The relationship between capital structure and financial performance of insurance companies in Kenya
Capital structure refers to the mix of debt and equity used by a firm in financing its assets. It enables a firm to determine its financial strengths and to identify its weaknesses and also strengthens the firm's ability to meet maturing obligations and to convert assets into cash. The research was guided by the objective to establish the relationship between capital structure and financial performance of insurance companies in Kenya. To meet the objectives of the study, a descriptive research design was adopted. The study mainly used secondary data collected from insurance firms through simple random sampling method for 4 years. The population of interest was the performance as measured by ROA, ROE and capital structure as measured by the debt/equity ratio from the FY 2006 to FY 2009. Data obtained from insurance companies for a period of four years was analyzed using financial ratios to ascertain the change in financial performance as a result of different capital structures. Data was presented using tables. Capital structure decision was found to be critical for any business organization due to the need of maximizing returns to various organizational components, and also because of the impact such a decision has on a firm's ability to deal with its competitive and volatile environment effectively. The findings indicated that debt to equity ratio accounted for a smaller percentage of financial performance of all three types of insurance companies. There was a positive but weak relationship between capital structure and financial performance.