THE EFFECT OF ASSET STRUCTURE ON FINANCIAL PERFORMANCE OF INSURANCE COMPANIES IN ETHIOPIA

Abstract

The main purpose of this study was to examine the effect of asset structure on the financial performance of selected insurance companies in Ethiopia. This study adopted explanatory research design to understand cause and effect relation between components of asset and its financial performance. In the mean time, quantitative approach was used to construct empirical model. Secondary data was collected from fifteen insurance companies for the period of 2014-2020. Return on asset was used as a measure of companies’ financial performance which was dependent variable and five components of asset including cash and cash equivalents, fixed asset, statutory deposit, investment and reinsurance were used as independent variables. Liquidity ratio and age of company were used as control variables. Panel regression model was applied to analyze the collected data. The result indicated that cash and cash equivalents, fixed asset, liquidity ratio and age of firm have a positive and significant effect on financial performance of insurance companies. Reinsurance and statutory deposit have negative and significant effect on financial performance and investment has positive and insignificant effect on Ethiopian insurance companies’ financial performance. Asset structure has a significant effect on the financial performance in the insurance industry. Therefore, the insurance companies need to optimize their asset structure so as to realize maximum profit and minimize cost of fund based on the result of the study.