A report on credit rating

7/27/2019 A report on credit rating

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EASTLAND INSURANCE COMPANY

LIMITED

A LEADING GENERAL INSURANCE COMPANY

OF BANGLADESH

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Finance

Credit Rating

of

Eastland Insurance Company Limited.

F 504: Fixed Income SecuritiesMBA Finance (11th Batch)

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http://en.wikipedia.org/wiki/File:Banknotes.jpg


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Submitted toSubmitted to

Muhammad Mujibul Kabir

Associate Professor

Department of Finance

University of Dhaka

Submitted By:Submitted By:

Name Roll

Date of submission: October 2, 2010

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October 2, 2010

Muhammad Mujibul Kabir

Associate ProfessorDepartment 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 wehave 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

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SL No. contents Page No.

01 Executive Summary 6

02 Introduction of the company 7

03 Qualitative Analysis 10

04 Quantitative Analysis 17

17 Comparative Analysis 21

18 Credit Rating 23

19 Appendix (Financial Highlights and Multi

Stage Dividend Growth Model)

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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 theshareholders. 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 theconfidence 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

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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 November1986.

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-nationalcompanies.

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:

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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

Number of Branches: 23

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:

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Chapter 2

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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 as-

o 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 keydeterment 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 thatready 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 strengthgood 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.

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COMPET

ITIVE

RIVALRY

POWER

OF

SELLERS

POWER

OF

BUYERS

POTENTI

AL

ENTRY

rivalry


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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

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

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.

14

rivalry

rivalry

rivalry

SUBSTITUTION

EFFECT

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Insurance industry and Porters model:

Threat of entry: easily can enter into the market as law enforcement bodies are passive.

Power of buyers: buyers can not bargain due to the lacking of proper knowledge

Power of sellers: sellers exploit the chance of buyers illiteracy.

Substitution effect: 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 hasbeen 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 necessaryprovide 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 intereston 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.

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Chapter 3Quantitative Analysis

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Quantitative Analysis:

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Factor : 1 Profitability 2005 2006 2007 2008 2009

ROIC 23.74% 10.46% 21.49% 12.08% 8.91%

Net Income 81,504,0

31

44,750,7

17

87,272,2

00

87,348,3

14

106,644,8

91

Dividend 7,800,000

10,800,000 -

26,410,000

49,005,000

Total Capital 310,466,6

56

324,608,3

43

406,048,49

9

504,320,3

02

647,237,4

77

ROA 13.66% 7.41% 12.32% 11.59% 11.28%

Net Profit 81,504,0

31

44,750,7

17

87,272,2

00

87,348,3

14

106,644,8

91TA 596,789,2

43

603,884,1

33

708,343,89

2

753,380,3

38

945,417,1

00

ROE 26.25% 13.79% 21.49% 17.32% 16.48%

Net Profit 81,504,031

44,750,717

87,272,200

87,348,314

106,644,891

Equity 310,466,6

56

324,608,3

43

406,048,49

9

504,320,3

02

647,237,4

77

Factor : 2 Financial Flexibility 2005 2006 2007 2008 2009

Financial Leverage 0.39 0.34 0.33 0.28 0.32Total Debt 198,777,8

90

208,160,5

48

231,117,11

0

208,072,1

20

298,180,6

23

Total Debt + Total

Shareholders' Equity

509,244,5

46

603,884,1

33

708,343,89

2

753,380,3

38

945,417,1

00

Debt Coverage 0.11 0.12 0.29 0.01 0.15

OCF 20,898,7

77

23,966,3

93

67,685,7

19

2,013,5

98

44,804,5

31

Total Debt 198,777,8

90

208,160,5

48

231,117,11

0

208,072,1

20

298,180,6

23

Factor : 3 Capitalization 2005 2006 2007 2008 2009

Operating Leverage 0.14 0.12 0.12 0.09 0.07

Net premium (premium less

reinsurance)

44,195,1

07

40,448,9

98

48,055,5

88

43,648,5

00

44,627,3

41

Shareholders Fund 310,466,6

56

324,608,3

43

406,048,49

9

504,320,3

02

647,237,4

77

Investment leverage 0.3552 0.4134 0.4816 0.4993 0.5850

Investment in Shares and

Debentures

110,264,5

55

134,206,1

50

195,564,53

4

251,819,6

61

378,655,0

19

Shareholders fund310,466,6

56324,608,3

43406,048,49

9504,320,3

02647,237,4

77

Factor: 4 Investment 2005 2006 2007 2008 2009

Investment Yield 0.32 0.28 0.15 0.18 0.08

Gain on Investment 35,586,2

20

38,209,3

31

28,683,8

77

45,286,9

55

30,164,7

18

Investment in shares and

debentures

110,264,5

55

134,206,1

50

195,564,53

4

251,819,6

61

378,655,0

19

Investment Income Ratio 2.74 2.55 1.10 1.46 0.48Investment Income 35,586,2 38,209,3 28,683,8 45,286,9 30,164,7

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Sensitivity ROE:

Value of enterprise 1,138,261,122.02

Shares outstanding 2,760,615.00

Intrinsic Value / Share 412.32

Mkt. Price (Sep 30,

2010)

1,240.00

Eastland Insurance Ltd.

Scenario Summary

Base Best Worst

Changing Cells:

Discount Rate 12.75% 9.50% 15.00%

Teminal g 1.00% 2.50% 0.50%

Result Cells:

Intrinsic Value 412.32 643.00 342.65

Current Cash Dividend 10.00%

Current g 1.25%

Discount Rate 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 Phonix Purabi Relaiance Rupali Nitol Ind.

Avg.

Factor: 1 Profitability

ROIC 15.34% 17.07% 9.53% 5.25% 3.71% 3.96% 7.90%

ROA 11.25% 4.09% 9.53% 2.31% 5.78% 4.83% 7.78% 5.72%

ROE 19.07% 9.47% 17.64% 7.58% 12.10% 9.55% 10.65% 11.16%

Factor: 2 Financial

Flexibility

Financial leverage 33.06% 55.11% 21.90% 95.56% 40.59% 23.66% 26.16% 43.83%

Debt Coverage 13.46% 1.55% -4.75% 0.00% 27.79% 30.77% 41.02% 16.06%

Factor: 3

Capitalization

Poerating Leverage 10.82% 66.55% 78.13% 29.55% 59.30% 76.57% 42.25% 58.72%

Investment Leverage 46.69% 0.47% 30.55% 29.57% 32.13% 8.11% 1.39% 17.04%

Factor: 4 investment

Investment Yield 20.27% 5.41% 7.95% 35.03% 3.41% 83.54% 13.67% 24.83%

Investment Income

Ratio

2.74% 8.21% 8.17% 36.45% 12.31% 8.51% 23.01% 16.11%

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

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Qualitative score:

Qualitative factors Subjective/ judgmental score

Industry risk 6

Diversification factor 6

Quality of management 6

Accounting quality: 4

Financial flexibility 5

Average score(Qualitative) 5.4

Quantitative score:

year 2005 2006 2007 2008 2009 average grading weight final

score

categorical

score

Factor : 1

Profitability

ROIC 0.24 0.10 0.21 0.12 0.09 15% 10 0.3 3

ROA 0.14 0.07 0.12 0.12 0.11 11% 6 0.3 1.8

ROE 0.26 0.14 0.21 0.17 0.16 19% 8 0.4 3.2 8

Factor : 2 FinancialFlexibility

Financial Leverage 0.39 0.34 0.33 0.28 0.32 33% 7 0.5 3.5

Debt Coverage 0.11 0.12 0.29 0.01 0.15 13% 4 0.5 2 5.5

Factor : 3

Capitalization

Operating

Leverage

0.14 0.12 0.12 0.09 0.07 11% 10 0.5 5

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Investment

leverage

0.36 0.41 0.48 0.50 0.59 47% 4 0.5 2 7

Factor: 4

Investment

Investment Yield 0.32 0.28 0.15 0.18 0.08 20% 5 0.5 2.5

Investment Income Ratio 2.55 1.10 1.46 0.48 140% 10 0.5 5 7.5Factor: 5 Operating

and Underwriting

Quality

Expense Ratio 0.20 0.29 0.25 0.28 0.32 27% 8 1 8 8

weighted average score(quantitative) 7.2

Final credit rating 5.4+7.2/2=6.3

AAA 10

AA 9

A 8

BBB 7

BB 6

B 5

CCC 4

CC 3

C 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 soundsolvency position.

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Chapter 6

Appendix

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Appendix:

Eastland Insurance Company Ltd. has been rated "Double A-minus" (AA-) by Credit RatingInformation Services Limited (CRISL) basing on its financials ended December 2009.

Rating Double A minus indicates very high claims paying ability with strong protection factorssupported by good financial performance and sound solvency position.

Summary observations as detailed on the status of the company in the report are- good financialperformance, sound solvency position, good technical performance, good liquidity, diversified

ownership, diversified Investment portfolio, sound re-insurance arrangement with local andforeign reinsurers, good underwriting performance, considerable renewal business, sound

internal control and experienced top management. This is for information of valued shareholdersthat 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. Particulars 2005 2006 2007 2008 2009

01 Gross Premium Income 200.10 260.10 316.87 350.96 396.7002. Re-Insurance Premium 73.12 110.51 140.40 154.32 179.29

03. Net Premium Income 126.98 146.55 176.47 196.64 217.41

04. Gross Claim 42.50 73.97 71.35 92.80 73.73

05 Investment and other Income 52.39 44.00 76.38 72.36 71.87

06. Net Profit before Tax 54.37 44.75 87.27 87.35 106.64

07. Paid-up Capital 90.00 108.00 130.68 163.35 212.35

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08. Shareholders Equity 274.91 301.58 380.74 437.52 526.42

09. Total Investment 367.88 408.90 492.31 538.98 670.34

10. Total Assets 501.92 603.88 708.34 753.38 945.42

11. Total Reserve 239.95 276.92 346.55 381.96 434.88

12. Rate of DividendCash:

Stock:

10%

20%

10%

21%

10%

25%

-

30%

-

30%

13. Earning per Share (EPS) Tk. 81.45 Tk. 36.84 Tk 67.22. Tk. 47.85 Tk. 46.71

14. Net Asset Value Per Share Tk.305.46 Tk.279.24 Tk.291.35 Tk.267,84 Tk.247,90

Multi-stage Dividend Growth Model

Current Cash

Dividend 10.00%

Current g 1.25%

Discount Rate 12.75%

Par (Tk.)

100.00

Year D1Assumed

g K D1 (2017)Power(1+k) DFCFE

2006

11.2

5 1.25% 12.75% -

2007

11.39 1.25%

1 997.78

2008

11.5

3 1.25%

2

2009

11.6

8 1.50%

3 804.62

2010

11.8

5 1.50%

4

2011

12.0

3 1.50%

5

2012

12.2

1 1.50%

6

2013

12.3

9 1.75%

7 527.13

2014

12.6

1 1.75%

8

2015

12.83 1.75%

9

2016 13.0 1.85% (terminal g) 13. 1

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6 28 0 386.46

V (Terminal)

120.

77

1

0 393.22

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.

A report on credit rating

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