Effects of Firm Characteristics on Financial Performance of Listed Insurance Companies in Nigeria
Chapter One
Objective of the study
The main objective of this study is to examine the effect of firm characteristics on the financial performance of listed insurance firms in Nigeria
The specific objectives are to:
- Examine the effect of age of the firm on the performance of listed insurance firms in Nigeria
- Evaluate the contribution of firm size to the performance of listed insurance firms in Nigeria
- Ascertain the effect of premium growth rate on the performance of listed insurance firms in
- Analyze the effect of loss ratio on the performance of listed insurance firms in Nigeria determine the impact of liquidity on the performance of listed insurance firms in Nigeria.
- Examine the effect of leverage on the performance of listed insurance firms in Nigeria
CHAPTER TWO
LITERATURE REVIEW
INTRODUCTION
This chapter examines the conceptual, theoretical and empirical evidence on the research undertaken on the impact of firm specific characteristics and the financial performance of listed insurance companies which will be extensively reviewed. Emphasis is therefore placed on age, firm size, premium growth, loss ratio, liquidity, and as well as leverage as they relate to financial performance of listed insurance companies over the period of eight years from 2013 to 2020.
CONCEPTUAL FRAMEWORK
Firm Specific Characteristics
Firm specific characteristics are factors that are mostly under the direct control of management. The firm specific indicators include firm size, liquidity, growth rate of premium, leverage, underwriting risk and age of the firm. On the other hand, the macroeconomic indicators are those factors that are beyond the control of management. This includes interest rate, GDP, and industry size (Sumaira & Amjad, 2013). This means that the financial performance of insurance companies could be ascertained using firm specific attributes (internal attributes) and macroeconomics variables (external attributes) as major determinants of profitability of the companies.
Malik (2011) clearly classified the internal attributes into two major sub-categories, namely, the financial variables and non-financial variables. From his explanation, he regarded financial variables as determining factors which are directly driven from items in a balance sheet and profit and loss accounts. This includes size, leverage, liquidity, premium growth, loss ratio and tangibility of asset. On the other hand, the non-financial variables are those factors which cannot be driven from the items in the balance sheet and profit and loss accounts.. The non-financial variables are classified as management quality or competency, efficiency and productivity, age, and scope of operation (Yuqili, 2007).
Following the work of Adams and Buckle (2003) in Bermuda, Abate (2011) in Ethiopia, Malik (2013) in Pakistan, Almajali and Yahya (2012) in Jordan, Daniel and Tilahun (2012) in Ethiopia, Sumaira and Amjad (2013) in Pakistan, Al-shami (2008) in United Arab Emirates among others combined both financial and non-financial statement variables as proxy for firm attributes in relation to financial performance of insurance firms. Other studies conducted by Akotey, Osei and Gemegah (2011) in Ghana, Charumathi (2012) in Indian, Ahmed et al (2011) in Pakistan, Browne and Hoyt (2001) in United Kingdom among others used financial statement variables as explanatory variables in determining the financial performance of insurance firms.
There are different forms of company characteristics depending on the nature of the research to be conducted. For the purpose of this study, six firm specific attributes as stated earlier were considered and discussed.
Liquidity measures the ability of managers in insurance and reinsurance companies to fulfill their immediate commitments to policy holders and other creditors without having to increase profits on underwriting and investment activities and/or liquidate financial assets (Adam & Buckle 2000). Liquidity refers to the degree to which debt obligations coming due in the next 12 months can be paid from cash or assets that will be turned into cash. It is usually measured by the current assets to current liabilities (current ratio). It shows the ability to convert an asset to cash quickly and reflects the ability of the firm to manage working capital when kept at normal levels.
A firm is required to maintain a balance between liquidity and profitability while carrying out its day to day operations. Liquidity is a precondition to ensure that firms are able to meet their short- term obligations and continued flow can be guaranteed from a profitable venture. The importance of cash as an indicator of continuing financial health should not be surprising in view of its crucial role within the business. This requires that business must be run both efficiently and profitably. In the process, an asset-liability mismatch may occur which may increase firm‟s profitability in the short run but at a risk of its insolvency. It should be noted that too much focus on liquidity will be at the expense of profitability (Gitman, 2007). A firm can use liquid assets to finance its activities and investments when external finance is not available or it is too costly. Higher liquidity would allow a firm to deal with unexpected contingencies and to cope with its obligations during periods of low earnings (Liargovas & Skandalis, 2008).
Leverage is measured by the ratio of total liabilities to total assets. It shows the degree to which a business is utilizing borrowed money. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future. Leverage is not always bad because it can increase the shareholders’ return on their investment and make good use of the tax advantages associated with borrowing. The degree of financial leverage reflects a company’s ability to manage their economic exposure to unexpected losses.
Companies that have been in the market for a long period of time have acquired reputation, since they have proven their ability to fulfill long-term contract obligations and their financial stability. The company age can be calculated straightforwardly for all companies. The age factor is scaled by considering the natural logarithm of company age.
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
This study examined the effects of firms characteristics on the financial performance of listed insurance firms in Nigeria. Therefore, this chapter set out the steps and procedures used in analyzing the factors that affect the financial performance of listed insurance firms in Nigeria. In line with the objectives, the chapter focused on research design, method of data collection, population and sampling, techniques of data analysis to be employed in the research and measurement of variables
Research Design
For the purpose of this study, correlational research design was adopted to address the research problem. A correlational research design is used to examine the statistical association or relationship between two or more variables. Correlational research design is therefore considered as the most appropriate for this study because it allows for testing of relationships between or among variables and making of predictions regarding these relationships. This study involves measurement of six independent variables to one dependent variable as well as assessment of the relationship between or among those variables concerned.
Population and Sample of the Study
The population of the study consists of all thirty (30) insurance companies listed on the Nigeria Stock Exchange as at 31st December 2013. The use of listed insurance firms can be justified based on availability and reliability of data. The non-listed insurance firms are excluded because of poor regulatory oversight as well as data reliability, availability and measurement issues.
This study focused on the investigation of main factors that drive the financial performance of listed insurance firms in Nigeria. Therefore, censoring sampling technique was adopted for the purpose of the study. Sample of twelve (12) listed insurance firms were selected from a total of thirty (30) insurance firms which represents 40% of the entire population. A filter was employed to select firms that are listed on the Nigeria Stock Exchange before the two recapitalization exercise that took place in 2003 and 2005 and are still listed. Consequently, eighteen (18) firms were eliminated leaving twelve (12) firms. The remaining 12 firms that met the criteria were used as the sample of the study. The population and sample of the study are show below:
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
This chapter presents the results from the analysis of data and its interpretation. The chapter is divided into four sections. The first section deals with the preliminary analysis of the sample using descriptive statistics. The second section presents correlation analysis between the explained and explanatory variables. This is followed by testing the hypotheses of the study as well as discussion of findings and policy implications from the findings. The last section ends with a discussion of the various robustness tests conducted in order to improve the validity of the results.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
Summary
This study investigates firm specifics characteristics affecting the financial performance of listed insurance companies in Nigeria for the period 2013-2020. The study used secondary data obtained from the annual reports and accounts of the insurance companies. Multiple regression was used with the aim of explaining and predicting empirically the relationship between firm specific characteristics and financial performance of the companies. The model used for the purpose of the study estimates the association and impact of six explanatory variables on one explained variable through the use of generalized least square techniques.
Panel data techniques (fixed effects and random effects models) were utilized to investigate the impact of firm specific characteristics on financial performance of listed insurance firms in Nigeria. The Hausman specification test showed that random effects model is the more appropriate model in this study. The results of random effects model reveal that firm size, loss ratio, liquidity and leverage are significant determinants of firm performance while premium growth and age of the firms are insignificant. Specifically, while firm size, loss ratio and leverage have significant negative relationships with performance, liquidity has significant positive relationship. However, age and premium growth are not significant. Thus, firm specific characteristics used in this study proved to be determinants of financial performance of listed insurance firms in Nigeria.
Conclusions
After careful review of the results and discussion, as well as relevant literatures, the study concludes that:
There is a positive and insignificant impact of age of insurance companies on financial performance of insurance firms proxied by ROA. This means that the age of insurance companies is positively and insignificantly in explaining the financial performance of listed insurance firms in Nigeria within the period under review. Although the result showed no statistical significance between these variables, it can be concluded that the age of insurance firms still explains the variation in profitability of insurance companies positively.
There is negative and significant impact of firm size on the financial performance of insurance companies. This implies that the larger the firm, the lower the financial performance of listed insurance firms in Nigeria.
Premium growth has positive and insignificant impact on the financial performance of listed insurance firms in Nigeria. This implies that the premium growth (PG) do not significantly influence the financial performance of listed insurance firms in Nigeria. Thus, it can be concluded that insurance companies are increasing their premiums and growing very rapidly but their growth does not produce any outcome to the insurance companies. Loss ratio has a negative and significant impact on the financial performance of listed insurance firms in Nigeria. This means that the higher the underwriting risks, the lower the financial performance of listed insurance firms in Nigeria.
There is a positive and significant impact of liquidity on financial performance of listed insurance firms in Nigeria. This implies that the more liquid the firms are, the better is their financial performance.
Finally, there is negative and significant impact of leverage on financial performance of listed insurance firms in Nigeria. This implies that the higher the level of leverage, the lower the financial performance of listed insurance firms
Recommendations
In the light of the analysis and findings, the following suggestions are proffered
(i) Insurance firms in Nigeria should not only rely on their reputation alone. They should devise new means of penetrating into the market by diversifying into new geographical market and developing a greater array of insurance product offering and services. Not only that, the investors should be aware of reputation effect as this can be misleading.
(ii) The management of insurance companies as well as policy makers should be more inclined to finding ways to obtain the optimal utilization of their assets while making the best use of their resources during the process of delivering their service as this may go a long way in improving their performance.
(iii) The insurance firms in Nigeria should not be much focused in increasing their growth in terms of premium while abandoning other alternatives (such as investment) that could improve their performance because being too preoccupied with premium growth can lead to self-destruction as other important objectives (such as the effective selection of profitable portfolios to invest in) might be neglected.
(iv) Insurance companies should have separate department with requisite personnel for their investment operations and underwriting activities and that the activities of these departments must be managed closely together in a complimentary manner. In particular, the underwriting/ actuary departments must insist on the validation of all policies in order to prevent price undercutting and overtrading by insurance marketing agents.
(v) Insurance firms in Nigeria should maintain their liquidity profile and standard while diversifying their assets in a way to remain profitable and sustainable.
(vi) The management of insurance firms should caution their decisions in respect to leverage. The financing decision should be more of equity than debt to avoid high leverage and low profitability through issuing more shares in the market and declining loans and debentures. Thus, the lower the leverage, the higher the performance. Therefore, insurance firms should rely more on internally generated funds and equity capital than debt capital as the source of financing.
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