The relationship between liquidity and profitability of insurance companies in Kenya

Abstract

The study sought to test the relationship betwee n liquidity and profita bility of insurance companies in Kenya. The population of the study comprised of all the 49 insurance companies registered with IRA as at 31 st December 2013 (Appendix 1). A census was carried out covering all the 49 insura nce firms for five years period (1 st January 2009 to 31 st December 2013). The study used secondary data and the variables were deduced from the audited financial statements of the 49 registered insuranc e firms for financial periods 2009 to 2013. The colle cted data was analyzed us ing descriptive statistics. Profitability was measured by ROA, while liquidity was measured by Quick ratio and Leverage ratio. Firm size as measured by l og of net premium and loss ratio were the control variables. The t-test was used to determine the significance of the constant term and the coefficients terms for each of the regressions. The importance of each of the regressions was determined by carrying out the F-test at 95% confidence level. The coefficient of determination R 2 was used to measure the stre ngth to which independent variables explain the va riations in the dependent variab les. The analysis was done using Statistical Package for Social Sciences ( SPSS) software version 21. The study established a positive relationship between quick ratio and profitability of insurance companies in Kenya. The study indicated that leverage rati o has a negative influence on ROA. The study established a positive relationship between log of net premiums and ROA. Finally, the study indicated a negativ e but significant relations hip between loss ratio and profitability of the in surance industry in Kenya. This st udy recommends that managers should maintain a trade off between profitability and liquidity, invest in liquid assets to improve liquidity as well as focus on exploring opportunities for growth and diversification and proper manage ment of investment portfolios