Profitability of Insurance Companies in Ghana: Panel Co-integration and Causality

Abstract

There are several factors that affect working capital management on profits of insurance companies in Ghana. The main objective of the study is to determine the factors that significantly influence the profitability of insurance companies in Ghana. Principal Component Analysis (PCA) was used to reduce the potentially large number of variables to a smaller set of significant variables that influence working capital management on profit for 10 insurance companies listed on the Ghana Stock Exchange between 2008 and 2014 without loss of information. Five significant factors; namely Cash Conversion Cycle, Debt Ratio, Current Ratio, Sales Growth Rate and Accounts Collection Period extracted using principal component analysis were used as regressors to identify the source of causation for profitability by testing the causal effect between working capital management and profitability in the insurance companies in Ghana over the period 2008-2014. A unit root test for all the extracted variables from principal component analysis showed that a co-integration test was feasible. A co-integration panel test revealed that there was a long run relationship between the extracted variables from principal component analysis. A two-step procedure generated a panel-based error correction and a Granger causality test revealed that there is a bi-directional causal relationship between working capital management and profitability. Hence, Cash Conversion Cycle, Debt Ratio, Current Ratio, Sales Growth Rate and Accounts Collection Period together have a significant effect on the profitability of insurance companies in Ghana and the reverse is true.