Risk and Required Rate of Return: ABC Company (Life Insurance Company)

A case study submitted to Doctor Ryan Roque, in partial fulfillment of requirements for
Master’s Degree

By

Christopher M. Ataza

Glenah Marie A. Gonzales

Renz Gellie L. Villarin

June 2023

Introduction:
 The insurance industry contributes to economic efficiency and fosters economic
growth in several ways. First, insurance improves risk allocation of an economy and reduces
transaction costs. Second, by protecting existing assets, insurers provide economic agents
with a more stable financial basis. Third, insurers foster governance through their asset
holdings by encouraging risk mitigation through warranties and/or risk exclusions, and
direct monitoring of risks. Fourth, insurance can be an alternative and supplemental
financial support in the event of economic losses caused by, for example, accidents,
catastrophes and bankruptcies.-Helmut Gründl, Ming (Ivy) Dong, Jens Gal.

Risk and Return is the theory and practice of investing. As Frank K. Reilly, said “…
the uncertainty that an investment will earn its expected rate of return”. Typically it will
distinguish between the loss and gain, however, the risky assets will generate negative
returns or vice versa. To identify the risk as the uncertainty of the rate and return is
becoming reasonable. The greater the uncertainty will likely result in larger gains, as well as
a greater investment will generate larger losses. The risk is the possibility of meeting danger,
loss or suffering. In investment they were the unexpected and unwanted outcome which are
harmful for the business. While, the return is the income received in an investment, it is a
belonging of expectation of being liquid. Insurance is a dynamic part of the economy, which
collects funds and mobilizes the needs sectors. It is a part of trade, commerce, and industry.

The analysis of the risk and return is significant in investment decisions as well as
managerial decisions; it influences risk and return of the shareholders. Consequently the
risk and return analysis influences the market price of the stock. So before making an
investment decision, a person must analyze the risk and return from a particular stock as
well as they can make a good risk-minimizing portfolio between their investments in the
stock. - Anju Maharjan, March 2021 “Risk and Returns analysis of Nepalese Life Insurance
Companies.”

Our Story:

The ABC Company is the combination of strengths of two financial leaders that were
shaking things and demystifying what has been seen as a complicated and boring industry.
They were called Troo but refreshed recently to carry both parent firms’ names – ABC
Company and Ageas. It was founded in 2015 and integrated the end-to-end IT platform in
the cloud. Their technology enables them to offer the customers seamless experience and
customized financial solutions. ABC Company Insurance is a lifetime partnership between
ABC Company Bank, with over 500+ branches, and Ageas, an award-winning international
insurance group with a heritage spanning over 200 years. The intention is to give young
Filipinos a sustainable advantage in life through an approachable institution offering
dynamic insurance options.

Who we are, we help you protect what matters most and reach your life goal. Back in
2015, we were founded as a joint venture, this is a lifetime partnership that means
accessibility to reach us through any ABC Company store or our agency houses across the
country. The stability, trust for almost 200 years of strength and stability of Ageas, one of
Europe’s largest insurers. Lastly, our commitment to live your best life today with multi-
channel access and solutions that give you value for your money.

Gathered Audited Financial Statement Report Summary:

The Company’s other financial assets as at December 31 are summarized below:

Based on the comparative analysis of the audited financial statement of comprehensive

income of ABC Company. It shows the subsequent net loss of its financial income starting
year 2018 (824,767,989.00), 2019 (623,594,184.00), 2020 (527,819,892.00), and 2021
(529,657,125.00). To take-up from the consideration of COVID-19 crises, that has a huge
impact for the companys’ long-term forecasted income. This series of annual losses give us
the hint to determine the risk and the required rate of return of ABC Company, to remain in
public offering its services.

Statement of the problem

 This study aims to determine the risk and the required rate of return of ABC
Company during before and after COVID - 19 crises. The study sought answers for the
following question.

What are the challenges that the company ABC Company Insurance Corporation
encountered during the midst of the global pandemic.

a. In terms of income
b. In terms of expenses

Results and Discussion:

Market conditions have always been dynamic, but the recent covid-19 pandemic has sowed
more fear and uncertainty to those who have placed a good amount of investment in unit-
linked policies. This has an impact in the economies across the world, putting a stop to the
longest-lasting equity bull market into a recession of historic proportions. Needless to say
that economic activity has dwindled and put up a question on the depth and duration of the
market downturn. In the Philippines, a lockdown has been implemented throughout Luzon
in order to contain the spreading of the virus locally. Facing this crisis causes a global
economy to slow down and will recover depending on the duration and depth of the
coronavirus crisis. The speed and depth of the downturn seems more severe because the
constraints are physical, not financial. Where production and consumption of goods was on-
going and the only hindrance was the difficulty in financing. Currently, no matter how
much money we have, we cannot purchase goods and services because no one is offering
them.

The COVID-19 crisis continues to have a significant impact on individuals, society, business
and the wider economy across the globe. The insurance industry has not escaped its impact,
but insurers have responded quickly to the crisis. As the broader economy recovers and
responds to the pandemic, insurers will face several challenges but also see many new
opportunities in the medium to long term.

The uncertainties and limited economic activity during the COVID-19 pandemic in 2020
changed the perspective of consumers in the Philippines when it comes to insurance. This,
and the availability of newer insurance coverage with pre-existing needs or those with a
medical condition, resulted in the growing share of the GDP contribution of the insurance
industry, especially in 2021. The Philippine insurance sector is regulated by the Insurance
Commission, which aims to establish a strong national insurance market.

The country slipped into a technical recession by the second quarter of the year after its
gross domestic product contracted by a staggering 16.5 percent—the sharpest drop ever
recorded in more than three decades.

According to Insurance Commissioner Dennis Funa, surges in claims coincided with the
spikes in COVID-19 infections.
“The claims paid increased drastically from February to April and dipped slightly in June,”
Funa said. “This reflects the reported spike of COVID-19 cases in the Philippines between
March and May.”
The insurance industry in the Philippines has paid out a total of PHP8.25 billion since the
pandemic began last year, with the largest share going to death benefits at PHP2.89 billion.

The current market trend suggests that uncertainty remains a key factor and global
economic slowdown is expected in 2020 with growth dropping to as low as 1.5%. Locally,
the country's GDP is estimated to grow at a range of -0.6% to 4.3% depending on the
duration of the lockdown. As the ABC Company of Ageas Insurance Corporation target in
five (5) years after being founded in 2015, will generate net income.

Income loss during pandemic for the following reasons.

a.) In terms of income

The company increase it’s income due to premium collections during 2021, this is
because of the transition of digital touch points and channels which adapt and
grow in this new contactless economy.

However, the company still it’s loss six (6) year due to following reasons;

1. Net unrealized gains credited to other comprehensive income due to adverse

economic conditions.

Available for Sale

The account as at December 31 consists of:

Under Section 209 of the Amended Insurance Code (Republic Act No. 10607), to the extent
of 25% of the insurance company’s minimum net worth, the insurance company should
invest in bonds and other debt securities approved by the IC as security for the benefit of the
Company’s policyholders and creditors.
 The investment income recognized in profit or loss relating to transactions involving
AFS financial assets for the year ended December 31, 2021 amounts to P39.98 million (2020 -
P40.67 million).

Unit linked Funds

The Company launched its Variable Unit-Linked (VUL) products in July 2017 wherein 3
basic funds were created for the said product: Bond fund, Balanced fund, and Equity fund.
In 2019, the Company launched an Asian Equity fund. The funds are invested in bond
securities for fixed income portfolio and unit investment trust fund (EW PSEI Fund) or
exchange traded fund (BlackRock iShares Core MSCI AC ex-Japan ETF) for equity portfolio.
The funds are being managed by the Trust Division of EWBC

The ABC Company is at high risk, in terms of its invested funds. As we observed in
the below Unit Price Graph as of June 05, 2013.

The Unit Prices displayed on this website are subject to final confirmation by EastWest
Ageas Insurance. The Company shall not be liable for any loss/damage that may result
from the inaccuracy of the figures above. For policy transactions, the Unit Price reflected on
the corresponding Transaction Notice will be deemed final.

The Dollar Income Paying Fund that aims to achieve income and capital growth over
the long-term investing in USD-denominated exchange traded funds has declined from $
1.0000 Unit Price as of April 07, 2022 to $ 0.8965 as of April 30, 2023. Currently, its risk
profile is at an aggressive rate of 9/10. Subsequently, its fund performance has lost to -
10.35% since inception. The downward movement in the US yield curve is the start of
cutting the policy rates of the 2nd half of early 2023.

The Asian Equity Fund, which aims to achieve capital and income growth from
investment in iShare Core, Japan Index and (2) - money market securities, has declined from
P 1.0000 unit price as of February 12, 2019 to P 0.9359 as of April 30, 2013. Currently, its risk
profile is at an aggressive rate of 9/10. Subsequently, its fund performance has decreased by
-6.41% since inception.
 The Equity Fund, with a primary objective is to achieve capital and income growth
from a diversified portfolio in the Philippines equities as also declining from P 1.0000 as of
July 27, 2017 to P 0.8093 as of April 30, 2023. Currently its risk profile is at an aggressive rate
of 7/10. Subsequently, its fund performance decreased to -19.07% since inception.
Investments under assets held to cover unit-linked liabilities are valued at market price.
Changes in the assets held to cover unit-linked liabilities due to investment earnings or
market value fluctuations result to the same corresponding change in the unit-linked
liabilities

b.) In terms of expenses

2. Increase on insurance related and other administrative expenses.

The net claims and benefits incurred for the years ended December 31 consist of:
Details of general and administrative expenses for the years ended December 31 are as
follows;

However, even the ABC Company was loss for the year, it sustained the operating expenses
due to capital infusion (contributed surplus) of its parent company from Belgium. As shown
below,

As at December 31, 2021 and 2020, the Company is subject to externally imposed
capital requirements set and regulated by the IC. The Company has complied with
the externally imposed capital requirements during the financial reporting periods.

Conclusion:
 The series of downfall of the ABC Company Insurance Corporation investment in
Dollar Income Paying Fund, Asian Equity Fund, and The Equity Fund. Is quite risky as its
portfolio keeps declining the trend based on their historical unit prices. But, this is also an
opportunity for them to have an additional investment as the prices become cheaper.
Investors are becoming much more aggressive in this situation in order to boost its stability.
As we observed, its Bond and Balance Equity trend, are uptrend in their unit prices. Because
of the downtrend in yield movement for the rest of the year as inflation continues to ease on
lower commodity prices, although upside risk still exists as core inflation remained high at
7.8% in March, but they didn’t expect the BSP to cut policy rates this year.

The Company is exposed to financial risk through its financial assets, financial liabilities,
insurance assets and insurance liabilities. In particular, the key financial risk that the
Company is exposed to is that the proceeds from its financial assets are not sufficient to
fund the obligations arising from its insurance contracts.

Together with the Philippine News Agency, the low insurance penetration rate in
the Philippines, especially among the poor, along with the recovery of the economy, are
among the opportunities that an official of ABC Company consider propelling the business
in the long run. In an interview, the Insurance President and chief executive officer Sjoerd
Smeets, said the lower level of financial literacy in the country compared to advanced
economies, Filipinos are not keen on really getting insurance coverage. In Addition,
Filipinos don’t go themselves looking for insurance, They are more being approached and
somehow convinced that life insurance is good for them. As their intention is not to grow
market share, but to aim is to protect more Filipinos.

Recommendations.

1. Increase brand awareness through digital advertising and other online platforms.

Process to do:

1. Actively sharing of online engagements posted from the main pages

and website of ABC Company Insurance.
2. Participate in programs organized by the company such as tree
planting, fun run, etc.
3. Additional other forms of advertisement on public places such as
buses, MRT and LRT stations and other public transportation.

2. Cost cutting of expenses.

3. Brand partnerships and collaborations
4. Offer promo and bundled insurance policies products which premiums are lower to
its competitors.

References:

https://troo.life/investments
https://www.pna.gov.ph/articles/1200401
https://www.allianzpnblife.ph/press/blog/what-s-our-covid-19-market-outlook-.html
https://troo.life/corporate/source-documents
https://orangemagazine.ph/2023/ABC Company-ageas-insurance-opens-the-doors-of-its-
second-agency-house-in-the-heart-of-ortigas/
https://business.inquirer.net/380345/troo-expands-footprint-through-an-agency-sales-
channel-rebrands-as-ABC Company-ageas-insurance#ixzz85N3CXlu1
https://www.insurance.gov.ph/
https://www.statista.com/statistics/1299937/philippines-financial-impact-of-covid-19-on-
insurance-consumers/
https://www.prulifeuk.com.ph/en/explore-pulse/health-financial-wellness/study-on-the-
impact-of-the-covid-19-pandemic-on-health-insurance-riders/
https://www.insurance.gov.ph/wp-content/uploads/2022/06/IC-Press-Release-27-April-
2022.pdf
https://www.insurancebusinessmag.com/asia/news/breaking-news/covid19-insurance-
claims-in-the-philippines-reach-billions-310912.aspx

Interview Questionnaire:
Correspondent:

1. What are the strategies that the company used to generate income during the
pandemic?
a. Digital payments, through online banking and electronic payment.
b. Offering discounted policy mode of payment.
c. Others
specify____________________________________________________________

2. What are the challenges that the company ABC Company encountered during and
after the crisis?

a. Decreases in premium collections due to adverse effects of pandemic

b. Cost cutting of operational expenses.
c. Retrenchment of employees.
d. Others
specify____________________________________________________________

3. What are the biggest factors of insurance risk?

a. Operational
b. Strategy
c. Compliance
d. Reputation
 e. Others
specify___________________________________________________________

4 . How does ABC Company acquire revenue sharing?

a. Reinvest in companies' investment portfolio.

b. For funding of the operating expenses.
c. Distribution to the stockholders.
d. Others
specify___________________________________________________________