BACHELOR THESIS Major Finance SOLUTIONS TO IMPROVE THE DEBT MANAGEMENT OF AVIVA VIETNAM LIFE INSURANCE CO , LTD TABLE OF CONTENT INTRODUCTION OF THE THESIS 1 1 The rationale of the thesis 1 3 The rese.
The rationale of the thesis
Vietnam's progress during the past 30 years has been exceptional, according to Dr.
Le Dang Doanh's 2016 paper, "Vietnam after 30 years of renovation: Achievements and Prospects," highlights the remarkable economic and political transformations in Vietnam since 1986, which propelled the nation from one of the world's poorest to a low to middle-income status Dr Dao Thu Hang's 2020 analysis further supports this, noting that from 2002 to 2018, Vietnam's GDP per capita surged 2.7 times, exceeding US$2,700 in 2019 This economic growth has significantly enhanced living standards and healthcare quality for the population Despite the COVID-19 pandemic's impact in 2020, Vietnam demonstrated resilience with a GDP growth rate of 2.9%, making it one of the few countries globally to achieve positive economic growth during that period, as reported by the World Bank in their 2021 overview.
The COVID-19 pandemic has heightened health awareness among the Vietnamese population, with nearly 71 percent of insurers acknowledging a significant increase in understanding and appreciation for insurance, as reported by Vietnam Report in 2021 Doctor and researcher Paul Schuler (2021) highlights the probable health concerns linked to the pandemic, which, coupled with the unpredictable nature of COVID-19, has prompted the government to advocate for commercial health insurance The National Assembly has set a goal to achieve over 91 percent health coverage for the population by 2021.
The Resolution on the socio-economic development plan for 2021, enacted on November 11, 2020, highlights the critical role of commercial health insurance during challenging times both nationally and globally To enhance the quality of insurance services for consumers, the Government introduced Decree No 80/2019/ND-CP on November 1, 2019, which outlines regulations and standards for individuals involved in auxiliary insurance activities and related service organizations This demonstrates the government's commitment to fostering growth in the insurance sector, particularly in health insurance, while also aiming to boost consumer demand for commercial health insurance products.
Because of the above reasons, I seized the opportunity in this internship and became an intern of Aviva Vietnam life insurance company With a history of more than
With a legacy spanning 300 years, Aviva Life Insurance Company represents an excellent opportunity for me to enhance my knowledge and expertise This thesis offers crucial insights into Aviva Vietnam Life Insurance Company, examining its current business operations, challenges related to debt management, and potential solutions to address these issues.
2 The subject of the thesis
Analyzing debt management of companies, thus pointing out current problem with debt managing of Aviva Vietnam during the period 2017-2021 and how to improve it.
The research objectives and questions
The research objectives
This article analyzes the debt management situation of enterprises, focusing on Aviva Vietnam's debt management capabilities It identifies the challenges the company faces in managing its debt and offers practical solutions to enhance its debt management strategies.
Using the provided financial reports to analyze the company’s debt management.
Identify what problems the company is currently having with debt managing.
Providing solutions for the company to solve the issues, as well as improving company’s debt managing performance.
The research questions
With the aim of enhancing the debt managing status of Aviva Vietnam, some research questions must be answered, including:
What is debt management, how is it measured and which factors influencing profitability among companies?
What is the assessment of Aviva Vietnam’s debt managing situation in the last 5 years?
What recommendations and solutions should be presented to Aviva Vietnam in particular and state management agencies in general so as to improve debt managing of Aviva Vietnam?
The scope of the thesis
This article explores the fundamental principles of debt management, providing an overview of how businesses typically handle their debts It specifically examines the debt management practices of Aviva Vietnam, highlighting the current challenges and strategies employed Based on this analysis, the article offers targeted recommendations aimed at enhancing the company's debt management capabilities for improved financial stability and performance.
- Geographical scope: The research materials are limited in Vietnam.
- Time scope: The bachelor thesis uses research materials from 2017 to 2021, and was completed in a period of 5 months.
The research methodology
Data collection
To support the thesis analysis, extensive data on various insurance companies has been gathered from multiple sources This includes financial statements from the Vietnamese insurance market, specifically focusing on Aviva Vietnam, covering the years 2017 to 2021 Additional documents were sourced from the Department of the Insurance Supervisory Authority and the Vietnamese Insurance Association Furthermore, relevant academic articles and studies pertaining to insurance companies have been incorporated into the research.
Data analysis
The data analysis method includes systematizing, synthesizing, comparing,evaluating, and generalizing the data acquired in order to resolve theoretical difficulties with Aviva Vietnam's real profitability performance.
The structure of the thesis
CHAPTER 1: Debt managing situation of companies in Vietnam
CHAPTER 2: Current debt managing situation of Aviva Vietnam Life Insurance Co., Ltd. CHAPTER 3: Solutions to improve the debt managing of Aviva Vietnam Life Insurance
THEORETICAL FRAMEWORK FOR ANALYSIS OF
Definition of debt and debt management
Debt is defined as the amount of money borrowed by an individual or company from another entity, as per the Economic Dictionary of the National Economics University It typically arises from borrowing funds to acquire essential goods, services, or assets Debt certificates serve as documentation that guarantees the repayment of the borrowed amount along with interest throughout the loan period.
According to James Chen (2022), in general, there are four main categories of debt:
Figure 1.1: Four main categories of debt according to Investopedia
Secured debt is collateralized debt Debtors usually require the collateral to be property or assets with a large enough value to cover the amount of the debt.
Unsecured debt refers to loans that do not require any collateral, meaning that the lender relies primarily on the borrower's creditworthiness and repayment ability Before approving or denying a loan, lenders assess the debtor's credit profile, as it plays a crucial role in the decision-making process.
Revolving debt refers to a flexible line of credit that allows borrowers to access funds up to a specified limit, repay the borrowed amount, and then borrow again as needed This type of credit provides ongoing access to funds, making it a convenient financial tool for managing expenses.
A mortgage is a secured loan specifically designed for purchasing real estate, including houses and condos, where the property itself serves as collateral for the debt.
However, debt can also be divided into two groups: Long-term debts and Short- term debts.
Figure 1.2: Two main categories of debt
Long-term debt is commonly utilized by businesses to fund significant acquisitions or expansion initiatives Due to the extended repayment timeline, companies generally make consistent payments, typically on a monthly or quarterly basis, to settle the debt Additionally, long-term debt usually comes with lower interest rates compared to short-term borrowing options.
Short-term debt refers to obligations that must be settled within a year, primarily utilized by businesses to manage daily operations or address unforeseen costs Due to the brief repayment timeline, companies are required to make regular monthly payments Additionally, interest rates on short-term debt tend to be higher than those for long-term debt, as lenders perceive it as a greater risk.
The key distinction between short-term and long-term debt lies in their repayment periods; short-term debt is due within one year, whereas long-term debt is due after one year This difference significantly affects the interest rates associated with each type of debt, as short-term debt usually carries higher interest rates due to the increased risk perceived by lenders.
Debt management is a way to get company’s debt under control through financial planning and budgeting
The goal of a debt management plan is to use these strategies to help the company lower their current debt and move toward eliminating it completely.
Indicators to measure debt management of companies
The findings indicate that manufacturing companies experience decreased profitability when they incur debt, aligning with the pecking order theory Additionally, high levels of tangibility negatively impact profits, establishing a connection between tangibility, debt, and profitability It is observed that while increased debt may lead to greater tangibility, it ultimately results in lower profits Therefore, larger firms should avoid increasing physical assets through debt and instead prioritize sales growth to boost their earnings.
Debt=Current debts+Long−term debts+Technical reserves
Assets play a crucial role in the success of any business, enabling profit generation, enhancing overall value, and ensuring operational continuity By maintaining precise asset records, business owners can effectively assess their financial position and make informed decisions for future growth.
Equity financing involves raising capital by issuing new shares of stock, which does not affect a company's profitability However, this process can dilute the ownership stakes of existing shareholders, as the company's net income is distributed among a greater number of shares.
Equity=Paid−¿Capital+Compulsory reserves+Accumulated losses
The debt ratio is a key financial metric that measures a company's leverage by calculating the proportion of total debt to total assets Expressed as a decimal or percentage, this ratio indicates how much of a company's assets are financed through debt A debt ratio greater than one signifies that liabilities exceed assets, suggesting potential financial risk, especially if interest rates increase Conversely, a lower debt ratio indicates that a larger portion of the company's assets is funded by equity, reflecting a more stable financial position.
A company's debt ratio serves as an indicator of its financial leverage, and this percentage can vary significantly across different industries For instance, utilities and pipeline companies typically exhibit much higher debt-to-equity ratios compared to sectors like technology.
The debt ratio of a corporation is calculated using the following formula:
A debt-to-equity ratio of 30% can be excessive for industries with unstable cash flows and limited companies that leverage debt In such cases, a company with a higher debt ratio than its competitors may face costly borrowing and financial strain during adverse conditions Conversely, in stable sectors like utilities, where consistent cash flows and higher debt ratios are common, a 40% debt level can be considered sustainable.
A debt ratio greater than 1.0 (100%) signifies that a company's liabilities surpass its assets, while a debt ratio below 100% indicates that assets exceed liabilities Analyzing the debt ratio alongside other financial metrics can help investors assess a company's risk profile effectively.
The debt ratio is often defined as total liabilities divided by total assets, highlighting a nuanced distinction between debt and liabilities based on the context In contrast, the more commonly used debt-to-equity ratio utilizes total liabilities as its numerator, emphasizing its close relationship with the debt ratio.
The gross debt service ratio and total debt service ratio are essential metrics in consumer lending and mortgages, as they assess a borrower's ability to repay loans These ratios are calculated using long-term and short-term debt, including the current portions of long-term debt, while excluding liabilities like accounts payable and negative goodwill.
The gross debt ratio measures the percentage of monthly housing expenses, including mortgage, insurance, and property costs, relative to monthly income In contrast, the total debt service ratio encompasses both housing costs and additional debts, such as car payments and credit card bills, in relation to monthly income Generally, acceptable total debt service ratios range from the mid-30s to low-40s percent.
There are server ways to evaluate a Debt Ratio:
Common debt ratios assess a company's financial health by comparing its debt levels to its assets Key ratios include debt-to-equity, debt-to-assets, long-term debt-to-assets, leverage, and gearing ratios, which provide insights into the company's debt management and overall stability.
Healthy debt ratios vary by industry and company type, with a debt-to-equity or debt-to-assets ratio below 1.0 considered relatively secure Ratios exceeding 2.0 are viewed as risky, particularly in sectors like banking, which typically operate with higher debt-to-equity ratios.
The debt-to-equity (D/E) ratio is a vital financial metric that measures a company's financial leverage by dividing total liabilities by shareholder equity This ratio indicates the extent to which a company relies on debt versus its own funds to finance operations In times of corporate downturns, the D/E ratio reflects the ability of shareholder equity to cover existing obligations, making it an essential tool for assessing financial risk As a specific type of gearing ratio, the D/E ratio provides valuable insights into a company's capital structure.
The debt-to-equity ratio of a corporation is calculated using the following formula:
The D/E ratio requires information from a company's financial sheet Total shareholder equity must equal assets minus liabilities on the balance sheet, which is a rearranged form of the balance sheet equation:
Individual accounts not traditionally classified as "debt" or "equity" may be incorporated into balance sheet categories, necessitating further analysis to assess a company's true leverage, especially considering factors like retained earnings, intangible assets, and pension plan adjustments To enhance comparability across different stocks, analysts and investors often modify the debt-to-equity (D/E) ratio due to the ambiguity surrounding certain accounts Additionally, evaluating short-term leverage ratios, profit performance, and growth forecasts can provide valuable insights into the D/E ratio analysis.
The debt-to-equity (D/E) ratio is a key financial metric that assesses the relationship between a company's debt and its net assets, helping to evaluate how much debt is used to leverage its assets A high D/E ratio often signifies increased risk, as it suggests that the company relies heavily on debt to finance its growth.
Factor affecting debt management among life insurance companies
Based on “Factors influencing debt financing decisions of corporations – theoretical and empirical literature review” of Micah O Nyamita, Hari L Garbharran and Nirmala Dorasamy, there are 9 main factors:
Figure 1.3: Internal factors that affect debt management among life insurance companies
(Source: Factors influencing debt financing decisions of corporations – theorical and empirical literature review)
Debt financing and corporation size
The size of a company significantly influences its debt financing choices, with larger firms generally experiencing lower bankruptcy risks and enhanced diversification According to the trade-off hypothesis, this relationship suggests that bigger corporations tend to have higher levels of debt financing due to reduced debt agency costs, lower monitoring expenses, and improved access to credit markets Additionally, larger firms can effectively utilize tax shields by taking on more debt, as they are often more transparent and capable of issuing substantial amounts of debt while spreading issuance costs However, the relationship between company size and debt financing can yield both positive and negative outcomes; the positive aspect highlights the benefits of diversification, while the negative aspect underscores the challenges posed by information asymmetry.
Corporation nature of asset (tangibility)
Corporations with more tangible assets typically possess a higher capacity for debt due to the collateral they provide, which enhances debt financing levels Asset tangibility is crucial in financing decisions, as it not only increases a firm's liquidation value but also mitigates the risks associated with mispricing during bankruptcy According to agency theory, firms with significant debt often underinvest, leading lenders to seek collateral to protect their interests Consequently, tangible assets serve dual purposes: they allow companies to pledge assets as collateral, thereby reducing agency costs, and they safeguard debt holders during liquidation Conversely, firms lacking sufficient collateral may face higher interest rates or resort to issuing stock instead of debt, indicating a positive relationship between asset tangibility and debt financing Additionally, the pecking order hypothesis suggests that firms with substantial tangible assets may incur lower debt financing levels, as these assets reduce information asymmetry and make stock issuances more cost-effective.
Theoretical studies suggest a negative relationship between debt financing levels and corporate growth potential, as increased growth raises financial hardship costs and agency issues related to debt, prompting firms to prioritize shareholder-benefiting investments Consequently, the trade-off hypothesis indicates that growth leads to lower debt financing levels, particularly for firms in expanding industries with flexible investment options, where agency costs are heightened Higher growth potential can incentivize inefficient investments or risky ventures that jeopardize lenders' wealth, resulting in increased borrowing costs Therefore, growing businesses often prefer utilizing internal resources or equity capital over loans Additionally, firms with intangible growth potential may hesitate to commit to debt servicing due to uncertain revenue streams While growth prospects can be positively associated with leverage under the pecking order hypothesis, which posits that more profitable firms should incur more debt, asymmetric information between managers and investors complicates this dynamic According to Myers and Majluf (1984), managers may opt to issue shares when stock prices are high to benefit existing shareholders, leading to a potential reduction in new share pricing demands This behavior can result in a preference for debt over equity, ultimately increasing debt financing levels.
Corporation risk, or volatility, assesses the probability of financial difficulties and is believed to be inversely related to levels of debt financing Research by Frank and Goyal (2009) indicates that companies with greater fluctuations in cash flows face a higher risk of financial distress and should therefore minimize their debt usage They argue that increased cash flow variability can diminish the chances of capitalizing on tax benefits.
Increased corporate risk can lead to reduced debt funding, as higher earnings volatility raises the likelihood of financial distress, making it difficult for firms to meet debt obligations (Deesomsak et al., 2004) This results in an inverse relationship between profit volatility and corporate debt financing Frank and Goyal (2009) highlighted that firms with fluctuating equity shares face greater risks and may encounter adverse selection issues in the stock market Consequently, the pecking order hypothesis suggests that these riskier firms, characterized by volatile equities, tend to have higher levels of debt financing Additionally, firms with variable cash flows often need to access external capital markets regularly, further increasing their debt financing levels.
Higher corporation tax rates enhance the tax deductibility of debt interest payments, making debt financing more attractive compared to equity financing, as dividend payments do not offer the same tax benefits This relationship underscores the significance of corporation taxes in corporate debt financing decisions, a concept widely accepted by experts following pivotal research in the field.
The pecking order hypothesis suggests that firms with higher liquid assets can utilize these assets as internal cash sources rather than relying on debt, leading to reduced levels of debt financing Additionally, managers may leverage liquid assets to enhance shareholder value, potentially at the cost of debt holders, which can increase agency costs associated with debt financing and further decrease overall debt levels.
Non-debt tax shields, such as depreciation deductions and provisions for bad debts, help reduce tax liabilities without relying on interest expenses Corporations that benefit from these non-debt tax shelters tend to utilize debt financing less, as they have sufficient tax credits from their investments and depreciation Consequently, there is an inverse relationship between non-debt tax shelters and the use of debt financing, indicating that companies with substantial non-debt tax benefits are less inclined to seek out debt-related tax advantages.
The trade-off theory suggests that a higher risk of bankruptcy leads to increased bankruptcy costs, resulting in a negative relationship between bankruptcy risk and debt financing (Kayo and Kimura, 2011) In contrast, larger firms benefit from diversification and more stable cash flows, making them less likely to face bankruptcy compared to smaller firms Consequently, according to the pecking order theory, larger and more profitable companies are inclined to utilize their internally generated funds, which reduces their reliance on debt financing Thus, larger firms with lower insolvency risks tend to maintain lower levels of debt financing.
Macroeconomic variables, such as GDP, inflation rates, interest rates, financial institution activities, and industry medians, play a crucial role in shaping corporate financial strategies, particularly in debt financing decisions The literature on financial management highlights the significant influence of these external economic factors on a firm's capital structure choices Understanding how these macroeconomic conditions affect corporate debt financing is essential for effective financial decision-making.
Figure 1.4: External factors that affect debt management among life insurance companies
(Source: Factors influencing debt financing decisions of corporations – theorical and empirical literature review)
The insurance industry in Vietnam remains competitive, even amid the COVID-19 pandemic Chapter 1 provides essential insights for insurance businesses, covering fundamental knowledge about insurance and the specifics of Vietnam's insurance market It discusses various types of insurance, their characteristics, and the current landscape of domestic life insurance companies Additionally, the chapter identifies key competitive factors among local insurers, establishing a foundation for comparing Aviva Vietnam with its domestic counterparts This analysis will ultimately highlight areas where Aviva can enhance its competitiveness within the Vietnamese insurance market.
DEBT MANAGEMENT SITUATION OF AVIVA VIETNAM LIFE
Overview of Aviva Vietnam Life Insurance Co., Ltd
2.1.1 General information of Aviva Vietnam Life Insurance Co., Ltd
(Source: www.aviva.com.vn)
Vietnamese name: Công Ty TNHH Bảo Hiểm Nhân Thọ Aviva Việt Nam
English name: Aviva Vietnam Life Insurance Company Limited
Headquarter address: Floor 13th, Mipec Tower, 229 Tay Son Street, Dong Da district, Hanoi
On July 29, 2011, the Minister of Finance issued Establishment and Operation License No 64 GP/KDBH for Vietinbank Aviva Life Insurance Company Limited This joint venture is formed between Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) and Aviva Insurance Group, the largest insurance provider in the United Kingdom.
VietinAviva was established through the collaboration of Aviva's three centuries of experience and world-class service quality with Vietinbank's extensive branch network in Vietnam Both companies aim to create an effective bancassurance channel by forming a joint venture in the insurance sector The company is authorized to operate in the life insurance market.
34 business operations such as recurrent payments (life insurance, term insurance, mixed insurance, life insurance, and so on); health insurance business; business reinsurance; and investing idle money in Vietnam.
All of VietinAviva's ideals are founded on the foundation of the two words
VietinAviva aims to establish itself as one of Vietnam's most admired life insurance companies by prioritizing trust as its core value The company is dedicated to being a reliable financial partner for both businesses and individuals, effectively sharing and managing risks and losses through its insurance offerings With the support of life insurance, policyholders can embrace life to the fullest, knowing they have a dependable safety net.
2.1.2 History of Aviva Vietnam Life Insurance Co., Ltd.
2.1.2.1 Foundations of Aviva Vietnam Life Insurance Co., Ltd.
Aviva commenced its operations in Vietnam in 2011 as a joint venture with Vietinbank, known as Aviva Life Insurance Company In April 2017, Aviva Group acquired 50% of Vietinbank's stake in the venture, leading to the establishment of Aviva Vietnam Life Insurance Company The company's mission is to provide exceptional financial solutions and peace of mind to customers in the Vietnamese market.
Aviva Vietnam, a prominent insurance provider from the UK, has made significant strides in the industry, highlighted by its exclusive partnership with Vietinbank, one of Vietnam's largest joint stock commercial banks.
Aviva has established an exclusive partnership with Vietinbank to distribute insurance products across over 1,000 branches and transaction offices nationwide This collaboration aims to diversify financial solutions to meet the growing needs of customers The partnership is recognized as a leading Bancassurance channel, supported by more than 700 financial consultants operating within Vietinbank's network.
Besides, Aviva also invests heavily in the traditional agency channel with more than 2,000 professional consultants and has a top operating rate of the market.
2.1.2.2 Development of Aviva Vietnam Life Insurance Co., Ltd.
In September 2017, Aviva introduced its universal life insurance product, "Yêu Thương Trọn Vẹn," aimed at meeting the diverse investment and protection needs of customers throughout various life stages That same year, Aviva disbursed over 14 billion VND to policyholders, with a significant 89.4% of these payments attributed to medical and surgical claims.
By the end of 2019, the company, which has been operating under a 100% foreign-owned model for just two years, achieved remarkable success, recording nearly VND 1,000 billion in annual insurance premium revenue—a 66% increase compared to the previous period—while also generating a pre-tax profit exceeding VND 62 billion, solidifying its position as a market leader.
In the first half of 2020, the company continued to grow by more than 50% year- on-year and is now one of the fastest growing life insurers in the market.
As of now, the Company has successfully completed three increases in charter capital, reaching over 2,800 billion VND Additionally, it has formed a strategic partnership with VietinBank to distribute life insurance products throughout Vietnam The organizational structure and functions of the divisions at Aviva Vietnam Life Insurance Co., Ltd play a crucial role in supporting these initiatives.
Figure 2.1: Organization chart of Aviva Vietnam
2.1.2.4 Functions and obligations of the divisions
The highest of all is the Management Committee (Mancom), which includes all shareholders with the rights to decide the company’s future decisions
Interim Chief Agency Officer: Takes in charge of the sales in agency as well as every activity, projects in the agency
Interim Chief Bancassurance: Takes in charge of the sales in bancassurance – in which is corporate with Vietinbank – as well as any activities, projects related to the bancassurance.
Chief Financial Officer: Managing investing activities, or any activities related to accounting and actuary.
Aviva prioritizes the security of its files and information by utilizing a highly secure company network Ensuring the protection of both core company data and customer information is a critical responsibility within the organization.
Infrastructure Services & Services Desk: Provides rapid and crucial supports to employees whenever they have an issue with the company’s network or computer- related problems
Core Applications: The company develop its own website, surfaces and platforms for employees to work on it This provides a closed environment with high security for Aviva employees only.
HR Operations and Rewards focus on effectively managing human resources, including the onboarding of new recruits and interns This department is dedicated to recognizing and rewarding the efforts of hardworking employees, fostering a motivated and engaged workforce at Aviva.
Talent Acquisition: The company provides various scholarships as well as studying programs to students across the country, thus encouraging the studying spirits.
Learning, Talent & Organization Development: Provides different courses of essential knowledge, skills for employees of Aviva
HR Business Partners (HRBPs) play a crucial role in enhancing HR functions by optimizing activities, analyzing HR data, and improving employee retention They are responsible for forecasting staffing requirements, overseeing termination processes, managing risks, and ensuring employee wellbeing while adhering to compliance standards.
Branding is essential for defining the
Communication & CSR: Anticipating stakeholder expectations, articulating CSR policy, and managing various organization communication tools designed to provide true and transparent information about a company's or brand's integration
38 of business operations, social and environmental concerns, and interactions with stakeholders.
Conflict risk plays a crucial role in Aviva's management process and decision-making framework When conflicts and risks, including potential threats, become unmanageable, the Compliance & Risk Management department must take immediate action to safeguard both the working environment and the company.
The department is responsible for drafting agreements, business contracts, legal letters, and essential documents to safeguard the organization's legal interests Additionally, it provides guidance on legal changes affecting the business and develops training programs for employees to prevent any potential legal violations.
Current debt management situation of the market and Aviva Vietnam
2.2.1 Current debt management situation of Vietnam insurance industry
To evaluate the debt management capacity of the Vietnamese insurance market, it is essential to analyze the debt ratios of both large and small insurance companies in Vietnam The following data presents the debt ratios of 18 Vietnamese insurance companies from 2011 to 2021, sourced directly from the companies' financial statements published on their official websites, ensuring the accuracy and reliability of the information.
Table 2.1: Debt ratio 18 insurance companies in Vietnam during 2017-2021
Manulife 84% 83% 81% 80% 78% 70% 66% 70% 61% 60% 60% AIA 75% 78% 78% 78% 77% 70% 72% 68% 73% 75% 70% Chubb 72% 71% 73% 73% 73% 71% 70% 75% 70% 65% 63% Daiichi 70% 71% 68% 66% 67% 70% 65% 64% 68% 70% 65% Prevoir 75% 72% 70% 71% 66% 68% 65% 60% 60% 60% 60% Cathay 65% 48% 64% 70% 69% 80% 75% 70% 65% 60% 60% FWD 65% 48% 64% 70% 69% 80% 75% 70% 65% 60% 60% Hanwha 64% 60% 57% 87% 75% 60% 65% 62% 50% 52% 40% Fubon 26% 48% 74% 72% 71% 70% 65% 62% 67% 55% 50% Generali 78% 79% 80% 77% 68% 70% 65% 62% 50% 50% 50%
Sun life 26% 48% 74% 72% 71% 70% 65% 62% 67% 55% 50% Phu Hung 65% 48% 64% 70% 69% 80% 75% 70% 65% 60% 60% BIDV met life 65% 48% 64% 70% 69% 80% 75% 70% 65% 60% 60%
(Source: Bao Viet Life, Prudential, Manulife, AIA, Chubb, Daiichi, Prevoir, Cathay, FWD, Hanwha, Fubon, Generali, Aviva, Sun life, Phu Hung, BIDV met life and
To evaluate debt management objectively, we calculate the average debt ratio for the Vietnamese insurance market using available data The results indicate that the average debt ratios across this market consistently exceed 50%.
A debt level of 0.5 (50%) is typically regarded as low risk, indicating that a company's assets are twice its liabilities, with creditors owning half of the assets and shareholders owning the other half In contrast, a debt ratio of 1 (100%) signifies that total liabilities equal total assets, meaning the company would need to liquidate all its assets to settle its debts, resulting in a highly leveraged and potentially inoperable business.
Figure 2.3: The average debt ratio of Vietnam insurance industry in the period of 2011-
(Source: Bao Viet Life, Prudential, Manulife, AIA, Chubb, Daiichi, Prevoir, Cathay, FWD, Hanwha, Fubon, Generali, Aviva, Sun life, Phu Hung, BIDV met life and
A lower debt ratio typically indicates a more stable company with long-term potential, as it signifies less total debt However, each industry has its own benchmarks, with a ratio of 0.5 considered acceptable In Vietnam's insurance sector, debt ratios consistently range from 60% to 75%, a level deemed neither particularly good nor bad, though ratios exceeding 100% are concerning From 2011 to 2016, this debt ratio gradually increased from 60% to 75% The State Bank of Vietnam's report, "Main developments of the world economy in the period 2011 - 2015," highlights that the global economic crisis, which began in 2008, has led to ongoing volatility, characterized by slow economic growth, high unemployment, reduced trade activities, fluctuating capital flows, and rising public debt.
44 facing many difficulties Debt ratio can be directly affected by the negative impact of the economic crisis, which has led to an increase in debt during the period 2011-2016.
After 2016, Vietnam's insurance market maintained a debt ratio above 70% until it dropped to 65% in 2020, a year marked by significant global economic challenges due to the COVID-19 pandemic Despite a forecasted severe recession affecting major economies, Vietnam's GDP still grew by 2.91%, showcasing resilience amid disruptions from natural disasters and the pandemic The country implemented effective strategies to balance disease prevention with socio-economic development, resulting in positive economic outcomes, even though 2020 marked the lowest growth rate in the 2011-2020 period This achievement positioned Vietnam as one of the top performers globally during a time of unprecedented difficulties.
In 2020, the debt ratio of enterprises, particularly insurance companies, showed some improvement, despite the highest growth rate globally However, two COVID-19 waves in 2021 disrupted the Vietnamese economy, causing the average debt ratio of insurance companies to rise from 65% to 68% Analysis of the debt ratio data reveals that the debt management practices of these businesses are not fully effective compared to standard benchmarks Nevertheless, the overall debt management of insurance companies remains commendable, as their debt ratios are not alarming, and Vietnam continues to experience one of the highest economic growth rates in the world.
2.2.2 Current debt management situation of Aviva Vietnam Life Insurance Co., Ltd.
In 2021, Aviva Vietnam, Hanwha Life Vietnam, Generali Vietnam, and Sun Life Vietnam each held a market share of 2.5%, positioning them as primary competitors in the insurance sector This thesis will focus on analyzing the debt management performance of Aviva in comparison to its competitors, Hanwha, Generali, and Sun Life.
2.2.2.1 Total debt of Aviva Vietnam
Table 2.2: Total debt of Aviva and other companies in 2017-2021
(Source: Aviva’s Annual Report, Hanwa Life Vietnam’s Annual Report, Generali
Vietnam’s Annual Report and Sun Life’s Annual Report in 2017-2021)
Aviva Vietnam's debt remains lower than that of competitors like Generali Vietnam and Hanwha Vietnam, yet it exceeds that of Sun Life Vietnam This highlights Aviva's current debt position relative to other companies Analyzing the growth of corporate debt from 2017 to 2021 reveals a consistent upward trend, with total debts rising from approximately 3-4 trillion VND to between 6-10 trillion VND, specifically 5.9 trillion VND for Sun Life and 9.8 trillion VND for Generali.
Figure 2.4: Total debt of Aviva and other companies in 2017 -2021
Aviva Vietnam Hanwha Life Vietnam Generali Vietnam Sun Life Vietnam
(Source: Aviva’s Annual Report, Hanwa Life Vietnam’s Annual Report, Generali
Vietnam’s Annual Report and Sun Life’s Annual Report in 2017-2021)
Vietnam faced significant economic challenges due to the COVID-19 outbreak that began in April 2021, leading to a GDP decline of 6.02% in the third quarter Prolonged lockdowns in major economic centers like Ho Chi Minh City and Hanoi severely impacted the business sector, resulting in an overall GDP growth estimate of only 2.58% for the year, which was 4.2 percentage points lower than the World Bank's December 2020 forecast Additionally, from 2019 to 2021, there was a notable increase in debt, directly affecting the debt indices of Vietnamese insurance companies, including Aviva Vietnam, Hanwha Vietnam, Generali Vietnam, and Sun Life Vietnam.
2.2.2.2 Total assets of Aviva Vietnam
Table 2.3: Total assets of Aviva and other companies in 2017-2021
(Source: Aviva’s Annual Report, Hanwa Life Vietnam’s Annual Report, Generali
Vietnam’s Annual Report and Sun Life’s Annual Report in 2017-2021)
Between 2017 and 2021, the assets of Hanwha Vietnam grew gradually from VND 3.6 trillion to VND 13.5 trillion, while Generali Vietnam's assets increased from VND 3.9 trillion to VND 12.6 trillion Similarly, Aviva experienced a slow rise in assets, although its total remains the lowest among the four insurance companies discussed.
Figure 1.5: Total assets of Aviva and other companies in 2017-2021
Aviva Vietnam Hanwha Life Vietnam Generali Vietnam Sun Life Vietnam
(Source: Aviva’s Annual Report, Hanwa Life Vietnam’s Annual Report, Generali
Vietnam’s Annual Report and Sun Life’s Annual Report in 2017-2021)
Sun Life Vietnam insurance experienced a slight decline in total assets from 2017 to 2019, but saw significant growth between 2019 and 2021 This shift highlights the challenges faced by Aviva, as its total debt approached its total assets, severely impacting the company's liquidity, particularly during the difficult circumstances brought on by the COVID-19 pandemic.
Table 2.4: Total equity of Aviva and other companies in 2017-2021
(Source: Aviva’s Annual Report, Hanwa Life Vietnam’s Annual Report, Generali
Vietnam’s Annual Report and Sun Life’s Annual Report in 2017-2021)
The data reveals that Aviva Vietnam's equity showed minimal growth, experiencing a slight decline from 2018 to 2020 Similarly, Generali Vietnam's figures mirrored Aviva's trend, starting with a lower equity of VND 0.9 billion in 2017 compared to Aviva's VND 1.6 billion, yet it outperformed Aviva in subsequent years, reaching VND 2.7 billion In contrast, Hanwha Life demonstrated significant equity growth, increasing from VND 0.4 billion to VND 4 billion by the end of 2021, making it the standout performer among the three companies.
Figure 2.6: Total equity of Aviva and other companies in 2017-2021
Aviva Vietnam Hanwha Life Vietnam Generali Vietnam Sun Life Vietnam
(Source: Aviva’s Annual Report, Hanwa Life Vietnam’s Annual Report, Generali
Vietnam’s Annual Report and Sun Life’s Annual Report in 2017-2021)
As for Sun Life, it can be seen that the company had a modest start but gradually increased its equity in the period 2018-2019 and has grown rapidly in the period 2019-
2020 In the two years 2020-2021, Sun Life's equity grows more slowly than in previous years According to Investopedia, companies with smaller equity tend to have less risks in
Aviva Vietnam stands out as the insurance company with the least risk due to its lower debt burdens compared to competitors with higher equity However, this reduced equity also limits the company's cash flow, posing challenges for securing sufficient capital to invest in future projects.
2.2.2.4 Debt ratio of Aviva Vietnam
Table 2.5: Debt ratio of Aviva and other companies in 2017-2021
(Source: Aviva’s Annual Report, Hanwa Life Vietnam’s Annual Report, Generali
Vietnam’s Annual Report and Sun Life’s Annual Report in 2017-2021)
It can be seen that Aviva's debt ratio has always remained below 100%, specifically 77.0% in 2017, 61.0% in 2018, 73.0% in 2019, 78.1% in 2020, and 79.6% in
In 2021, a debt ratio below 100% is considered favorable, indicating that a company has more assets than liabilities Aviva experienced a significant decline in its debt ratio in 2018, dropping by 16% However, from 2019 to 2021, the debt ratio has consistently risen, suggesting a decrease in assets and an increase in debt While Aviva's debt ratio remains under 100%, it has not reached the ideal range of 0.3 to 0.6, which complicates its ability to secure external financing compared to companies with debt ratios below 0.4.
Figure 2.7: Debt ratios of Aviva and other companies in 2017 -2021
Aviva Vietnam Hanwha Life Vietnam Generali Vietnam Sun Life Vietnam
(Source: Aviva’s Annual Report, Hanwa Life Vietnam’s Annual Report, Generali
Vietnam’s Annual Report and Sun Life’s Annual Report in 2017-2021)
In 2017 and 2018, Hanwa Life Vietnam exhibited a notably high debt ratio, surpassing that of Aviva during the same period However, through effective debt management strategies, the company successfully reduced its debt ratio to below 0.6 in 2019.
Assessing the debt management ability of Aviva Vietnam
2.3.1 Achievements of Aviva Vietnam for debt managing
Firstly , Aviva Vietnam managed to raise its assets gradually throughout the years.
With the assets continue to grow even in the middle of COVID-19 pandemic, Aviva Vietnam will be able to control its debt managing more efficiently in the following years.
Secondly , Aviva Vietnam is noticeable in managed to keep its debt ratio below
Between 2017 and 2021, the company maintained a favorable debt ratio of 100%, indicating sound financial health Furthermore, Aviva successfully reduced its debt ratio from 2017 to 2018, demonstrating the effectiveness of its debt management strategy, which could be leveraged in subsequent years.
Aviva Vietnam maintains a conservative equity level compared to other insurance firms, which minimizes its risk of incurring debt This strategic approach reflects the company's commitment to effective debt management and highlights its understanding of the importance of maintaining lower equity issues for future financial stability.
2.3.2 Limitations of Aviva Vietnam for debt managing
Aviva Vietnam's debt has consistently surpassed its equity, indicating a troubling trend as it continues to rise annually This imbalance poses a significant risk of bankruptcy if the debt continues to escalate, reflecting a low liquidity ratio Such circumstances highlight the ineffectiveness of Aviva Vietnam's current debt management strategy, necessitating the development of a more robust plan for 2022.
Aviva's debt ratio has consistently remained high compared to the benchmark throughout most years While the company maintained a debt ratio near the benchmark from 2011 to 2016, significant fluctuations began in 2017, resulting in a notably elevated debt ratio by 2021.
Figure 4.9: Comparing Aviva’s debt ratio to the benchmark of 2011-2021
(Source: Bao Viet Life, Prudential, Manulife, AIA, Chubb, Daiichi, Prevoir, Cathay, FWD, Hanwha, Fubon, Generali, Aviva, Sun life, Phu Hung, BIDV met life and
Between 2017 and 2021, Aviva Vietnam maintained a relatively high debt-to-equity ratio compared to industry benchmarks, indicating an ineffective debt management strategy, with the exception of the 2017-2018 period.
2.3.3 Causes for the debt managing situation of Aviva Vietnam
Aviva, a well-established insurance provider in England, is relatively new to Vietnam's insurance market, having launched its headquarters in the country in 2011 This recent entry into the Vietnamese market contributes to its smaller size and less favorable performance ratios compared to other established insurance firms in the region.
Aviva Vietnam, one of the youngest insurance companies in the country, operates with a capital volume of VND 1.7 trillion, which is significantly lower than the average capital of other firms in the industry, estimated at VND 4 trillion.
Aviva Vietnam's risk assessment capabilities are weaker compared to competitors, primarily due to its limited experience in the local insurance market If the company fails to enhance its risk assessment processes, it risks diminishing its value and eroding customer trust.
Interest rates: Vietnam’s interest rate has been decreasing mildly during 2017-
In 2020, Vietnam's interest rate dropped significantly to 4% in 2021, remaining unchanged since then This 4% rate continues to exert a notable impact on the financial performance of Aviva Vietnam.
Inflation rates: Inflation rates in Vietnam fell significantly towards the end of
2021 (2 percent in 2021 vs 3.22 percent in 2020); but, with recent increases in oil costs, inflation rates must still be effectively maintained to keep life insurance firms viable.
Chapter 2 summarizes the basic information of Aviva Vietnam life insurance company, including: basic financial information; the company's history; information about positions and departments in the company; the company's achievements; the financial position of the company; and the difficulties that the company is currently facing By analyzing the strengths and weaknesses of Aviva Vietnam along with the problems the company is facing, Chapter 2 will be the foundation for Chapter 3 to rely on and analyze the most practical solutions for Aviva in order to get the company out of difficulties and at the same time improve its competitiveness with other domestic insurers.
SOLUTIONS TO IMPROVE THE DEBT MANAGEMENT OF
Oriented development of Aviva Vietnam Life Insurance Co., Ltd from 2021 to 2024
3.1.1 Objectives of Aviva Vietnam Life Insurance Co., Ltd from 2021 to 2024
Figure 3.5: Aviva Vietnam’s milestones for 2021 - 2024
(Source: Aviva Vietnam’s Milestones ““What” to achieve”)
Aviva Vietnam sets strategic four-year milestones to outline its future goals, with the current focus spanning from 2021 to 2024 The timeline highlights the company's key objectives and aspirations during this period.
It can be seen that Aviva needs to consolidate financial issues first in order to have a foundation for the development of different aspects Through the period of 2021 and
2024, we can see that Aviva Vietnam has many plans for customer segments, the distribution of each sales channel and IT segment as well as other company programs.
From 2021 to 2024, Aviva aims to diversify its customer segments while investing in human resources and infrastructure to enhance its primary sales channel, as evidenced by the increasing revenue share from agency sales compared to bancassurance The company is committed to digitalizing all operations, from sales to customer experience, to streamline processes Additionally, Aviva prioritizes employee education and has recruited international experts to develop training programs for students and staff To further support education, Aviva offers scholarships to underprivileged children, helping them access better learning opportunities.
In a nutshell, the milestones that Aviva Vietnam mentions are very real and the company can completely try to complete those milestones within a certain period of time.
3.1.2 Planning of Aviva Vietnam Life Insurance Co., Ltd from 2021 to 2024
Aviva Vietnam aims to establish itself as the leading life insurance provider in the country, guided by its slogan “Av
In terms of financial aspects, making profit and offering dividends for shareholders are Aviva Vietnam’s first and foremost precedencies After a challenging year of
Despite facing challenges in 2020, including negative earnings, Aviva Vietnam is poised for significant growth over the next five years, aiming to outpace competitors of similar size The company is committed to "sustainable development," focusing on enhancing VTB Partnership Value while achieving sustainable growth in the value of new business (VNB).
Aviva Vietnam aims to enhance customer attraction through resilient distribution channels by collaborating with VietinBank, leveraging referral models, data analytics, and product bundling The company is also committed to diversifying its distribution strategy, focusing on selectively growing the agency channel while deepening its market presence and targeting new profitable segments.
Aviva Vietnam aims to enhance its brand awareness and stand out in the market through a strong distribution orientation The company seeks to ensure that customers recognize the value of its affinity and digital channels, fostering a mindset where they associate insurance with Aviva.
Aviva Vietnam aims to enhance customer experiences and streamline internal processes through modernization and digitalization By leveraging data analytics and localizing internet payment solutions, the company is positioning itself to become a fully integrated end-to-end digital insurer.
Aviva Vietnam aims to enhance its organizational capabilities by fostering a start-up culture and leveraging diverse talent pools Recognizing human resources as a key focus, the company is committed to recruiting world-class talent, promoting cross-functional projects, and developing skilled teams within a collaborative framework.
Aviva Vietnam's five key cornerstones focus on enhancing future financial performance, increasing market share, identifying and diversifying effective distribution channels, leveraging technological advancements in operations, and nurturing hidden talents among employees through discovery, training, and support.
Solutions and recommendations to improve the debt managing performance of
3.2.1 Internal recommendations of Aviva Vietnam
Figure 3.2: Aviva Vietnam’s recommendation for the company’s growth in 2021-2024
Aviva Insurance Company recognized the significance of revenue generation via the Bancassurance channel and formed a strategic partnership with Vietinbank This collaboration has led to a long-term cooperation plan that provides mutual benefits for both organizations.
Bancassurance sales channel, Aviva will make a specific business plan, including: o Referral model o Data analytics o Product bundling
Aviva recognizes the Agency channel as a vital sales avenue, on par with its Bancassurance channel The company's strategy involves selectively developing its agency network while fostering group business initiatives By concentrating on the most promising agents, Aviva aims to boost revenue and streamline management of its agency development efforts.
In the process of consolidating supply and customer experience, Aviva insurance company always strives to promote product quality as well as service quality for different customer segments
To do this, Aviva Vietnam must hold training courses for staffs more often in order to improve its serving quality, thus increasing customer experience and positive feedbacks.
Build lean start-up & process culture
Aviva advocates for business simplification and automation in lean start-ups to enhance revenue and streamline processes The aim is to create shorter, simpler, and faster operations, ultimately improving the efficiency of the company's business structures.
3.2.2 External recommendations for Aviva Vietnam
Aviva Vietnam has the option to issue new shares or increase its existing share count to boost cash flow This strategy may lead to stock sales, particularly if the company faces financial challenges By utilizing the funds generated from these shares, Aviva can address its debts and enhance its overall financial health.
Aviva Vietnam has the option to sell some of its assets and lease them back to generate surplus funds from the resale This strategy could provide the company with the necessary capital to settle existing debts However, given the nature of its asset utilization, leasing assets may not be a practical solution and should be considered only as a last resort.
Aviva Vietnam should focus on boosting sales to effectively reduce debt and improve its debt-to-total-asset ratio To achieve this, the company can increase sales while maintaining low overhead costs This can be accomplished by enhancing service performance and developing a range of insurance products that are cost-effective yet valuable to customers.
3.2.2.2 Improving Debt-to-equity ratio
To effectively reduce its debt-to-equity ratio, Aviva Vietnam should focus on increasing sales revenues and profits This can be achieved through strategies such as raising prices, boosting sales, or cutting costs The additional funds generated can then be allocated to pay down existing debt, alleviating the company’s debt management challenges.
Implementing more effective inventory management is a key strategy for reducing Aviva Vietnam's debt-to-equity ratio Excessive inventory levels can tie up significant operating capital, leading to wasted cash flow To optimize inventory management, Aviva Vietnam can utilize the day's sales of inventory (DSI) ratio, an essential component of the cash conversion cycle (CCC), to assess and enhance the efficiency of their inventory practices.
To reduce the debt-to-equity ratio, Aviva Vietnam can consider restructuring its debt by refinancing existing loans with high interest rates to take advantage of lower current rates This strategic move will decrease interest expenses and monthly payments, ultimately enhancing the company's profitability and cash flow while increasing cash reserves Negotiating better terms for debt is a straightforward and effective approach to improve the firm's financial health.
3.2.3 Recommendations for State management agencies
3.2.3.1 Recommendations for Ministry of Finance and the Department of Insurance Supervision and Administration
To enhance transparency and improve the understanding of health insurance products, it is essential to collaborate with relevant ministries to urgently revise the Law on Insurance Business and related inspection guidelines This initiative aims to increase public awareness of health insurance, particularly focusing on Aviva Vietnam's offerings.
To enhance state management and oversight, it is crucial to implement stringent measures against individuals, organizations, and businesses exhibiting unethical practices or delivering subpar products and services Additionally, prioritizing the development and improvement of insurance human resources is essential for maintaining industry standards and ensuring consumer trust.
In addition to the previously mentioned solutions, the Ministry of Finance and the Department of Insurance Supervision and Administration can explore various other strategies to enhance their operations and effectiveness.
To enhance transparency and comprehensiveness in the insurance sector, particularly in health insurance, it is crucial to collaborate with relevant ministries and agencies to promptly revise the Law on Insurance Business and its associated guidelines for inspections and examinations.
In collaboration with the Ministry of Health and Vietnam Social Security, efforts are underway to develop strategies that promote transparency, public accountability, and fair competition This initiative aligns with the objectives outlined in Resolution No NQ/TW from the Sixth Conference of the 12th Party Central Committee, held on October 25, 2017, which focuses on enhancing the protection of public health in contemporary contexts, as well as with Resolution No 139-NQ/CP from December 31, 2017, which details the government's action plan for implementing Resolution No 20-NQ/TW.
Collaborate with local authorities and socio-political organizations, including the Women's Union, Farmers' Union, War Veterans Union, and Youth Union, to effectively implement projects and programs aimed at enhancing health care awareness among households and diverse communities in Hanoi, particularly in light of the ongoing pandemic.