart 21 - Chartered Capital of Life Insurance Companies (VNDbn)

Bao Minh* Bao Viet Vietnam* Bao Viet Life 1,500 ACE Legal capital QBE Prudential Vietnam 1,200 Vien Dong Insurance Bao Long Legal capital 600 Liberty Agrinco AIA 400 PVI Pjico PTI ACE 320 AIG BIDV Insurance Prevoir Vietnam 160 Groupama Vietnam VIA NewYort Life Vietnam 160 IAI UIC Samsung-Vina Manulife 160 GIC Bao Tin Bao Minh CMG 160 AAA Insurance - 200 400 600 800 1,000 1,200 - 500 1,000 1,500 2,000

Source : MoF, VinaSecurities Source : MoF, VinaSecurities capital will be increased from VND70 billion (US$4.4 7. Narrow investment portfolio due to million) to VND300 billion (US$18.7 million) for non- regulation and small capital market life companies. For life companies the minimum will be lifted from VND140 billion or (US$8.75 million) In developed markets insurance companies enjoy to VND600 billion (US$37.5 million). This decree a large diversified revenue base given their range of amounts to a declaration of war. Out of 16 non-life products and a multi asset class investment portfolio, companies, 13 do not currently meet the higher which is the main source of profit. Revenue comes capital requirement. Five of eight life insurers are from a mixture of direct premiums, reinsurance below the waterline. The timeline to implement the premiums and investments in deposit, bonds, real decree is still open. estate and equites.

Even foreign firms have modest levels of capital, Not so in Vietnam. Product offerings are still limited though this is mainly due to the restricted scope of and the range of investments is very small. Basically their business, especially in the non-life sector. it amounts to bonds and then others.

The joint-stock companies are facing even greater Before 1993, with a monopoly on the market, challenges. With the exception of Bao Minh, which Bao Viet supplied only 22 insurance products that was equitised in 2004 and satisfies the legal capital covered basic risk of enterprises, organisations, and requirement, the other four joint-stock companies individuals. Not much choice for clients. Since then, have current capital of less than VND 80 billion. insurance coverage has expanded into over 600 Should the new decree come into effect, they would different products, including over 100 different life need to double their current chartered capital just to products and over 500 non-life insurance products reach the new minimum. (personal injury, goods damages, personal liability, mixed products, etc.). Even for Bao Minh and Bao Viet, the two largest local insurers, there is also a difference in their chartered The choice is wider but still compares poorly with capital and the actual paid in capital. By the end of the thousands of product offerings available in other 2006, Bao Minh’s chartered capital is VND1,1000 markets. billion (US$68.8 million) but the actual paid in capital is only VND434 billion (US$27 million). New investments by insurance companies in Vietnam was US$568 million in 2006, raising the VinaRe’s chartered capital was defined as VND500 accumulated investment to US$2.15 billion, a 28% billion (US$31 million) but the actual paid in capital increase compared to 2005. This growth rate is is only VND343 billion (US$21.5 million). Bao Viet’s quite small compared to the CAGR of 66% in the chartered capital is VND3,000 billion (US$187 1993-2006 period. The decrease in the growth rate million) but the actual paid in amount is only is mainly due to the low growth rate of new life VND1,895 billion �����������������(US$118 million). premiums written in 2005.

16 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 22 - Investment Portfolio - 2006 Life Non - life Bao Viet Prudential Manulife Bao Viet Bao Minh Pjico PVI Bonds and bank deposit 75% 77.1% 87.1% 2.3% 64% 66% 81.7% Stock 12.8% 10.8% 3.7% 0% 33.4% 21.7% 15.4% Real estate, lending 12.2% 12.1% 9.2% 0% 2.6% 12.3% 2.9% Mandate investment 0% 0% 0% 97.7% 0% 0% 0% Source : MoF

However, their portfolio is not well diversified. Up to Nonetheless the stock market cannot be ignored. 57.3% of investments are in bonds and 22% in bank So far, 124 companies were listed on the HOSE. deposits while the balance is in stocks, real estate The VN Index increased 144% in 2006 and 35.2% and other. Among all insurers, foreign insurers focus year to date. New IPO’s expected over the next two more on bonds and bank deposits while joint-stock years include large state-owned enterprises such as companies have built more diversified portfolios. But Vietcombank, BIDV, ICB, MHB, Hanoi Beverage in general, bonds and bank deposits still account for Company (Habeco), Saigon Beverage Company the bulk of investments. (Sabeco), Mobifone and Vina Phone.

Even though these are safe investments, they do As transparency and free floats rise the insurance not bring high returns, restricting the efficiency of companies will gradually increase their exposure to insurance companies and hurting their performing the equity markets as they seek better returns. So as financial intermediaries. Bond yields range far, four insurance companies have established their from 7% to under 10% across the yield curve. And own investment funds and securities companies. recently five year yields have dropped to around These will enable them to improve access to the 8.0%. Meanwhile, the insurance interest paid out capital market. The investment activities is expected is around 8%. The low spread results in very low to generate higher income in the following years. profit margins. And then there are bank deposits. Cooperation Untill last year the Vietnam equity market was too among bankers and non-life insurers is long- small and not very attractive for insurers. At the end established and beneficial to both parties. Bankers of 2006, there were 106 listed companies in Ho Chi buy shares in insurance companies and enjoy Minh Securities Trading Center and 86 companies dividends; insurers receive capital and improve their on Ha Noi Trading Center, with the total market finances, thereby attracting more customers and capitalization of US$ 13.8billion accounting for bigger premiums, most of which will be deposited 22.7% GDP. But few companies in key industries to the bank. have been listed. The development of the capital market depends heavily on the provision of more These deposits often form one of the biggest and supply, of which the stocks of equitised companies, most stable sources of capital, on which bankers rely joint-stock companies, and government bonds are for interest lending. The flow of money adds value to the main sources. both insurers and bankers. Besides, bankers have leverage over their customers. To assure the debt Insurers also have difficulties in making large equity repayment, bankers usually ask their customers to investment due to lack of financial transparency of buy insurance for mortgage assets (fire insurance, domestic firms. Currently, the active supervision construction insurance, for instance). Insures all of the authorities stops at ensuring tax obligation know that and they like to sell their product to such are being met and does not fully protect other customers. stakeholders. In most joint-stock companies, compliance with corporate governance regulations Without support from the banks, it is very hard for is given low priority. This has created a bigger insurers to approach these customers. One of risk for investment and reduced the confidence conditions for getting the support from the banks of insurers in local enterprises. Because of the is to make deposits. In supplying products to the insurance industry’s characteristic prudence, in the banks’ customers, the bigger the deposit, and the absence of good alternatives they prefer to put their stronger the insurer’s position. money in safer, less-profitable investments.

17 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 23 - Growth of the AB urban middle class in Vietnam Chart 24 - FDI, Top ten countries and territories

January 1 to August 22, 2007 Total to August 22, 2007

100% Projects Total Capital Projects Total Implemented 6% 8% 8% 11% 12% 18% (US$mm) Capital Capital 14% 23% 26% 15% (US$mm) (US$mm) 80% 24% 30% Korea 237 1,695 1,560 10,608 2,933 39% >VND 7mm Singapore 49 1,330 509 9,610 4,072 60% 47% VND4m- 48% VND7m Taiwan 134 601 1,706 9,175 3,175 53% 54% 58% VND2m- VND4m Japan 89 451 857 8,509 5,170 40% 53% 51% Hong Kong 31 149 414 5,586 2,326 < VND 2mm 43% Bristish Virgin Islands 30 861 311 4,282 1,445 20% 33% 31% 21% United States 35 195.5 347 2,577 784.7 24% 14% 14% 9% Netherlands 6 57.7 78 2,475 2,242 6% 4% 2% 2% 0% France 11 135.6 187 2,384 1,152 2002 2003 2004 2005 2006 2007F 2008F 2009F Malaysia 22 140 222 1,809 1,136 Cayman Islands 2 70 25 1,754 641

Source : ACNielsen Source : Vietnam Economy Times Business environment for the Interest rate environment insurance sector Vietnam has 5 state-owned commercial banks (SOCBs), 37 domestic joint-stock commercial banks Macroeconomic environment (JSCBs), 33 foreign banks branches and a number of non-banking financial institutions. Among them, Vietnam is doing well. The Government forecasts the SOCBs account for up to 70% of the lending that the average economic growth rate will be market share. The government has gradually around 7.5-8% in the period 2006 to 2010, and liberalised interest rates since 1996 and pursued the VinaSecurities believes the economy will easily free interest rate since roughly August 2000. The meet those targets. SBV announces monthly prime interest rates instead of a ceiling interest rate. All credit institutions, based WTO integration and strong capital flows into the on the prime interest rate, decide their actual interest country will be key drivers for future development. rate within 0.3% of the government target per month 2006 FDI inflow was recorded reached US$ 9.9 for short-term loans and 0.5% per month for medium billion, the highest amount since 1987. and long-term loans. In the past, the four SOCBs operated as a cartel to set the ceiling interest rate There was a notable correlation between FDI and for 6 and 12-month deposits. This is then the base non-life insurance revenue. In the period from 2000 for other JSCBs to set their own deposit rates with to 2006, FDI inflow increased at an CAGR of 25.8% the allowed variance not to exceed 0.05% per month per annum, while non-life premiums rose by 27%. for the same term. There are ways around this of This is the main market of foreign insurers. In course. The JSCBs simply offer a higher interest practice, there was a division of the market based rate for 7, 9, and 11-month deposits, which are not on the nationality of the investor, with Japanese regulated. In fact the cartel has broken down as all investors preferring Japanese insurers. banks scramble to raise capital.

Other more powerful forces are also at work. Interest rates are on the rise. Due to a high level of Vietnam is a young country in the region with a dolarisation in the banking system, the SBV has to rapidly growing population of around 84 million follow the Federal Reserve interest rate movement people. The average age is calculated at 28 year- closely. As US rates go up so must Vietnam follow to old, and the annual growth rate of the working-age avoid a shift out of dong deposits into dollar deposits. population (20 to 49 years-old) is estimated at 2.3% Moreover, fierce competition among domestic banks over the next five years. This segment accounts to attract deposits is another factor in pushing up for about 52% of total population. Meanwhile, the deposit rates. Deposits in the banking system are up number of people from 0 to 19 years-old accounted 30% in the first half. One key reason for this capital for about 40% of total population. This will be the raising frenzy is the lack of trust in the interbank main source of labour in the future. capital market.

With higher incomes, Vietnamese people spend In 2005, the central bank pushed up adjusted more on insurance. Manna for Life insurers. recapitalisation and rediscount interest rates three Provided they have the right products. According times and primary rates twice. The recapitalisation to a recent consumer survey, customers place rates rose from 5% to 5.5%, the rediscount rate from the highest priority on products such as education 3% to 3.5%, and the prime interest rates from 7.5% financial planning and saving plans. to 7.8% per annum. Commercial banks’ interest

18 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 25 - Monthly Prime Interest Rates of VND Chart 26 - Annual Prime Interest Rates of VND

0.70% 8.40% 8.25% 0.69% 0.68% 8.20% 0.69% 8.25% 8.00% 0.66% 7.80% 0.65% 7.80% 0.64% 7.50% 0.625% 7.50% 0.62% 7.60% 0.625% 0.62% 7.44% 7.40% 0.60% 7.20% 0.60% 7.20%

0.58% 7.00% 2001 2002 2003 2004 2005 2006 Q3 2007 2001 2002 2003 2004 2005 2006 Q3 2007 Source : SBV Source : SBV rates for dong deposits rose by 0.48 to 0.63% per Why is this reform so important for insurers? annum and for dollar deposits by 1.25 to 1.5% y/y. The trend continued in 2006 and into 2007. Well in order to make the market more friendly for institutions liquidity has to improve. Increasing the Both factors have led to a rise in deposits and free float of the market from 25% (VinaSecurities a falling interest rate spread between deposits estimate based on the top 20 companies by market and loans. According to the IMF’s indicators, to capitalisation) to 50% is a key challenge. Secondary ensure the effectiveness of banking operations, issuances by listed companies and reduction of the the difference between the input interest rate and government share is the key to that. the output interest rate is about 10% and should be at least 2% for Vietnam economic situation. This Since 1993, the Government has equitised over indicator in Vietnam was 1.8% to 2.0% in 2004 and 3,600 state-owned enterprises. Among them, about 2.0% to 2.4% in 2005. It is too low compared industry, construction, and transportation accounted IMF’s analysis. for 66%; trading and services for 27.6%; and the remaining 7% was found in agriculture, forestry, These interest rate fluctuations are a major factor and aquaculture. In terms of share distribution, for that affects the performance of insurers. Insurance about 70% of equitised companies the value of the companies invest around 80% their investment state’s investment remained the same, though it portfolio in bank deposits and bond, so the income was diluted by the issuance of new shares. After generated through investment activities is highly the equitisation, the capital structure is diversified by dependent on interest rates. Increasing interest an average of 46% held by the state, 30% kept by rates usually leads to faster investment income employees, and 24% awarded to outside investors growth. With low financial leverage, a bigger return who may be local or foreign. from investment in bank deposit is quite favourable to offset the interest expenses of the short-term and The government is putting pressure on the state- long-term liabilities. owned companies to equitise and list in the stock exchange and the securities trading centres. Stock market They hope that these processes will improve their efficiency with more involvement from outside - Outperformed all the key market in Asia-Pacific shareholders in management and operations. with 104% y/y growth by Q3 2007 Some listed companies have successfully issued new shares and found that the listed market is one - Grew at a CAGR of 65.6% from Q3 2003 - Q3 of the most useful and effective sources for capital 2007 mobilisation. In the coming years, many of the big state-owned companies will come to the market, A new securities law has been issued and took significantly increasing the market’s size. effect from January 2007. The limitations on foreign ownership of stocks are expected to be lifted from The rapid expansion of the stock market creates big 49% to 100% for no strategic sectors sometime mid opportunities for insurance companies to diversify 2008. Investors and insurance companies are keen their investment portfolio. With a more proportional to see this limit lifted altogether (except possibly in investment in equity markets, we expect better some sensitive sectors such as finance, telecoms, investment income for the insurance industry in the and resources). near future.

19 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 27 - Number of equitized firm Chart 28 - Share Structure in Equitized Firms 1000 846 Outside 800 700 investors, 611 24% 600 500 State*, 400 254 212 46% 204 164 200 101 2 1 2 6 4 0 5 3 3 9 1 5 7 Employee 199 200 199 199 200 200 199 s, 30%

Source : MoF, Deutsche Bank Source : MoF, Deutsche Bank

Regulatory environment: satisfies relevant conditions may operate insurance Increased transparency and operations in Vietnam provided it has been issued a standardisation of the legal framework license by the MoF. In practice, the law allows three types of private sector insurance companies (two Decree No. 100/ND-CP issued in 1993 was the types for foreign companies) to operate in Vietnam: cornerstone of Vietnam insurance industry. Since then the insurance regulation system has been (1) Joint-stock commercial insurance companies; supplemented and amended many times, helping (2) Joint-venture insurance companies, including the industry to start to adopt international practices. life, non-life and brokerage companies; Under the pressure of the BTA and WTO agree- (3) 100% foreign-invested insurance companies. ments ,the insurance law which took effect from 2000 and its guidance documents has set up a more All three types of companies can use their free cash transparent legal framework, which is considered to invest in government bonds, corporate stocks fair to all players, especially life insurers. This result and bonds, real estate, private equity, deposits, and rewarded the efforts of policy makers, associations, loans. companies, consumers, and other stakeholders in The Department of Insurance under MoF acts as an balancing the benefits of a healthy insurance mar- independent regulatory body, monitoring and super- ket and the requirement of bilateral and multilateral vising all the activities in the insurance market. Im- agreements to which Vietnam has committed. portant issues such as solvency, healthy competition Both local and foreign insurers enjoy the same legal and codes of conduct are regulated in detail through framework in life sector. For non-life insurance as legislation and guiding documents. stated above, there remain some areas where for- One major challenge in analysing insurance compa- eign insurers have not been allowed to sell products nies is that standard financial disclosure is not enough to state owned businesses or to set up 100% foreign- to fully understand the company’s condition. Proper owned branches. This has significantly affected the analysis requires substantial disclosure of things like performance of foreign insurers and protected the reserve ratios, exposure to catastrophic/environmen- interesta of local insurers. Such restrictions will be tal loss, and details of the company’s operations. We removed partially in 2008 and fully in 2011. should also note that AM Best ratings take all of this The insurance industry is very sensitive to regulatory information and more into account. changes. A very special feature of insurance sector is that it has been adjusted and influenced by vari- The Association of Vietnamese ��������Insurers ous legal documents covering issues including Civil Code, Enterprises Law, Maritime Law, Competition The Association of Vietnamese Insurers (AVI) was Law, Civil Aviation Law, Law on Road Traffic, Law set up in 1999 with ten members. AVI is a voluntary on Fire, Law on Construction, Law on Tourism, Law social and professional organisation for insurance on Petrol and Gas and other related regulations. insurers legally operating in Vietnam. The organisa- Inconsistencies among these laws have hindered tion aims to represent and protect the legal rights and insurers’ daily operations. benefits of its members, and cooperate in develop- ing the Vietnamese insurance industry. It plays an The Law on Insurance which took effect from 1 April important role in gathering statistics and advising 2001 provides the legal framework for the insur- the government in the formulation of the regulatory ance sector. Under this law, any organisation that framework for the sector.

20 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 29 - Financial services - 2006

Banks Life Insurance Non Life Insurance Broking Penetration 8.0% 0.87% 0.66% 0.13% Top 4 market share 68% 94.9% 89.2% 56.2% Number of players 82 7 21 55 Foreign and Joint-venture share 16% 63.5% 3.2% 0% Supervised by SBV MOF MOF SSC Restrictions on new entry High Medium Medium Very high Restrictions on foreigners High Low Medium Very high

Source : VinaSecurities, SBV, VNExpress

Industry Overview and Analysis worry about their top employees, who have valuable experience in the sector and access to sensitive Life insurance started in 1996 and began to grow customer databases. significantly from 1999, when foreign insurers joined the market. In the period 1999-2006, the industry The influences of WTO membership will be felt recorded a remarkable average growth of 55%. almost entirely by the non-life insurance. When Non-life insurance achieved a CAGR of 26%, while the restrictions are removed from 2008, the life insurance reached 61%, much higher than the sector will shift to a different stage of competition. average in the South East Asia region. Investment However, observers have a positive outlook on the income grew with a CAGR of 55% in this period. development of the market. Local firms will continue to dominate the market at least in short term. They The annual increase in penetration rate reflects are still the main suppliers in motor vehicles and the faster growth rate of the insurance industry in personal injury insurance, accounting for 99% and comparison with that of GDP. The Government 97% market share respectively, which accounting expects that the spend rate will reach 4.2% of GDP for 36% of total premiums in 2006. or US$43 per capita by 2010. Official policy has been designed to help reach those targets. Because of WTO accession, the competition will not only come from top global insurance companies around the world but also from the medium-sized Insurance industry and WTO companies in the region. The former will focus on big projects and customers, while the latter will Being a member of WTO, Vietnam will open its mount a challenge for niche markets. The small- door to foreign players, which will bring many customer segment is the target market of many opportunities and challenges. Consumers will local players, likely to result in tight competition in benefit the most, and will find themselves with a the coming years. much wider choice of products as well as better service and more affordable premiums. The falling market share for local firms, especially state-owned firms, is already obvious in the life The demand for human resources will grow insurance. Bao Viet Life’s market share has slipped sharply and there will be a flow of employees from from 70% in 2000 to 36.5% in 2006, losing its local insurance firms to foreign ones. With better market leader position in 2003. However by 2006 finances, a more dynamic working environment, and Bao Viet had stabilised its market share and was good training programs, foreign insurers will have a mounting a stiff challenge to Prudential in the key large advantage over domestic firms. Local insurers urban battlegrounds.

21 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 30 - Size of Insurance Market (VNDbn) Chart 31 - Penetration and Density

4.50% 25

3 22 48 3 Density (US$) , 1

8 4.00%

9,000 02 , 77 8 , Penetration (% GDP) Non-life 7 3.50% 4.2% 20

8,000 5 5

Life 57 , 44 , 6 3.00% 7,000 6 Investment income 5

53 15 , 8 6,000 5 2.50% 2.03% 1.82% 8

76 1.97% , 4 36 , 5 2.00% 1.86%

5,000 4

81 10 , 1.46%

3 13.39

4 1.50% 4,000 4

82 10.27 , 9.66 62 0 , 2

2 1.00% 8.01 12 9 6 3,000 , 0.49% 5

2 0.57% 3 60 60 , , 5.73 1 1 26

, 0.50% 2,000 6 3 1 1.13 98 5 83 1.78 0 1,000 48 0.00% - 2 20 9 1 - 1996 1999 2002 2003 2004 2005 2006 2010E 1996 1999 2002 2003 2004 2005 2006

Source : 2005 Insurance Report - Finance Publicing House Source : 2005 Insurance Report - Finance Publicing House

Of course even with a declining share Bao Viet’s auction of Bao Minh for a long time, but with only revenues have grown remarkably as the overall 43,340 shares (or 1% of total share outstanding) to market has expanded exponentially. And that is a be sold, the event was a disappointment especially key point for both the life and non-life players. The for individuals. With a long-term strategy, Bao Minh market is set to grow so quickly that most domestic awarded most of its shares to founding partners players can afford to bleed share for a while. such as Vietnam Airlines, Song Da Construction Holding Company, VinaFood, and Maritime Holding Increasing competition will push local insurers to Company, who were also its biggest customers in restructure, strengthen their finances, and improve the last several years. Very prudent. These partners their overall performance. This will help them to will ensure the firm’s revenue and profits for the replicate the knowledge and professional skills near future. held by their global rivals. This process will provide local insurers with more advantages in terms of Bao Minh’s auction took place on 2 July 2004 risk management, marketing, customer relationship with an offer price of VND150,000 (or 1.5 times management, and investment. The trick is not to book value), and the registration for auction was bleed to death before you build those skills. over-subscribed 2.4 times, attracting over 1,000 investors. The lowest accepted bid price was VND We believe that the non-life players will have about 196,000 and the highest one was VND 269,000. five years to build a competitive response to the The average bid price was VND 217,000 and the foreign invasion if they are to avoid succumbing to it. forward 2005 PE and PB were 11.14x and 1.85x If like Bao Viet they succeed, their will enjoy strong respectively, which were cheaper than the average growth going forward. If not they will be victims of ratios in the region. Vietnam’s market opening. Bao Minh listed on the Ha Noi Securities Trading The government has pushed state-owned insurance Centre in November of 2006. Chartered capital companies to restructure in the last several years. So is VND434 billion (US$27 million). Total listed far, the Government has completed the equitisation share is 43.3 million. Just over five million shares of Bao Viet, PVI, VinaRe and Bao Minh. Among are transferable, while the remaining 88.26% are them, VinaRe and Bao Minh have listed on the Ha non-transferable. Being a joint-stock company, Noi Securities Trading Center. Bao Viet is trading however, the state is still the biggest owner of Bao in the OTC market and will be listed soon. Minh holding up to 63% chartered capital. Vietnam Airlines, also a state-owned company, keeps 7% of Equitisation the chartered capital. Bao Minh plans to increase its chartered capital and decrease the percentage Vietnam had six state-owned insurance companies. of state capital to 51% by 2010. Currently, the State The Government has already equitised three large Capital Investment Corporation (SCIC) is managing insurers – VinaRe in 2003, Bao Minh in 2004 and the state’s holding . PVI in 2006, Bao Viet - and BIC is next.

So whats the track record so far? Observers were SCIC was established under the Decision 151/2005/ keenly interested in the equitisation VinaRe, Bao QD-TTg dated June 20 2005 signed by the Prime Minh and PVI. Many investors had waited for the Minister. Its job? Similar to Temasek. Manage the state’s share holdings in former SOE’s.

22 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

The price of Bao Minh’s stock on the OTC market compensation amount with VinaRe. As a result, the before listing was stable for a long time at around 5x greater the insurer’s revenue, the greater the chance to 5.5x par value. These shares were not liquid due that it will reinsure with VinaRe, benefiting VinaRe to the heavy institutional shareholdings. After listing and its shareholders. The state benefits because the stock closed at 7.1x par value , a 27%. At the the rules limit the flow of premiums abroad and adds end of December Bao Minh was trading at a FY06 stability to the market. PE of 54.7x and a FY06 PB of 9.5x. Not cheap. The equitisation helped to draw attention away from Liquidity is a big problem. The average daily trading the fixed reinsurance marlet. volume in the first month after listing was around 25.000 shares. The average trading value was PVI was the last insurance company to be equitised around VND 2bn (US$ 125.000) or around 1% total at the tail-end of 2006. It was the most crowded daily trading value of the HoSTC. Pitiful. and eventful auction in the Vietnamese stock market. People queued up for the registration and Investors are all waiting for the State to reduce their auction outside HASTC. The auction attracted 7,854 ownership proportion that can boost the trading investors (including 107 institution investors and value and help the stock more liquidity. 7,851 individual).

VinaRe was transformed into a joint-stock company PVI’s auction took place on the 29th of December in October 2003, with chartered capital of VND343 2006. With an offer price of VND 11,500 (US$ 0.7 billion (US$22 million). In contrast to Bao Minh, or 1.15 over book value), the registration for auction the equitisation of VinaRe had some peculiar was over-subscribed 26 times. The lowest accepted characteristics. The capital structure included bid price was recorded at VND 142,000 (US$ 8.9) no outside investors, and the two main groups and the highest one was VND 11.5 million. However of investors were the state and 13 insurance with an average price of VND 160,250 (US$ 10 or companies operating in Vietnam. The state held 16 times over book value) valuations were sky high. the controlling stake of 56.5%. The auction valued the company at FY06E P/E of 167x, and FY06E P/B of 13.8x. The offer price, and the accepted price, was equal to the par value. In other words there was no auction This far exceeded the expectation of many investors, at all. The proportion of shares issued to each especially the institutions. As a result, out of 107 insurance company was based on the revenue participating institutional investors, only 4 of them contributed by each company. won in the auction.

The reason for the closed doors at the non-auction ?. The average accepted price and PE ratios were Business. Under current rules, insurance companies much higher than those of Bao Minh with P/E of 55x are free to reinsure other insurers, including foreign times. Remember at that time Bao Minh ranked insurers. If reinsuring abroad, local firms are second in the insurance market with a 22% market required to reinsure at least 20% of the committed share whilst PVI’s market share was only 12.5%.

23 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Bao Viet’s equitisation Bao Viet is expected to list on Hanoi Trading Center Following the successful equitisation of Bao Minh at the end of 2007 and will move to Ho Chi Minh in 2005, the Prime Minster issued Decision No. Stock Exchange in 2008 as well. 310/2005/QD-TTg dated 21 November 2005, approving Bao Viet’s equitisation and setting up a The chartered capital was VND3,000 billion but pilot model for Bao Viet Finance-Insurance Group. the actual paid in capital was just VND 1,895 This process include three main activities: billion.Under the valuation made by its consultants (supervising by the MoF), the value of Bao Viet - Equitisation of the Bao Viet Holdings was VND 4,443 billion.The State continues to keep their amount and sell out the new amount to - Restructuring of the organisation of Bao Viet from investors to get a new chartered capital of VND a state-owned company to a parent-subsidiary 6,800 billion. However, the actual chartered capital company after the auction was just VND 5,730 bn. The gap between the actual chartered capital and the - Formation of the Bao Viet Finance-Insurance planned mobilized capital was the failure in selling Group to strategic partners.

Bao Viet Holdings will become a diversified According to a recent meeting, holding by the ownership company with the state remaining the Governemnt and the MoF, on reform of the state- largest shareholder holding 65.3%, employee stake owned enterprises for the period 2007-2010, Bao of 0.7%, foreign strategic partners stake of 18%, Viet Group will operate under the form of a joint- domestic strategic partners stake of 7.22% and other stock company with diversified strategies. Under investors with 8.74%. Bao Viet selected its local the projection, Bao Viet will expand its operations to strategic investors including VNPT, (holding 3.25%) other financial services such as commercial banking Vinashin (3%) and Sasco (0.75%). and after a wait through Bao Viet Joint-stock Bank (2008), leasing of almost four months, HSBC signed up to become sector via Bao Viet Financial Leasing Company its foreign strategic investor. (2008-2010), real estate and hospitality through Bao Viet Real Estate Company (2008) and Bao Viet Resort and other industry via Bao Viet Community Health Insurance Company (2008).

Chart 32 - Bao Viet’s organizational Structure

Source : Bao Viet

24 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 33 - Insurance Business Model

Company selection and Respond Company

Agents, Partners Clients

Products Products selection and Respond

Source : VinaCapital Business model analysis

1. Consumer behaviour

Since its beginnings in 1993, and from 2000 in 54% in 2005, compared with only 34% for the state particular, with rising incomes and the entrance of insurers. Interviewees have had little awareness foreign insurers, the Vietnamese insurance industry of foreign players. has developed quickly and generated considerable Local insurers are the most popular in Vietnam for awareness toward insurance products. two main reasons: (1) no restrictions on business In general, individuals know much more about life presence and operations, and (2) positioning of insurance than non-life insurance, mainly because foreign players. As for statutory products, the of the insurance companies’ strategies. Except number of people purchasing motor vehicle and for personal insurance and compulsory liability fire insurance accounts for one third of total market insurance (motor vehicle third party liability), non- share, as these products are compulsory. Therefore, life companies have positioned themselves for the this profitable segment is now awarded exclusively commercial market; selling to the aviation, oil and to local players. gas, and shipping industries. In the life sector, thanks to the fairly open policies of Life insurers target individuals using big, noisy the Government, more and more life insurers have marketing campaigns which provide product set up operations in Vietnam. These players have information and educate the consumer. In addition, helped improve public awareness, especially among in the early stage of operation, life insurance those living in urban areas. A survey in the five big companies followed a strategy of recruiting huge cities found that an average of 96.5% of interviewees numbers of agents in an effort to expand their knew about or had heard of life insurance. Many of presence and market share. At that time, it was very them had been approached by agents and were easy to become an agent or “financial consultant”, fairly knowledgeable about life insurance. and nearly every second family seemed to have Advice about insurance products is sought from a at least one life insurance agent. Owning a life variety of sources. Many people asked their friends insurance contract became fashionable, a visible and relatives before making their decisions on their sign of the customer’s entry into the consuming first policy. Fewer people are consulted about the classes. purchase of subsequent policies. There are a number of channels for insurance Although many Vietnamese still consider the role companies to approach potential clients. State- of the woman to be secondary to the man in the owned companies with long histories in Vietnam, and family hierarchy, women control the purse strings in foreign companies with global experience and good a substantial number of households. This also gives resources are both experts at self-promotion. Local women considerable decision-making authority over joint-stock companies are less active marketers the purchase of insurance policies (even when not because their clients tend to be institutional. held in the woman’s name). This is one reason for In the non-life sector, thanks to the equitisation the popularity of insurance products focused on of Bao Minh, public awareness of joint-stock children and education. These products have been companies’ products has increased rapidly, up to best-sellers in recent years.

25 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 34 - Awareness of Life Insurance Companies (n= 808) Chart 35 - Sources of Advice Before Buying

100

80 1st policy Spouse

60 Friends 93 97 98 93 99 99 Relatives 40 2nd policy Neighbors 20 Others 0 3rd policy HCMC = Ha Noi = Can Tho = Da nang = Nghe An = Quang None 154 150 150 150 102 Ninh = 102 Yes (%) No (%) 0% 20% 40% 60% 80% 100%

Source : VIE’s Survey Source : Survey

2. Company Another advantage of local players is that they have a good understanding of consumer behaviours Insurance companies play an important role in the throughout the country. The understanding is purchasing model. It focuses on the strategies critical to the design of good products and the management, product design, training and supporting development of effective marketing and development its agents, customer education, investment, and strategies. administrative works. Potential clients look carefully at a company’s past performance, and most insurers Local companies’ comfort level with local business have a good short-term track record in the opinion practices also gives them an edge over foreign of Vietnamese consumers. competitors, as local players are more flexible in the payment of informal commissions Insurance companies have met the needs and requirements of consumers by supplying a wide Foreign players variety of products in terms of features, premium rates, and optional contractual terms. Insurers’ Most foreign insurers have had a long track record prestige has increased dramatically as customers in the insurance industry with extensive expertise judge products to be safe and service to be good. and experience. They also get strong support from their parent companies and other subsidiaries in the Local players group around the world. They are well-known for the standardisation and high quality of their products Given their history in the market, local insurers and services, and for the advanced application of are well known to consumers. This advantage technology in their management, operations, and is multiplied by the extensiveness of agent and IT systems. branch networks. These will be big advantages as companies develop and expand. This has given them an advantage as they set up operations in Vietnam. In combination with a long In addition, relative to state-owned banks, state- development history, foreign insurers are better at owned insurance firms have received much support developing distribution channels. from the government. Many customers think that state-owned insurers have given them greater security against unexpected loss.

26 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 36 - Awareness of Life Insurance Companies Chart 37 - Awareness of Non-life Insurance Companies

Joint- State- venture, owned , Foreign- 9% State- Foreign- 33% ow ned, 3% ow ned , owned, 34% 52% Joint- venture, 15% Joint-stock, 54%

Source : VIE’s Survey Source : VIE’s Survey

3. Products classes. Strong stock market performance and a wider variety of attractive, higher-interest banking Talking about insurance, people often think mostly products have taken up some of the demand for of protection, even though this is just one function of life insurance products. It is apparent that many insurance. Insurance companies all know that and consumers are losing faith in life insurance products. they try to diversify their products to satisfy potential Complicated procedures and strict conditions clients and improve competitiveness. to cash in their policies are also deterring new consumers from investing in these products. As a Life products result, money is flowing into bank deposits, gold, In some surveys, saving for children’s education and securities instead. was considered top priority. The highest preference To improve the competitiveness and development rate for education policies was found in Nghe An of the sector, life insurers are launching new life province, where 60% of respondents made it their insurance products such as unit linked policies and first choice compared to only 39% of respondents bancassurance. These are vital for the future of the in Can Tho. life-insurance market and have worked in all other markets. Insurers hope these new products will Preferences vary by region, with the poorer central meet the demand of their potential customers who provinces valuing education policies most. Those are high income earners or knowledgeable clients provinces are least suitable for agriculture, but many or both. must still rely on it to earn a living. Education is widely considered as the only escape route from Bancassurance is a product combining life insurance poverty. Parents hope that their children will have and banking services. This type of product will be a better life and they support their children with developed in the near future. higher education. Unit linked policies combine elements of insurance In contrast, in the Mekong delta it seems easier to and investment, allowing consumers to receive earn a living, and this is reflected in their insurance traditional insurance rights and investment at the preferences. In the Mekong delta, savings and same time. investment products are more popular. These products are analysed in the next section. Products and services are the main areas for Non-life products improving competitive advantages among insurers. Prudential and Bao Viet have gained such advantages In the non-life market, there are a wide range and become the market leaders. Prudential has of products. But these product are not well been best known for its savings and education differentiated. products while Bao Viet is considered more for its retirement, critical illness, and health products. The same basic product design is replicated across Other companies have fallen far behind. insurers in categories such as motor and vehicles, fire, personal injury and liability insurance which The decline in the life insurance market since are, of course, statutory products. These products 2005 has occured as the relative attractiveness of accounts for over 42% total premiums written in the insurance products has fallen. More choice. In other market. The reason is that selling prices are set by words competition has arrived from other asset the MoF.

27 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 38 - Type of Policies by Location Chart 39 - Types of Policies

100% 60% 80% 50% 60% 40% 40% 30% 20% 20% 0% 10% HCMC Ha Noi Can Tho Da nang Nghe An 0% t t n e Saving and investment Retirement n d o o i Education Protection only i en t t on an y a l c Don't know men m N t c e r ng s on i i ote t e du v r e v a E P n R i Source : Survey S

Source : Survey In this segment, local insurers try to expand their are the ones who bring the premiums back to the market share via a low cost strategy. Price discounts companies. The agents, not the employees, advise and commissions are the main tools for beating the customers and sell products. Therefore their image, competition. behaviour, and performance are very important, since they can heavily influence a potential However a low cost strategy is not the most suitable customer’s purchasing decisions. strategies for long term development of services companies, especially in the insurance industry. In practice, most sales are made on the relationship Normally, when buying a product, the prestige of with the agent alone. This is typical of an immature an insurer is a more important factor than the low insurance market. price offered. For sustainable growth, we believe that local insurers should improve their product While bancassurance contributed a small amount differentiation so that they can build their own to total premiums, there is no doubt that the agency competitive advantage. network is the backbone of the life insurance industry in Vietnam. For other segments, product differentiation is considered to be high. The difference does not At the end of 2006, the life insurance sector had lie so much in the product design but in the 63,550 agents, 31% less than in 2005. However, the customer services such as global network (maritime number of newly recruited agents reached 69,580 insurance), quick response, track record of insurer, and 62,984 in 2004 and 2005 respectively, implying consulting services and so on. a very high turnover and very low productivity.

4. Agents Most insurance companies struggle to retain their agents. In 2006, AIA had 8,632 agents (-52.28% Insurance products are a “promise” or “commitment” compared to 2005), Prudential had 20,989 agents by the insurer to bear responsibility when an (-44.53%), Manulife had 2,821 agents (-24,21%), insurance event happens. However many customers Bao Viet Life had 21,529 agents (-15,44%) and see the insurance contract as so much paper. To Dai-ichi (Bao Minh CMG) had a lowest loss ratio them, the most important thing is feeling comfortable with 2,44%. about their investment. They consider the insurer’s prestige and track record, and may even want to tour The number of inactive agents is the other part of the company’s offices. the picture. As selling policies has become more difficult, agents’ income has declined leading to The agent represents the company’s face and is attrition and hiring difficulties. The indiscriminate therefore a critical factor in securing new sales. hiring practices of the past few years have With the retail strategies and individual segment introduced a significant number of lower quality, less positioning, insurance companies have to use their productive agents. On average, an agent sells 6.5 agent network to make face to face contact with their policies per year for main products and 6.6 policies potential customers. with sub-products. Premium for the first year was VND14.5mm per agent and the average premium The agents are not employees of insurance was just VND 87.9mm per year. This is quite a low companies, and they operate through a cooperative number for a fast-growing market like Vietnam. agreement based on commissions. However, they Life insurers face a big problem when most agents

28 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 40 - Stated importance: Company and Agents Companies Agents

Financial strong 86% Trustworthy 89% Having a good track record of setting claims 84% Not cheat on financial matters 80% Has large capital investment in Vietnam 74% Helpful - whenever there is any problem 79% Has good agents 72% Having a fast speed of response 76% Being back by the Government 70% Responsibility 75% Used by many people 61% Informative 74% World’s famous company 61% Clear in explaination 73% Known by many people 60% Source : Survey consider their job at an insurance company as just This may stop some abuses but more needs to be a part time job. This conception is the result of the done. In the long term, insurers have to give more way both insurers and agents behaved in Vietnam. training and careful selection to build and maintain Insurers try to recruit as much as possible and take a professional agent network so as to satisfy the prioritise candidates have a strong relationship with diversified need of customers. other people. Most of these people, in fact, have a good job or position in the society. The non-life insurers face another problem. The actual transactions fulfilled directly by professional They use their relationship to gain the insurance agents and customers are quite small – just about contract, not based on the benefit of the products 10% of total transactions. The rest is conducted and their skills. After a while they run out of friends among the companies and customers and in most to sell to and most quit at that point. cases with the support of third parties. The value of insured properties is usually very high. Customers There is no strong commitment to the job. Mean do not fully trust the agents and prefer to work while, insurers pay commission and bonus based on with the company directly or through a third party. the revenue their agent achived. There is no salary This allows them to negotiate for discounts or at all, except some financial support for the leader commissions, which is prohibited by law. of each team or sub group. Hardly a job for life. Currently, insurers are permitted to pay commissions Insurers are trying to improve things. Six life insurers only to their agents and not to any employee, in Vietnam, including ACE Life, Bao Minh CMG, customer, or other person. To attract customers, Bao Viet Life, Manulife, Prudential and AIA have many insurers look for ways to deal with this joined forces to build up software for managing problem that in many case runs afoul of the law. insurance agents which aims to improve the quality This practice is not without risks. In 2005, Allianz of life insurance agents and fight against unhealthy – then the biggest wholly owned foreign insurer in competition among companies. terms of chartered capital – withdrew from Vietnam amid claims of abnormal practices. The system helps to prevent the same agents from working for different companies at the same The old model to build a presence by flooding the time. It regularly happens that one insurance agent market with agents and tolerating a high agent works for several insurance companies, and this turnover is no long working. Companies can has been causing big problem for life insurers. So no longer rely on simply selling more and more as to get insurance policies which can bring the policies to gain market share. The time for rapid agents commission, the blacklisted agents often expansion of market share is over and insurers tell lies about the functional and operational scopes must now reinforce their resources, strategies, and of insurance companies and about the insurance operations. Focusing on improving the quality and policies. These misleading information has caused professionalism of the agents is one of the most disputes between customer, agent and company. important tasks to be considered. Customers are Damaging for the prestige of the company. now more educated about life insurance, and they are becoming more inclined to base their purchasing decisions on the suitability of a product to their needs than on their relationship with the agent.

29 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 41 - IT Spending - The Virtuous Circle

Higher IT More System Spending Application

Lower Loss Better Risk Ratio, Higher Management Net Income

Source : VinaSecurities Insurance sector - ����������Challenges Informatics

IT applications are not limited to company websites Statistics and informatics and MS Office. These are just the tip of the iceberg. IT must be applied to all facets of the Statistical information and information processing company’s operations – websites, security, core play very important roles in the insurance industry. business applications, back office, customer relation Insurers use this information to formulate business management, infrastructure, and so on. Insurance strategies and design products, and determine companies manage a large numbers of policy holders pricing policies and allocate expenses. These and agents. They collect, store, and process millions related factors determine the loss ratio, expense of customers and risk data points (such as flood ratio, and more importantly, the company’s profits. history, volcanic history, average rain fall, accident frequency, etc.). Statistics As for the customers, policy holders require accuracy Insurers have various statistical information sources in premium calculation, policy terms, policy changes, both at home and abroad. The main and formal inquiry responses, payments, and compensation. sources are from AVI and the Insurance Bureau Agents are very sensitive to commission calculations, (belonging to MoF). They keep track of and update customer relation management, and IT support from the performance and some keys indicators of the company. They need help from the companies to insurance companies such as prime premiums, calculate premiums, compensation, reimbursement, ceded premiums, retained premiums, compensation, and insurance interest according to product terms and market share. The information is published and and type. This support also helps agents give their gives a superficial picture of the market. potential customers accurate advice.

It is difficult to get deeper and more detailed socio- IT is the foundation for supporting insurance economic information that the industry needs to companies’ core activities.Insurance companies make informed decisions. The shortage of statistics all know of the importance IT in improving their on risk and insurance fraud creates a heavy burden competitiveness. With strong finances, good for insurers in building strategies, designing products, operational experience, and support from parent and making decisions. companies, foreign insurers can easily meet advanced IT requirements. MoF is currently planning to cooperate with AVI in preparing united report forms, from which a Local players have fallen behind in this regard, mostly database for the Vietnamese insurance market would spending in one of two ways. First, smaller insurers be developed. It will face some difficulties at first tend to spend on IT to make basic upgrades to their because the big insurers who have set up their own infrastructure. Second, bigger insurers spend on database are not willing to share with other parties. modern IT systems to compete with regional rivals. But in the long term, it will help the development of the industry. 30 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

The capital sources for investment come from the Actuarial skills Government (in the case of Bao Viet) or from new capital raising and retained earnings (like Bao Minh Another weakness of domestic insurers is a lack and the other joint-stock companies). of actuarial skills, especially in the non-life sector. For a long time, Vietnam had no training centre that Bao Viet and Bao Minh, the two biggest local insurers, specialised in this area. The Ho Chi Minh Economics have already started to modernise their IT systems. University and the Ha Noi National Economics Bao Viet has been using IT firms to write its software University, with the support of Prévoir Company, have for several years. BaoViet has invested significantly cooperated with French partners to train students in in the development of its information technology this line of study to meet the industry’s demands. platform, spending approximately VND 85bn last However, this effort is only in the preliminary stages, year. New systems named BVPROP and BV and demand is not being fully met. ACCOUNT are being developed by the CMC Group and HiPT Group whose partners are IBM, Microsoft As a result product design and pricing is often based and Hewlett Packard. These systems are based on experience alone, while some insurers employ on the IBM Application Architect (IAA), the leading foreign consulting agencies at a fee. Therefore, they application architect for insurance companies and have not had a professional approach to actuarial used by some of the largest insurers in the world. analysis in terms of data collection, storage, and processing. Usually, they only collect financial data Bao Minh just finished its consultancy stage after a such as total premiums, loss ratios, and other related long time working with PriceWaterHouseCoopers and risk information reclassified by line of product, by now is in the software selection stage. They hoped location, and in a specific time. Such information is to finish this stage by January 2007 and implement not enough for risk assessment and management. the system by the end of next year. Although loss and expense ratios depend on a variety of objective and subjective factors, they are also For other joint-stock companies, the cost of investment very dependent on risk identification, assessment is a formidable challenge. With a small number of and management. Local firms are lacking in these, customers, it is very hard for them to go down the resulting in higher and more volatile loss ratios than learning curve and achieve economies of scale. If those of foreign rivals. they continue to invest in expensive IT systems, the cost of insurance products will increase and they These limitations are manifested in certain product will lose their competitiveness. In the long term, lines. For instance, in motor vehicle insurance, all however, smaller companies must overcome this insurers sell the same products with the same price setback and find ways to develop their IT systems. for all kinds of consumers nationwide. A 60 year-old In this fast paced environment, IT not only helps them man with a 10 year-old motor vehicle and a 30 year- provide good customer service, but it also helps them old with a newly bought vehicle pay the same price increase operational efficiency. for coverage.

CMCsoft, a subsidiary of CMC Group, was established The insurance business is based on the large number in 1996. Its core activities focus on financial sectors, principle: that a large number will share the risk of a banking, insurance, management and others. For small number of events. Insurers, especially small insurance sector, CMC has bought a license for using ones, can tweak their product to differentiate from IAA from IBM to develop its core software named others if they have enough information to classify CMC Property & Casualty Insurance software (CPC). their potential customers by risk. Following this So far, this software can deploy for non-life insurance strategy, motor vehicle insurance data should be with all insurance activities. collected and recorded according to the frequency and severity of accidents, and broken down by age, Currently, FPT and HiPT have cooperated with sex, profession, vehicle type and age, among other several foreign companies to develop the software factors. Based on the resulting risk profile, a suitable for insurance companies in Vietnam such as CSC premium can be set. The riskier the customer, the (Malaysia), 3C - Infotech (India), Fis-software. higher the premium. These companies are known for their expertise and experience and their products have been used Insurers can modify benefits and added value to in many insurance companies around the world. each customer group. With such differentiation, However, the expense for such products, especially small insurers can position themselves precisely for customisation are very high. AVI has cooperated enough to compete with three main insurers in this with CSC (Malaysia) to build its own software but the line of product – Bao Viet, Bao Minh, and Pjico, process is just in some basic application.

31 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

which together held about 78% of the motor vehicle other sensitive factors that seem very strange to insurance market in 2006. foreign players and professional practitioners.

The large number principle still prevents small Up to present, the Government has provided detailed insurers from competing directly with large ones. regulation to ensure the solvency of insurers which Bigger insurers have many advantages due to cover all insurance operation including minimum their larger customer databases, which allow for registered capital, deposits, reserves, provisions, more reliable statistical analysis. This competitive and minimum solvency margins. advantage is the result of good past performance and the exploitation of market leadership positions. For solvency margins, there is distinction between In theory, the industry would benefit from a shared life and non-life, but both foreign and local firms database accessible for a fee. However, the big say they are satisfied with the current regulation of players are not willing to share their databases with 20% retained premium for non-life insurance and competitors without some reward. The difficulty 4% reserves for life insurance. is doubled for small players who cannot set up a reliable database for risk management and effective As for reserves, insurance companies have to pricing. allocate 5% of their annual after tax profit, but the accumulated total amount does not exceed 10% For unit-link products, it requires much expertise in of their chartered capital. However, the detailed developing, launching and improving. Insurers have provisions for the management of M&As or insolvent to cooperate with fund managers and there are not or troubled insurance companies have not yet been many fund managers related to insurance business issued. In the worst case scenario, insurers would whilst the law does not require insurers to use these follow the standard bankruptcy law, which makes products to invest directly into the stock market. The no provision for individual policy holders. Unlike sucess of this line of products will be much depend other industries, mergers and bankruptcies could on the long-term cooperation among all related affect the entire insurance industry, and even the parties. whole economy.

The supervisory regime for the insurance industry is Insurers’ ability assessment at present one sided. Although insurers are forced to have their financial statements audited, they are not In other developed countries, there are many obliged to make their financial conditions public. The independent rating agencies to assess and rate Government has set up some financial indicators, other companies in all kind of industries, including especially the solvency indicator, for supervision banking and insurance. This kind of service rating as mentioned above, but it is not enough. It is very report is a must in some cases, especially in big hard for customers to get the information they need projects which helps customers have a clearer to properly evaluate companies. This also explains view of the insurers’ abilities before choosing a why many insurers have ceded their premiums to company. In Vietnam, there is no such rating foreign players due to a lack of financial ability. In agency. Customers do not have enough information some cases, compensation is delayed due to a lack about their insurers. Purchasing decisions are still of working capital. mainly based on relationship, perceptibility, and

32 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 42 - Benefits of Bancassurance

Benefits to Customers Customers - Lower premiums rate thank to lower distribution cost - Better and more suitable products supplied - More convenience with better services - One more channel for selection

Insurers Bankers

Benefits to Insurers Benefits to Banks - Access huge customer base of and share services with banks - Increase service-base income and reduce the reliance on - Reduce their reliance on traditional agents interest spreads as the major source of income - Develop new financial products more suitable to customers' need - Leverage on their extensive customer database - Expand market presence quickly thank to the current network of banks - Increase customer retention rate via a wile range of products - Obtain additional capital from banks - Attract deposit from insurers - Increase profit margin thank to cost reduction - Increase the productivity of operation - Increase their presence and reputation

Source : VinaSecurities, Swiss Re

New Line of Products . distributing some standardised non-life products such as motor vehicle and personal injury insurance, The introduction of new life-insurance products such which are now the mainstream products in Vietnam. as unit-link and bancassurance are considered to For such reasons, banks find it more attractive to be the key weapons for the second growth wave in sell life insurance products than non-life insurance the life-insurance market. Most life insurance firms products. want to launch these product as soon as possible in Vietnam because the stock market is growing along In many countries, life insurers consider the with consumer interest. traditional distribution channel, like career agents, to be the most important one. However, insurers remain keen to diversify their distribution channels Bancassurance and decrease pressure on the primary channels. Bancassurance is considered a new channel that Bancassurance is a popular concept around the benefits stakeholders and customers. world and is not new to Vietnam. In most cases, bancassurance has been used and understood In Vietnam, the development of bancassuance as an alternative sales channel to supplement the can be divided into four main stages. In general, traditional network of career agents and brokers. the first stage started in 1990s, when bankers In its simplest definition, bancassurance is the freely provided non-life insurance products to their distribution of insurance products by banks. A customers. Insurance expert said that this was broader definition would include broader cooperation not really bancassurance at all but it was the very between bankers and insurers to exploit financial important preparation stage of bancassurance. The markets. relationship between bankers and insurers was not close and there was no sharing of customer Life insurance benefits more from bancassurance databases. Because of the similarity between some than non-life, primarily because of the similarities life insurance and deposit products, there was some between life products and banking products. concern over the risk of substitution. Moreover, life insurance is a long-term commitment that requires customer trust, and banks generally The second stage only began several years ago. have this relationship already. Moreover, the The life insurers were very active and began customer database providing customers’ track to explore deeper relationships with bankers record and risk profile is more helpful for life through distribution agreements. Insurers sent insurers than non-life insurers. On the other hand, their professional agents to the banks to approach although banks have some competitive advantages potential customers directly. The insurance in supplying non-life products tied to bank services agents’ expertise were gradually transferred to such as fire insurance, property insurance, and bank employees, mainly credit officers, who had liability insurance, they have fewer advantages in undergone training by the insurance companies.

33 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Banks distributed life insurance products in return as cash collection, cash management, telebanking, for fee income but with little sharing of customer and payroll services. On 20 October 2006, the databases and limited investment. alliance launched its first two products named “education saving accounts” and “new home and At this time, some cooperation agreements were set car credit”. Within the first day, they signed contracts up. Bao Viet signed an agreement with Agribank with 38 customers with the total contract value of and Incombank. Manulife connected with EAB. over VND500 million (US$31,300). Small beginings AIA cooperated with HSBC. Prevoir Vietnam made but this is the future. These were the first new friends with Vietnam Post and Telecommunications products designed and developed by an insurer and (VNPT). Prudential set up a connection with banker in Vietnam. ACB, Vietcombank and Agribank and VASS with Oricombank (OCB) recently. The last stage of bancasurrance development in Vietnam will involve the financial services groups. Lets look briefly at one of the partnerships, The main characteristic of this stage will be the full Prudential had 70 branches, while Agribank had up integration of operations, systems and products; to 2,000 branches and transaction units nationwide. and a high capacity to leverage banks’ existing Obviously, customers could easily connect with customers and other services provisions. This form Prudential via such a wide network. Customers is not strongly present in Vietnam but there are some could pay their premiums at any Agribank branch projects under development. The Government or Prudential offices and the transaction fees were has announced plans for Bao Viet to establish charged to Prudential, not the customers. a joint-stock bank near the end of the year, and Vietcombank plans to set up an insurance company Currently Vietnam is in the third stage, marked sometime next year. by the creation of strategic alliances in the form of joint-ventures and joint-stock companies. This The pioneer in this stage is BIDV with its joint- stage brings a higher degree of integration in venture with QBE (Austraila). In December 2005, product design and development, services provision BIDV bought out QBE in the joint-venture and and channel management, and mutual ownership transferred it into a wholly state-owned company of products and customers. Both parties show named BIC under the control of BIDV. But then this a willingness to share their customer databases subsidiary is in the non-life segment, so it is not a and have strong commitments to IT and human true bancassurance operation. resources investment. Bancassurance is under development in Vietnam. In June 2006, Bao Viet and East Asia Commercial At the end of 2004, insurance premiums received via Bank (EAB) signed an investment and comprehensive the banking system accounted for less than 1% of cooperation agreement. Accordingly, Bao Viet will total premiums, and in 2005 the result was not much be a strategic partner of EAB. This cooperation better. Meanwhile, across Asia bancassurance was will benefit both companies. EAB will provide over projected to boost premiums by 5.5% and 1.5% in one million Bao Viet policy holders with a banking- life and non-life sectors; and account for 13% and insurance multi-function cards. Policy holders can 6% life and non-life insurance business by 2006, use such cards for daily payments in Vietnam, respectively. Vietnam is playing catch-up. China, and some other Asian countries. Moreover, EAB will share the cost of ATM installation in Bao Viet transaction, and help Bao Viet in training labour Unit link products forces for the Bao Viet joint-stock bank. Investment link or unit-link is a product which Besides the cooperation with EAB, Bao Viet has combines life-insurance and investment. It allows also set up a strategic alliance with Techcombank. customers to roll their premiums into securities, real On 28 Feb 2006, both parties officially signed a estate and stocks. Money invested in it is divided into Bancassurance Agreement. Under this agreement, two portions, life-insurance premium and mutual- the two sides would provide banking and insurance fund investment. This product offers transparency as services or “bancassurance” products to their customers are given some freedom to choose their customers, and would cooperate in studying, investment options. Customers are also informed designing, and developing bancassurance about the details of investment yields. products. Unit link is also designed to give customer flexible Techcombank provided Bao Viet with e-payment control of their investment. Customers are the services and other modern payment models, such investors and insurers are acting as customers’

34 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report financial advisors. It has some main features, Others have not established investment funds yet. including They have a department in charge of investment activities. But such department’s operational • Broad range of investment fund choices provided focus is rather narrow. Investments are mainly in by reputable investment managers. Government bonds and deposits. This limits the • The sum assured is based on customers’ expansion of unit link products. Some have decided needs. that setting up their own asset-management outfit • Choice of life protection level and optional would not be worth it as the Vietnam securities coverage to suit your needs. Riders for market is too small for them to set up a single additional insurance protection can be added. purpose unit. • Can help funding many purposes such as Successful cooperation between asset-management pensions, education or savings. companies and insurers is the norm around the • Flexible modes of payment ranging from single world. Both parties gain benefits. However, in payment to regular monthly payments. Vietnam, there is no discussion between insurers • Flexibility to add or withdraw funds any time. and existing asset-management players in launching this product. Insurers prefer to go it alone. This new product, estimated to be applied from sometime in 2007, would be indispensable for The Vietnamese Government has permitted middle-class life insurance clients. Already firms insurance companies to set up their own investment such as Prudential have geared up to launch unit fund and launched unit link products. This was linked products. However some of the domestic expected to be launched in Q2 2006. But some players are not ready yet and the government insurers are not ready for these new products. The is delaying launch untill their preparations are AVI is now expecting the green light by Q3, 2007. complete. How has the product fared in other regional Unit-linked products are the life insurers life-line to markets? deal them back into the game competing directly against banks with their high deposit interest rates Indonesia and brokers offering access to the growing stock market. If the launch is successful annual growth Indonesian life insurers expect premium-income rates for the life sector will rise again to 20% or growth to hit 25 percent in 2006 after it continued above and sector will enjoy a new lease of life. to perform well through the third quarter of the year. The industry’s un-audited total assets this year Insurance will directly rival investment funds. Life increased more than 20 percent from last year. insurance clients will pay a monthly premium, which they may then roll over into investments at a Unit-link, which was first introduced to Indonesian certain level. Unit-link, in particular, will be the first insurance customers in 1993, remained the most life-insurance product to compete with securities. popular products and contributed 29% to total Consumers will receive traditional insurance rights premium income. The popularity of unit-link products and investment when purchasing this product. This will drive industry growth going forward. product is similar to an investment fund certificate, but it is a little bit different because it also carries Korea insurance. It means that in risky cases, clients will not lose all of their money. For instance, one portfolio Investment-link policies had been desirable in the includes 40% bonds, 40% of stocks and 20% real market since its launch in 2000. Total first year estate. Other offers 10% real estate, 20% bonds premium income from the sales of the product and 70% stocks. The portfolios are called units, and in 2004 accounted for 34% of the total first year profits differ depending on the mix. premium income earned by the industry, an increase of 81% y/y. Although investment-link policies Normally, depending on the size of each insurer and may have boosted premium income, the benefit the current market situation, the insurer has two for Korean insurers was limited. This is because options for managing the unit-link business: current regulation prohibits insurers from managing the fund on their own. Insurers have to share their - Set up asset-management unit and/or investment income with investment banks that manage the fund actual investment. When this restriction is removed, - Cooperate with other asset-management players Korean insurers will be able to set up their own Currently, three life insurers have decided to manage investment fund. And profits will flow! their own asset-management firms namely Bao Viet, Manulife and Prudential.

35 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 43 - Total New Policies from 2001 to 2005 Chart 44 - Product Structure

2,500,000 40% 1,200,000 60% New policies 49% 50% 30% 36% Growth YoY 1,000,000 40% 2,000,000 35% 20% 26% 16% 30% 800,000 20% 1,500,000 10% 10% 17% 0.4% 600,000 -5% 0% 0% -16% -10% 1,000,000 -13% 400,000 2% -10% -27% -20% -30% -20% 200,000 500,000 -21% -39% -40% -34% -30% 0 -50% - -40% 2001 2002 2003 2004 2005 2006 Main Products Supplementary Products 2001 2002 2003 2004 2005 2006 Grow th YoY - MP Grow th YoY - SP

Source : AVI Source : MoF, AVI, VinaSecurities

Life market – Consolidating after a However, from 2004 onward, insurance companies to peak and posted an unexpected decline in new long run policies. n Good growth for Q1 2007, the first signs of There were nearly 1.2 million new policies in 2005, growth we have seen for over two years with down 33.6% compared to 2004 and equalling only 28.8% y/y growth 58% of the policies written in 2003. Moreover, the n Premium revenue only accounts for 0.7% of GDP invalid policies totalled 1,284,313, up 17% compared and 3.24% of savings. to 2004. At the year end there were 6,756,408 valid policies, an overall year-over-year increase of only n Around seven million (of more than 84 million 3.15%. The industry was in trouble. Vietnamese) people signed insurance contracts, with an average premium of about US$6.1 per Last year things got worse. According to AVI, the year. number of new policies in the first quarter of 2006 was down 27% y/y. Manulife, AIA, and Bao Minh n The life insurance market is expected to raise its CMG were down 56%, 44%, and 31% respectively. premium revenues to hit VND19���������������������� trillion (US$1.2 Prudential lost least of all: 30%. In the first six million) in 2007 and VND30.9������������������������ trillion (US$1.9 months of this year, life insurance premium revenues million) by 2010. reached VND3,374 billion (US$210.9 million), down 6% y/y. The number of new contracts by the six At the end of 2005, the life sector had a total largest companies decreased to 216,845, only 70% chartered capital of VND4,060 billion (US$256 of the 2005 level. This has been the biggest decline million), total assets of VND23,753 billion (US$1.5 in the life insurance market so far. billion) and total transaction reserve was VND20,382 billion (US$1.3 billion). Total 2006 premiums were VND8,483 billion or 5.7% y/y. More seriously, the year-on-year growth The sector employed 91,286 agents nationwide. rate has also decreased in the last three years by Total premiums amounted to VND8,023 billion 18.2%, 3.2%, and 5.7% in 2004, 2005, and 2006 (US$505 million), a 3.24% increase over the respectively. previous year. Foreign insurers were the main players and had 62% market share. In 2005, invalid policies, compensation, and claims (including insurance interest) went north, reaching Foreign companies operating in Vietnam are VND2.4 billion (US$150,000) and representing a generating large profits now. In 2002, Manulife 64% increase over 2004. Vietnam, the first foreign life insurance company in Vietnam, announced US$1.25 million in profits after So what is up with the life market? three years in operation. Two years later, Prudential Vietnam also announced US$3.5 million profit after The main explanation for the falling numbers is that five years in operation. payments and interest under insurance contracts have not caught up with rising deposit interest Year 2003 was the most successful year yet for life rates and Government bonds interest rates. Then insurance companies, with over two million new the stock market took off and even the real estate policies extended, an increase of 17% compared and gold markets offered attractive alternatives. Life to 2003 and of 58% compared to 2002. policy returns looked very stodgy.

36 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 45 - Term of Insurance Policies (Life) Chart 46 - Premium Structure of Main Products

21 - 30 100% 31 - 50 96% 86% 94% - Whole Life years, 2% years, 2% 80% - Pure Endow nment - Term 60% - Endow nment 40% 11 - 20 - Annuity years, 20% - Others 36% 5 - 10 years, Rider (over Total 0% Premiums) 60% 2003 2004 2005

Source : VIE Source : AVI

Add to this complicated procedures and poor follow- the licence on June 2005 right in the American up by some career agents. In addition, life insurance Ministry of Trade’s office when the Vietnamese products have not been diversified to meet growing Prime Minster visited America. New York Life didn’t demands while living conditions, incomes, and even set up before doing a 180. investment opportunities are on the rise. People now find it easier to access the capital market or We think New York Life looked at the current state find substitute products. of the Vietnamese life insurance market and are choosing to focus on their potential market in other Endownment insurance generated 94% and 87.5% countries. For new entrants starting from scratch is of total main product premiums in 2005 and 2006, a tough one. The only viable strategy now is M&A respectively, indicating that insurance companies or a pure niche play. The case also explains why have not paid enough attention to specific products less life insurers have come to Vietnam last year in such as health insurance. More sophisticated comparision with non-life insurance sector. products (e.g., investment linked products) are being tested but the current restrictive environment However despite the current problems in the life provides additional challenges for insurers to market, with the imminent introduction of new overcome. products the industry is likely to see a second wave of strong growth starting perhaps as early as next A shake-up has begun. The Bao Minh CMG year. Joint-venture (Bao Minh Insurance Corporation, the Autralian financial and banking group, We found some positive signs in the Q1 2007 Commonwealth) sold out to the Daiichi Mutual sector results. The life sector attracted 250,661 new Life Insurance of Japan. Accordingly, the latter policies, a 13% y/y growth, bringing the total number purchased all shares of the joint-venture to form a of current effective policies to 6,836,656 policies, an 100% foreign owned life insurance firm. The deal increase of 1.04%. Premium written grew 28.8% y/y bring the sole joint-venture form in life insurance in and the premium written per policy has increased Vietnam to an end. Most life insurers saw strong numbers, Bao Viet Life Daiichi, is the second largest life insurance in Japan achieved the best performance (47% y/y growth) and the six largest life insurance in the world in term following by Manulife (37%), AIA (29%) and Dai- of annual gross premium. Vietnam is the first country ichi (28%). Consolidation, improved training and where Daiichi starts its operation in the form of 100% recruitment of new agents may be paying of finally. foreign owned enterprise. Its an agressive move. Life insurers have been focused more on the quality than the quantity of agents. The deal is a strategic shortcut of Daiichi to penetrate Vietnamese market. Daiichi will enjoy the distribution Despite the low growth rate in the past 3 years, the of Bao Minh CMG nationwide which is not only good sector has attracted more life insurers. HSBC Life for their life insurance business but also good for International Ltd. entered the Vietnam market earlier other financial services of Daiichi. Daiichi will quickly this year with its representative office in Hanoi. launch the investment link products and perhaps add Recently, Vietcombank, Seabank and Cardif (a other financial services such as asset management subsidiary of BNP Paribas) all together set up a life and consumer finance. insurance company. These new players find many opportunities in the life insurance industry, especially Then New York Life pulled out of the market. Rather in health care and bancasurance products. sudden and not a little embarassing. After getting

37 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 47 - Operation Ratios in 2006

Bao Viet Bao Minh Pjico Vien Dong PVI Average

Net loss ratio 30.1% 55.1% 51.2% 42.3% 12.7% 38.3% Expenses ratio 43.0% 44.6% 29.8% 63.4% 35.7% 43.3% Combined ratio 73.1% 99.7% 81.0% 105.7% 48.4% 81.6%

Investment income (VNDbn) 126 97 28 72 54 NA Investment income/Pre-tax income 58.9% 97% 122% 224% 89% NA Investment income/Owners’ equity-2y Avr 27.5% 18% 18.8% 34% 16% 23.0% Investment income/Total assets-2y Avr 5.8% 7% 5.2% 22% 6% 9.1%

Source : AVI

Non-life insurance Bao Viet had a strong position in insurance transactions, with a low net loss and expense ratios At the end of 2006, the non-life sector had a total resulting in a low combined ratio of 73% in 2006. chartered capital of VND4,486 billion (US$280 million) and total assets of VND8,215 billion (US$513 Both Bao Minh and Pjico were very aggressive in million). The sector had a total of 6,714 employees expanding their market shares. They also accepted and 45,706 agents. In 2006 total premiums were high combined ratios of 99.7% for Bao Minh and VND6,445 billion, up 17.5% y/y. Local insurers 91.7% for Pjico. Neither earned enough money were the main players in this sector and held a on the underwriting side and had to break-even 96.8% market share. with the help of their investment income. Pjico is a typical example. With a combined ratio of over 1. Investment activities and operation 91%, when we added its underwriting reserve, ratios Pjico had an operational loss, pre-tax profit came solely from investment income after offsetting the Despite a small and an underdeveloped capital operation loss. market, local insurers made a reasonable return on investment income in 2006. Bao Viet led the way PVI investment activities were rather conservative. with over VND126 billion (US$7.8 million), increased They tried to balance operations and investment 1.4% compared to 2005. activities. The combined ratio of PVI was the lowest among selected top insurers at only 48.4% far lower Bao Minh followed suit with VND97 billion (US$6.1 than the norm of 81%. PVI has followed a successful million), up 17.2% compared to 2005. In terms niche strategy. With a competitive advantage in of investment income to owners’ equity and total oil and gas insurance, PVI can export its services assets, Bao Minh and PVI lagged behind with the overseas and has penetrated some regional lowest ratios. VASS seemed to have the most markets such as Malaysia, Japan, Singapore, and dynamic and agressive exposure toward the stock Russia. Therefore, they were not influenced by the market and lending resulting in impressive ratios. tough competition that has affected other.

Chart 48 - Investment INcome in 2006 Chart 49 - Operation Ratios in 2005

350 250% 120.0% 312 300 224% Net loss ratio Expenses ratio Combined ratio 200% 100.0% 250 200 150% 80.0% 98% 98% 122% 150 89% 100% 60.0% 100 84 72 54 50% 40.0% 50 28 - 0% 20.0% Bao Viet Bao Minh Pjico VASS PVI 0.0% Investment income (VNDbn) Investment income/Pre-tax income Bao Viet Bao Minh Pjico VASS PVI

Source : AVI Source : AVI

38 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 50 - Loss Ratios by Lines in 2006

1,600,000 100% 1,400,000 88% Net Premium 90% 80% 1,200,000 Net claims paid Loss Ratio 70% 1,000,000 60% 800,000 52% 56% 50% 46% 600,000 40% 30% 400,000 27% 20% 17% 20% 200,000 10% - 0% 3% 0% , n . s y d n y e t s c , ns . I an s re i ine n ubli and s F I Health Motor P u Vehicl Liabilit Personal Aviatio accident Hull Casual Explosio B Insurance Insurance Insurance of goods Pand Insurance Property & Interuption Insurance transported

Source : AVI

Loss ratios by product line

Total claims paid in 2006 reached VND1,342 billion Given these smaller companies strategies they (US$84 million, accounting for 29% of net premium can only expand their market share in the short written. Hull and P&I insurance and personal term. In the long term, we believe non-life insurers accident were the biggest in terms of premium should focus on core operations and niche products, revenue but they also posted the highest loss ratios improving the quality of services supplied and of 56% and 52% respectively, followed by goods capital ability to survive and compete after WTO transported insurance with a 46% loss ratio. integration.

Issues with expense ratios 2. Statutory insurance

Some companies have achieved high growth To protect the public interest, the government has rates in revenue but their operating expenses provided some main statutory insurance products, but have increased faster than revenue. This implied guidelines have been issued only for motor vehicle that the higher premium revenue was the result of owner, third-party liability coverage. Other products intense price competition. A clear sign the market are still waiting for guidelines from the authorities. is maturing, at least as far as existing products are The statutory insurance products include: concerned. - Motor vehicle and ship third party liability, airlines New, small insurance companies have considered liability for services supplied to customers, job liability commissions the most effective weapon to compete. insurance for lawyers, and job liability insurance for They have reduced prices and expanded services reinsurance enterprises; to both current and potential customers, including those who have already signed insurance contracts - Construction and installation insurance for projects with competitors. As a result premiums are using state capital, trust funds guaranteed by the reduced along with revenue, but the value of Government, investment and development credit insured properties and the insurers’ commitments funds of the state, and investment and development were unchanged. Moreover, such insurers are funds of state-owned enterprises. undercapitalised and cannot service large insurance obligations. They can only retain a small amount In addition, oil and gas projects, construction and of premiums received after reinsuring it to other installation, projects and construction works with a insurers, who are to some extent their competitors. high risk for public security and the environment are In some cases, low premiums mean that local also subject to statutory insurance. For other projects insurers cannot settle with reinsurers or are forced using other sources of capital, the Government to use less-highly-rated companies. This is a encourages the purchase of insurance; considerable problem.

39 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

- Shipping insurance is regulated under Decision No. road deaths. Motor bike accidents accounted for 128/1999/QD-BTC. Accordingly, ship owners licensed 73% of the total and automobile accidents 22%. to do offshore fishing are obliged to have their ships The reason for the increase in accidents is explained insured. For inland water business transportation, by the rapid increase in motor vehicles, which has registered means of transportation are also subject outpaced the development of new infrastructure. to third party liability insurance; Despite the high loss ratio, there is still great - Fire insurance is also provided for in the law on fire potential in this sector. Many insurers consider this prevention. These regulations are considered a good their mainstream product. The size of the market is opportunity for insurers to expand their exploitation about VND5.4 trillion (US$338 million). The sector and push the current growth rate of 15.3% in 2005; collected premiums totalling VND1,350 billion (US$84.4 million) in 2005 and 1,711 billion (US$ 67.6 - Tourist insurance has become a statutory product milliom) in 2006. The number of policy holders was as of January 2006 under the law on tourism. 600,000 or 67.6% of all registered automobiles and 5,000,000 (or only 30.8%) registered motorbikes. 3. Product growth rates in 2006 Many policy holders buy insurance to comply with traffic regulations, not based on their understanding The non-life insurance market has grown quickly of the utility of the product. To expand market share, but not uniformly across all products. In 2006, oil insurers build good relationships with authorities and gas insurance achieved the highest growth or related parties to gain priority over competitors. rate of 76.5% y/y. Car and EAR insurance ranked This process brings with it higher expenses including second with 36.5%. Property & casualty insurance, sales expenses, commissions, and other informal fire and explosion insurance followed with 34% and expenses. 21% respectively. b. Personal and injury insurance a. Motor vehicle insurance Pupil insurance and student insurance Like other countries in the region, motor vehicle insurance is the dominant non-life business line. With the premiums of VND959 billion (US$60 The reason is that motor vehicle (bikes and cars) million) in 2006, (a 14% increase y/y), personal liability insurance is compulsory, and that contact injury insurance was the third biggest product line. with customers over liability coverage opens the Bao Viet Insurance was the market leader in this door to sales of damage coverage as well. This segment with VND583 billion in premiums (US$36 line of product accounted for 30% total premiums. million). Bao Minh and Pjico followed with VND208 Premiums rose 18% y/y in 2005. In 2006 a different billion (US$13 million) and VND67 billion (US$4.2 picture. Motor vehicle premiums accounted for million) respectively. 21.7% of the total rising only 6.9% y/y due to intense There is still considerable room for growth in this price competion, poor new car sales last year and segment. Vietnam has over 17.2 million school the growing maturity of motor insurance segment. children and 1.31 million college students. With the average fees of VND30,000 per person pa, the size Loss ratios are on the rise as well. For motor vehicle of the market was VND 555.3bn (US$ 34.7million), insurance, the loss ratio increased from 48% in in which pupil insurance was VND 516bn (US$ 2004 to 52% in 2005 and 56.7% in 2006 because 32.2million) and student insurance was VND 39.3bn of the greater frequency and severity of accidents. (US$ 2.5million). Currently, only 50% of pupils According to the Bureau of Traffic Police, in 2006, have insurance policies, and student insurance there were about 14,318 accidents (and 11,283 penetration is low but growing. fatalities) compared with 14,141 accidents (10,400 fatalities) in 2005. Thats an 8% annual increase in

Chart 51 - Operation Ratios Calculation

Net loss ratio = Net claims paid / Net premium written Expenses ratio = (Other operating expenses + Selling and Administrative expenses) / Net premium written Combined ratio = Loss ratio + Expenses ratio

Source : AVI

40 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 52 - Dead Accidents by Sector (1995-2003) Chart 53 - Labor Accidents by Provinces (1993 - 2003)

Construction HCM, 19% HCM Construction, Others, 16% 43% Dong Nai Others, 53% Electricity Quang Ninh Electricity, Dong Nai, 16% Ha Noi Exploitation 14% Quang Hai Phong Exploitation, Sectors 9% Sectors required Hai Phong, Ninh, 9% Others required high high labor safety 7% labor safety equipments Ha Noi, 8% equipments, Others 6% Source : MOLISA Source : MOLISA

Bao Viet, Pjico, and Bao Minh are the three main not the bottom line, of the income statement. It is suppliers in this segment, sharing the VND200 billion an effective way to improve overall market share (US$12.5 million) pupil insurance segment. Bao Viet and their reputation. Insurance has a 70% market share. Pjico received VND30 billion (US$1.9 million) in premiums in 2004 - Finally, since 65% of the population is under 30 and achieved the most significant development years old and 23% is in school, this segment allows in this segment with an average growth rate of them to capture future potential customers. 40% over the period 2001 to 2006. Local insurers consider this to be an important market. Labour insurance

However, the products and services supplied are Labour insurance presents a similar situation, with not well differentiated. The principal tools used to insurers covering only five million labourers – 11% compete are sharing premiums with the school and of total labour force. The Government estimates granting commissions to agents and third parties. Of that Vietnam adds one million more workers to the total pupil insurance premiums, commission ate up labour force every year. over 40% while compensation expenses accounted for over 50%. Bao Viet Insurance and Pjico had a In general, the number of labour accidents and their high loss ratio with 54.4% and 63% respectively. But seriousness has increased steadily. From 1995 up to 249% for QBE. In 2005, Pjico achieved a 32% to 2002, the number of accidents increased by an increase in premiums compared to 2004. average of 23% per year, with a spike in 1996 of 51%. More seriously, the number of on-the-job However, the high loss ratio is a matter for fatalities also grew at an average rate of 14% over consideration. In Hanoi only, Pjico paid compensation the same period. Fortunately, the recent growth in in over 4,000 cases and recorded a loss ration of up accidents has dropped to 10% and growth rate of to 70% of premiums received. The picture would job-related fatalities remains at the 2003 level. be rosier if they added paid-out commission. If the margin is so low, why do they still consider it These rates take into account accidents that occur a potential market? They do so for a variety of nationwide, but most are concentrated in big cities reasons: and areas with high numbers of enterprises like Ho Chi Minh City (19%), Dong Nai Province (14%), - Some insurers feel a sense of social responsibility Quang Ninh (9%), Hanoi (8%) and Hai Phong that outweighs profit considerations. Some of the (7%). These provinces accounted for 57.24% of same companies have established scholarships to all accidents, 29.6% of fatality-causing accidents, support poor pupils. 37.5% of fatalities, and 49% of injuries. These accidents take place in all sectors, especially - Secondly, insurers want to reinforce and in construction (16%), electricity (16%), mineral expanded their market share and position. In exploitation (mining, oil and gas etc.) (9%), and some small towns, the pupil and motor vehicle are other sectors with heavy requirements for safety the main products. They have found it difficult in equipment (6%). In these four sectors alone, fatal sell other products due to low demand and poor- accidents accounted for 46.5% of all accidents and perceptions toward insurance products. Moreover, amounted to 50.8% of all on-the-job deaths. market share is calculated based on the top line,

41 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 54 - Labor Accidents for the period 1995 - 2003

5,000 1 4,500 79% 0.8 No. of 4,000 accidents 3,500 0.6 51% No. of Death 3,000 0.4 30% 2,500 24% 26% 25% 21% 0.2 Growth - 2,000 10% 8% 8% 6% Accidents 1,500 1% -2% 0%0 1,000 -10% -0.2 Growth - 500 -29% Death - -0.4 5 6 7 8 9 0 1 2 3 199 199 199 199 199 200 200 200 200

Source : MOLISA c. Shipping insurance and goods transport insurance VIP has also signed a contract to build 2 vessels The shipping insurance segment also faced fierce with the capacity of 16,500D WT worth US$ 49.2 competition due to reduced insurance fees by million. And SHC took delivery of the SHC PIONEER many insurers. The shipping industry has grow by with a loading capacity up to 20,000 ton which was 150-200% since 2004, and a recent revaluation of insured by Bao Minh and West of England. ships led to increases in premiums of 15% y/y to VND526 billion (US$32.9 million). In 2006, Bao In 2006, Vietnam exported goods valued at US$39.6 Viet Insurance was the leader with a 28.1% market billion, and imported goods worth US$44.4 billion. share, Bao Minh ranked second with 19.8%, and With average insurance fees of 0.3% over the export Pjico followed with 15.6%. and import turn-over of US$84 billion, the market size was up to US$252 million. Premiums topped The local insurers are not very experienced in risk US$33 million in 2006 accounting for 13% of total assessment and management, resulting in high market size. The remaining 87% was awarded compensation ratios last year. Some insurers to foreign insurers based overseas. Maritime had to pay compensation equal to their premiums, insurance coverage is considered one of the most including bao Minh (96.67%). Albeit in a slightly important criteria in assessing the ability of an better position, other insurers also recorded high insurer. All insurers have taken pains to improve loss ratios: Bao Long (78%), Bao Viet (71%), and their positions. Bao Minh set a target of VND177 SamSung Vina (66.5%). billion (US$11 million) for this sector in 2006. In the first nine months of 2006 alone, Bao Minh collected Thank to the rapid development of the capital up to VND123 billion in premium (US$7.7 million), markets, shipping companies has raised capital and an increase of 16% y/y, of which goods transport in the first 3 quarters of 2007, most listed shipping accounted for 50%. Bao Minh actual number was companies have bought or ordered new vessels to VND 207.7 billion at the end of 2006. This is an upgrade their ageing fleets. improvement, but it is very small in comparison with the total value of goods transported through Ho Chi In September 2007, Marina Hanoi (MHC) bought Minh’s ports. a new container vessel named Ocean Asia from Bremerhaven (Germany). Some main indicators With WTO membership, two-way trade between include GT/NRT: 10.835MT/6.558MT, loading Vietnam and other countries around the world capacity: 950 Teus, length: 150m, width: 23m, will increase. However, to capture these new speed: 13 Knots (service) 17.0 Knots (Max). Other opportunities, local insurers must persuade players such as VIPCO (VIP) and Saigon Maritime Vietnamese enterprises change their trading Company (SHC) have expanded their loading practices. In other words, Vietnamese enterprises capacity as well. must be encouraged to buy insurance.

42 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report d. Agricultural insurance

Agricultural insurance has been deployed in Vietnam market. Unfortunately, Groupama stopped supplying since 1980s. Everyone knows the important of agricultural insurance after 2 years in operation. 2006 agricultural insurance to the economy. Over 70% direct premium results were quite sad. Bao Viet got Vietnamese population live in rural areas and work VND 672 million (US$ 42,000) and Groupama only in the agricultural, forestry and fishery sector which got VND 2 million (US$ 125). contributed around 21% in GDP in 2006. At the end of 2006, Agribank received a license In practice, according to statistic number of MoF, the to set up a new insurance company, named ABIC penetration rate of Vietnamese agricultural insurance operational since August. With a strong network and is very low, under 1% of total crop plants and domestic a close ralationship with the farming community, we animals are insured. At the end of 2001, agricultural think ABIC can do well with a niche strategy. insurance only covered 0.19% crop plants, 0.24% of cattle, 0.10% of pigs and only 0.04% of poultry. Since Surveys show that the problems came from both then, the penetration rate is not much improved. supplier and customer. Farmers have a limited financial ability and do not fully understand the The need is clear. The damage cause by disease, essentials of insurance. With fragmented production drought or natural disaster in years past in the and low productivity, the income per capita of farmers agricultural sector has been very serious. For is very low. Most of them are still in the lowest level example in was 1994, loss amounted to 8.2% GDP, of Maslow’s hierarchy. 10.5% GDP in 1997, 4.8% GDP in 1999 and 4.57% GDP in 2000. As for insurers premiums written are low, selling and administrative expenses are high while the And in the aviation flu recently, The Vietnamese commissions generated are poor. It is very hard agricultural sector lost 38 million of fowls (15% total to attract agents to work for them. In many cases, nationwide) with the value of VND 3,000bn. Out of insurers had to cover all the arising expenses. 38 million fowls, only 500 were covered by insurance with a total compensation of VND 12mm. The Both insurers and customers are not speaking a shows clearly that farmers did not pay nearly enough common language. Farmers, living in fertile areas attention to hedging their risk. and enjoying the good returns, do not want to buy insurance. Those who do like to buy insurance live Bao Viet was a pioneer but it found many difficulties in regions where calamity and epidemic disease making any money as revenues are paltry while the regularly happen. compensation paid out has increased rapidly. In 2002, Groupama entered the market and set up the Not good for insurers. The insurance business is head office in Can Tho City, the center of Cuu Long based on the majority principle that a large number River delta. Groupama is the only one who has its of customers share the risk. The current model is not head office out of Ho Chi Minh City and Ha Noi City. working. Insurers will have to expand their customer South west and South east region were its main base to other region for better risk management.

43 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 55 - Brokerage Premiums by Types in 2006 Chart 56 - Brokerage Commission in 2006

Property and Property and 9.8% Casualty Casualty 1.8% Cargo 17.2% Cargo 3.8% 68.9% 2.5% Aviation Aviation 2.6% 1.4% Motor Motor 7.9% 5.2% Fire&special hazard Fire&special hazard 0.1% 3.1% Hull and P&I 1.1% 57.5% 3.9% Hull and P&I General liability 7.8% General liability 0.1% Business 5.5% interruption Business interruption Health and personal accident Health and personal accident Source : VnEconomy, VinaSecurities Source : VnEconomy, VinaSecurities

Brokerage

Although still in the early stages, brokerage activities Recently, local brokers have developed quickly have developed fast. Total brokerage premiums were but foreign brokers are still the main players in the up 57% and 28% y/y from VND580 billion (US$36.3 brokerage sector. The market share of local players million) in 2004 to VND908 billion (US$56.8 million) was 16.23% in 2005, an improvement from 12.2% in 2005, and up to VND1,159 billion (US$72.4 in 2004. This was quite small compared to foreign million) in 2006. The proportion of total brokerage rivals with 83.77%. Three global insurance brokers premiums received over total non-life premiums have also appeared in Vietnam. They have a lot of was 18% at the end of 2006, a big improvement experience and, more importantly, a global network. from 5.1% in 2003 and 16.3% in 2005 and had a In contrast, local brokers have weak agent networks, CAGR of 80.8% for this period. This ratio was 30% smaller funds, and poorly trained staff. in Thailand and Malaysia at the end of 2004. Each broker has positioned itself in its own segment. The broker acts as an intermediary between Foreign brokers have focused on foreign-invested corporations and insurers. Not unlike an agent enterprises to take full advantage of their worldwide representing an insurer, the broker represents the connections and greater status. Recently, the insurance buyer and is involved at several points Government has permitted them to service along the risk chain. Brokerage operations are Vietnamese SMEs, but they have had difficulty especially important in tight markets. Insurance penetrating this market primarily due to the much brokers, though new to Vietnam, play a critical role different business culture and small market. in the insurance business: they provide consultation to insurance buyers regarding policies, conditions, Meanwhile, local brokers have concentrated on the premiums, actuarial and loss control, claims local enterprises and individuals, where the demand management services, and right insurers. They is greater. However, besides their regular customers also facilitate negotiation and signing of insurance with whom they have very deep relationships, contracts. local brokers find it difficult to educate potential customers, who are used to buying insurance in However, in comparison with other countries, the the traditional, more direct method. Many of them number of brokerage companies in Vietnam is do not trust brokers and prefer to deal with prime very small. Currently there are only 8 brokers in insurers directly. Vietnam. Singapore has 36 brokers and over 158 primary companies, Malaysia has 63 and over 53, Brokers have been used mainly by foreign and Indonesia has 66 and over 169. enterprises. They have a lot of experience in using

Chart - Risk Chain

Risk Com. Primary R/I R/I Retro- Manager Broker Insurer Broker Reinsurer Broker cessionaire

Source : Swiss Re

44 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 57 - Brokerage Premiums & Non-life Premiums Chart 58 - Number of Brokerage Companies

1400 20% 5 Total brokerage premium 17.98% 18% Local brokers 1200 % Non-life 4 4 4 16% 4 Foreign brokers 1000 12.2% 16.4% 14% 3 3 3 3 800 12% 10% 1,159 2 2 600 8% 2 908 6% 400 5.1% 1 1 1 1 4% 1 200 580 2% 196 0 0% 0 2001 2002 2003 2004 2005 2006 2003 2004 2005 2006

Source : VnEconomy, VinaSecurities Source : VnEconomy, VinaSecurities such services to save costs and manage risks more For agricultural insurance, the brokerage premiums effectively than when dealing directly with insurers. were zero as no company took care of this segment. Moreover, local enterprises are not familiar with Premium received and commission received are this service because brokerage insurance is new closely correlated. to Vietnam. Currently, foreign brokers can only approach foreign-invested enterprises and non- As for commission, P&C insurance also accounted state-owned enterprises. They do not spend time for the biggest portion with a 57.5% share. While or money educating consumers like state-owned health and personal accident came second and enterprises. enjoyed the highest margins accounted for 17% total commission received against only 9.8% of That leaves a big barrier for local brokers in accessing total revenue received. In 2005, thanks to effective the huge market of big state-owned companies who and flexible cost management, with only 16.2% of lack experience in using brokerage insurance. In the premium market, local brokers took 25% of the general, foreign brokers have contributed much total commissions. The 2006 number are not yet to the development of the market by introducing available. international standards and best practices into Vietnam. Among eight players, Aon Vietnam, one of the top ten brokerage insurance and reinsurance So far, the increase in FDI has been one of the companies in the world (ranked by Business most important motivations for the development Insurance Magazine) and the market leader in of this sector. Some experts say that although the Vietnam, captured 46.6% of premiums but only service has begun to grow strongly it still cannot 36% of total commissions in 2005. Aon came to meet demand. There are plenty of opportunities Vietnam quite early, establishing offices in Ho Chi for brokerages to expand, especially after January Minh City and Hanoi in 1993, and has achieved 2008, when the barriers will be removed. an average annual growth rate of over 20%. Aon Vietnam has focused on foreign companies seeking The biggest slice of total brokerage premiums specific advice on insurance and risk management came from the property and casualty segment with for their Vietnamese operations. Aon Vietnam has 68.9%, followed by the health and personal accident good relationships with big companies in the oil insurance and motor insurance with 9.8% and 7.9% and gas, aviation, manufacturing, construction, and respectively. Other segments are very fragmented. telecom sectors.

45 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report Chart 59 - Reinsurance structure Chart 60 - Statutory Reinsurance Premiums

Items 2003 2004 2005 2006 54.0% 53.0% 53.3% Prime premium 10,390 12,479 13,558 14,928 52.0% Received from oversea 38 63 98 112 51.0% 50.6% 50.0% Total premium received 10,428 12,542 13,656 15,040 49.6% 49.0% Paid to oversea 1,448 1,946 1,694 2,295 48.4% 48.0% 47.8% Total premium holding 8,980 10,596 11,962 12,745 47.0% % holding 86% 84% 88% 85% 46.0% % reinsurance to oversea 14% 16% 12% 15% 2001 2002 2003 2004 2005

Source : MoF Source : MoF 20% of the committed amount to a local reinsurance Reinsurance company (VinaRe). The rest they can do with as they like. Vietnam’s insurance industry has been developing rapidly and has improved its prestige throughout the VinaRe’s total revenues and statutory revenues region. The reinsurance received from overseas have trended downward in the last five years. The was rather small but it surged by 66% y/y in 2004 non-life insurance market has grown significantly, and around 56% y/y in the last 2 years. Overseas but not evenly. The growth was mainly in non- reinsurers controlled around 14% of total prime reinsurance transactions such as motor vehicles premiums that helped to keep the retained premium and personal injury, while the life insurance growth at around 86% in the last three years, resulting in a rate has been quite low. Reinsurance transactions higher profit margin than the industry standard. have come under fiercer competition from foreign rivals. Moreover, local insurers want to retain more In Vietnam, the Vietnam National Reinsurance premiums from primary products like maritime, fire, Company (VinaRe) is the sole provider of construction, and installation. reinsurance services. This state-owned company was established in January 1995 and was converted In addition the industry has faced a big problem into a joint-stock company in January 2005. because insurers try to expand their market share VinaRe’s chartered capital is VND500 billion via reducing the selling fees. Because of the (US$31.25 million) but the actual paid-in capital is resulting razor thin margins they cannot afford to just VND343 billion (US$ 21.5 million). Of this, the re-insure to other insurers. state has contributed 56.5%. Another 13 non-life Just like other insurers in the industry, VinaRe insurance companies hold a combined 40.5%, and was very conservative in its investment policy. The other individuals hold 3%. investment in bank deposits and bonds occupied VinaRe’s core business is reinsurance and the biggest part with around 85% of the total. Bank investment in financial instruments such as bonds, deposits alone accounted for 57%. The investment stocks, private equity, and real estate. in equity was modest, accounting for only 14% of total investments. The porfolio has been boosted The government also uses VinaRe as a tool to in the last 2 years with an increase in bond and influence the insurance market. They try to limit the equity investment. By 2006, bonds accounted for shift of insurance services and foreign currencies the biggest portion with 56% share of total long term abroad. Under the insurance law, currently, investment (an increase from 28% in 2004). Equity insurance companies can freely reinsure other investment ranked second with 26% share of total insurance enterprises including foreign insurance long term investment whilst bank deposit decreased companies abroad. They must reinsure at least sharply from 57% in 2004 to 18% in 2006. Chart 61 - Reinsurance Indicators Chart 62 - VinaRe Historical Performance

Av. Growth 900 300% 2005 2006 2004-2010 Total premiums received 800 250% Premiums Ceded 700 Retained premiums 200% Personal injury 84.05 96.66 15.5% 600 Total pre. Growth Retained pre. Growth 150% Oil and Gas 55.95 64.34 10.0% 500 100% Shipping insurance 26.87 29.56 15.5% 400 50% Aviation 340.34 196.42 15.0% 300 Fire&special hazard 111.8 117.39 21.0% 200 0% Import and Export Goods 83 92.13 16.5% 100 -50% Life insurance and Others 6.4 7.2 25.0% - -100% 1999 2003 1996 1997 1998 2001 1995 2000 2004 2005 2006 Average non-life growth 16.5% 2002 Average reinsurance growth 17.6%

Source : Government’s strategies toward the development of the Source : VinaRe, VinaSecurities insurance market from 2003 to 2010 46 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 63A - VinaRe’s Investment Porfolios Chart 63B - VinaRe’s Post Auction Shareholder Structure

Employees, 70% Other investors, 2.2% 60% 57% 56% 52% 16.8% 50% State, 36.2% 40% 34% 28% 30% 26%

18% New strategic 20% 14% 13% partners, 10% 17.0% 0.6% 0.3% 0.2% 0% Existing 2004 2005 2006 shareholders, Equity investment Bonds Banking Deposit Lending 27.9%

Source : VinaRe Source : VinaRe The reinsurance sector achieved a CAGR of 25% This year, VNR hopes chartered capital will reach in total premiums written, and a higher growth rate VND 750bn, an increase of 118.7% compared to of 28% in retained premiums. It is estimated that current chartered capital of VND 34.4bn. The new reinsurance premiums have fallen 42% in 2006 due paid-in capital will be awarded to: to the changes in VinaRe’s policies toward aviation - Existing shareholders with 13,720,000 shares insurance. The change will not have a big influence (10 old shares will get 4 new ones) at VND 10,000 on operating income and other financial ratios (such per share. as retained premiums, net income), because they - Employees, BOM, BOD and Audit Committee with usually retrocede a large amount of aviation contract 1,650,000 shares at VND 15,000 per share. premiums overseas. - Outside investors via auction with 12,580,000 Under the strategy for development of the insurance shares at the reserve price of VND 60,000 per market in 2003-2010, the Government projects share. growth of 17.6%, higher than that of non-life - And strategic investors with 12,750,000 shares. insurance, which it sets at 16.5%. Currently, life Details of selection criteria and offer price will be reinsurance premiums are very small, accounting announced by the Board of Management. for under 11.3% of total reinsurance abroad in 2006. This segment has great potential, with an estimated VNR will use the new paid-in capital to increase its growth rate of about 25% in the next period. IT applications and financial strength so as to win more reinsurance contract not only in Vietnam but VinaRe has set a target to achieve VND1,721 billion also in the region, and to retain more reinsurance (US$108 million) in reinsurance revenue in 2010 premium written. and an average growth rate of 15.85% in the period Moreover, the new paid-in capital can be used to 2004-2010. Their retained reinsurance revenue invest more in other non-life insurance companies would then be VND1,710 billion (US$107 million) that VNR has invested such as Pjico Insurance, with the expected growth rate of 24.13% for the Samsung Vina Insurance, Bao Tin Insurance and period 2004 to 2010, and the provision fund would Global Insurance who are in need of capital to meet be VND500 billion (US$31.3 million). The total the new legal capital required by the MoF. retained premiums of the market via operations of VinaRe will be VND2,000 billion (US$125 million) VNR has also shown interest in contributing capital and the total reinvestment to the economy will be to newly established companies such as Bao Viet VND1,000 billion (US$62.5 million). Bank and FPT Bank. We have concerns. Too much capital is being mobilized in a short time, Free float is tiny. Out of 34.4 million shares the investment projects are too long term and is outstanding, only 600,000 shares (or 3% total share being invested in smaller non-life insurers who are outstanding) are available for trading on the HaSTC. competing against each other; These stocks mainly come from the employees. As aresult, the market has not been eager to invest. Other shareholders such as the State and 13 non-life In the August auction, out of 12,580,000 share insurers haven’t traded shares since inception. offered, only 746,300 shares were sold accounting Recently, VNR’s shareholders agreed to increase for 6% of the total offering. The average accepted its chartered capital to VND 3,000bn by 2015. The price equalled the reserve price. One of the worst plan is divided into three stages. The first stage is auctions so far. in 2007. The last two stages will be by the end of VNR is currently trying to find potential strategic 2009 and 2015 respectively. partners.

47 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 64 - Earning Model - Bao Viet Insurance Corporation

FY 2005 yoy FY 2006 yoy FY 2007E yoy FY 2008P yoy

Net Premium and Investment Income (VND mm) 5,729,613 3.44% 5,318,341 -7.18% 5,653,396 6.30% 6,182,097 6.30% EBT (VND mm) 399,135 72.69% 430,886 7.95% 536,022 24.40% 572,244 24.40% Net Profit (VND mm) 306,222 75.16% 318,869 4.13% 393,484 23.40% 420,263 23.40% Pre-tax Profit Margin 6.97% 8.10% 9.48% 9.26% Net Profit Margin 5.34% 6.00% 6.96% 6.80% ROE 17.6% 16.9% 17.2% 14.6% Average Equity 1,738,677 1,884,017 2,288,969 2,879,353

Source : Companies’ Financial Statements and Forecast, VinaSecurities Company analysis Bao Viet Insurance Corporation profile Life has functioned as an independent, wholly- owned subsidiary of BVIC with a paid in capital of • Bao Viet Insurance Corporation expects FY2007 US$40 million and a network of 61 subsidiaries, revenues of almost VND5.6 trillion (US$353 mil- 500 transaction offices, 2,500 employees, and lion) up 6.3% y/y. The same growth rate is also 22,000 agents in 61 provinces nationwide. BaoViet projected for 2008. Insurance is able to leverage off a combined • Profits is projected at VND572 billion (US$35.7 distribution platform to distribute both its life and million) in 2007, up 24.4% y/y. nonlife product. Its sales force is well-trained and BaoViet Insurance has the largest number of • In 2006, Bao Viet continued to top the domestic professional full-time agents . We see this as their market, offering life insurance as well as cover- key competive advantages. age for vehicles, goods and shipping lines BaoViet Insurance has two training centers located in • Income is growing faster than revenue because Hanoi and Ba Ria Province providing annual training Bao Viet Insurance Corporation has transfered for approximately 70 representatives from branches its investment capital to Bao Viet Holdings for across the country. These branch representatives investment re-allocation. This will be managed are then required to train the wider agency network by Bao Viet Fund Management. affiliated to their respective branches. This structure enables the entire sales force of BaoViet Insurance Bao Viet Insurance Corporation (BVIC) is a to be trained and catch up with the rapid pace of subsidiary of the state-owned Bao Viet Holdings change in the industry. and operates as Vietnam’s leading life and general insurer. BVIC accounts for approximately 38% of In 2006, Bao Viet saw its total assets grow by each sub-sector’s premiums. BVIC comprises two 11.9% from US$848 million to US$950 million. The subsidiaries named Bao Viet Insurance (Non-life) insurance firm’s investment assets and fixed assets and Bao Viet Life. In addition to insurance, Bao accounted for US$882 million or 93% of total assets, Viet Holdings manages investment fund, securities and rose 14% y/y last year. Net premiums written company, other financial institutions and other increased only by 2.8% y/y from US$296 million to enterprises in many industries. US$304 million, while pre-tax profit grew by only 9.4%, from US$24.7 million to US$27 million over The equitisation has just finished for Bao Viet the same period. Holdings, which includes BVIC (Bao Viet Life, Bao Viet Non-life companies) and other subsidiaries. Bao Viet has also set up a joint venture with Tokio Marine in which Bao Viet and Tokio Marine hold Bao Viet Life supplies youth coverage, endowment 51% and 49%, respectively. The joint-venture protection, term and whole life support, life annuity named Vietnam International Assurance (VIA) plans, and group term life insurance. Bao Viet Non- provides general insurance in the Vietnamese life covers motor vehicles, personal injury, marine market. The products offered by VIA are similar to cargo, aviation and hull damage, fire and special that of BaoViet Insurance. However, there is a tacit hazards, construction and installation, and third- non-compete agreement between VIA and BaoViet party liabilities. Insurance. The main customers of VIA are Japanese BVIC has a paid in capital of approximately US$71 corporate clients, buying mainly fire, property and million and a countrywide network. This number will marine insurance policies. Other products offered increase to US$ 150mm when Bao Viet Holdings by VIA include automobile insurance, public liability finishes its procedures to be a joint-stock company. insurance, personal accident insurance, workman At the beginning, BVIC included Bao Viet Non-life compensation and engineering insurance. VIA has Insurance and its dependent subsidiaries with enjoyed good operating results. In 2006, the net over 3,750 agents in almost every province and income of the joint venture was VND 22 billion, up city nationwide. Since January 2004, Bao Viet 50% y/y.

48 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 65 - Earning Model - Bao Viet Life

FY 2005 yoy FY 2006 yoy FY 2007E yoy FY 2008P yoy

Net Premium and Investment Income (VND mm) 3,870,991 2.83% 3,245,471 -16.16% 3,407,745 5% 3,714,442 9% EBT (VND mm) 154,177 313.23% 228,704 48.34% 308,750 35% 330,363 7% Net Profit (VND mm) 111,007 313.23% 174,824 57.49% 227,271 30% 243,180 7% Pre-tax Profit Margin 3.98% 7.05% 9.06% 8.89% Net Profit Margin 2.87% 5.39% 6.67% 6.55% ROE 14.89% 23.7% 18.9% 14.0% Equity 745,734 736,646 1,202,560 1,734,378

Source : Companies’ Financial Statements and Forecast, VinaSecurities

Bao Viet Life In the coming years, Bao Viet Life will be designing • Second biggest player in the life sector with products catered to particular groups, especially 38% market share based on income. The current products were based • Holding 1.6 million policies in-force at the end on a wide range of characteristics including age, of 2006 gender, and financial goals. Depending on their income, customers will select the most suitable • Expects an average annual growth rate of 5% product and decide the value of the contract. The between 2007 and 2010 new products will give customers more choices • In 1H 2007, Bao Viet lead the way in the life based on their income and allow them to more sector. Total premiums came to over VND 1.6 flexibly satisfy their coverage needs. trillion, an increase of 5% y/y and revenue from new insurance contracts rose 35% y/y The Group insurance products have accounted for average growth rate of the life sector of 25%. around 5% of total premiums. Bao Viet considers this a potential segment to exploit. Being a WTO Bao Viet had total assets of VND12,617 billion member, more foreign companies will invest in (US$789 million) and an ROE of 23.7% in 2006. Vietnam and human resources will be a matter of Bao Viet is the largest in terms of chartered capital concern. To retain skillful staff, employers in all among life insurance companies, with its chartered industries are turning to better insurance policies capital equal to VND1,500 billion (US$95.3 million), as a way to attract and retain employees. Recently, and it is the sole state-owned, local life insurance Bao Viet has found success in some sectors such company in Vietnam. Its core business revolves as garments, construction, and pottery. around a variety of life insurance products, including Whole Life Insurance, Pure Endowment Insurance, The year-on-year growth rate of direct premiums has Term Insurance, Endowment Insurance, Annuity decreased constantly from 43% in 2002 and actually Insurance, and Rider (supplementary) Insurance. fell 16% in 2006. Bao Viet fell far behind its main competitor, Prudential, which saw 6.19% growth Being a subsidiary of Bao Viet Insurance Corporation, in 2006. Bao Viet also lost its number one market Bao Viet Life is in a favourable position to set up share slot from 2003. Moreover, direct claims and an active business network. Currently it has 61 benefits paid increased significantly in the same branch offices and about 500 transaction offices, period by a whopping 52.7% y/y in 2005 and 20% 2,500 employees, and about 22,000 agents in y/y in 2006 due to increases in compensation and 61 provinces nationwide. With its wide network, the number of invalid policies. Bao Viet Life can keep in touch with its customers regularly and quickly respond to their concerns. Investment income also declined 81% y/y compared Bao Viet Life’s agent turnover was the lowest in to 2005. In 2005, the investment revenues contributed the sector thanks to flexible agreements. Usually 21% of total revenues, a big improvement compared in other companies, agents are terminated if they to 14% in 2003 but dropped to 4.7% in 2006. are inactive in three consecutive months. As a Don’t panic. The reason is that Bao Viet Life has state-owned company with an obligation to serve transfered its entire investment porfolio to its fund the public good, Bao Viet’s agents can remain manger Bao Viet Fund Management (BVFMC). This on contract for up to one year while inactive, as is now accounted at the consolidated level. determined on a case-by-case basis. Even while Despite Bao Viet’s efforts, direct claims and benefits inactive, agents continue to enjoy commissions from paid increased faster than of direct premiums. As their exploited contracts. a result, payment ratios, including direct claims and

49 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 66 - Bao Viet Life’s Main Indicators Chart 67 - Premiums, Claims and Payment Ratio (US$mm)

12,000 200% 12,000 200% Direct premiums Direct premiums 180% 180% w ritten w ritten 10,000 10,000 160% 160% Direct claims and Direct claims and 8,000 140% benefits paid 8,000 140% benefits paid 120% Accumulated 120% Accumulated 6,000 100% Reserves 6,000 100% Reserves Direct premiums Direct premiums 80% 80% 4,000 w ritten % 4,000 w ritten % 60% 60% Direct claims and Direct claims and 40% 40% 2,000 benefits paid % 2,000 benefits paid % 20% Accumulated 20% Accumulated - 0% Reserves % - 0% Reserves % 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005

Source : VnEconomy, VinaSecurities Source : VnEconomy, VinaSecurities benefits paid over direct premiums written was up many success. Discussions are also currently being an average of 46% per annum in the 2003 to 2006 held with the Habubank for similar bancassurance period, and grew 65% y/y in 2006. The trend is partnerships. not a favourable one and represents a bad sign. Despite the negative trend in all aspects, Bao Viet New unit-linked products are also being planned Life net income still increased 46% y/y in 2006. The jointly with BVFMC, given their increasing popularity. high growth rate in net income was found in the It is expected to attract new customers because of underwritting reserves which decreased by 68% in the more attractive returns offered and clients have 2006 compared to 2005, accounting for only 15% more opportunities to select the most approriate direct premiums in 2006 compared to around 50% products. These products are expected to be in 2005 and 70% in 2003 and 2004. available by the end of 2007. Besides, together with Tillinghast, BaoViet is developing a universal life With its effort to expand the cooperation with other product (investments savings and life insurance), financial institution, in 2004, BaoViet and Agribank, which is also expected to be launched by the end one of the leading state-owned banks, signed a of 2007 or early 2008. co-operation agreement stipulating that both firms will provide financial products and services for each BaoViet has fallen behind Prudential in developing other. In particular, Agribank will offer account unit linked products partly because of a lack of management, bill payment services, premium inhouse actuarial know-how in managing unit linked instalments and ATM facilities to Bao Viet, while accounts. the life insurer will provide Agribank employees with insurance coverage. Both companies’ client For its long term development, Bao Viet has signed bases should benefit from the bancassurance consulting contracts with LIMRA International to arrangement. In addition, Bao Viet also signed conduct a market study on its agency compensation bancassurance agreements with Techcombank. structure and agency network management. In addition, Bao Viet has signed another contract with Bancassurance is considered a key area of growth Tillinghast Towers Perrin on assisting and advising for BaoViet Life. A partnership with Techcombank Bao Viet with its asset liability management. Such signed in October 2006 where the bank has agreed effort will help Bao Viet to improve its position and to be the distributor of BaoViet products including will be the frontier in the next development period. term insurance. The cooperation has announced with

50 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 68 - Earnings Model - Bao Viet - Non-Life

FY 2005 yoy FY 2006 yoy FY 2007E yoy FY 2008P yoy

Net Premium and Investment Income (VND mm) 1,888,290 6.41% 2,039,385 8.00% 2,243,324 10.00% 2,467,656 10.00% EBT (VND mm) 204,003 5.05% 214,263 5.03% 227,119 6.00% 241,882 6.50% Net Profit (VND mm) 148,126 5.94% 156,127 5.40% 166,275 6.50% 177,083 6.50% Pre-tax Profit Margin 10.80% 10.51% 10.12% 9.80% Net Profit Margin 7.84% 7.66% 7.41% 7.18% ROE 38.00% 34.0% 21.9% 16.3% Average Equity 389,842 459,537 760,115 1,088,157

Source : Companies’ Financial Statements and Forecast, VinaSecurities

Bao Viet Insurance (Non-life) smaller on 2005 due to fiercer competition. In • Largest and longest-standing insurer in Viet- 2006, Bao Viet Insurance was still the leader in this nam segment with 38.4% of the market, down from 42.3% in previous year. • Leads market with 34.9% share in 2006, down from 38.6% in 2005 and 40.5% in 2004 Bao Viet Insurance has achieved much success in personal accident and healthcare insurance. • Gross premiums in 2005 reached VND2,246 In 2006, premiums from these product lines was billion (US$140 million), 6.65% y/y, and pre-tax VND582 billion (US$36 million), up 7.3% y/y, and profits were VND156 billion (US$9.7 million), up accounting for 60.8% of total market share. Bao 5.4% y/y Viet has developed a very strong relationship • Total assets of VND2,313 billion (US$145 mil- with schools and universities nationwide who lion) and an ROE of 34% are the main consumers of pupil insurance and comprehensive personal insurance. BaoViet • Direct claims and management expense ratios Insurance insures approximately 9 million pupils increased significantly in 2006, higher than the and students across the country. Premiums for this average level in the 2003-2006 period product accounts for 32% of Personal Accident and Bao Viet Insurance is a subsidiary of BVIC and Healthcare premiums. specialises in non-life insurance services. The Bao Viet Insurance also developed a close insurer had a total of 64 dependent subsidiaries relationship with SOS to provide international and over 3,750 agents in almost every province assistance and consulting services to tourists, which and city nationwide at the end of 2005. Bao Viet helps it to provide a wide range of products related has captured a huge share of the big state-owned to standard and emergency medical insurance and companies, state-funded projects, and state travel insurance. agencies, especially in personal accident and healthcare insurance, automobile insurance, and For other key product lines, Bao Viet Insurance cargo insurance. enjoyed a high market share in 2006 (28% market share in cargo insurance, 29% in aviation insurance, Bao Viet Insurance’s advantage is its extensive 50% in business interpruption insurance, 31% in network of branches and agents in all provinces CAR EAR, 34.2% fire and explosion and all risk resulting in a strong connection and relationship with property) but it faced strong competition. Marine its clients and local authorities nationwide. hull, P&I insurance and Cargo Insurance are still Bao Viet Insurance’s premiums increased 6% y/y in the main segments for foreign insurers. For aviation 2006. The company is feeling increased competitive insurance, Bao Viet’s premiums reached VND98 pressure not only from other local insurers but billion (US$6.2 million), accounting for 29% market also from foreign companies who have extensive share of this product line. So far Bao Viet and Bao product experience in the industry. The competition Minh are the only two suppliers of this product line in is especially strong from small and medium-sized Vietnam. For Oil and Gas Insurance, PVI (a former regional insurers. subsidiary of PetroVietnam) is the market leader thank to its close relationship with PetroVietnam. Premiums from automobile insurance came to VND656 billion (US$41 million) or 25.6% of total Under the Decree 130/2006/ND-CP which made premiums in 2006. This number was a little bit fire insurance compulsory for all enterprises, the

51 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 69A - Operation Indicators Chart 70 - Investment Porfolio in 2005

90.0% Real 75.6% 80.0% Net loss Estate, 70.0% ratio Investme Stock, 60.0% nt 48.2% 0.28% 50.0% Expenses Mandate, 40.0% ratio 27.4% Lending, 30.0% 20.0% Combined Deposits ratio 10.0% and 0.0% Bonds, 2003 2004 2005 Average 89.42%

Source : Financial Publish House Source : Financial Publish House

MoF has recently approved a new comprehensive Bao Viet has always managed to turn a profit in product to be offered to SMEs. Such product will both its main operation and investment activities. offer a comprehensive insurance cover for fire, Net loss ratios were stable to around 49.7% in the accident and health care as well as third party liability 2003-2006 period but increased to 55% in 2006 coverage. The product is expected to be attractive due to higher competitive pressures. Expense due to its competitive pricing and comprehensive ratios were also low compared with other local coverage. insurers, averaging 38.2% in the same period but also increased rather shaprly to 43% in 2006. As In 2006, premiums from reinsurance activities were a result, the combined ratio of 87.9% in 2006 was VND141 billion (US$8.8 million), up 37% y/y. And close to industry norm. Bao Viet has clearly been the outward reinsurance was VND 497 billion or 3.5 losing some of its competitive edge. times bigger than that of inward reinsurance. Bao Viet Insurance arranged some big deals with high Investment over pre-tax profit ratios fluctuated value properties and strict insurance conditions in around 58%. Investment income over total assets some key areas like construction of hydroelectric and was the lowest among the big five insurers at thermoelectric plants, oil and gas projects, fishing only 5.8% in 2006, far behind the average ratio of boat insurance, and professional liability insurance, 9.1%. Investment income over owners’ equity was to name a few. Bao Viet’s good relationship with a little bit higher than the average of 23.1%. The local and foreign reinsurers has helped it to share explanation is in the investment portfolio structure. and manage risk very effectively. Before 2005, Bao Viet’s investment portfolio was very conservative, with only 0.3% of assets in the This has made Bao Viet less exposed to payouts stock market. Investment in real estate, mandates, related to natural calamities such as storms and lending accounted for just over 10% of and floods, which regularly affect Vietnam’s investments, and nearly 90% of investments were central and Mekong Delta regions. To reduce in deposits and bonds. This conservative structure reinsurance concentration risk, the Company has has led to very modest returns. established reinsurance programs with various leading international reinsurance companies. The In cooperation with BVFMC, Bao Viet Insurance financial conditions of the reinsurers are monitored hopes to receive bigger returns by taking on much on an ongoing basis and reinsurance arrangements more risk under the guidance of a professional are reviewed periodically. Leading international investment manager. So far, Bao Viet Insurance reinsurers Munich Re and Swiss Re are two of the has transfered its investment porfolio to BVFMC and Company‘s reinsurers. Bao Viet Holding has planned to increase capital in BVF1 to VND800 million and set up BVF2 in the With its favourable position in the insurance market, coming year.

Chart 69B - Key Operation Indicators 2003 2004 2005 2006 Average Net loss ratio 46.1% 49.5% 48.3% 54.6% 49.7% Expenses ratio 34% 36% 40% 43% 38.2% Combined ratio 80% 86% 88% 98% 87.9% Investment/Pre-tax income 45% 67% 61% 59% 57.8% Investment income/Owners’ equity NA 23.3% 31.9% 27.5% 27.6% Investment income/Total assets NA 7.1% 6.5% 5.8% 6.5%

Source : Bao Viet, VinaSecurities

52 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 71 - Brand awareness Chart 72 - Prudential Product Positioning

Source : Prudential Source : Prudential

Prudential - Always Listening, selected customers. The company also enhances their agents’ productivity via training and a wide Always Understanding range of products. The relationship between the • Prudential announced profit of VND61 billion company, agent group leaders, and career agents (US$4 million) at the end of 2004 is very good. • Market leader in Life market with 41.6% market Like other players in the industry facing many share in 2006 with strong brand awareness difficulties in 2005, Prudential also performed below expectations. Prime premiums were VND3,296 • In 2006 Chartered capital was US$75 million billion (US$207 million), an increase of only 6.19% and total premiums and investment income y/y from 2004. The compensation and payout ratios were VND 15,412 (US$ 963 million), increased dramatically, from 76.7% in 2004 to 82.4% • Diversified strategy, including investment man- in 2005. New policy sales were unable to keep up agement and consumer finance (2006) with maturing benefits for customers.

Prudential opened a representative office in Vietnam Due to the underdeveloped capital market, up in 1995 and was granted a license in 1999. It has untill 2005, Prudential put too much money in bank 81 service centres nationwide with good location deposits and government bonds, with the two asset and organisation, and modern facilities. At the types accounting for over 88% of total investments. end of 2005, Prudential had 1,600 employees and A smaller amount was allocated to stocks (7.13%), 37,837 agents, the widest network in life insurance and the rest to real estate, lending, and mandate sector. The distribution model has three main investments (4.3%). This was really a very safe characteristics: portfolio, but returns were correspondingly low.

(1) Focus on major urban centres To improve the returns on its investments, Prudential has made several important changes. In May 2005, (2) Simple agency model Prudential was granted license to establish the Prudential Vietnam Fund Management Company (3) Basic product set with an investment capital of VND23 billion (US$1.4 Prudential has traditionally focused on tier-one cities million). This fund manager has helped Prudential such as Ho Chi Minh City and Hanoi, which have the manage its free cash through investments in a more highest per capita income in Vietnam. Recently, the diversified set of financial instruments with higher company has revised its strategy and expanded into risks and a greater potential for rewards. some tier-two cities (such as Danang, Can Tho, and The second big change is Prudential’s decision to Hai Phong) and other provinces nationwide to create open a consumer finance company with chartered economies of scale. Prudential has also turned capital of US$7.5 million, the license for which was its focus to developing sectors with unexploited granted in October 2006. Vietnam has five state- potential and providing greater customer satisfaction owned banks, 38 joint-stock banks, and 29 foreign- through improved efficiency. invested banks, but the consumer finance market is The company has achieved considerable success still in the early stages. in its educational planning and regular saving plans. Just a small number of the 84 million Vietnamese These products have been introduced to customers people use modern banking services. Consumer by career agents advised to pitch the product to finance is considered a strategic service of Vietnam

53 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 73 - Investment Porfolio in 2005 Chart 74 - Prudential’s Chartered Capital

Rl estate, (US$mm) 80 75 75 Stock, lending 65 7.13% and 60 mandate 40 investme 40 Bonds nt, 4.30% 20 15 and bank deposit, 0 88.57% 1999 2001 2001 2003 2006

Source : Prudential Source : Prudential banking sector in the coming years. With the agreements. The first was in 2003 with Asia expansion of the AB classes and growing numbers Commercial Bank, the second in early 2004 with of SMEs, the potential for consumer finance is Vietcombank (VCB), the largest and best managed obvious, and the era of ATM card, credit card, and state-owned bank, and the third (also in 2005)with electronic payment is on its way. Among the 17 Agribank, which have the widest network in Vietnam. commercial banks in Vietnam, revenue from credit The cooperation brings a variety of benefits to all cards was up 300% in 2005. However, the lack of parties. a distribution network is the main barrier for deeper Prudential is very dynamic in investment activities and wider market penetration. Over 10,000 retailers and has achieved a good investment result thank in Vietnam now accept credit and debit card, but they to the rapid development of the stock market. With are concentrated in big cities such as Hanoi, Ho Chi the support of its fund manager, In June 2007, Minh City, and a handful of tourist destinations. Prudential announced a special insurance interest In general, with such a low starting point, consumer of VND 521bn. 740,000 policy holders benefited finance is in the initial stages, but promises big from this special offer. Prudential is very anxious to potential for mortgage and non-mortgage lending. launch their new line of investment linked products. The growth rate of consumer finance is connected Although Prudential has been ready since the to the increase in the number of credit cards and the beginning of the year but they still can not launch adoption of electronic payments over cash. it due to the lack of regulation and guidelines on investment linked products from the authorities. We In an effort to build on its agent channel, Prudential are still waiting for local players to get ready. has established a number of banassurance

Chart 75 - Prudential and Bancasurrance in 2005

Bancassurance in Vietnam Set up 4 operating models Acquired over 2,000 customer through bancassurance Develop sales people into management roles Minimal infrastructure giving a lower cost base A working direct marketing hybrid

Prudentail Vietnam successs with bancassurance Productivity is higher than agency force FSCs approximately 15% more efficient than agents TMRs approximately 200% more efficient than agents Now producing about 1% of Prudential Vietnam business Effective 0.5% of market share Confident of hitting 5% of Prudential Vietnam business in 2005

FSCs : Financial Services Compensation Scheme TMRs : Restricted Prior Service Credit

Source : Prudential, VIE

54 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 76 - Earnings Model - Bao Minh

FY 2005 yoy FY 2006 yoy FY 2007E yoy FY 2008P yoy

Net Premium and Investment Income (VND mm) 721,696 7.58% 1,046,027 44.94% 1,585,000 51.53% 2,035,950 28.45% EBT (VND mm) 84,503 34.39% 100,748 19.22% 186,628 85.24% 250,305 34.12% Net Profit (VND mm) 84,503 63.44% 100,748 19.22% 160,500 59.31% 215,263 34.12% Pre-tax Profit Margin 11.71% 9.63% 11.77% 12.29% Net Profit Margin 11.71% 9.63% 10.13% 10.57% EPS 1,947 2,321 2,700 2,851 Dividend per share 11% 12.0% 12% 12% P/E 54.08 45.36 28.89 27.36 P/B 8.96 8.42 2.15 2.03 ROE 17.75% 19.14% 11.88% 9.69% Average Equity 476,203 526,432 1,351,371 2,222,148

Source : Companies’ Financial Statements and Forecast, VinaSecurities

Bao Minh - Hold Being a joint-stock company, however, the state • Bao Minh has revised its 2007 income projection is still the biggest owner of Bao Minh holding from VND 110bn up to VND 150bn, a 48.9% yoy 63% of chartered capital. Vietnam Airlines, also growth a state-owned company, keeps a 7% stake. With • Bao Minh has evolved rapidly in three years as this ownership structure, Bao Minh has had strong an equitised company and listed on the Ha Noi support from the state, helping it become the Securities Trading Centre in November 2006. second-largest Vietnamese insurer after Bao Viet. Bao Minh plans to increase its chartered capital and • Bao Minh held 21.3% market share in 2006. decrease the state’s stake to 51% by 2010. • 2007P revenue and investment income growth is 51.5% y/y with earnings up 59.3%y/y. Bao Minh is involved in all insurance transactions, including medical and personal accident, casualty • Currently, the State holds 63% of chartered and property, cargo and inland transit, hull and capital. P&I, general liability, aviation, automobile, fire and • Under the capital mobilisation plan through 2010, allied perils, business interruption, agriculture risks, the state’s stake will be reduced to 60% in 2007 and reinsurance. Bao Minh’s core activities were and 51% in 2010. motor vehicle and personal injury insurance, which together accounted for about 40% of total direct We are positive on the non-life insurance sector’s premiums. Bao Minh is also the main provider of future earnings growth and the expansion in aviation insurance for Vietnam Airlines. investment operation but with the FY07 PE of 28.8x and the FY07 PB of 2.15x, we do not think this Bao Minh’s market share increased constantly stock’s valuation is attractive and we recommend from 1995 to 2003, peaking at 28%. But from 2004 a Hold rating. afterward, it has faced stronger competition and bled market share to about 21.3% in 2006. This decline Established in 1994 from a branch of the Vietnamese is more serious when we exclude revenue of aviation Insurance Cooperation, Bao Minh is now a joint- insurance. The market share calculation is based on stock company with 61 subsidiaries and training the proportion of revenue each company receives centres nationwide, over 1,500 employees, and in comparison with the total revenue of the sector. 8,571 agents. Bao Minh set up joint-ventures in the Prime premiums received from aviation services form of a United Insurance Company (with a 48.5% accounted for 15.7% of total prime premiums. But stake) and Bao Minh CMG (50%). This has now Bao Minh reinsured to other companies up to 90% been sold to Daiichi Life. Recently, Bao Minh won of those premiums. Excluding that amount (just a license to set up a securities firm and will get one assumption), the estimated current market share more license for fund management this year. would be under 20%.

It also has diversified private investments in others In 2006, Bao Minh achieved prime premiums companies such as Saigon Kim Lien Hotel (33.8%), of VND1,387 billion (US$87 million) and 17.7% Ha Long Hotel (7.5%), Post and Telecom Insurance y/y growth. The decrease in the growth rate of Company (10%), Ho Chi Minh City Stock Company Motor and vehicles insurance (12%) and aviation (4%), and National Survey Company (50%). insurance (12.5%) were offset by higher growth

55 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 77 - Key Operation Indicators 2001 2002 2003 2004 2005 2006 Average

Net loss ratio 50% 55% 42% 48% 29% 55% 46.8% Expenses ratio 55% 48% 58% 40% 71% 45% 52.4% Combined ratio 105% 103% 100% 88% 100% 100% 99.1% Investment income/Pre-tax income 234% 177% 85% 90% 98% 97% 120.8% Investment income/Owners’ equity-2y Avr NA NA 84.2% 20.8% 17.4% 18.5% 35.2% Investment income/Total assets-2y Avr NA NA 9.1% 4.6% 5.5% 6.6% 6.4%

Source : Bao Minh, VinaSecurities rates in other lines. Among the best performers With this high combined ratio, Bao Minh did not were Maritime insurance (up 47.8%), Property and earn money through its underwriting operations. casualty insurance (up 38.5%), and Hull and P&I Therefore, its pre-tax profit mainly came from insurance (up 26%). investment income and other income. This is common practice in a hard market, but given the In 2006, reinsurance operation was not so good. restrictions on foreign insurers, the market was Bao Minh tried to increase its retained premium not competitive enough to necessarily justify this and reduce the reinsurance to other insurers. The practice. If Bao Minh cannot generate a profit in its retained premium growth rate was 27.7%, which was main operations and reinvest for its development, 1.5 times bigger than that of total premium written. it will face difficulties in the future when restrictions Unfortunately, the growth rate of net compensation on foreign insurers are removed. paid was up to 41.2%. Whilst total compensation payments reached VND630 billion (US$39.3 Bao Minh’s balance sheet reflects its conservative million), accounting for 44% of premium revenue, portfolio with over 55% invested in bank deposits an increase of 22.5% y/y compared to 2005. and bonds. The proportion of deposits and bonds decreased in 2005 thanks to the development of the In 2006, the inward reinsurance received was up securities market. In 2005, Bao Minh’s investment 58% compared to 2005. However, most of them in securities increased 3%, but this number is still suffered loss due to continuos CAT losses during very low given the company’s resources. 2006 that push the loss ratio of the company increase from 47.9% before reinsurance paid to Investment income reached VND97 billion (US$6 50.4% when adding the compensation inccured by million) in 2006, up 17% compared to 2005. This inward reinsurance treaties. was the main source of net income in the last six years. In 2006, investment income contributed up The combined ratios were stable but very high in the to 97% of pre-tax profits, or over 18.5% of owners’ last six years, averaging 99%. This means that Bao equity and 6.6% of total assets. These numbers Minh was just around its break even point during were a bit higher than the average of the big five this period. The net loss ratio and expenses ratio non-life insurance companies, but they were still fluctuated widely, especially in 2004. The net loss very modest in comparison with other countries. ratio and expenses ratio were 71% and 28%, while the average numbers were 54% and 47% in this Investments in joint-venture companies have played period, respectively. We think there was a change an important role in the company’s development. in acounting policies that year. Two joint-venture companies have created good

Chart 78 - Bao Minh Market Share Chart 79 - Operation Rations in 2005

30.0% 28.1% 24.5% 120% 25.9% 26.1% 24.0% 24.6% 99% 25.0% 22.0% 21.3% 100% 21.2% 21.7% 20.3% 20.0% 80% 52% 15.5% 15.0% 60% 47%

10.0% 40% 20% 5.0% 0% 0.0% 2001 2002 2003 2004 2005 2006 1999 2004 2006 1996 1998 2003 1995 1997 2001 2002 2005 2000 Average Net loss ratio Expenses ratio Combined ratio

Source : Bao Minh Source : Bao Minh

56 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 80 - Investment Porfolio Chart 81 - Retained Premium and Compensation in 2005

70% 450 140% 59% 400 120% 60% 55% 350 115% 100% Deposit and Bonds 300 97% 50% 80% Stocks 250 73% 73% 40% 200 59% 60% 150 50% Equity Investment 40% 30% 20% 22% 100 20% Others 50 20% 19% 9% 20% 0 2% 0% l s e e Lending n g y 10% 2% 2% r Motor vehicl 0.4% 0.2% inju Goods Aviatio Property transport Personal Shippin Liabilitie hazard 0% insuranc 2004 2005 Retained Premiums Compensation paid Fire&specia Loss Ratio

Source : Bao Minh Source : Bao Minh opportunities to expand business, build relationships, growth rate far exceeded the growth in net premium and provide a competitive edge. and investment income which was only 7.6% y/y. The reason is simple, Bao Minh reduced the + United Insurance Company (UIC), non-life reinsurance amount and increased the retained insurance, was founded in 1997, with the chartered premium ratios. capital of US$5 million. The capital contribution is as follows: Bao Minh (48.5%), Mitsui (23%), The 2007 reserves are estimated at VND 39.7bn Sompo (23%), and LG (5.5%). In 2005, premiums or a 15% increase compared to 10% growth rate were US$7.33 million, up 14%, and net income of gross revenue. With more dynamic policies, Bao was up 37% compared to 2004. UIC operated very Minh tries to keep a bigger part of the premiums effectively compared to other foreign players. In written so as to increase its gross margin. Doing 2005, among foreign insurers operating in Vietnam, so, Bao Minh has to be responsible for a higher UIC ranked second in terms of market share with risk. To reduce the risk and avoid a sudden effect 2%, after only VIA with 2.2% market share. on its performance, Bao Minh plans to increase its underwriting reserves which also reduce its income. + Bao Minh CMG, life insurance. Established in They hope the increase in premium retained can 1999, Bao Minh CMG is a joint-venture between Bao offset the underwriting reserves and contribute Minh and Commonwealth Bank of Australia (CBA), to the profit directly. In addition, the reserves can and with a total chartered capital of US$25 million, be use to invest in financial instruments such as to which Bao Minh contributed 50%. bonds, bank deposit or stock that also contribute to the net profit. However, in January 2007, Bao Minh announced its decision to sell, Bao Minh CMG, to Daiichi Mutual Bao Minh enjoyed tax exemption in the last two Life Insurance of Japan for an undisclosed sum. years. For 2007 and 2008, Bao Minh has to pay 50% The deal is considered good for all parties. Bao of its corporate income tax which is one of reasons Minh gets cash to concentrate on its core business for the decrease in net profit. while Daiichi gets a foothold in the Vietnamese life market. The first 2007 net income projection did not satisfy the expectation of many observers. Net income is Cooperation with other financial institutions such as also affected by high underwriting reserves amount banks, investment funds, and leasing companies is and corporate income tax. Net income is estimated considered one of the main sources for insurance around VND110 billion, an increase of 10% exploitation. At the end of 2005, Bao Minh teamed compared to 2006 but still smaller than the growth up with 33 credit institutions and supported its 31 rate of new paid incapital. By the end of Q1 2007, subsidiaries in cooperating with 176 separate bank Bao Minh has revised its projection. Accordingly, branches. Bao Minh received support from such big net income is projected to reach VND 150 billion, a names as Agribank, BIDV, and Techcombank. 49% yoy growth. VinaSecurities forecasts that this number will be VND 160 billion and FY07F PE, thus, Year 2005, the first year after equitization, was a is estimated of 28.8x and FY07F PB is of 2.15x. successful year for Bao Minh. Net profit reached These ratios are higher than those of average ratios VND 84.5bn in 2005, a 63.5% increase y/y. Such in the region.

57 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 82 - Earnings Model - PVI

FY 2005 yoy FY 2006 yoy FY 2007E yoy FY 2008P yoy

Net Premium and Investment Income (VND mm) 231,611 8.70% 426,575 84.18% 659,722 55% 745,486 13% EBT (VND mm) 40,126 13.94% 60,212 50.06% 210,400 249% 357,680 70% Net Profit (VND mm) 28,891 18.22% 44,039 52.43% 210,400 378% 357,680 70% Pre-tax Profit Margin 17.32% 14.12% 31.89% 47.98% Net Profit Margin 12.47% 10.32% 31.89% 47.98% EPS (VND) 414 985 3,240 4,201 P/E NA 90.39 27.47 21.18 P/B NA 7.93 3.56 4.17 ROE 20.0% 13.4% 19.8% 20.8% Average Equity 144,451 328,626 1,062,077 1,720,331

Source : Companies’ Financial Statements and Forecast, VinaSecurities

PetroVietnam Insurance (PVI) KNOC, Premier Oil, Talisman (Malaysia), PIDC - OUT PERFORM (Algie) and many oil and gas sub-contractors around the world. The specific of this line of product n ����������������������������������������������The third largest non-life insurer in Vietnam is the very high risk. PVI has also set up a deep holding 18.1% market share in 2006 and 27% relationship with several qualified assuming insurer in 1H 2007 such as Marsh, AON, JLT, Willis, HSBC, Lloyds n �����������������������������������������������Having big competitive advantages in supplying Syndicates, AIG, Zurich, Munich Re, Swiss Re, Tokio insurance services for energy sector Marine & Nichido Fire Ins who have also provided PVI reinsurance services and consulting services to n �������������������������������������������PVI has also exported its services abroad, improve its effectiveness and efficiency. insuring projects in South Korea, Algeria and Malaysia. PVI is now considered not only an insurer for PetroVietname but also an insurer for a diversified n PVI expects to reach VND1,850 bn in premium customer base. In 2006, PVI has achieved a and VND204 bn in net income in 2007. significant development in Properties and Casualty We have a positive outlook on the performance and insurance. PVI has become the market leader in prospect of PVI thank to its dominant position in this segment with VND 698 billion (US$ 43mm) and energy insurance segment, property and casualty 44.8% market share of this line of product, nearly segment and its international strategies. However, double that of Bao Viet, the second palyer in this with a FY07F P/E of 27.4x and FY07F P/B of 3.56x line. This segment is now the biggest premiums while the risk of increasing competion from foreign generator of PVI, accounting for 37.2% of its total insurers post WTO era may affect the company’s direct premiums. PVI was also the market leader in profits and growth rate over the next some years. We other product lines such as Hull and P&I insurance do not believe a premium is justified and would wait (holding 36% market share) and CAR&EAR product for share price weakness before buying. Therefore, line (with 47% market share). we rate the stock an OUT PERFORM. For the period 2007-2010, PVI projects that the prime PVI total assets was VND 1.2 trillion (US$ 75mm) at premiums written average growth rate will be about the end of 2006, an increase of 121% YoY. Revenue 8% to 15%. In which, energy insurance segment is in 2006 reached VND 1.16trillion (US$ 73mm), an 3% due to strong competition from Lioyd’s market; increase of 66% YoY. maritime, installation and construction, property and PVI had set up a wide agent network nationwide fire insurance segment have a same growth rate of with 92 institution agents and 199 individual agents. 10%; goods stranport insruance segment is 15% PVI’s core insurance class of products include and other segments are 25% to 30%. energy insurance, maritime, technical, assets, Besides, reinsurance will be taken priority to go liability, motor vehicles and so on. PVI also had 3 international. The company will remain the growth specific departments in charge of energy insurance, rate of 15% in the last several years for the period maritime insurance and technology insurance. 2007-2010, in which average growth rate of Oil and gas is the mainstream product line and reinsurance received from foreign countries will use to account for about 40-50% premiums of the reach 10%. This target is strongly assured thanks company. In 2006, this number was decrease to 20% to the relationship among PVI, PetroVietnam and of its premiums but account for up to 92.6% market their partners. share of this product line. In which revenue from oil PVI’s investment activities has achieved a good and gas operation offshore contributed 80%. In this operation with the high gorwth rate of investment field, PVI’s main customers include Vietsovpetro, BP, income. The investment revenue was VND 54bn PetroVietnam and its subsidiaries, Vietgaszprom, (US$ 3.4mm), up 126% compared to 2005. For

58 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 83 - Operation Indicators Chart 84 - PVI Investment Revenue

60 1.2 2004 2005 2006 112% 50 Investment Revenue (VNDbn) 1 Net loss ratio 16.3% 27.4% 12.7% Growth 85% 40 0.8 Expenses ratio 53.4% 47.5% 35.7% Combined ratio 69.7% 74.9% 48.4% 30 0.6

Investment income/Pre-tax income 61.0% 59.4% 89.3% 20 0.4 33% Investment income/Owners’ equity-2y Avr 17.6% 16.5% 16.4% 10 0.2 Investment income/Total assets-2y Avr 5.2% 4.8% 6.2% 10% 15% 0 0 Source : PVI, VinaSecurities 2001 2002 2003 2004 2005 2006

Source : PVI the period 2001 to 2006, the CAGR was recorded leader with a 30.3% share of the contracts signed at 46%. Investment income has contributed a big (new contracts and rolled over contracts) in the non- portion in the pre-tax income, accounting for about life insurance market. Bao Viet ranked second with a 60% in 2004, 2005 and 89% in 2006. 24.7% share and Bao Minh followed with 19.9%. For the period 2007-2010, PVI expects the everage PVI has now collected VND 1trillion in premiums so growth rate of investment activities around 18% per far this year as of 10th June, an increase 130% y/y annum based on its more diversified investment and 65% its full year 2007 projections. This quite porfolio to minimize risk. But in our assessment, outstanding performance mainly is a combination this number is rather conservative. PVI can totally of premium gains and, gains in market share in the achieve a much higher growth rate than that. three core segments. Oil and gas insurance share On 13 June 2007, PVI has launched its new rose to 94.3% (vs. 92.6% in 2006), hull and P&I subsidiary named PV Invest focusing on real estate, insurance rose to 40.3% (vs. 36% in 2006) while they securities and equity investment. PVI holds 69% captured 79% of the CAR&EAR insurance segment stakes. Its partners include PVFC (8%), Sudico (vs. only 47% in 2005). Absolute numbers have not (8%), VIBank (8%). been given so we cant give you the y/y increase. PVI has paid capital in several well-known companies PVI increased its chartered capital to VND and projects such as VinaRe (VND 17bn), Habubank 851.350 billion in June. The total offered amount (VND 24bn) and PV Securities (VND 15bn) just was 35,135,050 shares. Of these, 19 million were name a few. allocated to PetroVietnam, part of the balance or 6,135,050 shares were offered to employees and PVI’s auction was the last remarkable event of current shareholders. The rest or 10 million were Vietnamese market in 2006. The auction attracted offered to public via a competitive auction. 7,854 investors (including 107 institution investors and 7,851 individual) and the registration for auction New chartered capital will be allocated to the main was over-subscribed 26 times. The lowest accepted projects as follow: bid price was recorded at VND 142,000 (US$ 8.9) - To cooperate with PV Trans to build three new and the highest one was VND 11.5 million. However oil-vessels. PVI will contribute VND 525bn. with an average price of VND 160,250 (US$ 10 or - To contribute to Vinaconex Financial Investment 16 times over book value) and FY06E P/E of 167x, JSC: PVI will invest VND 50bn FY07F P/E of 80x and FY06E P/B of 13.8x, FY07F - To contribute to Vinalines Financial Investment P/B of 12.6x; it really far exceeded the expectation JSC: PVI will invest VND 30bn of many investors, especially institution ones. As a result, out of 107 participating institution investors, - To increase working capital so as to retain more only 4 of them won the bid and there was no foreign premiums and increase reinsurance ability investor at all. With these projects, PVI hopes to diversified its The above average accepted price and PE ratios investment activities and increase its investment are too higher than those of Bao Minh two years income. The project with PV Trans is the biggest ago and even higher than that of Bao Minh at the one. The two partners will get the first vessel by the same date of PVI’s auction of VND 113.400 (U$ 7) end of 2008, the other two will be delivered by the and FY06E P/E of 55x. Mean while, in 2005, Bao end of 2009. The feasibility study shows that the pay Minh ranked second in the insurance market with back period is 22 years and IRR of 10.6% which is 22% market share whilst PVI’s market share was only suitable for long term investors. Besides, PVI around 12.5%. has planed to to use its reserve fund to invest in a more diversified portfolio with a target of an average According to Association of Vietnamese Insurers’ ROIC of 15% for the period 2008-2012. statistic, at the end of Q1 2007, PVI was the market

59 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 85 - Earnings Model - Bao Long

FY 2004 yoy FY 2005 yoy FY 2006E yoy FY 2007P yoy

Net Premium and Investment Income (VND mm) 98,268 57.37% 130,996 33.30% 127,124 -2.96% 150,006 18% EBT (VND mm) 13,362 61.05% 15,949 19.36% 14,443 -9.44% 16,465 14% Net Profit (VND mm) 9,621 70.52% 11,483 19.35% 10,697 -6.84% 12,349 15% Pre-tax Profit Margin 13.60% 12.18% 11.36% 10.98% Net Profit Margin 9.79% 8.77% 8.41% 8.23% EPS 601 718 669 772 Dividend per share 12% 14% 14% 14% P/E 53.22 44.59 47.86 41.46 P/B 6.35 6.23 3.01 3.20 ROE 15.21% 14.10% 8.49% 7.49% Average Equity 63,271 81,412 126,067 164,898

Source : Companies’ Financial Statements and forecast, VinaSecurities Nha Rong Insurance JS Company (BAO LONG) - UNDER PERFORM Bao Long did not pay enough attention to its n ���������������������������������������������ROE was recorded at around 15.2% in 2004 but investment activities. The investment portfolio was constantly decreased to 8.5% in 2006. too much prudent. The biggest portion of collected premium was put in bank deposit and this amount n �����������������������������������������������Investment income over owners’ equity was 9.5% has increase year on year. Such deposit helps Bao in 2006. Long gains more favorable for approaching database n ��������������������������������������������Bao Long has planned to push its investment of banks’ clients. But the return from investment did activities in the coming year. not fully reflect its investment ability. Bao Long has planed to expand its investment activities in the Nha Rong Joint-stock Insurance company, briefly year to come. Accordingly, Bao Long will recruit called Bao Long, has officially opened and operated professional staff for their investment department to since July 1995. Bao Long main shareholders push its investment in equity and stock market. include Bao Viet Insurance Corporation, Trading and Investment Corporation (PETEC), Vietcombank, Bao Long gets stuck in the middle in term of both ACB, Maritime Bank, Foreign Trade Development core operation and investment activities. The main & Investment Corporation (FIDECO) and AN PHU financial ratios in the last several years did not Services Company (ASC). make shareholders happy. Due to the small size of the company Bao Long’s performance lagged By the end of 2006, Bao Long has set up its owned behind the average for the industry. All operational network of 11 regional offices and 8 branches in key indicators are well behind local peers. cities and provinces. Bao Long has successfully built its presence and image in Ha Noi City. Ho Chi Minh Bao Long increased its chartered capital from VND City is still considered the main area of operation. 70bn to VND 160bn in September 2006 and will However, with a small network, Bao Long find much increase this further to at least VND 200bn before difficulties in expanding its market share. year-end. The increase in chartered capital is faster than that of estimated operating and investment With the big support from shareholders being banks, income resulting in a fall of ROE and a high PE ratio Bao Long finds much favorable for approaching to in 2006 and 2007. We hope that with the new paid potential customers being banks’ clients. About 50% in capital, Bao Long could expand its operation and to 60% revenue of Bao Long came from this channel improve its investment activities, gain more profit for insurance products such as property, fire and and meet the requirement for its development. A lot special hazard, liability insurance. of challenges lie ahead.

Chart 86 - Investment Income Structure Chart 87 - Operation indicators

100% 7% 2004 2005 2006 15% 80% Others Net loss ratio 55.8% 59.3% 71.6% Expenses ratio 25.6% 25.5% 29.7% 60% Stock Combined ratio 81.4% 84.8% 101.3% 91% Building for rent 40% 79% Investment income/Pre-tax income 44.0% 83.0% 82.7% Bank deposit Investment income/Owners’ equity-2y Avr 9.3% 16.3% 9.5% 20% Investment income/Total assets-2y Avr 6.7% 9.2% 5.9%

0% 2004 2005 Source : Bao Long, VinaSecurities Source : Bao Long

60 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 88 - Earnings Model - VASS

FY 2004 yoy FY 2005 yoy FY 2006E yoy FY 2007P yoy

Net Premium and Investment Income (VND mm) 31,761 NA 104,714 229.69% 130,237 24.37% 162,829 25% EBT (VND mm) 2,905 NA 13,552 366.51% 44,590 229.03% 72,941 64% Net Profit (VND mm) 1,093 NA 9,886 804.48% 32,105 224.75% 52,517 64% Pre-tax Profit Margin 9.15% 12.94% 34.24% 44.80% Net Profit Margin 3.44% 9.44% 24.65% 32.25% EPS (VND) 55 494 1,605 2,626 Dividend per share 6.5% 9% 11% 11% P/E 1,006.40 111.27 34.26 20.95 P/B 7.49 5.30 3.44 3.10 ROE 0.74% 5.58% 12.19% 15.59% Average Equity 146,843 177,136 263,394 336,818

Source : Companies’ Financial Statements and forecast, VinaSecurities

Vien Dong Insurance Company insurance companies like Bao Viet, Bao Minh, Pjico n A young and dynamic insurance company ect. VASS has made effort to expand its presence around the country and cooperate with brokerage n Chartered capital is VND 200bn (US$ 12.5mm) insurance companies to enhance its competitive n ��������������������������������������������ROE has increase from 5% at the end of 2005 ability. to 12% in 2006 n ��������������������������������������������VASS boasts its ROE will reach 15.6% at the The combined ratio turned around the average of the end of 2007 industry. With a strong support from shareholders being bankers, VASS can easily access to their Vien Dong Joint Stock Assurance Company (VASS) customer base to provide services for mortgage has officially operated in the non-life Insurance assets. This relationship help VASS reduce their Market since 2003. VASS’s big shareholders include selling cost resulting in a lower expenses cost in enterprises operating in some key industries such the last three years. However, these expenses were as banking, manufacturing and individual who are too higher than the industry’s norm while the loss experts in many others fields. VASS has received big ratios were quite lower than those of the industry. We support from its shareholders such as Saigon Joint have not found much information on such problems Stock Commercial Bank (Sacombank), Oriental in the financial statements. In the last two years, Joint Stock Commercial Bank (Oricombank), Military observers found that small insurers have pursued Joint Stock Commercial Bank (Militarybank), Hanoi low cost strategies. They have tried to reduce the Joint Stock Building Commercial Bank (Habubank), premiums as much as possible. And of course, with Hochiminh Security Joint Stock Company (HSC), a complicated relationship, the selling expenses and Lamson Sugar Company, Phu Tho Steel Company, commission expenses increased. VASS has not had Cuu Long Steel Company, An My Steel Company, competitive advantages in any line of insurance Phuong Trinh Transportation Company, Toan My products so far. To improve its performance, VASS Plastic Company and so on. needs to revise its long term strategies. Investment income contributed a major part in the With 22 branches nationwide, VASS has weaker pre-tax profit. Not like its peers, VASS’s investment network base to provide services than others portfolio was more flexible. The investment in bank

Chart 89 - Operation indicators

2004 2005 2006 Average Net loss ratio 5.4% 16.8% 42.3% 21% Expenses ratio 75.0% 56.7% 63.4% 65% Combined ratio 80.4% 73.4% 105.7% 87% Investment income/Pre-tax income 318% 183% 224% 242% Investment income/Owners’ equity-2y Avr 5.3% 12.2% 33.7% 17% Investment income/Total assets-2y Avr 3.8% 8.8% 21.6% 11%

Source : VASS, VinaSecurities

61 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 90 - Investment Struture Chart 91 - Investment Income Struture Chart - Investment Struture 100% 100% 14% 14% 9% 9% 4% 19% 80% 80% 37% Others 25% Others 60% 62% Stock 60% Stock 74% 68% Lending 40% Lending 40% 41% Bank deposit Bank deposit 54% 20% 20% 24% 12% 13% 19% 0% 0% 2% 2004 2005 2006 2004 2005

Source : Source : Vien Dong, VinaSecurities Source : Vien Dong, VinaSecurities deposit was down from 24% in 2004 to 12% in 2005. VASS has an ambitious plan to increase its financial In 2005, lending activities comprise short term loans ability. For the period 2006 to 2010, the company to key shareholders (US$ 3.3mm) who enjoyed hopes to mobilize other VND 400bn (US$ 25mm) interest rate from 10.8% to 15.6% pa. to increase it chartered capital. In other words, the new paid in capital will VND 100bn (US$ 6.25mm) Long term investment consisted of investment in per annum. In 2007, VASS will call for VND 100bn, listed and OTC securities such as REE (0.52% of in which, VND 50bn worth of share will be issued at stake), VF1 (1.9%), VinaRe (0.7%), Bong Sen hotel par value to current shareholders. The rest of VND (2.4%) just name a few. The investment in stock 50bn will be offered to public. made up a big return in the investment income structure while the interest from bank deposit was However, recently, VASS issued a new BOM’s the smallest. VASS considers stock investment Resolution that agreed to increase chartered capital a profitable channel. In the earning model, the to VND 600bn from VND 300bn currently. The new growth in net profit is expected mainly from the chartered capital will meet the legal capital required return from investment in which stock investment by the authorites. The company will offer 19.5 million is a key driver. shares to strategic partners. The new paid in capital will be allocated to its new subsidiaries such as Insurance revenue is on the rise year on year. The Vien Dong Securities Company, Vien Dong Fund increased premium mainly came from property Management and Vien Dong Real Estate. The insurance and construction insurance for big remained amount will be paid in other investment companies such as Dong Nai Hydro company, instruments. Cienco, REE, Tan Tien Plastic, Southern Steel ect. However, revenue size is small in comparison to its chartered capital and its competitors.

62 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Appendix

Chart 1A - Insurance Companies and Representative Office in Vietnam

Life Insurance Representative Office 1 Bao Minh CMG 1 Great Eastern Representative Office 2 Prudential Vietnam 2 Cathay Life Insurance Representative Office 3 Manulife 3 Dai-ichi Life Insurance Representative Office 4 AIA 4 Nanshan Life Representative Office 5 ACE 5 Ping An Representative Office 6 Prevoir Vietnam 6 Korea Life Insurance Representative Office 7 Bao Viet Life 7 Crawlord Representative Office Non-life Insurance 8 CUNNINGHAM Representative Office 1 Bao Viet Vietnam 9 Matthows Daniel International Representative Office 2 PetroVietnam Insurance (PVI) 10 Nissay Dowa General Insurance Representative Office 3 Bao Minh 11 Hynndal Marine and Fire Insurance Representative Office 4 Petrolimex Insurance (Pjico) 12 NTUC INCOME Representative Office 5 Bao Long 13 International SOS Representative Office 6 Postal Insurance (PTI) 14 MINHTAL Fire& Marine Insurance Representative Office 7 Vien Dong Insurance 15 Fubon Insuranc Representative Office 8 AAA Insurance 16 Union Insyrance Representative Office 9 GIC 17 Chungkuo Insurance Representative Office 10 Agrinco 18 LG Insurance Representative Office 11 Bao Tin 19 Korea Export Insurance Representative Office 12 QBE 20 Mitsui Sumitomo Representative Office 13 BIDV Insurance 21 Sompo Japan Representative Office 14 Groupama Vietnam 22 Marsh Vietnam Representative Office 15 Samsung-Vina 23 Jardine Lioyd Thompson Representative Office 16 IAI 24 Mclarens (VietNam) Representative Office 17 AIG 25 Asia Insurance Representative Office 18 ACE 19 Liberty Mutual 20 VIA 21 UIC Brokerage Insurance 1 Viet Quoc 2 Dai Viet 3 A Dong 4 Thai Binh Duong 5 Aon 6 Marsh 7 Gras Savoye 8 Cimeico Re-insurance 1 VinaRe

Source : VinaSecurities

63 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report 90 39 0.63 0.43 0.82 0.79 13% 13% 2020 30.57 25.07 19.26 9 9 7 1 6 5 2 6 8 6 % % 8 3 0. 0.4 0.7 0.7 12 12 201 28.4 22.1 17.0 8 6 9 4 1 8 7 1 3 4 % % 3 8 0.4 0.5 0.7 0.7 14 14 201 26.6 19.7 15.1 7 5 8 4 5 1 4 0 0 4 % % 3 8 0. 0.5 0.7 0.7 14 13 201 24.6 17.2 13.3 6 4 8 9 8 3 1 9 7 6 % % 3 8 0.5 0.3 0.6 0.6 16 15 201 22.9 15.1 11.7

Source : Asia demographics, CI, VinaSecurities Source : 5 3 7 6 2 6 8 8 4 2 % % 8 3 0.4 0.3 0.6 0.6 15 15 201 21.1 13.1 10.1 % % 4 5 4 2 7 4 9 5 4 7 1 8 6 4 % % . . 3 8 1 7 % 0.4 0.3 0.6 0.5 8.8 17 17 s 1 201 3 r 19.6 11.3 1 - ea y % 5 1 1 3 1 6 6 2 6 4 0 4 8 % % 3 8 0.4 7.5 0.3 0.5 0.5 9.7 19 18 201 17.9 t % % s 4 5 e 6 4 r . . e 7 t 11 n i % 2 % g . 2 0 5 6 9 5 0 8 8 5 s 2 n % % % r i 2 8 3 t 1 8

A . a / - 0.3 0.5 6.3 0.3 0.5 8.1 18 18 ea + 3 201 o 16.3 N y l 1 r f % 2 > 1 + bo i 1 S %

Source : Bankers, VinaSecurities 36 . 2 1 5 9 3 6 4 6 1 1 2 % % 1 8 2 0.3 0.3 0.5 0.4 6.9 5.4 21 21 201 15.0 % % % % % % % 2 0 4 4 0 0 0 s 3 0 4 2 0 9 5 ...... h 2 0 3 2 2 t 6 7 1 1 1 1 1 m 2 0 8 4 * 8 3 2 3 9 0 8 1 % % e 8 2 t 0.3 0.3 0.4 0.4 5.7 4.4 a 23 22 201 13.5 R t % % % % % % % s g 0 0 4 4 2 0 0 e n i % 0 2 4 6 8 9 5 r t ...... 8 e a . 2 0 3 1 1 6 7 s t o 1 1 1 1 1 1 h l n A t f I / + 9 3 7 2 2 8 4 6 7 3 % % + m g N 8 2 r 0. n o 6 i 0.3 0.4 0.3 4.6 3.6 23 23 % 200 b i 12.2 d 5 . S n 7 e L % % % % % % % % % % 0 0 4 0 9 9 0 5 0 0 s 4 4 2 7 8 6 5 6 9 5 8 6 3 6 1 4 6 7 3 9 ...... h % % 8 2 8 8 9 8 3 8 4 4 4 1 t 0.3 0.3 3.7 0.2 0.4 2.9 26 27 m 200 11.0 2 1 % % % % % % % % % % 4 4 0 8 3 2 0 0 0 0 7 2 5 0 0 5 4 0 4 6 % % 0 0 0 5 5 4 1 1 4 5 2 8 s ...... h 8 8 9 8 3 8 4 4 4 1 0.3 0.3 2.9 0.2 0.4 9.8 2.3 31 29 t 200 m 9 % % % % % % % % % % 6 1 3 6 1 9 7 9 3 6 % % 0 0 4 0 5 6 0 0 0 0 2 8 8 8 6 4 4 1 0 2 4 2 ...... s 0.2 2.2 0.2 0.3 8.6 1.8 0.2 33 31 200 7 7 8 8 3 8 4 4 4 1 h t m e 6 t a R t s 5 3 1 8 2 0 8 4 1 9 e % % % % % % % % % % 2 8 r 6 4 0 6 3 9 0 0 0 0 0.2 0.2 1.7 0.1 0.3 7.7 1.3 e 5 4 4 1 2 8 8 8 1 2 200 t ...... s n 7 7 8 8 3 7 3 3 4 1 h I t t i m s 3 o p g e D s e i c D D D D D D D D n S S S S N N N N e r U U U U V V V V r u C p e e k k s g g k k k n n a a n n r r a a n a a e e a b b v v b b B m m A A m m o o o o c c c c V V h h t t B B c c D D e e I I i i C C e e

Chart 2A - Vietnamese DepositChart and Lending2A rates V B T A V B T A Total population (m) Urban % Bank account penetration % Number of urban bank accounts (m) Credit/debit card pentration Urban population AB urban middle class % AB urban middle class (m) Growth rate year/year Number of credit cards (m) Growth rate year/year

Chart 3A - Urban consumerChart 3A market model

64 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 4A - Economic Development Five-year Planning

Period Period Indicators Unit 2001 - 2005E 2006 - 2010P A Economic Indicators 1 Economic Growth % 7,50 7,5 - 8,0 In which: - Agriculture, Forestry and Fishery % 3,7 3-3,2 - Industry % 10,2 9,5 - 10,2 - Services % 6,9 7,7-8,2 2 Economic Growth Rate - Agriculture, Forestry and Fishery % 5,5 4,5 - Industry % 15,7 15,2-15,5 3 GDP at current price (to the end of the last year in the period) GDP (VND) VND tril 838,5 1.694 - 1.760 GDP (US$) US$bn 53,1 94-98 GDP per capita US$ 640,0 1.050 - 1.100 4 GDP structure (to the end of the last year in the period) - Agriculture, Forestry and Fishery % 20,7 15 - 16 - Industry % 40,8 43 - 44 - Services % 38,5 40 - 41 5 Import and Export - Exports US$bn 110,2 243 - 254 - Growth rate % 17,0 16,0 - Imports US$bn 130,4 286,5 - Growth rate % 19,0 14,5 6 Development Investment - Total 5 years investment (2005 price) VND tril 1.337,6 2.200,0 - Total 5 years investment (2005 price) US$bn 84,6 139,4 - Total 5 years investment (current price) US$bn 77,5 155,0 - Total development investment/GDP % 37,5 40,0 B Social Indicators - Pooulation (of the last year in the period) million 83,16 88,4 - Growth rate (of the lsat year in the period) % 1,4 1,14

Source : The Government

Chart 5A - Macro Data and Forecast

2001 2002 2003 2004 2005e 2006f 2007f 2008f 2009f 2010f

Value GDP (US$bn) 32.5 35.1 39.5 43.9 50.9 55 62.6 70.8 80.9 90.4 Population (mm) 79.8 80.9 82 83.1 84 89 92.2 95.4 98.7 102.2 GDP per capita (US$) 407.5 433.8 482.2 528 612 617.3 679.4 742.7 819.3 884.7 GDP Growth 6.9 7.1 7.3 7.7 8.4 7.6 7.9 8.2 8.7 8.5 CPI 1.6 0.6 1.8 2.8 8.3 7.1 6.2 4.6 4.4 2.9 Export (FOB, US$bn) 15.1 16.5 20.2 25.6 31.5 38 45.3 54.3 64.1 75.6 Import (FOB, US$bn) 16 19 24.9 31.1 36.9 42.4 49.2 57.6 66.8 76.8

Growth GDP NA 8% 13% 11% 16% 8% 14% 13% 14% 12% Population NA 1% 1% 1% 1% 6% 4% 3% 3% 4% GDP per capita NA 6% 11% 9% 16% 1% 10% 9% 10% 8% Export NA 9% 22% 27% 23% 21% 19% 20% 18% 18% Import NA 19% 31% 25% 19% 15% 16% 17% 16% 15%

Source : IMF, ADB, WB, BMI 65 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 6A - Factors affecting insurance supplier choice

High financial safety

Good customer services

Introduced by acquaintances 5% 1% 1% 9% Long working history 29% High professional characteristics 10% Competitive premium

Vietnamese insurance firm

11% High reputation 13% Foreign investment firm

11% Working in different countries 11%

Source : VIE’s Survey

Chart 8A - IT Application Model

B2B B2C B2E

Authentication Authorization Encryption Security Directory Mgmt Password Mgmt

Customer Relationship Mgt. Core Business Applications Back Office Underwriting Financials General Asset Customer Quotation/ Endorse Terminate/ Call Center Policy Cancel Ledger Management Information Proposal & Renew Surrender Accounts Budget Payable Accounts Cash Sales Force Reinsurance & Co-insurance E-Mail Receivable Management Automation Proportional Non-Proportional Facultative Annual Treaty Treaty Statement Click Stream Personalization Analysis Claims Investment Intimate Register Validate Estimate Settle Human Resources Campaign Customer Analytics Human Management Payroll Product design Resources

Data Anal & Search Online Business Decision Agent Collaboration Content Mgt. Knowledge Rep. tool Engine Management training Inteligent Tree Support

Web Session & Operations Workflow Web Metrics Service Mgmt Management Technology Infrastructure Web Operating Systems Content & Database Mgmt Reporting Presentation Systems & Support Applications Management Document Mgmt

Source : Bao Minh

66 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Chart 22A - Investment Portfolio of Local Non-life Insurers

100% Others 80% Trust investment 60% Lendings 40% Real estate 20% Private equity 0% Stock PTI GIC

Pjico Bonds VASS Cash and bank Non-life In. (2006) Bao Viet (Non-life)

Source : MoF, VinaSecurities

67 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report November 16, 2007 Insurance Report

Global Disclaimer

Copyright 2006 VinaSecurities. All rights reserved. This report has been prepared and issued by VinaSecurities or one of its affiliates for distribution in Viet Nam and overseas. The information herein is believed by VinaSecurities to be reliable and is based on public sources believed to be reliable. With the exception of information about VinaSecurities,VinaSecurities makes no representation about the accuracy of such information. Opinions, estimates and projection expressed in this report represent the current views of the author at the date of publication only. They do not necessarily reflect the opinions of VinaSecurities and are subject to change without notice. VinaSecurities has no obligation to update, amend or in any way modify this report or otherwise notify a reader thereof in the event that any of the subject matter or opinion, projection or estimate contained within it changes or becomes inaccurate. The information herein was obtained from various sources and we do not guarantee its accuracy or completeness.

Prices and availability of financial instruments are also subject to change without notice. This published research may be considered by VinaSecurities when buying or selling proprietary positions or positions held by funds under its management. VinaSecurities may trade for its own account as a result of short term trading suggestions from analysts and may also engage in securities transactions in a manner inconsistent with this report and opinions expressed therein.

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68 Please refer to the disclosures of pontential conflicts of interest and the disclaimer at the end of this report