EFFECT OF PORTFOLIO MANAGEMENT IN THE PROFITABILITY OF NIGERIA INDUSTRIES
(A CASE STUDY OF EMENITE PLC)
BACKGROUND OF THE STUDY
The concept of profit maximization has been a dominant theme in the practices of business from time immemorial. As business enterprises, insurance company have not been an exemption. Through their various investment activities, they have attempted to enhance their profitability and thus perpetrate their existence.
From a broader perspective, insurance companies have been identified as the oldest of non-bank financial institution. Operating on the world’s financial landscape. They constitute a very important segment of the non-bank financial sub-system. In terms of funds mobilized, loans granted and investment made. They finance industries and channel funds to the government for development Coffiong, 2005. In order words, these roles insurance companies assemble various securities and asset that address investor and then manage theme. This therefore leads us to the concept of portfolio management.
Portfolio management consist of three major activities, asset allocation, shift in weighing across major assets classes and security selection within assets classes. Assets allocation can best be characterized as the blending together of major asset classes to obtain the higher long-return at the lowest risk. Managers can make opportunistic shift in assets class weighing in order to improve returns prospects over the long term objectives (farrel, 1993).
It would be instructive to note that although insurance companies are predominantly involved in under writing, this is not their major income earner. As already pointed out, their income also comes from their investment activities. Furthermore, a large proportion of profit of insurance companies in not the result of technical insurance underwriting, but that of return on investment and return on assets. As a result, it is thus positive to observe that the ability of insurance companies to manage effectively and efficiently their investment portfolio should have an effect on their profitability.
Essentially, the investment portfolio of insurance companies is composed of investment classified into those of either short term maturity. The short term investment are those falling due to after one year 9union assurance annual report and accounts, 2005).
Thus, portfolio management entails the management of these component in a way that leads to the actualization of the objectives of profit maximization. The major indicators of profitability are stock price and financial ratios (return on investment, return on assets and return on equity).
The discourse therefore, shall attempt to establish the effect that portfolio management has on the profitability of selected insurance companies in Nigeria.
STATEMENT OF THE PROBLEM
In recent times the global insurance land scope has been shown to witness tremendous growth and development. In particular, global insurance premium grew by 9.7 percent in 2004 to reach 3.3 trillion. This follows 117 percent growth in the previous year. Life insurance premium grew by 9.8 percent during the year, thanks to arising demands for annuity and pension producers. Non-life insurance premium grew by 9.4 percent as premium rate increased.
Advanced economic account for the bulk of global insurance with premium income of %1.2 billion in 2004, North America was the most important region followed by the EU (at $1,198 billion) and Japan (at $492 billion). The top four counties accounted for two thirds of the premiums of 2004. Emerging markets accounted for over 85 percent of the world’s population but generated only 10 percent of premium (Wikipedia, 2007)
Using the United Kingdom as a basis of analysis writing shows that two sticking factors may explain why these western countries seem to do far better. The first is that the portfolio are widely diversified and secondly, the apparently great stability in portfolio proportion. Although government securities retain a prominent part in the portfolios, holdings of private sector assets (securities, Lonas and Mortgages and property and grounds rents) dominate the portfolio (Dolls, 1979).
It is thus not surprising why the United Kingdom and other western countries hold a dominant share of the world insurance market. In contrast. Nigeria insurance firms seems to adopt the opposite portfolio composition. In particular, government regulations gives specifications of the proportion of the proportion of insurance firm funds to be invested in government securities. The problem though is that such securities may not have high yields, no wonder therefore why the insurance industry is yet to make much impact on the global insurance funds. According to the Swiss Re Global Insurance report to 2004, Nigeria was ranked 62 out of 88 countries in terms of annual premium volume. The industry is also believed to have 0.02% of the total world insurance market presently, it has been slumped to 0.01% (Intercontinental bank, 2006).
Coupled with this are the defects within the Nigeria financial environment. Major identified problem include man power problems, defective regulatory framework, capitalization problems, poor investment climate, and lack of professionalism (NZOTTA 2005). In view of these issues, this study therefore aims to examine the effect of portfolio management of selected insurance companies on their profitability.
OBJECTIVES OF THE STUDY
The primary objectives of this study are to analyze the effects of portfolio management on the profitability of selected insurance companies in Nigeria. The specific objectives include:
To examine the determinants’ of profitability of insurance company (s) investment
To determine the relation between insurance companies short term investment and their gross premium.
To examine the significance of insurance companies long term investment on their gross premium.
The researcher will bear the following questions in mind in he drive to carry out this research thoroughly.
Do you think that portfolio management has some effects on the overall performance of the company?
Are there any relationship between the level of portfolio maintained and profitability?
What do you think is the relationship between the level of portfolio maintained and profitability?
In line with the specific objectives of this study, the variables of this study shall be incorporated into mathematical models and the following are the hypothesis derived from the models.
Ho: There is no significant relationship between the
portfolio investment of insurance companies and their gross premium.
Hi: There is a significant relationship between the portfolio investment of insurance companies and their gross premium.
SIGNIFICANCE OF THE STUDY
The significance of this study can be viewed from two major stand points.
This kind study will assist in broadening understanding of the following or the scope of knowledge of the following:
It will be of benefit to the community since this study contributes an important input to the pool of research resources on this subject area.
It is perceived that a myriad of groups stand to benefit from the result of this study.
Insurance companies will not be left out as this study touch on issues relevant to the investment activities of insurance companies.
Under academic significance
In the academic arena, this study will prove to be significant in the following ways.
It will be of immense help to students who may wish to carry out further research on this topic.
For government, it will help them for tax purposes.
To shareholders and investor, it will help the shareholders to kwon the performance of the organization.
SCOPE OF THE STUDY
This study designed to analyze portfolio management by insurance companies in Nigeria. However, due to financial constraints, the entire industry will not be analyzed. As a result the researcher deemed it fit to limit the scope to just two (2) insurance companies in Nigeria.
Also, the years under review will be between 1990 and 2005. It is believed that this will in no way hamper the realization of research objectives.
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