Risk Analysis: Pragati Insurance Limited

Company Profile
PRAGATI INSURANCE LIMITED was established in 1986. A group of young entrepreneurs of Bangladesh who had earlier launched a commercial Bank in the private sector sponsored the company with 30 million Taka capital. Sponsors included shipping magnets, Engineers, Road Builders, Top Garment Exporters and Importers. Market size of Bangladesh in the non-life sector was Tk.1,050 million in 1986. It has grown to Tk.12,284.20 million in 2009. With the arrival of private sector power companies like AES, gas giants like UNOCAL, SHELL and discovery of new off shore gas in the Bay of Bengal and other private sector infrastructure industry in the country, it is expected that there would be quantum jump in the non-life insurance premium portfolio in Bangladesh once the decision as to utilization or export of gas is taken by the Govt. The company insure all traditional lines of non-life insurance businesses; fire & allied risks including flood, cyclone, earthquake, Typhoon, malicious damage, burglary, riot, strike, damage, house breaking, industrial all risks, DOS, machinery break-down, loss of profit, business interruption, CAR/EAR, personal accident including workmen compensation, motor insurance of all descriptions & value, Travel medical & medical insurance including treatment abroad to name a few broad lines. Paid-up capital of the company is Tk.447.80 million and Reserves including capital reserves stood at Tk.2,176.68 million thus making an equity base of Tk.2,624.48 million as of December 2011. Total Asset as of 31st December, 2011 stood at over Tk.3,461.34 million.

Claim Settlement
Client's service and prompt settlement of claims are the key to the success and growth of the company. Claims are settled immediately on completion of the required formalities by the insured and the surveyors. The company has settled claims of over Tk.370.45 million since 2007 till 2011. The gross premium earned and gross claims settled during the last 5(five) years stood as under: (Taka In Million) 2010 2011 1,062.26 110.68 1,137.29 60.33

2007 Gross Premium Earned Net claim settled 802.76 58.42

2008 979.08 48.65

2009 1,035.88 92.37

Re-Insurance arrangement
Company' portfolio is adequately reinsured both at home and abroad. Fire and allied risks are covered by surplus and Auto-Fac Treaties. Marine Cargo risks are also covered by surplus & Auto-Fac Treaties. Motor risks are covered by 3 layer XL Treaties. Engineering and Misc. risks are covered by Surplus Treaty. The company has also cover for fire and marine cargo own retained portfolio. Company's gross premium income, Reinsurance cession and net premium retention for the year 2011 were as under (Taka in Million)

Fire Gross Premium Reinsurance Retained Premium 484.09 239.87 244.22

Marine 420.03 46.19 373.84

Motor & Misc. 233.16 18.36 214.80

Total 1137.28 304.42 832.86

Financial Performance of Pragati Insurance Limited

The following table shows the last five years financial performance of the company. Taka in Million
Particulars Financial Performance 2011 Gross Premium Net Premium Net claim Underwriting profit Investment Income Income from financial service Net profit before tax Net profit after tax Dividend in Percent 1137.29 477.20 60.33 89.31 6.20 46.30 133.38 79.82 2010 1062.26 474.69 110.68 63.09 77.28 40.97 161.52 106.95 2009 1035.88 429.11 92.37 62.86 43.16 4.50 131.38 68.55 2008 979.08 412.81 48.65 99.24 69.84 49.46 198.83 118.07 2007 802.76 341.97 58.42 77.90 74.74 46.72 176.84 142.66

10+15(Stock) 15+5(Stock) 20+10(Stock) 20+15(Stock) 35(Stock)

Share Capital & Reserve Paid-up Capital Total Reserves & Surplus Share holders Equity Assets Investment in Shares and Securities Cash, FDR and Bank Balances Land and Building Total Assets Ratios EPS P/E (Times) Solvency Surplus Net Asset Value Per Share Net Cash Flow Per Share Credit Rating Long Term Short Term AA1 ST1 AA1 ST1 AA1 ST1 AA2 ST1 AA2 ST1 2.36 33.39 2696.64 58.60 0.94 3.38 46.11 2126.47 49.80 1.16 2.87 52.84 2092.14 530.44 10.88 4.68 20.28 2044.48 600.21 47.08 5.68 8.45 1899.89 747.04 2.01 397.14 510.46 2014.75 3461.34 389.27 523.23 1518.30 3012.47 391.23 473.04 1496.21 2900.94 361.65 532.12 1319.03 2662.47 242.58 510.34 1318.52 2449.50 447.80 2176.68 2624.48 426.47 1669.54 2123.07 387.71 1668.88 2056.60 337.13 1686.42 2023.56 249.73 1615.88 1856.61

Risk Analysis
Liquidity Risk
Liquidity risk of an insurance company can be created from two reasons. One is liability side reason and another is asset side reason. The liability side reason occurs when the insurance policy holders seek to cash in their financial claim immediately. When the policy holders want to settle the insurance claim, Pragati Insurance Company Ltd uses their liquid assets to pay the claim. Asset side liquidity risk arises from the change in interest rate of investment portfolio. The following table shows the liquidity risk of Pragati Insurance Limited.

Magnitude of Shock Liquid assets Liquid Liabilities Liquidity Ratio Fall in liquid liabilities Revised Liquid Assets Revised Liquid Liabilities Revised Liquidity Ratio Increase in liquidity ratio

0.05 458.76 223.83 2.05 11 448 213 2.10 0.06

0.07 458.76 223.83 2.05 16 443 208 2.13 0.08

0.1 458.76 223.83 2.05 22 436 201 2.17 0.12

Pragati Insurance Company is less exposed to changes in the variables because the liquidity ratio for Pragati Insurance Company improves in all three scenarios. The decrease in liquid liability is more in proportionate than that of liquid assets which ultimately results in better liquidity ratio of 2.10, 2.13, 2.17 times where the base ratio is 2.05 times. The liquidity ratios under the three scenarios are graphically showed below.

Liquidity Risk
2.18 2.16 2.14 2.12 2.1 2.08 2.06 2.04 2.02 2 1.98 Liquidity ratio Revised Liquidity ratio

5% 2.05 2.1

7% 2.05 2.13

10% 2.05 2.17

Equity Price Risk

Pragati Insurance Company assesses the impact of the fall in stock market index to measure the equity price risk. We have measured the loss if the current value of all the securities listed on the stock exchanges fall at the rate of 10%, 25% and 50%. We have seen from the table that the CAR of Pragati Insurance Company Ltd. falls below the minimum level of 10% in case of all scenarios. So Pragati Insurance Company is highly exposed to Equity Price Risk. The following table shows detailed result.

Magnitude of Shock Total exposure in stock market Fall in the stock prices Tax Rate Tax adjusted loss Total regulatory capital Revised Capital Risk weighted assets Revised risk weighted assets CAR Revised CAR Fall in CAR (% age points)

0.10 384.777 38 42.50% 22 150 128 2769.07 2,747 0.054169812 0.043551827 0.007617985

0.25 384.777 96 42.50% 55 150 95 2769.07 2,714 0.054169812 0.034891945 0.019277866

0.5 384.777 192 42.50% 111 150 39 2769.07 2,658 0.054169812 0.014811888 0.039357924

Following is the graphical presentation of different scenarios.

Capital Adequacy Ratio

12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Regulatory CAR Revised CAR 10% 10.00% 4.65% 25% 10.00% 3.48% 50% 10.00% 1.48%

Market Risk
We measured DEAR (Daily Earnings at Risk) and VAR (Value at Risk) to determine the market risk. Variance-Covariance or risk metrics model are used here. DEAR (Daily Earnings at Risk) for Pragati Insurance Company Ltd is 19.17 million Taka. It indicates that if the next day turns out a bad day then Pragati Insurance Company Ltd. will lose 19.17 million Tk. Loss for 10 days will be 60.62 million Tk. Here 95% confidence intervals are used for calculations. Standard Deviation of Market Return Market Value Position Stock Market Return Volatility DEAR VAR (10 days) 0.029844816 389.277 0.049243947 19.17 60.62

Summary
Pragati Insurance Company Ltd. is one of the first generation insurance companies in Bangladesh. They are less exposed to liquidity risk because their amounts of liquid assets are much higher than liquid liabilities. Pragati Insurance Company Ltd. is highly exposed to equity price risk and market risk because of maintaining a lower capital adequacy ratio.

Risk Analysis: 4th ICB Mutual Fund

Background
ICB is the pioneer organization of initiating mutual fund in Bangladesh. The countrys first mutual fund, the First ICB Mutual Fund was launched on 25 April 1980. Since then ICB had floated 8 mutual funds of total capital of Tk. 17.5 crore up to 1996. ICB 4th mutual fund is one of them. ICB mutual funds are now perceived by investors as a rewarding and relatively safe investment instruments because of their strong and steady performance in terms of dividend and portfolio management.

About 4th ICB Mutual Fund

Date of Launching is June 6, 1986. Total Paid-up Capital is 10 million taka. Total Cost Price of the Portfolio is 96.359 million taka, and Market Value of the Portfolio is 211.970 million.

Key Financial Information of 4th ICB Mutual Fund Dividend and Interest Income
The Fund has earned an amount of Tk. 58.17 Lac as dividend and interest from 74 securities during 2011-12 of which, Tk.51.74 lac (88.95 per cent) was received in cash within 30 June 2012.

Capital Gains on Sale of Investments

During 2011-12, the Fund has earned Tk.185.29 lac as capital gains by selling securities of 43 companies.

Income, Expenses and Distributable income

During the year under review, the Fund has earned a gross income of Tk. 293.87 lac by way of dividend and interest income from investment in securities of Tk.58.17 lac interest income of Tk.50.41 lac on bank deposits and capital gains of Tk.185.29 lac. After deducting the total expenses of Tk.50.17 lac incurred as staff expenses, management fee, printing and stationery, postage and telegram, interest on current account with ICB, bank charges, provision against investments and others, the net income of the Fund stood at Tk.243.70 lac. Taking into account the previous years undistributed income of Tk.312.23 lac, the Fund had a net distributable income of Tk 555.93 lac as on 30 June 2012 resulting in distributable income per certificate of Tk. 55.59.

Dividend
The Fund has declared dividend at the rate of 185.00 per cent per certificate of Tk.10.00 each for the year 2011-12 which was 165.00 per cent per certificate in the previous year. After making provision of Tk. 185.00 lac for payment of dividend the Fund has an undistributed income of Tk.370.68 lac.

Interest Rate Risk

In 2010 & 2011 4th ICB Mutual Fund has surplus rate sensitive asset was greater than rate sensitive liabilities. So, the company is exposed to reinvestment risk.

60000000 50000000 40000000 30000000 20000000 10000000 0 Rate Sensitive Assets Rate Sensitive Liabilities Repricing Gap 2012 2011

After calculating the weighted-average duration of assets and liabilities for 4th ICB Mutual fund, the leverage adjusted duration of liabilities was calculated. Finally the duration gap for the fund was 0.080681 years i.e. the Asset of the MF will be more affected than liability when there is an increase in the interest rate. For this reason, when there is an increase in interest rate, the value of asset will be more decreased than that of liability resulting in an decrease in the market value of equity. So there is potential risk if the interest rate is increased but there is no risk when interest rate falls as this will have a positive impact on the market value of equity. But in Bangladesh we generally do not see interest rate to fall. So the mutual fund is quite in the Interest rate risk in 2012 due to its composition of the balance sheet.

Interest Rate Shock

Interest rate shock measures the change in NII (Net Interest Income) due to change in the level of interest rate. For this analysis we have used three different scenarios as 2%, 4% & 6% shock in the interest rate according to Bangladesh Banks guideline for stress testing. a b c Magnitude of Shock Rise in MVE(onbalance sheet) Net Rise in MVE(onbalance sheet (139,312) (278,623) (417,935) 2% 4% 6%

d e f g h i j k l

& offbalance sheet) Tax Rate Tax adjusted gain Total Regulatory capital

(139,312) 0 (139,312)

(278,623) 0 (278,623)

(417,935) 0 (417,935)

100,000,000 100,000,000 100,000,000 Revised Capital 99,860,688 Risk weighted assets 121,180,564 121,180,564 121,180,564 Revised risk weighted assets CAR Revised CAR Rise in CAR (% age points) 121,041,252 120,901,941 120,762,629 82.52% 82.52% 82.52% 82.50% 82.48% 82.46% -0.02% -0.04% -0.06% 99,721,377 99,582,065

Here from the above table we can see that the base CAR is 82.52% and for the prescribed increase in interest rate by BB, the CAR of MF decreases under all three scenarios by 0.02%, 0.04% and 0.06% respectively.

Equity Price Risk

Magnitude of Shock 1 2 3 4 5 6 7 8 9 10 11 Total exposure in stock market Fall in the stock prices Tax Rate Tax adjusted loss Total regulatory capital Revised Capital Risk weighted assets Revised risk weighted assets CAR Revised CAR Fall in CAR (% age points) 0.00% 10% 206790677 25% 206790677 50% 206790677

20,679,068 51,697,669 103,395,339 0.00% 0.00% 0.00% 20,679,068 51,697,669 103,395,339 100000000 100000000 100000000

79,320,932 48,302,331 (3,395,339) 121180564 121180564 121180564 100,501,496 69,482,895 17,785,226 0.825214842 0.825214842 0.825214842 0.789251257 0.695168659 0.190907813 0.035963585 0.130046183 1.016122655

From the above mentioned table it can be seen that for 10%, 25% and 50% fall in the stock price the CAR of MF goes below the base rate of 82.52% and the fall is massive.

Market risk
In order to measure the market risk, Bangladesh Banks stress testing guideline is used for calculation of VAR (Value At Risk). For this purpose we have calculated the DEAR (Daily Earnings At Risk) then went for 5-days VAR as it is a general practice suggested by Bank For International Settlements (BIS). Here DEAR and VAR are calculated only for stock market investment of 4th ICB Mutual Fund as it does not have any investment in foreign exchange and fixed income securities. Sigma-m Market Value Position Stock Market Ret. Volatility DEAR (BDT) VAR-5(BDT.) 0.029844816 206790677 .04922 10183189 0.369127166 32202071

Here the daily earnings at risk for the MF is 10183189, which means that if tomorrow turns out to be a bad day it will incur a daily loss of BDT 10183189 and the loss for 5 days will be BDT 32202071.