Term Paper

Submitted to:
Mr. Ahmed Raihan Sadat
Lecturer
Department of Business Administration in
Finance & Banking
Faculty of Business Studies
Bangladesh University of Professionals
Mirpur Cantonment, Dhaka-1216
Submitted by:
Nowshin Nower
ID: 17221016
Section: B

This Term Paper is completed for the fulfillment of the course

‘Fundamentals of Insurance & Risk’ under FBS, BUP

Date of Submission: 31st October, 2018

LETTER OF TRANSMITTAL
October 31, 2018

Mr. Ahmed Raihan Sadat

Lecturer

Department of Business Administration in Finance and Banking

Faculty of Business Studies,

Bangladesh University of Professionals

Subject: Submission of the term paper on ‘Federal Insurance Co. Ltd’.

Dear Sir,

I gladly present to you the term paper on ‘Federal Insurance Co. Limited’ which was assigned to
me as a requirement for the completion of the course Fundamentals of Insurance and Risk
(course code FIN-2205) in Faculty of Business Studies, Bangladesh University of Professionals.
This term paper focuses on the operation, products and services, compact strategies and financial
position of the company.

Finally, I would like to thank you for the opportunity that you gave me. This term paper helped
me to get an exhaustive insight on the performance and condition of our general insurance
industry and obtain a complete overview of Federal Insurance’s contribution in it.

Sincerely,

Nowshin Nower

ID 17221016

1
Acknowledgement
The preparation for this term paper has helped me to realize that a work cannot ever be done

alone. First of all, I would like to thank Almighty ALLAH for giving me a sound health to

complete this term paper.

Secondly, I am extremely grateful to our Faculty Mr. Ahmed Raihan Sadat for guiding us and

giving all the valuable information.

I am also thankful to my friends and family who aided in providing proper time and effort to

complete this paper in the most effective manner.

2
Executive Summary
Our life and properties are always at risk because any kind of unexpected event can occur

anytime which can bring about huge loss. The concept of insurance has emerged to safeguard us

from these uncertainties by sharing our risks. The insurance company provides indemnification

against losses occurring from the uncertain events. They take an amount of money called

premium against the shared risks. Insurance plays a vital role in today’s business and commerce.

It provides security from loss and anxiety to the people. The insurance market of Bangladesh

consists of total 62 insurance companies. Among them there are two government owned

insurance companies- Sadharan Bima Corporation and Jibon Bima Corporation, 43 general

private insurance companies, 16 private life insurance companies and one foreign life insurance

company. This paper is based on the performance evaluation of a general insurance company of

Bangladesh named “Federal Insurance Company Limited. The company background, its

domestic operation has been described in the paper. It’s marketing and growth strategy was

discussed with the help of Ansoff’s Growth matrix. Many strengths and weaknesses of the

company have been found in the SWOT analysis. This paper will help to get an overview of the

CSR activities that Federal Insurance Company Limited performs. It has been found that the

company contributes a lot to the local community and for the economic welfare of Bangladesh.

In the analysis part two types of analysis was done of the financial data. One is trend analysis,

which shows the amount of change in balance sheet and income statement data from previous

year. Another is ratio analysis which was done by analyzing the financial ratios of the company

with two of the local competitors. Finally few recommendations were given to the company

based on our analysis.

3
4
Table of Contents
Introduction............................................................................................................................. 2
1.1 Background of the Company.............................................................................................3
1.2 Scope of the study........................................................................................................... 3
1.3 Objective of the study......................................................................................................3
Literature Review..................................................................................................................... 4
Research Methodology..............................................................................................................6
Findings.................................................................................................................................. 8
4.2 Products and Services....................................................................................................10
4.2.1 Fire Insurance......................................................................................................... 10
4.3 SWOT Analysis............................................................................................................. 16
4.4 Corporate Social Responsibility......................................................................................17
Analysis................................................................................................................................. 19
5.1. Trend Analysis........................................................................................................... 19
4.2 Ratio Analysis............................................................................................................. 21
Conclusion............................................................................................................................ 31
6.1 Summary.................................................................................................................... 32
6.2 Recommendation.......................................................................................................32
6.3 Limitations.................................................................................................................. 32
References.......................................................................................................................... 33
Chapter 1
Introduction

2
1.1 Background of the Company
Federal Insurance Co. Limited is a leading general company of Bangladesh which was

incorporated on 11 November, 1987 under the Companies Act. It was listed with Dhaka

Stock Exchange on 26th June, 1995 and with Chittagong Stock Exchange on 20 th November,

1995. The company is representing a perfect combination of expertise and diverse experience

in the field of insurance in Bangladesh. It has now become a big family of 20 respected board

member, 16 senior management members and 482 dedicated employees. Federal Insurance

now has 30 branches located at different strategically important areas of Bangladesh. Its

vision is to become an insurer of global standards and the number one choice for the

domestic customers. The Credit Rating Information Service Limited (CRISL) has rated

Federal Insurance ‘A- -’ for its strong financial and solvency position.

1.2 Scope of the study

This report enables to get an overall overview about the position, activities and goals of the

company how it runs business, corporate strategies, the product and services it offers, the

polices to operate the company, about the corporate social responsibilities, investment and

returns on it etc. Cross sectional financial analysis with a competitor is also a part of the

paper.

1.3 Objective of the study

o To know about the company’s operation
o To know the marketing strategy of the company.
o To know about the products and services the company offers to the customers.
o To get the financial strength of the company.
o To know about the strengths and weakness of the company.
o To know about the CSR activities of the company.

3
Chapter 2
Literature Review

4
Insurance is a mechanism in which one party (the insurer) indemnifies the other party (the

insured) against a particular amount of loss, occurring from specific course of actions within

a specified period. It is a contract under which the insured party pays an amount of money

known as premium to the insurer in return of a liability to compensate some possible losses

of the insured. It has been in the research that the overall performance of the Insurance

industry of Bangladesh is unsatisfactory compared to other service industries. [ CITATION

MSh15 \l 1033 ]

It has been found that the private non-life insurance companies of Bangladesh are increasing

their performance rapidly. But the nationalized insurance company- Sadharan Bima

Corporation (SBC) outperforms all the private insurers in most of the sectors except income

earning. The investment income of SBC has grown at 1.43% whereas it is 8.29% in case of

private general insurance companies. Most of the general insurance companies have

experienced significant growth in net premium earning after 2000. But the absence of

efficient regulatory body, lack of professional qualification of manpower, weak corporate

governance are some factors which are hindering the development of the whole insurance

sector in Bangladesh. [ CITATION Muh11 \l 1033 ]

The number of general insurance companies has been growing rapidly which brought about

huge competition in the insurance industry. That’s why the companies have found investment

as one of their major income sources. It is found that the insurance companies of Bangladesh

mainly invest in two financial instruments which are- government securities and shares. Few

of them also invests their cash in corporate debt securities, minority ownership and ICB

debenture. As the amount of investment by the general insurers has increased significantly it

may encourage them to go for some more diversified portfolio. [ CITATION Qua12 \l 1033 ]

5
 Chapter 3
Research Methodology

6
Both Qualitative research and Quantitative research were our major tools to complete this

report. Most of the data was collected from the official website of the Federal Insurance Co.

Ltd. The website provides detailed description about how the company was formed, how it

operates, how they serve their customers and the society and much more. The analysis part of

the report was done with the help of the company’s last few years’ financial data gathered

from company’s annual reports. The financial data of Green Delta Insurance and United

Insurance Co. Ltd was collected and interpreted in order to make a cross sectional analysis

with Federal Insurance Co. Ltd.

7
Chapter 4
Findings

8
4.1 Local Operation
The company has established its head office at Motijheel which is the major business and

commercial hub of Dhaka city. It has total 30 branches all over Bangladesh which includes

all eight divisions and other important cities.

9
4.2 Products and Services
Federal Insurance Company Limited offers 6 major insurance products. They are:

4.2.1 Fire Insurance

The fire insurance policy is a contract under which the insurer is responsible for

indemnifying the insured for any financial loss occurred due to damage or loss of property,

caused by fire. The insurer agrees to indemnify the policy holders in return of premium.

The policy covers-

 Buildings
 Machinery and Accessories
 Contents including furniture
 Inventory and inventory in process.
 Industrial risks
 Utilities located outside the manufacturing risks
 Farms situated outside the industrial risks.

There are 6 different types of fire policies that the company offers. They are-

 Fire and Allied Perils Insurance

 Household Policy
 Hotel Owner’s All Risk Insurance
 Industrial All Risks Insurance
 Insurance of Consequential Loss Due to Fire and Allied Perils
 Operational Package Insurance

Marine Insurance

Marine insurance covers the loss or damage of ships, cargo, goods in transit between the

points of origin and final destination. The owners of goods in transit or shipment can insure

their properties under this policy. This policy indemnifies the insureds for the loss or damage

due to-

10
  Fire, explosion or sinking etc.
 Collision
 Discharge of cargo at port of distress
 Jettison
 General average sacrifice, salvage charges
 Earthquake, lightning
 Washing overboard
 Sea, lake or river water

Federal Insurance offers 3 types of marine insurance. They are-

 Marine Cargo Insurance

 Marine Hull Insurance
 Marine Freight Insurance

Motor Insurance

Federal Insurance Co. Limited offers 3 types of motor insurance. They are-

 Comprehensive Motor Insurance

 Act Liability Insurance
 Trade Policy Insurance

The comprehensive motor insurance policy provides coverage in respect of

1. Damage or loss of the motor vehicle

a) By fire explosion, self-ignition

b) By burglary or theft
c) By malicious activities during riot and strike

2. Third party liability due to motor accident

a) death of or bodily injury to any third person except the person who buys the policy.

b) damage or loss to any property other than property belonging to the insured.

11
3. Personal accident coverage for insured passenger

The comprehensive motor insurance policy also covers the personal injury of the policy

holder.

Act Liability Motor Insurance covers the expenses towards the legal liability in case of

accident of the insured’s vehicle resulting in death or injury of other person or damage or loss

of other’s property. The maximum coverages are-

Fatal Injury: Maximum BDT 10,000

Minor Injury: Maximum BDT 5,000

Property Damage: Maximum BDT 50,000

Trade Policy Insurance is also known as Road Risk Insurance. Motor trade policy is a special

type of insurance policy that offers insurance protection for anything running a motor

business either on a full time or part time basis. This type of insurance covers public liability,

employer’s liability, sales service indemnity etc.

Aviation Insurance

Under this type there are 6 sub categories of insurance products. They are-

 Hull Insurance & Liability Insurance

 Crew Personal
 War Insurance
 Deductible Insurance
 Loss of License Insurance
 Accident Insurance

Engineering Insurance

12
Federal Insurance Co. Ltd. Offers different types of engineering insurance like-

 Contractors All Risk Insurance (CAR)

 Erection All Risk Insurance (EAR)
 Deterioration of Stock Insurance (DOS)
 Power Plant Insurance
 Machinery Insurance(MB)
 Equipment Insurance
 Contractors Plant & Machinery Insurance (CPM)
 Electronic Equipment Insurance (EE)

Miscellaneous Insurance

This is a mixture of various types of insurance policies. Such as-

 All Risk Insurance

 Burglary and House Breaking Insurance
 Cash in Transit Insurance
 Cash in ATM Insurance
 Comprehensive General Liability Insurance
 Products Liability Insurance
 Employers Liability Insurance
 Professional Indemnity Insurance.

4.3 Strategic Position

Target Market

Federal Insurance Co. Ltd targets the broad market segment to have more customers, higher

revenue and cash-flow and a larger safety net. It is a customer focused company which tries

to penetrate the market with innovative and new products and better customer service. The

company has the ability of fulfilling its target market’s needs by managing risk with

minimum cost and personalized services.

13
Growth Strategy

The company is following the product development strategy at this moment. As they are in

an existing market of non-life insurance all they can focus on now is developing new

products and services for the clients which will differentiate them from the competitors.

Products
Existing New

MARKET PRODUCT
Existing

PENETRATION DEVELOPMENT
MARKET

STRATEGY STRATEGY
New
S

MARKET
DIVERSIFICATION
DEVELOPMENT
STRATEGY
STRATEGY

Ansoff’s Growth Matrix

4.3 SWOT Analysis

Strength

 Strong corporate management

 Highly qualified and experienced board of directors and employees

 Stable underwriting profit

14
  Strong network through the country

Weakness

 Less capital

 No advanced training facilities

 Lack of social media promotion

Opportunities

 Fragmented insurance market

 Development of IT in insurance

 Loosening of government regulations

 Location of head office

 Growing global insurance market

Threat

 Highly competitive non-life insurance market of Bangladesh

 Threats of new entrants

 Turnover rate is high.

 Increasing insurance frauds can increase company’s claim losses.

4.4 Corporate Social Responsibility

Business and society, these two are reliant and it must be guaranteed through common

understanding and mindful conduct, that business' role in building a good future is perceived

and encouraged by society. This is the reason Corporate Social Responsibility is a

15
noteworthy part of Federal Insurance. As global citizens they try their best to fulfill their

responsibility towards the society.

After the natural disasters, the company takes part in different sorts of activities for the

reconstruction and development of the affected infra-structures. Federal Insurance Co. Ltd.

Always tries to support the humanity through its CSR activities which includes financial aid

and support towards the communities all over the country. The company has recently donated

money to the Center for the Rehabilitation of the Paralyzed (CRP) to support the Children’s

with Disabilities. (CWD).

To recognize the success and also to inspire the talented children of the Company's

representatives; the Hon'ble Board of the Company remunerated the youngsters giving

education scholarship as a token of their extraordinary performance in accomplishing GPA 5

(Golden) in their particular PEC/JSC/SSC/HSC/ 'O' level/'A' level & Graduation exams. The

company has also planned to provide scholarships to the insolvent meritorious students of the

country who want to make a career in the fields of technology and digital science.

16
Chapter 5
Analysis

17
5.1. Trend Analysis
The trend or horizontal analysis has been done by measuring the changes in the amounts of

financial statement items of last two years.

Federal Insurance Co. Ltd

Condensed Balance Sheet
2017 2016 Increased Amount Percent

Total Assets 1,317,594,780 1,129,935,050 187,659,730 16.61%

Total Liabilities 512,090,684 360,221,959 151,868,725 42.16%

Total Equity 705,724,292 670,134,968 35,589,324 5.31%

18
 Balance Sheet Analysis

1,400,000,000

1,200,000,000

1,000,000,000

800,000,000

600,000,000

400,000,000

200,000,000

0
Total Assets Total Liabilities Total Equity
T

he balance sheet trend shows that the total assets of the Federal Insurance increased by

16.61% in 2017, the liabilities have increased by 42.16% which is not a good sign. Also, the

total equity increased by 5.31%. Federal Insurance should control the fast increase of

liabilities to avoid liquidity crisis.

Federal Insurance Co. Ltd.

Condensed Income Statement
For the year ended December 31
2017 2016 Change in amount Percent
Gross Premium 441.72 428.06 13.66 3%
Net Premium 251.08 243.46 7.62 3%
Net Claim 10.51 27.79 -17.28 -62%
Underwriting Profit 91.84 82.68 9.16 11%
Profit Before Tax 56.39 51.05 5.34 10%
Net Profit 14.84 14.84 0 0%

19
 Income Statement Analysis
2017 2016

it x fit
iu
m
iu
m
la
im of Ta ro
Pr re P
rem rem et
C
ng fo e t
P P i e N
ss et N rit i tB
N w of
ro er
G nd Pr
U

The income statement trend signifies that the company earned 3% more premiums than

previous year also the net claim has decreased by 62%. Though its underwriting profit has

increased the net profit remained the same as last year. The reason might be higher operating

and interest expense.

4.2 Ratio Analysis

For peer comparison based on financial ratios two of the renowned general insurance

companies of the country- Green Delta Insurance and United General Insurance company

was chosen.

Loss Ratio

Formula: Loss Ratio = Net Claims / Net Premium Earning

20
 Loss Ratio
0.30

0.25

0.20

0.15

0.10

0.05

0.00
2013 2014 2015 2016 2017

The trend shows that the loss ratio of Federal Insurance had been decreasing slightly and it is

less than the competitors. Lower loss ratio indicates higher operating profit of the company.

On the other hand, the higher loss ratio of Green Delta and United Insurance means that the

companies had to pay higher net claims in proportion of their net premium earnings. This can

happen because of better underwriting process of Federal Insurance and the other two

companies may need better risk management policies to guard against future possible

insurance payouts.

21
Expense Ratio

Formula: Expense Ratio = Underwriting Expense / Net Premium Earnings

Expense Ratio
0.60

0.50

0.40

0.30

0.20

0.10

0.00
2013 2014 2015 2016 2017
Federal Green Delta United

Expense ratio measures the percentage of premium earned used to pay the expenses of

acquiring, underwriting, servicing insurance and reinsurance. In the above trend we can see

Federal insurance had higher expense ratios than the competitors in last 5 years. This

22
signifies that the company is earning less premiums than its expenses to generate those

premiums compared to the competitors.

Combined Ratio

Formula: Combined Ratio = Loss Ratio + Expense Ratio

Combined ratio
Federal Green Delta United
0.57
0.52 0.54 0.54
0.50
0.48
0.45 0.45
0.41
0.33 0.35
0.32 0.32 0.32
0.27

2013 2014 2015 2016 2017

Combined ratio is the combination of loss ratio and expense ratio. In this trend we can see

23
Federal Insurance had a decrease in its combined ratio after 2014. In 2017 it had a moderate

combined ratio of 41% which means the company had to pay out 41% of the net premium

earned to generate that premium. It indicates that the company had better underwriting profit

than Green Delta Insurance in 2017. But United General Insurance had better combine ratio

meaning better underwriting profit than these two competitors in last 5 years.

Investment Income Ratio

Formula: Investment Income Ratio= Investment Incomes / Net Premiums Earned

24
 Investment Income Ratio
Federal Green Delta United
0.63 0.66
0.55
0.42
0.34

0.15 0.18 0.17 0.14 0.14

United
0.17 0.14
0.09 0.05 Green Delta
0.05
Federal
2013 2014 2015 2016 2017

The Investment Income Ratio of an insurance company measures the income the company

generates from its investment activities rather than its operations. As we know insurance

companies have two revenue-sources- one is premium income from underwriting another is

investment income. The company invests a portion of the premium earned in assets to earn

more profit. This ratio measures how much income is earned from investments compared to

net premium earned. In this trend we can say Federal Insurance had a very poor investment

25
income ratio than its competitors. It earned only 5% as investment income compared to net

premiums; whereas Green Delta earned 14% and United Insurance earned 34% income from

investments. Federal Insurance should invest more on stocks, bonds, real estates to have a

higher return to cover the liability of claims against their insurance policies.

Debt Ratio

Formula: Debt Ratio= Total Liabilities / Total Asset

The debt ratio of last 5 years shows that Federal Insurance had a higher ratio than its

competitors which means they are more leverage than Green Delta and United Insurance

Company.

26
 Debt Ratio
0.45
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
2013 2014 2015 2016 2017

Federal Green Delta United

Net Profit Margin

Formula: Net Profit / Sales

The net profit margin trend shows that Green delta had highest net profit margin and Federal

Insurance had lowest profit margin in last few years. This may happen because of the higher

underwriting expense, less investment income and high debt burden of the company.

27
 Net Profit Margin
70%
60%
50%
40%
30%
20%
10%
0%
Federal
40%33% 2013
16%14%13% 2014 62%2015
39%Green 47%2016
Delta
63% 47% 2017 United
36%33% 32%28%22%

Return on Assets

Formula: ROA= Net Profit / Total Assets

The Return on Assets trend shows that Federal Insurance had lowest ROA in recent years.

Which can be because of its lower net income than other two companies. The company has to

decrease its underwriting and operating expenses and increase investment incomes to have a

better ROA.

28
 Return on Assets
Federal Green Delta United
9.75% 9.63% 9.58%
8.65%

6.76%
5.58%
5.02% 4.72%
4.01% 4.11% 3.88%
3.72%

1.35% 1.31% 1.13%

2013 2014 2015 2016 2017

Return on Equity

Formula: ROE= Net Profit / Total Equity

The Return on Equity trend shows that Federal Insurance also had lowest ROE than its

competitors. It means they are less efficient in generating income from the investor’s capital.

29
 Return on equity
Federal Green Delta United
14.58%

11.00% 11.00%
10.00%
8.04%

9.90%
9.02% 6.70%
4.70% 5.20%
3.60%
2.10%
United
2.32% 2.21% 2.10%
Green Delta
Federal
2013 2014 2015 2016 2017

30
Chapter 6
Conclusion

31
6.1 Summary
Federal Insurance Company Limited is one of the leading general insurance companies in

Bangladesh. It has been operating its business in Bangladesh for last 31 years. It has a variety

of products and services for the customers. But it is difficult for the company to be the

market leader as there is a huge competition among the general insurance companies of

Bangladesh. The company has branches in all the strategically important areas of the country.

The financial position of the company is not as good as its competitors. Federal Insurance is

losing profitability in last few years. The factors affecting the decrease in profitability are:

high underwriting expense, less investment income, high debt burden, high operating

expense etc. The company has to take immediate concern on this otherwise it will lose the

market share.

6.2 Recommendation
 Federal Insurance company should try to follow stringent underwriting to increase

profitability.

 They should concentrate more on increasing level of surplus

 They should invest more on riskier investments to increase investment return

 The company should finance less from debt to lessen interest expense.

6.3 Limitations
 The entire report is completed based on the secondary data. No primary data has been

collected or used for the completion of the report.

 All the suggestions made and conclusion reached are fully based on our knowledge and

assumption.

32
References

Mamun, M. Z., 2011. PERFORMANCE EVALUATION OF GENERAL INSURANCE

COMPANIES IN BANGLADESH: A 1991 – 2008 Analysis.. Insurance Journal,

Bangladesh Insurance Academy, Volume Vol. 58, pp. 21-68.

Samina, Q. S., 2012. Investment Portfolio of Insurance Companies in Bangladesh: A Study

on Selected Insurance Companies of Bangladesh. World Journal of Social Sciences , 2(7), pp.

37-44.

Sarwar, M. S. & Chowdhury, A. Y., 2015. Performance Analysis of General Insurance

Companies: A Case Study on Bangladesh. BUP Journal, 1(3), pp. 33-43.

33
Appendix A

34
 Appendix A: Five Years Financial Summary of Federal Insurance Co. Ltd.

Appendix B

35
Appendix B: Five Years Financial Summary of Green Delta Insurance Co. Ltd.
Appendix C

36
Appendix C: Five Years Financial Summary United General Insurance Co. Ltd.

37