EASTLAND INSURANCE COMPANY LIMITED

A LEADING GENERAL INSURANCE COMPANY OF BANGLADESH

Finance

Credit Rating of
Eastland Insurance Company Limited.

F 504: Fixed Income Securities MBA Finance (11th Batch)

Submitted to

Muhammad Mujibul Kabir Associate Professor Department of Finance University of Dhaka

Submitted By:
Name Roll

Date of submission: October 2, 2010

October 2, 2010

Muhammad Mujibul Kabir Associate Professor Department of Finance University of Dhaka.

Dear Sir,

We are glad to inform you that here is the report you assigned us to prepare a report on Credit Rating of Eastland Insurance Company Limited for the completion of our course Fixed Income Securities (F504). In this report we have basically tried to find out the rating of Eastland Insurance by way of performing ratio analysis and other sort of analyses. We have covered all the necessary elements that should be included in a report. Besides, we are still students and we are in a process of developing our skills. So, we hope that you will be kind enough to consider the limitations of this report.

Thank you for giving us such an opportunity of working on the topic. We will be honored to provide you any additional information, if necessary.

Sincerely yours Abu Yousuf Md. Solaiman On behalf of group# 17

Table of Contents
4

SL No. 01 02 03 04 17 18 19

contents Executive Summary Introduction of the company Qualitative Analysis Quantitative Analysis Comparative Analysis Credit Rating Appendix (Financial Highlights and Multi Stage Dividend Growth Model)

Page No. 6 7 10 17 21 23 26

EXECUTIVE SUMMARY
Eastland has been offering comprehensive range of insurance packages from its 23 branches throughout Bangladesh, which include: Fire, Marine, Hull, Motor, Industrial All Risks,
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Engineering, Aviation, Personal Accident, Overseas Media-claim and Miscellaneous risks. Eastland is a proud insurer of host of clients ranging from distinguished individuals to big trading firms, Banks & Financial Institutions as well as large national & multi-national companies. Eastland Insurance Company Limiteds annual report has not provided enough disclosure to the shareholders. The report is not furnished with all necessary information needed to analyze a company. Financial flexibility measures the amount of a companys capital base that is financed through borrowed money, typically short term and long-term debt and hybrid capital securities, which can be issued at an operating company or holding money. Eastland Insurance Company Limited maintains financial leverage of less than 25% over the last five years. It is satisfactory for a general insurance company. The recent share price and P/E ratio of Eastland insurance indicates that investors have the confidence about the performance of the company. Management quality is a major factor in determining rating. Managements ability to develop a strategic vision and its ability to execute that vision are critical factors for a companys success in a competitive industry. The quality management of Eastland insurance is assessed by examining the track record, performance of management ,the ability to sustain company earnings and capital position and the organizations financial and business flexibility. In this report we have tasted its performance through quantitative and qualitative analysis. And compared the results to the industry. In our credit rating, Eastland Insurance Company belongs to BBB grade. Rating triple B indicates very high claims paying ability with strong protection factors supported by good financial performance and sound solvency position.

Chapter 1
6

Introduction to the company

Eastland Insurance Company Limited a public limited company incorporated on 5 November 1986 under the companies act 1994 to carry out general insurance business as per the Insurance Act 1938 and other related applicable laws and rules. It commenced business on 22 November 1986.

Eastland has been offering comprehensive range of insurance packages from its 23 branches throughout Bangladesh, which include: Fire, Marine, Hull, Motor, Industrial All Risks, Engineering, Aviation, Personal Accident, Overseas Media-claim and Miscellaneous risks. Eastland is a proud insurer of host of clients ranging from distinguished individuals to big trading firms, Banks & Financial Institutions as well as large national & multi-national companies.

The company is living up to its promised slogan: The name you have learnt to Trust by upholding its personalised services in both Sunny & Rainy days! As such, Eastlands name has been embedded in the hearts of thousands of its clients. Eastland Insurance Company has its head office at Dhaka. On 31 December 1999, it had 34 branches throughout the country. The management team of the company includes 31 executive officers led by the managing director and a 29-member board of directors. Company Profile:

Registered Name : Eastland Insurance Company Limited Registered office : 13 Dilkusha C/A, Dhaka 1000, Bangladesh. Paid up Capital : Tk. 276.06 Million Authorized Capital : Tk. 500 Million Incorporation : November 05, 1986 Commencement of Business : November 05, 1986 Credit Rating Grade : AA- (CRISL) Listing with Dhaka Stock Exchange (DSE) : 1994 Listing with Chittagong Stock Exchange (CSE) : 1994 Allotment of Public Share : 1994 Face Value Per Share : Tk. 100 Earning Per Share (EPS) : Tk. 46. 74 Total Asset of the Company : Over Tk. 945 million Reserve Base : About Tk. 434 million Investment Portfolio : Tk. 670 million : 23 Number of Branches Eastland is the proud sponsor of 02 (two) reputed Non-Banking Financial Institutions namely Industrial & Infrastructure Development Finance Company Ltd. (IIDFC) and National Housing Finance & Investment Ltd. led by prominent Banks, Insurance Companies and the renowned Business houses of the country as follows:

Chapter 2
9

Qualitative Analysis

Accounting quality:
Adequacy and availability of financial information in the website Eastland Insurance Company Limiteds websites is on an average rich. The site provides adequate financial data. Especially recent financial data is available in the website. The annual report or audited financial statement immediately preceding year is available for download. So management of Eastland Insurance Company Limited emphasizes in providing adequate and updated financial information to the general public. In their website they have provided their financial strength, highlights, Balance sheet as the year ended December 12, 2009 and half yearly report as on June 30, 2010. Adequacy of disclosure Eastland Insurance Company Limiteds annual report has not provided enough disclosure to the shareholders. The report is not furnished with all necessary information needed to analyze a company. Moreover explanations to different accounting items are given in the Notes on Accounts section but they are not adequate.
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 Quality of disclosure It provides sufficient material information in the notes of the financial statement Such aso It has provided the revenue recognition criteria. o It has provided the taxation and tax treatments. o Profit and loss account shows the income from shares and the total investment in shares during the year. o Information about interest income is given in the notes but it is not detailed. o The company does not provide detailed about the related party transaction. So accounting quality Eastland insurance is satisfactory except detailed information of other partys transaction. The access to financial data is also easy. Considering all the factors accounting quality can be referred as up to the standard the standard.

Financial flexibility:
It is important that a company is able not only to fund its business growth via internal capital generation but also to demonstrate the ability to service its obligation without stress. Insurers benefit from having the capacity to raise capital externally for additional growth or acquisitions and to meet additional financial demands. Financial flexibility-as directed by financial leverage, earning coverage, debt coverage, dividend coverage and access to capital markets-is a key determent of insurers credit profile. Financial flexibility measures the amount of a companys capital base that is financed through borrowed money, typically short term and long-term debt and hybrid capital securities, which can be issued at an operating company or holding money. The calculation considers all forms of debt used to fund the companys operations in leverage. Eastland Insurance Company Limited maintains financial leverage of less than 25% over the last five years. It is satisfactory for a general insurance company. Capital market confidence is also a key variable of rating. It has been frequently observed that ready access to capital markets is necessary for many insurers in case of needing to raise capital after a severe unexpected event, to fund an acquisition or simply to expand internal growth plans. The recent share price and P/E ratio of Eastland insurance indicates that investors have the confidence about the performance of the company. So the Eastland insurance has the capability to raise fund from the capital market by issuing repeat public offering or by offering right shares in the event of liquidity crisis or rebuild the capital base.
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Quality of Management:
Insurance is basically a technical business and dependent to a great extent on the quality of techno-human resources available to form a management team. The company has in its strength good number of highly qualified & experienced insurance personnel. The operation of the company is being carried out by an experienced Management team with wide exposure to insurance industry. Mr. M. Azmal Hoque, ACII, Managing Director joined the company as Executive Director on February 1991 with a long job experience in insurance business both at home and abroad. The activities of Eastland Insurance Company Limited are being carried out through the various Departments namely Marketing, Underwriting, Re-insurance, Claims, Administration, Branches Control Department, Finance & Accounts, Audit/Inspection & Legal matters, Shares & Investment, Information Technology, Board Secretariat and Company affairs. Management quality is a major factor in determining rating. Managements ability to develop a strategic vision and its ability to execute that vision are critical factors for a companys success in a competitive industry. The quality management of Eastland insurance is assessed by examining the track record, performance of management ,the ability to sustain company earnings and capital position and the organizations financial and business flexibility. The management has a track record of maintaining sustainable and incremental growth of the company. The earnings of the company are very stable and increase gradually each year. The investment and assets of the company also increase gradually each year. The management performance is satisfactory in respect of premium collection and profit making. Along with companys earning the net asset value of the company increased gradually each year. The management also able to maintain a sustainable profitability. The company provides high percentage of stock dividend to its shareholders for last six or seven years. Eastland insurances capital market performance is also good. Its share traded from a range of 1141 to 1297 for last one month and its P/E ratio is now 39.82. It also indicates that stockholders have the confidence in the performance of the, management of the company. The management of the company also to maintain good capital position of the company. The company also have Company has a stable growth of paid up capital and reserve fund. At the same time the management able to keep the industry and business risk at an acceptable level. Management also establish a forward looking business strategy to provide high quality and professional services to its clients and maintain the growth and progress of the company which is consistent with the vision of the company.

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Birds eye view of this model: First closer attention goes to the threats of new entries. Intense threats of new entries refer to sound competitive environment of the industry and so reverse is also true. This point catches the following heads Economies of scale Capital requirements of entry Access to distribution channels Legislation and government action Protecting established operators

Porters five factors model: Porters five factors model is a pioneering concept model to assess the industry competitive environment, profit making opportunity and sustaining capability. Here we will depict the five ground stones of this model at a glance and then make a concluding remark as to the assigned company considering these underlying variables.

POTENTI AL ENTRY

POWER OF SELLERS

COMPET ITIVE RIVALRY

POWER OF BUYERS

13 rivalry

rivalry rivalry
SUBSTITU EFFECT

TION rivalry

F-Porters five factors model

Second concentration belongs to bargaining power of buyers or sellers. Bargaining power in favour of any party gives us monopolistic notion which should not be the prerequisite of the healthy market. Following points give favouritism to the suppliers or the buyers Suppliers Buyers The buyer can threaten backward integration Alternative sources of supply exist The third idea goes to the threat of substitution effects. The higher the threat, the lower the opportunity to make gain and vice versa. Competitive rivalry also got momentum. Mountainous competition among the competitors trembling the profit making opportunity and agree to opposite scenario. High switching costs from one to another Powerful supplier brand The supplier can integrate forward to threaten the customer The customer is of little importance to the supplier
rivalry

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Insurance industry and Porters model: Threat of entry: Power of buyers: Power of sellers: Substitution effect: easily can enter into the market as law enforcement bodies are passive. buyers can not bargain due to the lacking of proper knowledge sellers exploit the chance of buyers illiteracy. No substitution effect

Competitive rivalry: No of companies are high than the market size. Eastland Insurance Company: Eastland Insurance Company follows Porters generic strategy that allows the company to pursue cost leadership and differentiation approach. The company has stepped into 24th of its journey towards greater excellence. Eastland Insurance being one of the leading insurance companies in the country has always been innovative and proactive towards the challenges it has been exposed to. Expedient attention is given to uphold the trust of the valued clients. Effective customer services, transparency and accountability, well trained staff, good corporate culture etc are the main factors behind the significant growth of the company. The purpose of insurance is to rapid claim settlement. Eastland Company firmly believes in and maintains strong commitments to appropriate effective handling of claims and enjoys a built in envious reputation in the market for expeditious settlement of claims. Eastland is always committed to render personalized service to its valued clients for establishing congenial relationship with them. When there is a substantial loss of the insured properties. Eastland Executives promptly rush to the spot accompanied by a Govt. Licensed surveyor and if necessary provide advice to take steps to minimize loss and considering the severity of loss arrange partial on account payment on the basis of the preliminary survey report for providing the insured an immediate relief to recover the loss. For settlement of numerous claims of various clients at the soonest possible time, simplest procedures and formalities are followed and executed through the claim department, headed by a highly motivated and experienced EVP who is assisted by a team of efficient personnel. Eastlands pragmatic policy of investment, efficient management of funds and reciprocal business, yielded good rate of return on its total investment portfolio. Maximum rate of interest on term deposit was bargained and earned. The overall affairs of the investment department is controlled and guided by a management committee. This committee reviews market situations and attends the trading house and submits reports of buy and sale daily.

15

Chapter 3
Quantitative Analysis

16

Quantitative Analysis:

17

Factor : 1 Profitability ROIC Net Income Dividend Total Capital

2005 23.74% 81,504,0 31 7,800,0 00 310,466,6 56 13.66% 81,504,0 31 596,789,2 43 26.25% 81,504,0 31 310,466,6 56 2005 0.39 198,777,8 90 509,244,5 46 0.11 20,898,7 77 198,777,8 90 2005 0.14 44,195,1 07 310,466,6 56 0.3552 110,264,5 55 310,466,6 56 2005 0.32 35,586,2 20 110,264,5 55 2.74 35,586,2

2006 10.46% 44,750,7 17 10,800,0 00 324,608,3 43 7.41% 44,750,7 17 603,884,1 33 13.79% 44,750,7 17 324,608,3 43 2006 0.34 208,160,5 48 603,884,1 33 0.12 23,966,3 93 208,160,5 48 2006 0.12 40,448,9 98 324,608,3 43 0.4134 134,206,1 50 324,608,3 43 2006 0.28 38,209,3 31 134,206,1 50 18 2.55 38,209,3

2007 21.49% 87,272,2 00 406,048,49 9 12.32% 87,272,2 00 708,343,89 2 21.49% 87,272,2 00 406,048,49 9 2007 0.33 231,117,11 0 708,343,89 2 0.29 67,685,7 19 231,117,11 0 2007 0.12 48,055,5 88 406,048,49 9 0.4816 195,564,53 4 406,048,49 9 2007 0.15 28,683,8 77 195,564,53 4 1.10 28,683,8

2008 12.08% 87,348,3 14 26,410,0 00 504,320,3 02 11.59% 87,348,3 14 753,380,3 38 17.32% 87,348,3 14 504,320,3 02 2008 0.28 208,072,1 20 753,380,3 38 0.01 2,013,5 98 208,072,1 20 2008 0.09 43,648,5 00 504,320,3 02 0.4993 251,819,6 61 504,320,3 02 2008 0.18 45,286,9 55 251,819,6 61 1.46 45,286,9

2009 8.91% 106,644,8 91 49,005,0 00 647,237,4 77 11.28% 106,644,8 91 945,417,1 00 16.48% 106,644,8 91 647,237,4 77 2009 0.32 298,180,6 23 945,417,1 00 0.15 44,804,5 31 298,180,6 23 2009 0.07 44,627,3 41 647,237,4 77 0.5850 378,655,0 19 647,237,4 77 2009 0.08 30,164,7 18 378,655,0 19 0.48 30,164,7

ROA Net Profit TA

ROE Net Profit Equity

Factor : 2 Financial Flexibility Financial Leverage Total Debt Total Debt + Total Shareholders' Equity Debt Coverage OCF Total Debt

Factor : 3 Capitalization Operating Leverage Net premium (premium less reinsurance) Shareholders Fund

Investment leverage Investment in Shares and Debentures Shareholders fund Factor: 4 Investment Investment Yield Gain on Investment Investment in shares and debentures Investment Income Ratio Investment Income

Sensitivity ROE:

Value of enterprise Shares outstanding Intrinsic Value / Share Mkt. Price (Sep 30, 2010)

1,138,261,122.02 2,760,615.00 412.32 1,240.00

Eastland Insurance Ltd.

Scenario Summary
Base Best Worst

Changing Cells: Discount Rate Teminal g Result Cells: Intrinsic Value 412.32 643.00 342.65 12.75% 1.00% 9.50% 2.50% 15.00% 0.50%

Current Cash Dividend Current g Discount Rate

10.00% 1.25% 12.75%

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Par (Tk.)

100.00

According to Multi stage growth model, value of the company is 2111.44.

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Chapter 4
Comparative Analysis CCCCC BBCCCCCCCCCCCCCCCCCCCCCCC CCCCCCC
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Comparative Analysis:
C
Eastland Janata Factor: 1 Profitability ROIC ROA ROE Factor: 2 Financial Flexibility Financial leverage Debt Coverage Factor: 3 Capitalization Poerating Leverage Investment Leverage Factor: 4 investment Investment Yield 20.27% 5.41% 7.95% 35.03% 3.41% 83.54% 13.67% 24.83% 12.31% 8.51% 23.01% 16.11% 15.34% 17.07% 11.25% 19.07% 4.09% 9.53% 9.53% 2.31% 7.58% 5.25% 5.78% 12.10% 3.71% 4.83% 3.96% 7.78% 7.90% 5.72% Phonix Purabi Relaiance Rupali Nitol Ind. Avg.

9.47% 17.64%

9.55% 10.65% 11.16%

33.06% 55.11% 21.90% 95.56% 13.46% 1.55% -4.75% 0.00%

40.59% 23.66% 26.16% 43.83% 27.79% 30.77% 41.02% 16.06%

10.82% 66.55% 78.13% 29.55% 46.69% 0.47% 30.55% 29.57%

59.30% 76.57% 42.25% 58.72% 32.13% 8.11% 1.39% 17.04%

Investment Income 2.74% 8.21% 8.17% 36.45% Ratio Factor: 5 Operating and Underwriting Quality Expense Ratio 26.71% 46.38% 72.96% 79.68%

42.96% 47.58% 65.31% 59.15%

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Chapter 5
Credit Rating

23

Qualitative score:
Qualitative factors Industry risk Diversification factor Quality of management Accounting quality: Financial flexibility Average score(Qualitative) Subjective/ judgmental score 6 6 6 4 5 5.4

Quantitative score:
year Factor : 1 Profitability ROIC ROA ROE Factor : 2 Financial Flexibility Financial Leverage Debt Coverage Factor : 3 Capitalization Operating Leverage 2005 2006 2007 2008 2009 average grading weight final score categorical score

0.24 0.14 0.26

0.10 0.07 0.14

0.21 0.12 0.21

0.12 0.12 0.17

0.09 0.11 0.16

15% 11% 19%

10 6 8

0.3 0.3 0.4

3 1.8 3.2

0.39 0.11

0.34 0.12

0.33 0.29

0.28 0.01

0.32 0.15

33% 13%

7 4

0.5 0.5

3.5 2

5.5

0.14

0.12

0.12

0.09

0.07

11%

10

0.5

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Investment 0.36 leverage Factor: 4 Investment Investment Yield 0.32 Investment Income Ratio Factor: 5 Operating and Underwriting Quality Expense Ratio 0.20

0.41

0.48

0.50

0.59

47%

0.5

0.28 2.55

0.15 1.10

0.18 1.46

0.08 0.48

20% 140%

5 10

0.5 0.5

2.5 5

7.5

0.29

0.25

0.28

0.32

27%

8 7.2

weighted average score(quantitative)

Final credit rating 5.4+7.2/2=6.3

AAA AA A BBB BB B CCC CC C 10 9 8 7 6 5 4 3 2

Eastland Insurance Company belongs to BBB grade. Rating triple B indicates very high claims paying ability with strong protection factors supported by good financial performance and sound solvency position.

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Chapter 6
Appendix

26

Appendix:
Eastland Insurance Company Ltd. has been rated "Double A-minus" (AA-) by Credit Rating Information Services Limited (CRISL) basing on its financials ended December 2009. Rating Double A minus indicates very high claims paying ability with strong protection factors supported by good financial performance and sound solvency position. Summary observations as detailed on the status of the company in the report are- good financial performance, sound solvency position, good technical performance, good liquidity, diversified ownership, diversified Investment portfolio, sound re-insurance arrangement with local and foreign reinsurers, good underwriting performance, considerable renewal business, sound internal control and experienced top management. This is for information of valued shareholders that 30% stock dividend for the year 2009 have been credited to the respective shareholders' BO Accounts on 25.05.10.

Taka in Million Sl.No. 01 02. 03. 04. 05 06. 07. Particulars Gross Premium Income Re-Insurance Premium Net Premium Income Gross Claim Investment and other Income Net Profit before Tax Paid-up Capital 2005 200.10 73.12 126.98 42.50 52.39 54.37 90.00
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2006 260.10 110.51 146.55 73.97 44.00 44.75 108.00

2007 316.87 140.40 176.47 71.35 76.38 87.27 130.68

2008 350.96 154.32 196.64 92.80 72.36 87.35 163.35

2009 396.70 179.29 217.41 73.73 71.87 106.64 212.35

08. 09. 10. 11. 12. 13. 14.

Shareholders Equity Total Investment Total Assets Total Reserve Rate of Dividend Cash: Stock: Earning per Share (EPS) Net Asset Value Per Share

274.91 367.88 501.92 239.95

301.58 408.90 603.88 276.92

380.74 492.31 708.34 346.55

437.52 538.98 753.38 381.96

526.42 670.34 945.42 434.88

10% 10% 10% 20% 21% 25% 30% 30% Tk. 81.45 Tk. 36.84 Tk 67.22. Tk. 47.85 Tk. 46.71 Tk.305.46 Tk.279.24 Tk.291.35 Tk.267,84 Tk.247,90

Multi-stage Dividend Growth Model

Current Cash Dividend Current g Discount Rate Par (Tk.) 10.00% 1.25% 12.75% 100.00

Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

D1 11.2 5 11.3 9 11.5 3 11.6 8 11.8 5 12.0 3 12.2 1 12.3 9 12.6 1 12.8 3 13.0

Assumed g 1.25% 1.25% 1.25% 1.50% 1.50% 1.50% 1.50% 1.75% 1.75%

K 12.75%

D1 (2017)

Power (1+k) 1 2 3 4 5 6 7 8 9

DFCFE

997.78

804.62

527.13

1.75% 1.85% (terminal g)

13.

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6 V (Terminal)

28 120. 77

0 1 0

386.46 393.22

V (2007)

2,111. 44

We have assumed that the company will carry on paying cash dividend. We assume that the dividend will continue to grow in step-up slabs. This model is optimistic about dividend growth of Eastland Insurance Ltd.

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