Q1 20: Health insurance revenue skyrocket; investment profits rise slightly
Direct written premium reached VND861bn, up 29.2% yoy, mainly due to strong increase in health insurance. Claim settlement expenses dropped 6.6% yoy as customers reduced social interaction. However, underwriting expenses surged 43.2% yoy due to the high growth in premium of health insurance and accident insurance – the segment that has the highest expenses. Hence, the loss ratio fell to 43.5% (Q1 19: 52.4%) and the expense ratio increased sharply to 45.5% (Q1 19: 40.9%).
Profit from financial and real estate investments increased by 8.3% yoy even as the stock market plunged due to the reversal of provision for investment in subsidiaries. Investment return rate was 6.1%/year (Q1 19: 5.4%/year). PAT reached VND42bn, up 20.2% yoy.
FY 20: Insurance business and investment adversely affected by the coronavirus pandemic
Direct written premium may drop 15.3% yoy to VND2,596bn. Gross profit from insurance will be lower by 5.9% yoy, reaching VND485bn due to (1) claim settlement expenses decreasing by 1.8% yoy to VND1,083bn due to payments for contracts signed last year; the loss ratio, therefore, will rise to 49.6% (2019: 48.9%) and (2) risks of fraudulence from customers may increase due to difficulties in doing business during the pandemic, leading to an increase in risk assessment and prevention expenses. This could cause underwriting expenses to be reduced by only 3.8% and the expense ratio could hit 44.4% (2019: 44.8%).
Uncertainty about the stock market and lower deposit interest rates following the government's support policies will result in a decline of 38.9% yoy return on investment to VND34bn, equivalent to a return rate of 4.6%/year (2019: 6.9%/year). PAT comes at VND131bn, down 21.2%. EPS is VND1,474.
Valuation and recommendation
Covid-19 creates systemic risks that prevents insurers from adapting risk diversification. Therefore, the insurance business will inevitably face obstacles. However, the impact on revenue may occur only in the short term until the pandemic is contained, particularly by the end of Q2 20, according to our expectations. In the long term, PGI's business performance will still be positive due to many factors including the Good B+ credit rating, the ability to reduce costs thanks to the application of information technology, and the support from major shareholders in expanding its high quality customer base. A prudent investment portfolio with 90% in bank deposits is also a plus to ensure stable profit growth.
Using methods of EVA, P/E and P/B, we revise down PGI's target price by 8% to VND17,500/share compared to the latest valuation in the 2020 investment strategy report. With an expected cash dividend within the next 12 months of VND1,300/share, we recommend Accumulate (from Buy) with a total return of 18% based on the closing price of 20 May 2020.