EFFECT OF PORTFOLIO MANAGEMENT IN THE PROFITABILITY OF NIGERIA INDUSTRIES (A CASE STUDY OF EMENITE PLC)
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EFFECT OF PORTFOLIO
MANAGEMENT IN THE PROFITABILITY OF NIGERIA INDUSTRIES
(A CASE STUDY OF
EMENITE PLC)
CHAPTER ONE
INTRODUCTION
1.1
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.
1.2
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.
1.3
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:
a. To examine
the determinants’ of profitability of insurance company (s) investment
b. To determine
the relation between insurance companies short term investment and their gross
premium.
c. To
examine the significance of insurance companies long term investment on their
gross premium.
1.4
RESEARCH QUESTIONS
The researcher will
bear the following questions in mind in he drive to carry out this research
thoroughly.
i.
Do you think that portfolio management has some effects on the overall
performance of the company?
ii.
Are there any relationship between the level of portfolio maintained and
profitability?
iii.
What do you think is the relationship between the level of
portfolio maintained and profitability?
1.5
RESEARCH HYPOTHESIS
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.
1.6
SIGNIFICANCE OF THE STUDY
The significance of
this study can be viewed from two major stand points.
1. Practical
significance
2. Academic
significance
Under practical
This kind study will assist in
broadening understanding of the following or the scope of knowledge of the
following:
1. 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.
2. It is
perceived that a myriad of groups stand to benefit from the result of this
study.
3. 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.
1. It will be
of immense help to students who may wish to carry out further research on this
topic.
2. For
government, it will help them for tax purposes.
3. To
shareholders and investor, it will help the shareholders to kwon the
performance of the organization.
1.7
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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