performance analysis of life insurance companies in bangladesh

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Performance Analysis ofLife 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 16-030

2. Nazim Reza 16-011

3. Tauhidul Islam 16-071

4. Md. Mashroor Ali 16-031

5. Rafsan Mahtab 16-087

6. Jakir Hossain 16-048

7. Rezaur Rahman 16-040

8. Avijit Kumar Saha 16-039

9. Jamal Hossain Shuvo 16-050

10. Md. Mokbul Islam 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

08 Conclusion 31

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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:

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

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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 are-

1. Delta Life Insurance company – current ratio 4.02 : 12. Fareast Islami Life Insurance Company – current ratio 3.79 : 13. Popular Life Insurance Company – current ratio 2.95 : 1

2007: The top three life insurance companies in respect of current ratio in 2007 are-

1. Progressive Life Insurance Co. Ltd. – current ratio 5.18 : 12. Pragati Life Insurance Co. Ltd. – current ratio 4.29 : 13. 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 : 12. Rupali Life Insurance Co. Ltd. – current ratio 5.51 : 13. 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 : 12. Progressive Life Insurance Co. Ltd. – current ratio 6.06 : 13. 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: 12. Delta Life Insurance Co. Ltd. – current ratio 7.89: 13. Pragati Life Insurance Co. Ltd. – current ratio 5.97: 1

2. 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.

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Formula:

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: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 are-

i. Progressive Life Insurance company – quick ratio 3.49 : 1ii. 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 are-

i. Progressive Life Insurance Co. Ltd. – quick ratio 4.03 : 1ii. 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 : 1ii. 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 –

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i. Fareast Islami Life Insurance Co. Ltd. – quick ratio 5.91 : 1ii. 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 : 1ii. Delta Life Insurance Co. Ltd. – quick ratio 5.67 : 1iii. Pragati Life Insurance Co. Ltd. – quick ratio 5.40: 1

3. 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: = Cash+Cash Equivalents

Current Liabilities

Calculation (%):

2006 2007 2008 2009 2010

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.

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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 Shareholder s ' euity

Calculation (%):

2006 2007 2008 2009 2010

Delta Life Insurance Company

38.78 34.14 34.679 39.23 33.91







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.

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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 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 (%):

Company’s name 2006 % 2007 % 2008 % 2009 % 2010 %


Fareast Islami Life Insurance 17.11 16.21 19.8 20.12 18.25






Rupali Life Insurance 18.25 17.23 17.65 16.36 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:In 20010 Delta Life Insurance Company has higher ROCE it indicate that in this year they are dominating Insurance sector for capital Employed activities.

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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:

Company’s Name 2006 2007 2008 2009 2010


Fareast Islami Life Insurance 13.25 14.50 13.85 12.96 16.32





Progressive Life Insurance 12.42 12.39. 13.63 14.62 16.46

Rupali Life Insurance 11.52 12.36 14.52 12.33 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: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.

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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 2006 2007 2008 2009 2010


Fareast Islami Life Insurance Company 1702.67 2753.80 2951.45 3145.74 3374.27

Meghna Life Insurance Company 1773.57 2640.42 4604.61 6067.10 7451.47

Popular Life Insurance Company 834.30 2255.65 3452.12 4289.94 6124.61

Pragati Life Insurance Company 730 1173 3214 5142 6410

Prime Islami Life Insurance Company 1482.20 2688.45 3142.11 4120.45 5210.78

Progressive Life Insurance Company

316 567.28 1200 1445.12 2247.12

Rupali Life Insurance Company 413.14 532.42 652.74 631.32 720.11

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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 ratioThe 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.

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).

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Debt-Equity Ratio

Company Name 2006 2007 2008 2009 2010


Fareast Islami Life Company 145.40 227.62 312.41 472.12 825.14

Meghna Life Insurance Company 141.47 218.73 345.14 412.81 512.01

Popular Life Insurance Company 55.96 140.60 279.59 312.45 421.78

Pragati Life Insurance Company 286.53 99.87 251.12 421.12 478.81

Prime Islami Life Insurance Company

90.35 641.25 312.45 712.78 825.14

Progressive Life Insurance Company

42.95 5.33 31.45 124.12 210.71

Rupali Life Insurance Company 85.12 105.81 251.12 312.10 213.11

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 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 2006 2007 2008 2009 2010

Popular 14% 13% 11.5% 9% 8.5%

Meghna 17% 14% 11% 9% 8%

Pragati 18% 10% 9% 8.5% 7%

Prime Islamic 12% 10% 8.5% 8% 7%

Progressive 13% 9% 8% 7% 6.5%

Delta 16% 14% 10% 9% 8%

Fareast Islamic 11% 10% 9.5% 8% 7.5%

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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 2006 2007 2008 2009 2010

Popular 65% 72% 70% 52% 75%

Meghna 62% 55% 43% 7o% 54%

Progoti 45% 60% 48% 72% 56%

Prime Islamic 58% 47% 63% 71% 61%

Progressive 47% 62% 55% 69% 67%

Fareast Islamic 53% 49% 65% 49% 70%

4. Capitalization Ratio:Capitalization ratios, also known as financial leverage ratios, are used to determine a company’s 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 its operational costs, and to what extent it is incurring new debt to do so. Capitalization ratios provide an indication of the company’s solvency and viability over the long term and allow more accurate risk assessments for prospective investors.

Typically, a company’s capitalization ratio is calculated by dividing the company’s long-term debt by the sum of the long-term debt and the shareholders’ equity, as follows:

Calculation:

Company 2006 2007 2008 2009 2010

Popular 90.16% 85.41% 89.65% 91.26% 95.90%

Meghna 96.26% 94.03% 52.47% 97.36% 97.26%

Pragati 85.47% 79.47% 87.72% 92.77% 94.82%

Prime Islamic 74.72% 83.26% 87.30% 87.61% 93.59%

Progressive 96.07% 67.99% 78.50% 92.04% 94.47%

Delta 99.85% 99.83% 99.97% 99.99% 99.99%

Fareast Islamic 95.75% 62.44% 68.07% 94.81% 95.47%

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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:

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 2006 2007 2008 2009 2010

Popular 10.92 14.17 17.78 15.59 17.26

Meghna 0.18 1.13 18.91 19.36 19.47

Pragati 16.93 17.50 20.89 11.20 13.25

Prime Islamic 3.80 6.83 12.25 15.29 19.21

Progressive 8.94 28.24 19.36 18.90 24.52

Delta 7.05 7.77 9.11 10.74 12.68

Fareast Islamic 7.64 9.57 8.04 8.23 7.84

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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.

OFC/Sales Ratio: =OperatingCash FlowNet Sales/ Revenue

Calculation (%):

2006(%) 2007(%) 2008(%) 2009(%) 2010(%)








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.

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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 PerCommon Share

Earning Per Share

Calculation (%):

2006 2007 2008 2009 2010








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.

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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.

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.

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Name of insurance company

Year (Short term debt coverage)

2010 2009 2008 2007 2006

Delta life insurance 1.4 1.2 1.2 1 .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 2 1.7 1.6 1.3

Pragati life insurance 1.5 1.8 1.2 -1 1.1

Prime islami life insurance 1 1.6 2.2 1.6 1.5

Progressive life insurance 1 .9 1.5 1.5 2.5

Rupali life insurance 1.5 1.1 1.7 1.3 1.1

Investment Valuation Ratios

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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 firm’s 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.

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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

Name of insurance company

Year (Price cash flow ratio)

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

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of each share of common stock to the earnings per share. The price-earnings (P/E) ratio reflects the investors’ assessments of a company’s 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

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,

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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:

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

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 price-to-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. It’s calculated by dividing the Annual Dividend paid by Stock Market Price per Share

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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

Delta Life Insurance

Company

0.137962 0.10633821 0.131413882 0.11068884 0.126984127 0.125628141

Fareast Islami Life 1.57096 1.65062585 1.647492625 1.09932498 0.851641414 0.722222222

Meghna Life Insurance 0.051475 0.09164221 0.069497698 0.06632823 0.077451687 0.126995646

Popular Life Insurance 0.001696 0.0032967 0 0.04145555 0 0.051020408

Pragati Life Insurance 0.003072 0.00353665 0 0.00311326 0.003949275 0.003038143

Prime Islami Life Insurance 0 0 0.371592639 0.25002502 0.332510815 0.368830022

Progressive Life Insurance 0.051971 0.04256279 0.07017867 0.04904815 0.045821462 0.059505003

Calculations:

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

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Annual Dividend paid by Companies as per their yearly Financial Statements

Annual Dividends Per Share

2005 2006 2007 2008 2009 2010


44.1479821

46.04444444 51.12 46.6 48 50

Fareast Islami Life 157.096 161.7613333 186.166667 134.1176471 149.8888889 130

Meghna Life Insurance

7.97866667

12.55498224 12.9960696 13.13298962 15.49033733 26.92307692

Popular Life Insurance

0.19 0.438461538 0 6.923076923 0 10

Pragati Life Insurance

0.50375 0.544644444 0 0.547933333 0.726666667 0.610666667

Prime Islami Life Insurance

0 0 49.421821 40.75407779 47.21653569 55.69333333

Progressive Life Insurance

3.9498 4.171153846 8.56179775 7.013885714 7.148148148 12.55555556

Market Price per Share as per DSE Index

Market Price Per Share

2005 2006 2007 2008 2009 2010Delta Life Insurance Company

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 Life Insurance 96 123 133 163 142 151

Progressive Life Insurance 76 98 122 143 156 211

Figure: Graph Showing the Dividend Yield Ratios.

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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.

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5. Price to Book Value Ratio:A ratio used to compare a stock's market value to its book value. It compares a company’s 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 ¿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


0.626846 2.57194861 2.680071519 2.09786407 1.803560195 1.688347068

Fareast Islami Life 2.173892 3.7764883 3.971363434 3.77715257 3.733694542 2.813062948

Meghna Life Insurance 1.078675 0.70221934 0.520302408 1.10377693 0.676148188 0.851774783

Popular Life Insurance 1.227013 1.28069521 11.22615135 2.39711065 2.030823926 1.248485811

Pragati Life Insurance 0.883828 1.64032107 1.948828161 2.48161507 2.710268231 2.673749613


0.874972 1.05004029 1.126203526 1.06453965 0.593870692 0.932943134

Progressive Life Insurance 1.071958 1.55415461 0.108193512 0.95632995 1.033170678 0.867020116

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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


1347282560

8731384980

9342560030

10358047500

10347648300

11545420000

Fareast Islami Life 1268453200

2456366890

3587958000

4467489600 5678342688 6927869960

Meghna Life Insurance

732856168 683924600 985732600 4368912670 3297562800 4793452000

Popular Life Insurance

32865060 54897000 658956000 1568498700 1976652246 2505674865

Pragati Life Insurance

1107654320

2349865400

3007623870

4328743200 5321487000 6349854000


87362175 132764879 174322386 176349877 143876534 437217649


156348790 254684600 326890000 327892470 473429800 567311689

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


2149304560

3394852040

3485936835

4937425469

5737345683

6838297776

Fareast Islami Life 583494250

650436780

903457480

1182766520

1520837504

2462749710

Meghna Life Insurance 679403870

973947260

1894537840

3958148204

4876982380

5627604970

Popular Life Insurance 26784600 42865000 58698300 654328870

973325270

2006971038

Pragati Life Insurance 1253246200

1432564300

1543298650

1744325000

1963454000

2374887300


99845625 126437890

154787640

165658346

242269127

468643407


145853400

163873400

3021345689

342865420

458230000

654323560

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Figure: Graph Showing Price to Book Value Ratios.

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.

performance analysis of life insurance companies in bangladesh

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