CRAB Ratings

General Insurance

Central Insurance Company Limited Rating Report

Ratings Long Term Short Term Date of Rating Validity

Analyst: Mir Arif Billah Financial Analyst

: : : :

BBB1 ST-3 18 December 2007 1 (one) Year

1. RATIONALE
Credit Rating Agency of Bangladesh Limited (CRAB) has assigned BBB1 (pronounced as triple b one) rating in the Long Term and ST-3 rating in the Short Term to the Central Insurance Company Limited (hereafter called CICL). General insurance companies rated as BBB1in the long term belong to Above Average Safety cohort. In this grade, companies are adjudged to be very solid, characterized by above average financials, adequate claims paying ability, valuable and defensible business franchises, and an attractive and stable operating environment. At the same time, companies rated as ST-3 in the short term belong to Satisfactory Grade having capacity for timely repayment of obligations, although such capacity may be impaired by adverse changes in business, economic, or financial conditions. CRAB performed the rating based on the audited financial statements of FY06 and other relevant information. As one of the pioneering private sector general insurance company of Bangladesh CICL achieved this grade by virtue of some good fundamentals like supporting income from investment, consistent underwriting profit, sound solvency position and satisfactory liquidity position. However, the performance has been impaired by factors such as limited market share, non-integrated MIS, high risk retention ratio, moderate operating efficiency, excessive management expense and shortfall of capital adequacy and weak corporate governance practice of the company. Overall performance of CICL had a downtrend in FY06 compared to that of FY05. In FY06, total gross premium shrank to BDT 145.03 million from that of its previous year (BDT 158.72 million). Consecutively, in FY06 net premium also decreased to BDT 95.52 million
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CRAB Ratings

General Insurance

having negative growth of 16.28% on that of its previous year (BDT 114.09 million). On the other hand, gross claim increased to BDT 50.71 million in FY06 from BDT 29.71 million in FY05 with 70.68% growth. In FY05, market share of CICL in respect of gross premium, gross claim and total assets were 1.99%, 0.97% and 1.79% respectively. As a listed company with DSE and CSE, CICL is traded in A category share. CICL has a large board size and it needs to be reduced to comply with SEC directives. Two committeesadvisory committee and executive committee are functioning right now. Another committee, audit committee which has recently formed very soon it will start its operation.
Table 1: Key Financial Highlights Particulars Net Premium Net Claim Paid Underwriting Profit Net Profit Total Asset Loss Ratio (%) Expense Ratio (%) Combined Ratio (%) Return on Net Premium (%) Return on Equity (%) Investment Yield (%) Current Ratio (%) Solvency Ratio (%) Paid-up Capital* FY04 81.58 (2.50) 14.56 17.89 371.54 48.18 57.44 105.62 21.93 13.99 8.16 157.09 4.71 72.00
Millions of BDT

FY05 114.09 11.54 24.25 25.81 392.93 18.72 42.04 60.75 22.62 19.24 7.38 168.45 4.03 72.00

FY06 95.52 (4.02) 22.97 27.96 427.11 34.96 52.80 87.77 29.27 15.37 7.31 196.00 5.70 108.00

* As on June 30 2007 paid-up capital was BDT 118.80 million.

Management expense is a bit high for CICL; during FY06 actual management expenses was BDT 76.58 million which is 179.13% excess of allowable limit. The IT infrastructure of CICL is now in primary stage, as it is not yet under consideration to establish complete computerized system and afterwards to start using professional software for accounts, underwriting, claims and reinsurance. The loss ratio and expense ratio is in line with its peers. In FY06 the average claim settlement ratio was 72.75% and average claim settlement period was 3.75 months. Average pending claim settlement period was 10.75 months for the same period. Within last 5 years, underwriting profit has just doubled and investment income also grabbed a solid portion of total profitability. Although during last two financial years underwriting profit dominated, in FY06 it decreased by 0.05% and reached to BDT 22.97 million. The investment portfolio comprised of national investment bond BDT 5.00 million, fixed deposit BDT 150.79 million, land BDT 104.54 million and shares in central depository Bangladesh Ltd. of BDT 1.01 million. As on FY06 ROE and ROA were 15.37% and 6.55% respectively which were slightly underneath of its previous year. In FY06 income earned from investment portfolio was BDT 19.09 million. As on June 30 2007 the paid-up capital of CICL BDT 118.80 million which is lower than the required level (BDT 150 million). In FY06, solvency margin is quite good having excess solvency of BDT 99.18 million which is 5.70 times of required solvency. CICL observed a sound liquidity position; during FY06 the current ratio was 196.00%. Average
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risk retention ratio for the company was 65.86%; among the 4 business classes, marine insurance obtained very high risk position (in FY06 88.11%). CICL maintained its obligatory reserve to meet up future uncertainty.

2. INDUSTRY OVERVIEW
2.1. BACKGROUND After independence of Bangladesh, insurance industry was nationalized. Subsequently through the enactment of Insurance Corporation Act VI, 1973, two corporations namely Sadharan Bima Corporation (SBC) for general insurance and, Jiban Bima Corporation for life insurance were established in Bangladesh. SBC was acting as the sole insurer of general insurance till 1984. Between 1985 to 1988 first generation of private general insurance companies were emerged as Bangladesh Government allowed the private sector to conduct business in all areas of insurance for the first time in 1984. A total of 16 private general insurance companies were registered in that phase. In 1996 another 8 private general insurance companies were registered. The third generation of private general insurance companies, which included 18 companies, came into operation between 1999 and 2001. The general insurance market in Bangladesh now consists of 43 private sector insurance companies and 1 state owned insurance company. Insurance Corporation (amendment) Act 1990 provides that 50% of all insurance business relating to any public property or to any risk or liability appertaining to any public property shall be placed with the SBC and the remaining 50% of such business may be placed with this corporation or with any other insurers in Bangladesh. But for practical reason and in agreement with the Insurance Association of Bangladesh SBC underwrites all the public sector business and 50% of that business is distributed among the existing 43 private general insurance companies equally under National Co-insurance Scheme. 2.2. GENERAL INSURANCE BUSINESS IN BANGLADESH General insurance business in Bangladesh has been growing steadily over the years. Total gross premium stood at BDT 8,015.53 million in FY05 whereas in FY03 the figure was BDT 5,878.18 million. Growth rate in gross premium also depicts an increasing trend. In FY05 the growth rate in gross premium was 18.18% which was about 6% higher than the growth rate in FY03. Growth of general insurance industry largely depends on growth in imports, exports, prospects of industrialization and investments. Marine and fire insurance dominate the general insurance business in Bangladesh. In FY05 marine and fire insurance premium were 39% and 36% respectively of total gross premium. On the other hand, in terms of gross claims misc insurance and fire insurance dominated with 49% and 30% of total gross claims in FY05.

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