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The Effect of Macroeconomic Factors on Financial Performance of Insurance Firms in Kenya

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The Effect of Macroeconomic Factors on Financial Performance of Insurance Firms in Kenya THE EFFECT OF MACROECONOMIC FACTORS ON FINANCIAL PERFORMANCE OF INSURANCE FIRMS IN KENYA BY FAITH NYAMU A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF MASTER OF SCIENCE IN FINANCE, SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI 2016 DECLARATION This research project is my original work and has not been presented for a degree at any other university for examination. Signature ____________________________ Date ___________________________ Faith Nyamu D63/72887/2014 This research project has been submitted for examination with my approval as the University supervisor. Signature _______________________________ Date __________________________ Dr. Kennedy Okiro Lecturer, Department of Finance and Accounting School of Business University of Nairobi ii ACKNOWLEDGEMENTS My dedication of the research project to my family. Their support and encouragement Impelled to achieve my goal. iii DEDICATION This research project would not have been a success without the support and contribution of a number of people, who immeasurably contributed towards my ultimate goal. I candidly give my gratitude to my project supervisor Dr.Kennedy Okiro, Lecturer department of finance and Accounting for his selfless dedication, guidance and encouragement towards the conclusion of the project. I would also wish to acknowledge the contribution of the rest of the university of Nairobi fraternity especially the MSC coordination office and moderators to the success of this project. I also wish to thank my family and close friends, for their moral support and encouragement towards the achievement of my goal and for understanding during the project period. I would not have made it this far without their prayers and cooperation. Most important I wish to extend my gratefulness to the Almighty God for providing me with good health, strength and knowledge that helped me make this project a success. iv TABLE OF CONTENTS DECLARATION............................................................................................................... ii ACKNOWLEDGEMENTS ............................................................................................ iii DEDICATION.................................................................................................................. iv LIST OF TABLES .......................................................................................................... vii LIST OF FIGURES ....................................................................................................... viii LIST OF ABBREVIATIONS ......................................................................................... ix ABSTRACT ....................................................................................................................... x CHAPTER ONE ............................................................................................................... 1 INTRODUCTION............................................................................................................. 1 1.1 Background of the Study ...................................................................................................... 1 1.1.1 Macroeconomic Factors ................................................................................................ 2 1.1.2 Financial Performance ................................................................................................... 3 1.1.3 Macro Economic Factors and Financial Performance ................................................... 4 1.1.4 Insurance Firms in Kenya .............................................................................................. 5 1.2 Research Problem ................................................................................................................ 6 1.3 Research Objective............................................................................................................... 8 1.4 Value of the Study ................................................................................................................ 8 CHAPTER TWO .............................................................................................................. 9 LITERATURE REVIEW ................................................................................................ 9 2.1 Introduction ......................................................................................................................... 9 2.2 Theoretical Literature Review .............................................................................................. 9 2.2.1 Arbitrage Pricing Theory............................................................................................... 9 2.2.2 Modern Portfolio Theory............................................................................................. 10 2.2.3 Intertemporal Capital Asset Pricing Model ................................................................. 11 2.3 Determinants of Financial Performance............................................................................. 11 2.3.1 Liquidity ...................................................................................................................... 11 2.3.2 Underwriting Risk ....................................................................................................... 12 v 2.3.3 Size of the Firm ........................................................................................................... 12 2.4 Empirical Literature Review ............................................................................................... 13 2.5 Conceptual Framework ...................................................................................................... 17 2.6 Summary of the Literature Review..................................................................................... 17 CHAPTER THREE ........................................................................................................ 18 RESEARCH METHODOLOGY .................................................................................. 18 3.1 Introduction ....................................................................................................................... 18 3.2 Research Design ................................................................................................................. 18 3.3 Population of the Study...................................................................................................... 18 3.4 Data Collection ................................................................................................................... 18 3.5 Data Analysis ...................................................................................................................... 19 3.5.1 Analytical Model ......................................................................................................... 19 3.5.2 Test of Significance ..................................................................................................... 19 CHAPTER FOUR: DATA ANALYSIS, RESULTS AND INTERPRETATION .... 21 4.1 Introduction ....................................................................................................................... 21 4.2 Descriptive Statistics .......................................................................................................... 21 4.3 Correlation Analysis ........................................................................................................... 21 4.4 Regression Analysis ............................................................................................................ 22 4.5 Interpretation of the Finding .............................................................................................. 24 CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS .. 26 5.1 Introduction ....................................................................................................................... 26 5.2 Summary ............................................................................................................................ 26 5.3 Conclusion .......................................................................................................................... 27 5.4 Recommendations ............................................................................................................. 27 5.5 Limitations of the study ..................................................................................................... 28 5.6 Suggestions for Further Research ...................................................................................... 28 REFERENCES ................................................................................................................ 29 APPENDICES ................................................................................................................. 35 Appendix I: List of Insurance Firms in Kenya ............................................................................ 35 vi LIST OF TABLES Table 4.1 Descriptive Summary Statistics ........................................................................ 21 Table 4.2 Correlation Matrix ............................................................................................ 22 Table 4.3: Model Summary .............................................................................................. 22 Table 4.4 Analysis of Variance (ANOVA)....................................................................... 23 Table 4.5 Regression
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