Relationship Between Profitability and Liquidity

Relationship Between gainfulness and liquid stateCHAPTER 1 INTRODUCTIONThis study empirically examines the relationship between profit office and fluidity, of insurance companies in Mauritius by using regression models and correlation analysis. The goal of any business is to figure out profits. If it does not make profit, it will soon go out of existence. Business need to ensure that it has enough money not only to cover expenses, but ensures that something is left over. Profit qualification of a family can be affected by many factors, among which there is fluidity.Every stakeholder has an interest in the liquidity position of his related friendship. Employees ar also having interest in the liquidity of their company in order to know whether the company can meet its employees related obligations that ar salary, pension, and provident fund. Sh arholders are interested in understanding the liquidity due to its huge impact on the positivity. One can understand the liquidity p osition by analyzing the monetary statements of a company. Liquidity position of a company can examined through financing decisions or investment decisions.1.1 Definition of LiquidityLiquidity is defined as the ability of a company to meet its short term obligations. It is also the ability of the company to convert its assets into capital. It is more explicitly the ability of a company to meet the cash demands of its policy and contract holders with no or negligible loss (Claire et al., 2000). The assets and liabilities of a company reflect its liquidity profile. Since liquidity risk is infixed in the financial institutions, one must be able to understand measure, monitor and annihilate this risk (Douglas and Raghuram, 2001).Liquidity RiskAccording to Claire et al., (2000), liquidity is the ability to meet expected and unexpected demands for cash through ongoing cash flow or the sale of an asset at fair market value. Liquidity risk is the risk that, at a point in time, an entity will be in short of cash or liquid assets to attain its cash obligations (Darling, 1999). This may result in a run-on-the-company event, which is an example of loss due to this risk which causes the collapse of an institution. This type of event can occur during a natural depression whereby most customers ask to have their cash paid immediately and that demand exceeded cash reserves. Other less dramatic losses can occur when a company needs to borrow unexpectedly or sell assets at an unanticipated low price (Stewart and Raghuram, 1998)1.2 ProfitabilityProfitability is defined as the ability of a company to generate income which surpasses its liabilities. Profitability is measured by different ratios such as, pay back on Equity (ROE), Price to Earnings Ratio (PER) and Return on additions (ROA) amongst others. The measurement of profitability is essential to every company (Eljelly, 2004). redress regulators either encourage profitability, when concerned with solvency, or seek to l imit it, when regulating rates. To investors and insurers, profitability plays an essential role. To policyholders of a stock insurer, it sounds like markup, while to those insured by a mutual company, it has no impact (McClenahan, 1999).Enz and Karl (2001), state that profitability is subject to arranged and accurate determination under a given set of conventions and accounting rules. Profits are important to investors and management as sources of dividends and growth. Profits provide go security against insolvency to insurers and regulators.1.3 Background on damages Sectors in MauritiusThe first two insurance companies (Phoenix Assurance Company and the Commercial Union) were set up in 1835 by the British. In 1845, the Mauritius Marine restitution was formed by Mauritian shareholders. A second Mauritian company was set up called the Mauritius Fire Insurance company in 1854. From that time till date, new companies have emerged.Presently there are 16 insurance companies operatin g in Mauritius. All these companies are employed in liveliness business, prevalent business or both.INSURANCE COMPANYLINE OF OPERATIONAnglo Mauritius Assurance Co Ltd animation InsuranceAlbatross Insurance Co LtdLife General InsuranceBritish American Insurance Co LtdLife General InsuranceIsland Life Assurance Co LtdLife InsuranceIndian Ocean General Assurance Co LtdLife General InsuranceJubilee Insurance Mauritius LtdLife General InsuranceLlyods Mauritius Co LtdLife General InsuranceLa Prudence Mauricienne Assurance LtdLife General InsuranceLamco International Insurance LtdLife General InsuranceLife Insurance Corporation of IndiaLife InsuranceMauritian Eagle Co LtdLife General InsuranceMauritius Union Assurance Co LtdLife General InsuranceNew India Assurance Company ltdGeneral Insurance graze Insurance Co LtdGeneral InsuranceState Insurance Company of Mauritius LtdLife General InsuranceSun Insurance Company LtdLife General InsuranceTable 1.1 List of Insurance Companies and their respective lines of operation1.3.1 Liquidity bring ons in Mauritius each(prenominal) insurance company has their own structures and policies to manage all the risks in their operations including liquidity. In addition, they have to abide by the guidelines on liquidity provided by the fiscal Services Commission and Section 23 of the Insurance Act 2005. Insurance companies have also to develop a contingency plan which should help them manage their liquidity on a global consolidated basis. Recent technological and financial innovations have provided insurance companies new means to finance their activities and to manage their liquidity (Vittas, 2003).The liquidity of insurance companies should usually be well planned since the frequency, timing and severity of insurance cl engages and benefits are quite uncertain (Levene, 2003). Insurance companies obtain their liquidity through (i) Underwriting Underwriting is calculated as premium revenues subtract payments and operating expenditures (ii) Investment Income Investment income consists of dividends, realized capital gains on stocks and coupon payments and principal payments on bonds and (iii) Asset Liquidation Assets liquidation is primarily concerned with stock sales and bonds on the financial markets (Holden and Ellis, 1993).1.4 Problem StatementThe eventual measure of efficiency of the liquidity preparedness and control is the effect it has on profitability. The companies preference of high return on assets to increase their profitability affects their liquidity positions. As a result, a study in the insurance sector in Mauritius is carried out to confirm this statement.1.4.1 Research ObjectivesThe research objectives of the study are as followsi. To assess the impact of liquidity on profitability of Mauritian insurance companiesii. To determine the relationship between liquidity and profitabilityiii. To evaluate the impact and significance of the different liquidity ratios on profitability1.4.2 o rient and Objectives of the DissertationThe aim of this dissertation is to investigate the relation between profitability and liquidity within the Mauritian context, in particular in the insurance sector. An econometric model would be used for this research study. The same model will be used to test the impact of liquidity on profitability of xiii insurance companies, namely Anglo Mauritius Assurance Co Ltd, Albatross Insurance Co Ltd, British American Insurance Co Ltd, Island Life Assurance Co Ltd, Indian Ocean General Assurance Co Ltd, Jubilee Insurance Mauritius Ltd, Llyods Mauritius Co Ltd, Lamco International Insurance Ltd, Mauritian Eagle Co Ltd, Mauritius Union Assurance Co Ltd, Swan Insurance Co Ltd, State Insurance Company of Mauritius Ltd and Sun Insurance Company Ltd.1.5 Outline of the Dissertation1.5.1 Chapter 1 IntroductionThe introduction gives an overview on liquidity risk and explains why it is an important area for research, in particular in the insurance sector in Mauritius. It gives a clear and concise statement of the aim and objectives of this dissertation.1.5.2 Chapter 2 Literature ReviewThis chapter is wholly a review of existing literature on liquidity and any relevant articles related to liquidity issue have been considered. This will help to put the proposed research in a relevant context and ensure that up-to-date techniques are used for the analysis in this research study.1.5.3 Chapter 3 MethodologyThis chapter describes the methods and estimation techniques used to compute estimates of the parameters in the econometric model and explain the equations being used. It also outlines the sources of selective information collection. Finally, the limitations of the study are outlined in this chapter.1.5.4 Chapter 4 Results and FindingsChapter 4 presents the Analysis of data and findings. Tables, graphs and figures are usually used in this chapter to better illustrate graphically the results of this research study. The data was analysed u sing EViews 7 and the findings will be discussed. The latter will enable comparison that will either confirm or contradict expectations.1.5.5 Chapter 5 Conclusions and RecommendationsThis final exam chapter presents the conclusions reached based on the findings of the previous chapter. Finally, some suggestions for further research in liquidity will also be presented.