FIRM CHARACTERISTICS AND THE PERFORMANCE OF NIGERIAN LISTED INSURANCE COMPANIES
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ABSTRACT
It has been determined that firm-specific qualities play a significant influence in boosting the financial performance of organizations, although the research in this field is contradictory and inconclusive. In light of these contradictory and ambiguous findings, this study explores the effect of firm-specific variables on the financial performance of Nigerian insurance firms that are publicly traded. The dependent variable is financial performance, while the independent variables are insurance company age, firm size, premium growth, loss ratio, liquidity, and leverage. The study population comprises of thirty (30) listed insurance companies as of December 31, 2013. Twelve of the listed insurance companies are chosen to comprise the study’s sample for a period of eight years (2006-2013). The research utilised multiple regressions as an analytical method. The analysis of secondary data gathered from the financial statements of the companies. The impact of firm-specific features on financial performance was investigated using panel data approaches (fixed and random effects models), and Hausman specification indicated that the random effect model is more suited. The outcome indicates that firm size, loss ratio, liquidity, and leverage are the most influential factors in determining financial success. Thus, the relationship between business size, loss ratio, and leverage is negative. In contrast, the liquidity ratio has a significant and positive relationship with financial performance. The relationship between the age of an insurance company and its premium growth and the financial performance of listed insurance firms in Nigeria is not substantial. Before making major business decisions, insurance companies should conduct careful evaluations and consider firm-specific characteristics (firm size, loss ratio, liquidity, and leverage) that influence the company’s financial performance, as this will go a long way toward improving their financial performance and achieving greater profitability and market competitiveness.
FIRST CHAPTER INTRODUCTION 1.1 Context of the Study
The insurance business plays a significant role in society since it stimulates the economy as a whole. This is because the sector is part of an economy’s immune and repair system, and its good operation can provide energy for the growth of other industries and the economy as a whole (Abate, 2012). Indeed, a well-developed and evolved insurance industry is essential for economic development since it offers long-term money for long-term investment and enhances the country’s risk-taking potential.
Businesses and individuals recognize the significance of insurance companies as they compensate for business losses, preventing the collapse of economic activities in the community. Insurers provide economic and social advantages to society not only by preventing losses, but also by reducing anxiety and stress, boosting employment, and generating premiums for long-term investment. As with any other industry, insurance companies must continue to enhance their performance in order to maintain their position in society.
Any commercial firm’s performance not only contributes to the improvement of its own market value, but also to the expansion of the entire industry and the general success of the economy (Ahmed, Naveed & Usman). In this sense, solid financial management must be consistent with the motivations to develop and improve profitability in order to satisfy the objectives of individual firm owners. The basic objective of any business is to increase profits and shareholder wealth (Gitman, 2007). However, due to internal and external environment obstacles, the majority of businesses are unable to achieve their objectives. In other words, performance is dependent on an organization’s capacity to acquire and manage its resources in a variety of ways so as to create competitive advantages (Iswatia & Anshoria, 2007).
Both internal and external factors may influence the performance of insurance firms. Internal factors are those management-controllable characteristics that account for variances in profitability between businesses. On the other hand, external factors are uncontrolled variables that influence a company’s decisions and over which management has no influence. However, macroeconomic or market-specific factors such as the expansion of the money supply, the interest rate, the inflation rate, and the gross domestic product are outside the control of management. Typically, a firm’s performance can be estimated based on firm features, which are significant predictors of insurance profitability. These characteristics include business size, underwriting risk, leverage, age, growth rate of written insurance premium, as well as the institution and political environment, which play significant roles in addition to firm-specific organizational behavior aspects.
In accordance with the preceding description, the insurer-specific internal factors are classified as financial and non-financial variables. The financial characteristics of insurance businesses are variables determined from their financial statements and profit and loss statements. Among these are business size, premium growth, loss ratio or risk underwriting, liquidity, tangibility, and leverage. Non-financial features, on the other hand, are those variables that cannot be acquired from an insurance company’s income statement and balance sheet. They include the company’s age, management skills, and operational scope. It is difficult, if not impossible, to measure management competencies directly because it is anticipated that such competencies will be reflected in insurance companies’ operational performance. This study integrated five financial variables (firm size, premium growth, loss ratio, liquidity, and leverage) and one non-financial variable (firm age) as proxies for firm-specific characteristics against the financial performance of listed insurance companies in Nigeria. The purpose of this study is to identify the firm-specific variables that influence the financial performance of listed insurance firms in Nigeria.
1.2 Description of the Research Issue
The insurance industry is vital to the development of commercial and infrastructure businesses. From the latter perspective, it promotes financial and social stability; mobilizes and directs savings; encourages trade, commerce, and entrepreneurial activity; and enhances the quality of individuals’ lives and the national well-being (Malik, 2011). In order to fulfill this function, insurance companies are supposed to be financially sound and viable through profitable operations.
According to Agabi (2009), the poor performance of insurance firms in Nigeria resulted from numerous years of nonpayment of claims by underwriting firms. This habit of defaulting on claims by insurance companies in Nigeria has resulted in a decline of their goodwill, which has translated to a poor image of the sector, and thus, confidence in the sector appears to have severely deteriorated. Consequently, Nigerians no longer consider insuring their assets due to a crisis of confidence in the industry. Several industries in Nigeria, such as banking and other financial institutions, are performing well; but, due to confidence difficulties, the insurance sector is not responding effectively to economic growth. This suggests that the overall financial performance of insurance companies in Nigeria is mediocre, with the exception of those with varied funding sources.
In the literature on business and corporate finance, measuring the financial performance of insurance businesses has therefore attracted substantial interest in both industrialized and some developing nations. As underwriters, these organizations not only provide a good mechanism for risk transfer, but also contribute to build entrepreneurial confidence in a manner that promotes investment growth and general economic activity.
Profitability is of paramount importance to all parties with a direct or indirect stake in the company. Researchers in the field of finance have not paid much attention to the profitability status of most insurance firms operating in Nigeria in relation to firm age, firm size, premium growth, loss ratio, liquidity, and leverage of the firm, despite the importance of profit to the survival of insurance firms. This could be attributable to the lack of a comprehensive review of the factors that play a crucial role in the profit realization of insurance firms in Nigeria. The extent to which firm-specific variables (firm age, firm size, premium growth, loss ratio, liquidity, and leverage) influence the financial performance of listed insurance firms in Nigeria is therefore of interest. It is necessary to evaluate the firm-specific characteristics of insurance companies in order to provide important information regarding their effects on performance.
Greene & Segal (2004), Deshng, Sandra & Lianga (2007), Adams, Hardwick & Zou (2008), Al-Shami (2008), Dieter (2011), Kozak (2011), and Charumathi (2012), among others, have investigated the relationship between firm-specific characteristics and the performance of insurance companies in developed countries, while others have focused on developing nations (Adams & Buckle (2003), Ahmed, Naveed, & Usman (2011), Abate (2012), Daniel & Ti To our knowledge, however, no research has been conducted on this area in Nigeria. The majority of literature focuses on the factors that affect the performance of banks rather than insurance businesses (Aburime 2008, Buba 2009, Ani et al 2012 and Akano 2014). Similarly, the results of research undertaken in developed and certain developing nations may not be applicable to insurance firms in Nigeria due to the fact that the supervision, regulatory, and operation environments of insurance firms in Nigeria are distinct. In addition, variables employed in other studies, particularly those from mature markets, may not be compatible with Nigeria’s nascent insurance industry. In Nigerian insurance enterprises, the relationship between firm characteristics and financial performance requires empirical examination. Therefore, it is not possible to simply apply the conclusions of studies conducted in other countries with different conditions to Nigeria.
1.3 Research Concerns
The study covers the following questions: I How does the age of insurance companies impact the financial performance of listed insurance companies in Nigeria? How does firm size affect the financial performance of listed insurance companies in Nigeria?
iii What effect does the premium growth rate have on the financial performance of Nigerian insurance companies that are publicly traded?
iv What impact does the loss ratio have on the financial performance of listed insurance companies in Nigeria? v How does liquidity impact the financial performance of Nigeria’s publicly traded insurance companies? vi What effect does leverage have on the financial performance of Nigerian insurance companies that are publicly traded?
1.4 Aims of the Research
This study’s primary purpose is to analyze the effect of firm-specific variables on the financial performance of listed insurance firms in Nigeria from 2006 to 2013.
Examine the impact of firm age on the performance of listed insurance companies in Nigeria ii Evaluate the impact of company size on the performance of Nigerian listed insurance businesses Determine the effect of premium growth rate on the performance of Nigerian insurance companies that are publicly traded.
iv. Analyze the effect of loss ratio on the performance of Nigerian insurance companies that are publicly traded.
Determine how liquidity affects the performance of listed insurance companies in Nigeria.
vi. Examine the influence of leverage on the performance of Nigerian insurance companies listed on a stock exchange.
1.5 Formulation of Hypotheses
Following the aforementioned objectives, the following null hypotheses have been formulated:
Age does not significantly affect the financial performance of listed insurance companies in Nigeria.
Ho2: Firm size has no substantial effect on the financial performance of Nigerian insurance companies that are publicly traded.
The premium growth rate has no major effect on the financial performance of Nigeria’s publicly traded insurance businesses.
Ho4: The loss ratio has no major effect on the financial success of Nigerian insurance companies that are publicly traded.
Ho5 Liquidity has no substantial effect on the financial performance of Nigerian insurance companies that are publicly traded.
Ho6: The impact of leverage on the financial performance of Nigerian publicly traded insurance companies is negligible.
1.6 Range of the Research
This study examines the effect of firm-specific variables on the financial performance of Nigerian insurance companies that are publicly traded. To examine this influence, the research was done over a period of eight years, from 2006 to 2013. Reforms aimed at boosting productivity, performance, and efficiency in the sector led to the selection of the study period. The time is deemed appropriate since it marks the beginning of financial changes that required insurance companies in Nigeria to enhance their capital base. The study focuses on internal factors because they can be easily measured using data collected from the financial statements of insurance firms in Nigeria and because they are controllable elements that are under the management’s control of listed insurance firms in Nigeria.
1.7 Importance of the Research
This study is predicated on the fact that the majority of empirical literature on firm-specific features focuses mostly on the banking industry. By implication, academics in Nigeria’s insurance sector have not devoted sufficient attention to this subject. In other words, the majority of empirical literatures focus on the banking sector and not the insurance sector. To the best of our knowledge, little or nothing is known about the insurance industry in relation to the subject under discussion, particularly from the perspective of an emerging country like Nigeria. This study aimed to give empirical data on the firm-specific factors that influence the financial performance of Nigerian insurance firms that are publicly traded.
The study will offer investors on the Nigeria Stock Exchange with information about the firm’s features and financial performance in order to protect their investments and lead them towards the most profitable and secure future investments. Similarly, the study would assist management in identifying signs of strong performance in order to take the required steps to improve the performance of insurance companies and make sound decisions that will propel the organization forward.
Government is interested in learning which businesses run well and which failed to take the required precautions to avoid bankruptcy disasters. In addition, customers are interested in the ability of insurance firms to pay their responsibilities, as measured by the companies’ success indicators.
Business professionals are interested in the results of this study in order to provide their client with expert counsel. This study is of relevance to policymakers so that they may formulate policies to strengthen the sector. This study contributes to the literature on finance by giving evidence supporting the positive influence of firm characteristics in affecting the financial performance of listed insurance companies in Nigeria. In addition, the data may give accounting professionals and regulators with useful insight into the complicated interactions between the characteristics of different types of enterprises and the financial performance of insurance companies.
FIRM CHARACTERISTICS AND THE PERFORMANCE OF NIGERIAN LISTED INSURANCE COMPANIES
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