Performance Analysis of Life Insurance Companies

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Performance Analysis of Life Insurance Companies in Bangladesh

(Insurance and Risk management: B-206)

Submitted to:

Mr. Md. Shahidul Islam Zahid Lecturer Department of Banking University of Dhaka

Submitted by: Group 06

1. Md. Mezbaul Haider 2. Nazim Reza 3. Tauhidul Islam 4. Md. Mashroor Ali 5. Rafsan Mahtab 6. Jakir Hossain 7. Rezaur Rahman 8. Avijit Kumar Saha 9. Jamal Hossain Shuvo 10. Md. Mokbul Islam

16-030 16-011 16-071 16-031 16-087 16-048 16-040 16-039 16-050 16-038

16th Batch Department of Banking University of Dhaka

Date of Submission: 26th October, 2011

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26th October, 2011

To Mr. Md. Shahidul Islam Course Instructor Insurance and Risk Management Course Code: B-206 Department of Banking Faculty of business studies University of Dhaka, Bangladesh.

Dear Sir, It gives us pleasure to submit the report on Performance Analysis of Life insurance Companies in Bangladesh. It was a fantastic opportunity for us to prepare the report under your guidance, which really was a great experience for us.

We have worked hard and tried our best to prepare the report. But due to some limitations we failed to collect more accurate data. We will be very pleased to provide further information if necessary.

Sincerely, Md. Mezbaul Haider (16-030) On behalf of the Group

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Acknowledgement

To begin with, We would like to express our infinite gratitude towards Almighty Allah and our course teacher Mr. Md. Shahidul Islam, Lecturer, department of Banking, Faculty of Business Studies, University of Dhaka, to provide not only extremely well arranged guidelines to complete our report work but would also help us to confront problems in our future career. We would like to express our heartiest appreciation to our all classmates, who have been a constant support to us and have patiently helped us throughout our report. We wish to extend our thanks to the computer lab assistant and all the peers of the Department who made it possible to work comfortably even in tough times.

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Table of Contents

SL

Topic

Pages

01

Executive Summary

05

02

Liquidity Measurement Ratios

06

03

Profitability Indicator Ratios

10

04

Debt Ratios

14

05

Operating Performance Ratio

17

06

Cash flow indicator Ratio

18

07

Investment Valuation Ratios

22

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08

Conclusion

31

Executive summary
Ratio is a way of expressing the relationship between one accounting result and another, which is intended to provide a useful comparison. Ratios assist in measuring the efficiency and profitability of a company based on its financial reports. Accounting ratios form the basis of fundamental analysis. The ratios can be used to evaluate the financial condition of a company, including the company's strengths and weaknesses. Here our report is about Performance analysis of Life Insurance Companies. In this report different types of ratios are calculated and compared according to the standard norm, of eight pioneer and dominating life insurance companies in Bangladesh. For each company, ratios are demonstrated here in matrix structures with their results, for five years, for every ratio separately.

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Introduction:
Various types of financial institutions exist in the economy of Bangladesh. Among these types insurance companies play a major role in our economy. These companies contribute a lot in the economy by diversifying risk among many people. There are two types of insurance companies- general insurance companies and life insurance companies. The subject matter of this report is to analyze the performance of the life insurance companies of Bangladesh. Life insurance companies bear the risk of peoples lives. There are eight listed life insurance companies in Bangladesh. Their performance has been analyzed by calculating various ratios for five years. The necessary information for this ratio analysis has been collected from their respective annual reports.

Liquidity Measurement Ratios:

1. Current Ratio
The current ratio is a popular financial ratio used to test a company's liquidity (also referred to as its current or working capital position) by deriving the proportion of current assets available to cover current liabilities. The concept behind this ratio is to ascertain whether a company's short-term assets such as cash, cash equivalents, marketable securities, receivables and inventory are readily available to pay off its short-term liabilities such as notes payable, current portion of term debt, payables, accrued expenses and taxes. In theory, the higher the current ratio, the better. Formula:

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The current ratios of the listed life insurance companies of Bangladesh are presented below-

Name of Companies

2006

2007

2008

2009

2010

Delta Life Insurance Co. Ltd.

4.02 : 1

3.06 : 1

5.75 : 1

4.45 : 1

7.89 : 1

Fareast Islami Life Insurance Co. Ltd.

3.79 : 1

2.88 : 1

4.92 : 1

6.69 : 1

7.95 : 1

Prime Life Insurance Co. Ltd.

2.56 : 1

4.12 : 1

3.57 : 1

5.49 : 1

6.68 : 1

Rupali Life Insurance Co. Ltd.

2.35 : 1

3.65 : 1

5.51 : 1

3.79 : 1

2.97 : 1

Pragati Life Insurance Co. Ltd.

2.46 : 1

4.29 : 1

5.46 : 1

3.76 : 1

5.97 : 1

Meghna Life Insurance Co. Ltd.

1.92 : 1

2.13 : 1

3.98 : 1

4.23 : 1

3.11 : 1

Progressive Life Insurance Co. Ltd.

3.84 : 1

5.18 : 1

4.63 : 1

6.06 : 1

5.37 : 1

Popular Life Insurance Co. Ltd.

2.95 : 1

4.01 : 1

5.23 : 1

5.62 : 1

5.21 : 1

Performance analysis:
Considering the above calculations, the year wise performance analysis of these companies, on the basis of current ratios, have been described below-

2006: In 2006, the top three life insurance companies holding the best current ratio, in other words
having the highest ability to pay off their short term liabilities are1. Delta Life Insurance company current ratio 4.02 : 1

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2. Fareast Islami Life Insurance Company current ratio 3.79 : 1 3. Popular Life Insurance Company current ratio 2.95 : 1

2007: The top three life insurance companies in respect of current ratio in 2007 are1. Progressive Life Insurance Co. Ltd. current ratio 5.18 : 1 2. Pragati Life Insurance Co. Ltd. current ratio 4.29 : 1 3. Prime Life Insurance Co. Ltd. current ratio 4.12 : 1

2008: The top three life insurance companies in 2008 are

1. Delta Life Insurance Co. Ltd. current ratio 5.75 : 1 2. Rupali Life Insurance Co. Ltd. current ratio 5.51 : 1 3. Pragati Life Insurance Co. Ltd. current ratio 5.46 : 1

2009: The three companies holding highest current ratio in 2009 are
1. Fareast Islami Life Insurance Co. Ltd. current ratio 6.69 : 1 2. Progressive Life Insurance Co. Ltd. current ratio 6.06 : 1 3. Popular Life Insurance Co. Ltd. current ratio 5.62 : 1

2010: The best three companies in respect of current ratio in 2010 are
1. Fareast Islami Life Insurance Co. Ltd. current ratio 7.95: 1 2. Delta Life Insurance Co. Ltd. current ratio 7.89: 1 3. Pragati Life Insurance Co. Ltd. current ratio 5.97: 1

1. Quick Ratio:
The quick ratio also known as the acid-test ratio - is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position. The quick ratio is a more conservative measure of liquidity than the current ratio as it removes inventory from the current assets used in the ratio's formula. By excluding inventory, the quick ratio focuses on the more-liquid assets of a company. The basics and use of this ratio are similar to the current ratio in that it gives users an idea of the ability of a company to meet its short-term liabilities with its short-term assets. Another beneficial use is to compare the quick ratio with the current ratio. If the current ratio is significantly higher, it is a clear indication that the company's current assets are dependent on inventory.

Formula:

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The quick ratios of the listed life insurance companies of Bangladesh are presented below-

Name of companies

2006

2007

2008

2009

2010

Delta Life Insurance Co. Ltd.

2.55 : 1

3.1 : 1

4.08 : 1

2.77 : 1

5.67 : 1

Fareast Islami Life Insurance Co. Ltd.

2.48 : 1

2.56 : 1

4.58 : 1

5.91 : 1

7.22 : 1

Prime Life Insurance Co. Ltd.

2.09 : 1

3.74 : 1

3.05 : 1

4.37 : 1

4.32 : 1

Rupali Life Insurance Co. Ltd.

1.89 : 1

3.13 : 1

5.19 : 1

3.28 : 1

2.46 : 1

Pragati Life Insurance Co. Ltd.

1.95 : 1

3.81 : 1

4.94 : 1

3.31 : 1

5.40 : 1

Meghna Life Insurance Co. Ltd.

1.51 : 1

1.86 : 1

3.54 : 1

3.90 : 1

2.79 : 1

Progressive Life Insurance Co. Ltd.

3.49 : 1

4.03 : 1

3.60 : 1

4.68 : 1

5.01 : 1

Popular Life Insurance Co. Ltd.

2.21 : 1

3.63 : 1

4.57 : 1

5.09 : 1

4.76 : 1

Performance analysis:

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Considering the above calculations, the year wise performance analysis of these companies, on the basis of quick ratios, have been described below-

2006: In 2006, the top three life insurance companies holding the best quick ratio arei. Progressive Life Insurance company quick ratio 3.49 : 1 ii. Delta Life Insurance Company quick ratio 2.55 : 1 iii. Fareast Islami Life Insurance Company quick ratio 2.48 : 1

2007: The top three life insurance companies in respect of quick ratio in 2007 arei. Progressive Life Insurance Co. Ltd. quick ratio 4.03 : 1 ii. Pragati Life Insurance Co. Ltd. quick ratio 3.81 : 1 iii. Prime Life Insurance Co. Ltd. quick ratio 3.74 : 1

2008: The top three life insurance companies in 2008 are

i. Rupali Life Insurance Co. Ltd. quick ratio 5.19 : 1 ii. Pragati Life Insurance Co. Ltd. quick ratio 4.94 : 1 iii. Fareast Islami Life Insurance Co. Ltd. quick ratio 4.58 : 1

2009: The three companies holding highest quick ratio in 2009 are
i. Fareast Islami Life Insurance Co. Ltd. quick ratio 5.91 : 1 ii. Popular Life Insurance Co. Ltd. quick ratio 5.09 : 1 iii. Progressive Life Insurance Co. Ltd. quick 4.68 : 1

2010: The best three companies in respect of quick ratio in 2010 are
i. Fareast Islami Life Insurance Co. Ltd. quick ratio 7.22 : 1 ii. Delta Life Insurance Co. Ltd. quick ratio 5.67 : 1 iii. Pragati Life Insurance Co. Ltd. quick ratio 5.40: 1

1. Cash Ratio:
Cash ratio is the ratio of cash and cash equivalents of a company to its current liabilities. It is an extreme liquidity ratio since only cash and cash equivalents are compared with the current liabilities. It measures the ability of a business to repay its current liabilities by only using its cash and cash equivalents and nothing else. Its standard value is 1:1 or above but not very high.

Cash Ratio: =
Calculation (%):

Cash+Cash EquivalentsCurrent Liabilities

2006

2007

2008

2009

2010

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Delta Life Insurance Company

325.83

426.02

489.36

553.473

1356.79

Meghna Life Insurance

709.26

692.74

687.29

688.08

673.31

Pragati Life Insurance

387.89

379.11

381.43

364.00

333.65

Progressive Life Insurance

235.81

271.00

346.01

396.32

426.24

Fareast Islami Life

316.46

319.72

326.25

323.96

328.71

Popular Life Insurance

462.37

478.81

473.98

476.03

479.36

Prime Islami Life Insurance

381.44

406.76

413.63

406.31

411.92

Inference: As we can see here all of the companies have high cash ratio. In case of Meghna Life

Insurance Company it is most. They have cash ratio of around 7:1. This means to satisfy of one taka current liabilities they have seven taka of cash or cash equivalent. Popular Life insurance has also high cash ratio. But this kind of very high ration indicates that the firms have not invested in long term fields of earning and so they have lower return from their cash. But as an insurance company it also necessary to hold enough cash or cash equivalent so that they can meet the insurance claims quickly.

Profitability Indicator Ratio:

1. Return on Equity (ROE):
Return on equity or return on capital is the ratio of net income of a business during a year to its stockholders' equity during that year. It is a measure of profitability of stockholders' investments. It shows net income as percentage of shareholder equity. The higher the ratio is the better the firm is.

ROE= Net Income Avg Shareholders'euity

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Calculation (%):

2006 38.78 Delta Life Insurance Company 34.02 Meghna Life Insurance 21.48 Pragati Life Insurance 29.38 Progressive Life Insurance 37.46 Fareast Islami Life 38.12 Popular Life Insurance 26.39 Prime Islami Life Insurance

2007 34.14

2008 34.679

2009 39.23

2010 33.91

39.36

48.24

47.21

48.78

32.00

47.23

42.37

46.93

32.26

38.20

38.86

37.21

40.37

38.09

41.67

38.21

37.25

38.38

39.95

43.29

29.78

29.34

31.89

37.82

Inference:
Here almost all of the firms have good ROE. Specially Meghna Life Insurance Company has the best one. Last three years they have maintain a good level of ROE. Progressive, Pragati and Prime Islami Life insurance have ROEs that fluctuate over years. But overall all of the firms have healthy ROE that indicates a good return from the share investment in these firms.

2. The Return on Capital Employed (ROCE):

The Return On Capital Employed (ROCE) ratio, expressed as a percentage, complements the return On Equity (ROE) ratio by adding a company's debt liabilities, or funded debt, to equity to reflect a

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company's total "capital employed". This measure narrows the focus to gain a better understanding of a company's ability to generate returns from its available capital base. By comparing net income to the sum of a company's debt and equity capital, investors can get a clear picture of how the use of leverage impacts a company's profitability. Financial analysts consider the ROCE measurement to be a more comprehensive profitability indicator because it gauges management's ability to generate earnings from a company's total pool of capital.

Calculation (%):

Companys name Delta Life Insurance Company Fareast Islami Life Insurance Meghna Life Insurance Popular Life Insurance Pragati Life Insurance Prime Islami Life Insurance Progressive Life Insurance Rupali Life Insurance

2006 % 19.8 17.11 20.23 21.3 17.29 16.26 19.25 18.25

2007 % 18.14 16.21 21.22 20.21 15.26 17.24 17.24 17.23

2008 % 17.2 19.8 18.25 19.2 18.24 15.55 16.55 17.65

2009 % 17.8 20.12 19.19 17.24 15.63 15.25 16.45 16.36

2010 % 21.4 18.25 20.8 21.24 16.8 19.24 18.56 18.45

In 2006: In 2006 Popular life Insurance has higher ROCE it indicate that in this year they are dominating Insurance sector for capital Employed activities. In 2007: In 2007 Meghna Life Insurance has higher ROCE it indicate that in this year they are dominating Insurance sector for capital Employed activities. In 2008: In 2008 Fareast Islami Life Insurance has higher ROCE it indicate that in this year they are dominating Insurance sector for capital Employed activities. In 2009: In 2009 Fareast Islami Life Insurance has higher ROCE it indicate that in this year they are dominating Insurance sector for capital Employed activities. In 2010:

P a g e | 15 In 20010 Delta Life Insurance Company has higher ROCE it indicate that in this year they are dominating Insurance sector for capital Employed activities.

3. Return on Asset (ROA):

This ratio indicates how profitable a company is relative to its total assets. The Return On Asset (ROA) ratio illustrates how well management is employing the company's total assets to make a profit. The higher the return, the more efficient management is in utilizing its asset base. The ROA ratio is calculated by comparing net income to average total assets, and is expressed as a percentage.

Calculation:

Companys Name Delta Life Insurance Company Fareast Islami Life Insurance Meghna Life Insurance Popular Life Insurance Pragati Life Insurance Prime Islami Life Insurance Progressive Life Insurance Rupali Life Insurance

2006 12.8 13.25 11.25 12.63 13.52 14.20 12.42 11.52

2007 12.98 14.50 12.56 13.54 14.52 13.20 12.39. 12.36

2008 13.25 13.85 15.85 13.49 15.22 14.45 13.63 14.52

2009 12.75 12.96 13.63 14.29 14.80 17.51 14.62 12.33

2010 14.23 16.32 14.56 15.32 15.88 16.21 16.46 17.81

In 2006: In 2006 Prime Islami Life Insurance has higher ROA it indicate that in this year they are the most successful life insurance company in their operating activities. In 2007: In 2007 Pragati Life Insurance has higher ROA it indicate that in this year they are the most successful life insurance company in their operating activities. In 2008: In 2008 Meghna Life Insurance has higher ROA it indicate that in this year they are the most successful life insurance company in their operating activities. In 2009:

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In 2009 Prime Islami Life Insurance has higher ROA it indicate that in this year they are the most successful life insurance company in their operating activities. In 2010: In 2010 Rupali Life Insurance has higher ROA it indicate that in this year they are the most successful life insurance company in their operating activities.

4. Earnings per Share EPS

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability. Calculated as:

When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period. Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio. For example, assume that a company has a net income of $25 million. If the company pays out $1 million in preferred dividends and has 10 million shares for half of the year and 15 million shares for the other half, the EPS would be $1.92 (24/12.5). First, the $1 million is deducted from the net income to get $24 million, then a weighted average is taken to find the number of shares outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M). An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number.

Earnings per Share EPS (Ratio)

Company Name Delta Life Insurance Company Fareast Islami Life Insurance Company

2006 11506.43 1702.67

2007 14197.90 2753.80

2008 15478.74 2951.45

2009 17514.78 3145.74

2010 18289.78 3374.27

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Meghna Life Insurance Company Popular Life Insurance Company Pragati Life Insurance Company Prime Islami Life Insurance Company Progressive Life Insurance Company Rupali Life Insurance Company

1773.57 834.30 730 1482.20 316 413.14

2640.42 2255.65 1173 2688.45 567.28 532.42

4604.61 3452.12 3214 3142.11 1200 652.74

6067.10 4289.94 5142 4120.45 1445.12 631.32

7451.47 6124.61 6410 5210.78 2247.12 720.11

As calculated Earning Per Share we can say that the Delta Life Insurance Company has the highest EPS of all of the company this Ratio indicate that their financial strength is more stronger than other companies.

Debt Ratios
1. Debt-equity ratio
The debt-equity ratio is another leverage ratio that compares a company's total liabilities to its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed. To a large degree, the debt-equity ratio provides another vantage point on a company's leverage position, in this case, comparing total liabilities to shareholders' equity, as opposed to total assets in the debt ratio. Similar to the debt ratio, a lower the percentage means that a company is using less leverage and has a stronger equity position. Formula:

Variations: A conservative variation of this ratio, which is seldom seen, involves reducing a company's equity position by its intangible assets to arrive at a tangible equity, or tangible net worth, figure. Companies with a large amount of purchased goodwill form heavy acquisition activity can end up with a negative equity position.

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Commentary: The debt-equity ratio appears frequently in investment literature. However, like the debt ratio, this ratio is not a pure measurement of a company's debt because it includes operational liabilities in total liabilities. Nevertheless, this easy-to-calculate ratio provides a general indication of a company's equity-liability relationship and is helpful to investors looking for a quick take on a company's leverage. Generally, large, well-established companies can push the liability component of their balance sheet structure to higher percentages without getting into trouble. The debt-equity ratio percentage provides a much more dramatic perspective on a company's leverage position than the debt ratio percentage. For example, IBM's debt ratio of 69% seems less onerous than its debt-equity ratio of 220%, which means that creditors have more than twice as much money in the company than equity holders (both ratios are for FY 2005).

Debt-Equity Ratio
Company Name Delta Life Insurance Company Fareast Islami Life Company Meghna Life Insurance Company Popular Life Insurance Company Pragati Life Insurance Company Prime Islami Life Insurance Company 2006 1050.11 145.40 141.47 55.96 286.53 90.35 2007 1313.96 227.62 218.73 140.60 99.87 641.25 5.33 105.81 2008 1627.13 312.41 345.14 279.59 251.12 312.45 31.45 251.12 2009 1821.12 472.12 412.81 312.45 421.12 712.78 124.12 312.10 2010 1912.41 825.14 512.01 421.78 478.81 825.14 210.71 213.11

Progressive Life Insurance Company 42.95 Rupali Life Insurance Company 85.12

After calculating Debt Equity Ratio of Eight company we reach a decision that among the company Progressive life Insurance Company has less Debt-equity ratio that indicate they used less leverage and has a stronger equity position.

2. Debt ratio:
Debt Ratio is a financial ratio that indicates the percentage of a company's assets that are provided via debt. It is the ratio of total debt (the sum of current liabilities and long-term liabilities) and total assets (the sum of current assets, fixed assets, and other assets such as 'goodwill') . A low percentage means that

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the company is less dependent on leverage, i.e., money borrowed from and/or owed to others. The lower the percentage, the less leverage a company is using and the stronger its equity position. In general, the higher the ratio, the more risk that company is considered to have taken on Debt ratio of six life insurance company for the year 2006 to 2010 :

Company Popular Meghna Pragati Prime Islamic Progressive Delta Fareast Islamic

2006 14% 17% 18% 12% 13% 16% 11%

2007 13% 14% 10% 10% 9% 14% 10%

2008 11.5% 11% 9% 8.5% 8% 10% 9.5%

2009 9% 9% 8.5% 8% 7% 9% 8%

2010 8.5% 8% 7% 7% 6.5% 8% 7.5%

3. Cash flow to debt ratio:

This ratio provides an indication of a company's ability to cover total debt with its yearly cash flow from operations. An increasing Cash Flow to Total Debt ratio is usually a positive sign, showing the company is in a less risky financial position and better able to pay its debt load. Cash flow to debt ratio of six life insurance companies for the year 2006 to 2010

Company Popular Meghna Progoti Prime Islamic Progressive Fareast Islamic

2006 65% 62% 45% 58% 47% 53%

2007 72% 55% 60% 47% 62% 49%

2008 70% 43% 48% 63% 55% 65%

2009 52% 7o% 72% 71% 69% 49%

2010 75% 54% 56% 61% 67% 70%

4. Capitalization Ratio:
Capitalization ratios, also known as financial leverage ratios, are used to determine a companys stability by comparing its long-term debt with its current equity and assets. A capitalization ratio provides investors and analysts with information about the extent to which a company is using its equity to finance

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its operational costs, and to what extent it is incurring new debt to do so. Capitalization ratios provide an indication of the companys solvency and viability over the long term and allow more accurate risk assessments for prospective investors. Typically, a companys capitalization ratio is calculated by dividing the companys long-term debt by the sum of the long-term debt and the shareholders equity, as follows:

Calculation:

Company Popular Meghna Pragati Prime Islamic Progressive Delta Fareast Islamic

2006 90.16% 96.26% 85.47% 74.72% 96.07% 99.85% 95.75%

2007 85.41% 94.03% 79.47% 83.26% 67.99% 99.83% 62.44%

2008 89.65% 52.47% 87.72% 87.30% 78.50% 99.97% 68.07%

2009 91.26% 97.36% 92.77% 87.61% 92.04% 99.99% 94.81%

2010 95.90% 97.26% 94.82% 93.59% 94.47% 99.99% 95.47%

Operating Performance Ratio:

1. The fixed asset turnover ratio:
The fixed asset turnover ratio measures the company's effectiveness in generating sales from its investments in plant, property, and equipment. This ratio is often used as a measure in manufacturing industries, where major purchases are made for PP&E to help increase output. When companies make these large purchases, prudent investors watch this ratio in following years to see how effective the investment in the fixed assets was. Here is how the fixed asset turnover ratio is calculated:

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There is no exact number that determines whether a company is doing a good job of generating revenue from its investment in fixed assets. This makes it important to compare the most recent ratio to both the historical levels of the company along with peer company and/or industry averages. Before putting too much weight into this ratio, it's important to determine the type of company that you are using the ratio on because a company's investment in fixed assets is very much linked to the requirements of the industry in which it conducts its business. Fixed assets vary greatly among companies. For example, an internet company, like Google, has less of a fixed-asset base than a heavy manufacturer like Caterpillar. Obviously, the fixed-asset ratio for Google will have less relevance than that for Caterpillar.

Calculation:

Company Popular Meghna Pragati Prime Islamic Progressive Delta Fareast Islamic

2006 10.92 0.18 16.93 3.80 8.94 7.05 7.64

2007 14.17 1.13 17.50 6.83 28.24 7.77 9.57

2008 17.78 18.91 20.89 12.25 19.36 9.11 8.04

2009 15.59 19.36 11.20 15.29 18.90 10.74 8.23

2010 17.26 19.47 13.25 19.21 24.52 12.68 7.84

Cash flow indicator Ratio:

1.

Operating Cash Flow/Sales Ratio:

OFC/Sales ratio is the ratio of operating cash flow of a company to its sales revenue. It is expressed in percentage that shows the ability to convert sales into cash. This Ratio will show up the Positive and negative changes in a company's terms of sale and/or the collection experience of its accounts receivable. It gives investors an idea of the company's ability to turn sales into cash. It is an important indicator of its creditworthiness and productivity.

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OFC/Sales Ratio: = Operating Cash FlowNet Sales/Revenue

Calculation (%):

2006(%) Delta Life Insurance Company 10.91 Meghna Life Insurance Pragati Life Insurance Progressive Life Insurance Fareast Islami Life Popular Life Insurance Prime Islami Life Insurance 18.63 8.36 11.58 21.87 27.21 17.26

2007(%) 11.64 14.25 9.25 12.96 23.17 31.24 22.79

2008(%) 11.02 16.23 11.27 9.27 18.69 27.54 20.67

2009(%) 11.12 20.41 12.94 11.29 25.46 29.01 23.14

2010(%) 10.03 17.24 9.88 10.64 28.72 29.30 21.78

Inference: As we can see here all of the companies have high OFC ratio. In case of Popular Life Insurance Company it is most. This indicates its creditworthiness and productivity. Farest Life insurance has also high cash ratio. As insurance company it very necessary to acquire higher OFC/Sales Ratio.

2. Dividend Payout Ratio:

This ratio identifies the percentage of earnings (net income) per common share allocated to paying cash dividends to shareholders. This ratio is an indicator of how well earnings support the dividend payment. Lower this percentage, more secure the dividend payment. A normal range for companies that do pay dividends is 25% to 50% of earnings. But the percentage may vary if a company keeps the amount of its dividend consistent with past dividends regardless of a drop in its earnings.

Dividend Payout Ratio =

Dividend Per Common ShareEarning Per Share

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Calculation (%):

2006 Delta Life Insurance Company Meghna Life Insurance Pragati Life Insurance Progressive Life Insurance Fareast Islami Life Popular Life Insurance Prime Islami Life Insurance 36.12 41.21 26.1 39.8 45.20 24.8 25.36

2007 24.31 47.2 21.35 36.10 40.9 20.1 27.1

2008 30.14 41.3 26.14 28.94 40.41 29.1 36.24

2009 35.12 38.9 29.87 31.8 30.14 34.85 20.14

2010 30.58 40.38 25.12 36.14 32.54 39.23 21.4

Inference: Here almost all of the firms have good Dividend Payout ratio. Specially Meghna Life Insurance Company has the best one. Fast three years they have maintain a good level of Dividend payout ratio. Progressive, Delta and Fareast Islami Life insurance have a good Dividend payout ratio that fluctuates over years. But overall all of the firms have healthy Dividend payout ratio that indicates the companies have well earnings support the dividend payment among.

3. Short term debt coverage ratio:

This ratio measures the ability of the company's operating cash flow to meet its obligations short term debt. It is one of the operating cash flow coverage ratios. The operating cash flow is simply the amount of cash generated by the company from its main operations, which are used to keep the business funded. The larger the operating cash flow coverage for these items, the greater the company's ability to meet its obligations, along with giving the company more cash flow to expand its business, withstand hard times, and not be burdened by debt servicing and the restrictions typically included in credit agreements.

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Formula:

The short term debt ratio shows how adept the firm is to meet the short term obligations. If it has a large shot term debt ratio it means it can easily pay the short term debt using the cash which is generated through its operating activities.

Short term debt coverage in Life Insurance Company:

The short term debt coverage of five years in eight reputable life insurance companies in Bangladesh is given in the next chart. The more the ratio, the better is for the firm.

P a g e | 25

Year (Short term debt coverage)

Name of insurance company

2010

2009

2008

2007

2006

Delta life insurance

1.4

1.2

1.2

.9

Fareast islami life insurance

2.1

2.2

1.7

2.1

2.2

Meghna life insurance

2.3

2.3

2.7

1.7

1.8

Popular life insurance

1.7

1.6

1.3

Pragati life insurance

1.5

1.8

1.2

-1

1.1

Prime islami life insurance

1.6

2.2

1.6

1.5

Progressive life insurance

.9

1.5

1.5

2.5

Rupali life insurance

1.5

1.1

1.7

1.3

1.1

P a g e | 26

Investment Valuation Ratios

1. Price/Cash Flow Ratio
The price/cash flow ratio is used by investors to evaluate the investment attractiveness, from a value standpoint, of a company's stock. This ratio compares the stock's market price to the amount of cash flow the company generates on a per-share basis. It is similar to P/E ratio

Formula:

Operating cash flow per share:

A value calculated by dividing a firms operating cash flow (minus dividends) by the number of shares of the capital stock that are outstanding. .

Price to cash flow ratio in Life Insurance Company:

The price cash flow ratio of five years in eight reputable life insurance companies in Bangladesh is given in the next chart.

For life insurance Company the operating income is high because they have a larger premium money but sometimes the claim are not much high, so the ratio may be very tiny, but sometimes they may have some adverse situation.

P a g e | 27

P a g e | 28

Year (Price cash flow ratio)

Name of insurance company

2010

2009

2008

2007

2006

Delta life insurance

.04

.04

.05

.06

.08

Fareast islami life insurance

.1

.17

.39

.22

.23

Meghna life insurance

.24

.27

.28

0.7

1.03

Popular life insurance

.27

.48

.58

.91

.75

Pragati life insurance

.34

.36

.36

-4.8

.49

Prime islami life insurance

2.32

2.13

2.19

2.26

2.79

Progressive life insurance

1.97

2.45

1.77

3.16

1.17

Rupali life insurance

1.2

1.98

1.46

1.45

1.95

P a g e | 29

2. Price to earnings ratio:

The price/earnings ratio (P/E) is the best known of the investment valuation indicators. The P/E ratio has its imperfections, but it is nevertheless the most widely reported and used valuation by investment professionals and the investing public. P/E ratio is an off- quoted measure of the ratio of the market price of each share of common stock to the earnings per share. The price-earnings (P/E) ratio reflects the investors assessments of a companys future earnings. The industry average of P/E ratio is about 26 times in abroad market place. Here, throughout this report it was our endeavor to assess the investors investing decision. From 2006 to 2010 we represented the total 5 years P/E ratio of 8 insurance firm.

Formula:

Price to Earnings Ratio (Times)

Year Wise comparison

Company

2010

2009

2008

2007

2006

Delta

0.068

0.045

0.034

0.047

0.047

Fareast

0.038

0.052

0.039

0.044

0.036

Meghna

0.022

0.023

0.058

0.053

0.032

Popular

0.039

0.087

0.10

0.12

0.093

Pragati

0.049

0.071

0.094

0.062

0.053

P a g e | 30

Prime

0.068

0.14

0.059

0.064

0.113

Progressive

0.271

0.470

0.541

0.624

0.470

Rupali

0.072

0.065

0.051

0.042

0.038

Inferences: A stock with a high P/E ratio suggests that investors are expecting higher earnings growth

in the future compared to the overall market, as investors are paying more for today's earnings in anticipation of future earnings growth. Hence, as a generalization, stocks with this characteristic are considered to be growth stocks. Conversely, a stock with a low P/E ratio suggests that investors have more modest expectations for its future growth compared to the market as a whole.

So, we can asses Progressive life insurance is expecting higher earnings compared the overall market among 8 insurance firm. Rupali life insurance is also expecting a growth over the years and therefore, the investors are paying more of their earnings today for future earnings growth.

3. Price to sales ratio

A stock's price/sales ratio (P/S ratio) is another stock valuation indicator similar to the P/E ratio. The P/S ratio measures the price of a company's stock against its annual sales, instead of earnings. Like the P/E ratio, the P/S reflects how many times investors are paying for every dollar of a company's sales. Since earnings are subject, to one degree or another, to accounting estimates and management manipulation, many investors consider a company's sales (revenue) figure a more reliable ratio component in calculating a stock's price multiple than the earnings figure. Price to sales ratio tends to focus on the annual sales of a firm considering the each stock price. As we selected some insurance firm net premium is consider as the annual sales, in fact the annual sales of policies. The formula for the price to sakes ratio is given below.

Formula:

P a g e | 31

Price to Sales Ratio (times)

Year Wise comparison

Company

2010

2009

2008

2007

2006

Delta

1.444

1.686

2.01

2.277

2.521

Fareast

5.206

6.742

3.966

4.752

5.807

Meghna

4.531

4.061

7.022

6.323

5.485

Popular

3.333

5.491

4.827

3.378

5.999

Pragati

6.62

10.33

5.623

6.395

4.821

Prime

5.335

8.749

6.671

5.467

6.692

Progressive

15.82

22.15

18.762

19.018

12.85

Rupali

7.897

6.526

5.983

5.983

9.184

P a g e | 32

Inferences: From the ratio table we can derive that the investors of the respective firms would expect

the stock price to be timed at their sales holding. Moreover we can say that Progressive life insurance would pay a higher amount of stock to hold their annual sales. But researchers conclude that "low priceto-sales ratios beat the market more than any other value ratio, and do so more consistently. So above analysis infer that Delta life insurance is in a good position in terms of sales to price (P/S) ratio. In addition Fareast and Meghna life insurance also pay low portion for every Tk. to hold the annual sales.

4. Dividend Yield Ratio:

A financial ratio that shows how much a company pays out in dividends each year relative to its share price. Its calculated by dividing the Annual Dividend paid by Stock Market Price per Share Outstanding. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows:

Dividend Yield=Annual Dividends Per SharePrice Per Share

The Ratio enables an investor to choose high growth potential stocks by screening the ratio percentage. Higher percentage suggests fast growth, and lower percentage suggests slow growth or, in some case, greater retained earnings.

Ratio Analysis Matrix (in decimal):

Below presented is the Matrix for Dividend Yield Ratio Analysis for the 7 chosen companies for the last 5 years.

2005

2006

2007

2008

2009

2010

P a g e | 33

Delta Life Insurance Company

0.1379 62

0.106338 0.1314138 21 82

0.110688 0.1269841 0.1256281 84 27 41

Fareast Islami Life

1.5709 6

1.650625 1.6474926 85 25

1.099324 0.8516414 0.7222222 98 14 22

Meghna Insurance

Life

0.0514 75

0.091642 0.0694976 21 98

0.066328 0.0774516 0.1269956 23 87 46

Popular Life Insurance

0.0016 96

0.003296 7

0.041455 55

0 0.0510204 08

Pragati Life Insurance

0.0030 72

0.003536 65

0.003113 0.0039492 0.0030381 26 75 43

Prime

Islami

Life

0 0.3715926 39

0.250025 0.3325108 0.3688300 02 15 22

Insurance

Progressive Insurance

Life

0.0519 71

0.042562 0.0701786 79 7

0.049048 0.0458214 0.0595050 15 62 03

Calculations:
Calculations are done by first finding the Annual Dividend per Share and then dividing them by the market price per share.

Annual Dividend paid by Companies as per their yearly Financial Statements

P a g e | 34

Annual Dividends Per Share

2005

2006

2007

2008

2009

2010

Delta Insurance Company

Life

44.14798 21

46.044444 44

51.12

46.6

48

50

Fareast Life

Islami

157.096

161.76133 33

186.16666 7

134.11764 71

149.8888889

130

Meghna Insurance

Life

7.978666 67

12.554982 24

12.996069 6

13.132989 62

15.49033733

26.92307 692

Popular Insurance

Life

0.19

0.4384615 38

6.9230769 23

10

Pragati Insurance

Life

0.50375

0.5446444 44

0.5479333 33

0.726666667

0.610666 667

Prime Islami Life Insurance

49.421821

40.754077 79

47.21653569

55.69333 333

Progressive Life Insurance

3.9498

4.1711538 46

8.5617977 5

7.0138857 14

7.148148148

12.55555 556

Market Price per Share as per DSE Index

P a g e | 35

Market Price Per Share

2005

2006

2007

2008

2009

2010

Delta Life Company

Insurance

320

433

389

421

378

398

Fareast Islami Life

100

98

113

122

176

180

Meghna Life Insurance

155

137

187

198

200

212

Popular Life Insurance

112

133

156

167

185

196

Pragati Life Insurance

164

154

123

176

184

201

Prime Islami Insurance

Life

96

123

133

163

142

151

Progressive Insurance

Life

76

98

122

143

156

211

Figure: Graph Showing the Dividend Yield Ratios.

P a g e | 36

Inference: As can be seen here most of the company has a Dividend Yield of more than 0.10 or 10%.
Fareast Life Insurance Company offers the highest Dividend as compared to others. On the other hand Pragati Life Insurance Company has the lowest of them all, but further analysis reveals that Prime Islami Life Insurance has more inconsistent Dividend payment, giving out no dividend two years in a row. The explosive investors looking for higher cash dividends are suggested to invest in Fareast Life Insurance, while more reserved and growth focused investors are suggested to invest in Pragati Life Insurance, as they project more retained earning thus a potential quick growth.

P a g e | 37

5. Price to Book Value Ratio:

A ratio used to compare a stock's market value to its book value. It compares a companys Market Value to its actual Book Value. It shows if the shares are under or overvalued. It can also suggest an investor about the residuals that can be retrieved if the firm goes bankrupt immediately. It can be calculated in two ways both giving out the same result. One way is by dividing the current closing price of the stock by the latest quarter's book value per share. Another unconventional way is to divide the Total Market Capitalization Amount by the Total book value for a given year. As for the convenience of the latter procedures we have decided to work on that framework. The formula for the calculation is as follows:
Price to Book Value =Market CapitalizationTotal Book Value

Ratio Analysis Matrix (in decimals):

Below presented is the Price to Book Value Ratio Analysis Matrix of the 7 chosen companies for the last 5 years.

2005

2006

2007

2008

2009

2010

Delta Life Insurance 0.6268 Company 46

2.571948 61

2.680071 519

2.097864 07

1.803560 195

1.688347 068

Fareast Islami Life

2.1738 92

3.776488 3

3.971363 434

3.777152 57

3.733694 542

2.813062 948

Meghna Insurance

Life 1.0786 75

0.702219 34

0.520302 408

1.103776 93

0.676148 188

0.851774 783

Popular Insurance

Life 1.2270 13

1.280695 21

11.22615 135

2.397110 65

2.030823 926

1.248485 811

Pragati Life Insurance

0.8838 28

1.640321 07

1.948828 161

2.481615 07

2.710268 231

2.673749 613

P a g e | 38

Prime Islami Insurance

Life 0.8749 72

1.050040 29

1.126203 526

1.064539 65

0.593870 692

0.932943 134

Progressive Insurance

Life 1.0719 58

1.554154 61

0.108193 512

0.956329 95

1.033170 678

0.867020 116

Calculation (in decimal):

The calculation requires collecting the market Capitalization Amount and dividing them by the Total Book Value of the firm. Book Value Calculations: Total Assets Intangible Assets Total Liabilities Market Capitalization Rate as per respective companies websites

Market Capitalization

2005

2006

2007

2008

2009

2010

Delta Insurance Company

Life

1347282 560

8731384 980

9342560 030

10358047 500

10347648 300

11545420 000

P a g e | 39

Fareast Life

Islami

1268453 200

2456366 890

3587958 000

44674896 00

56783426 88

69278699 60

Meghna Insurance

Life

7328561 68

6839246 00

9857326 00

43689126 70

32975628 00

47934520 00

Popular Insurance

Life

3286506 0

5489700 0

6589560 00

15684987 00

19766522 46

25056748 65

Pragati Insurance

Life

1107654 320

2349865 400

3007623 870

43287432 00

53214870 00

63498540 00

Prime Islami Life Insurance

8736217 5

1327648 79

1743223 86

17634987 7

14387653 4

43721764 9

Progressive Life Insurance

1563487 90

2546846 00

3268900 00

32789247 0

47342980 0

56731168 9

Total Book Value calculated by the formula: Total Book Value= Total Assets Intangible Assets Total Liabilities

Total Book Value

2005

2006

2007

2008

2009

2010

Delta Life Insurance Company

2149304 560

3394852 040

3485936 835

4937425 469

5737345 683

6838297 776

Fareast Islami Life

5834942 50

6504367 80

9034574 80

1182766 520

1520837 504

2462749 710

P a g e | 40

Meghna Insurance

Life

6794038 70

9739472 60

1894537 840

3958148 204

4876982 380

5627604 970

Popular Insurance

Life

2678460 0

4286500 0

5869830 0

6543288 70

9733252 70

2006971 038

Pragati Insurance

Life

1253246 200

1432564 300

1543298 650

1744325 000

1963454 000

2374887 300

Prime Islami Insurance

Life

9984562 5

1264378 90

1547876 40

1656583 46

2422691 27

4686434 07

Progressive Insurance

Life

1458534 00

1638734 00

3021345 689

3428654 20

4582300 00

6543235 60

Figure: Graph Showing Price to Book Value Ratios.

P a g e | 41

Inference: The above calculation suggests that all of the company has a fair Price/Book Value. That

means the firms have a good ground to justify the market price they hold. Fareast Life Insurance Co. stocks are perhaps overvalued in a minor extent. Meghna Life Insurance Ratio Analysis suggests their stocks are undervalued, management of the company can be suggested to look for internal instability that can be attributed to such an undervaluation. But overall all of the company has strong ground to assure their shareholder of the rationale of their market price.

Conclusion:
After the twenty financial ratio analyses, we have seen that there is a good balance among the firms. Most of the firms have good ratio figure. In case of liquidity measurement ratios all of the firms have very high figure. This means they retain much cash than need. This reduces the ability of the firm of earning. In case of profitability indicator ratios all of the firms have healthy figure. This means all of the firms have high net income. Firms have good debt indicator ratios. On the other hand in case of cash flow indicator ratios all of the firms have adequate good figure which refers that all of the firms generate enough cash for their activity. Last of all in case of investment valuation ratios all of the firms have strong ratios. This indicates that all of firms offer very good amount of divided to their equity holders as well as the firms work on the maximization of equity holders interest in the firms.