Impact of Financial Distress on Financial Performance in the Insurance Industry in Kenya

Abstract

Kenyan insurance industry is the fastest developing sector in Africa. This has been spurred by significant growth in foreign and local stakeholders seeking to put up businesses or setting up subsidiaries. In addition the industry has also witnessed increased activities in mergers, acquisitions and other restructuring. However, there are also a number of challenges facing the industry. Financial distress is one of them and if left unchecked it can lead to insurance failure. Thus to enhance industry stability it is important for firms to identify various reasons for corporate failure and take mitigations. The purpose of this research was to examine the influence of financial distress on financial performance of the insurance companies in Kenya. Financial distress was the independent variable which was measured using model of Altman Z score, reported between the year 2013 and 2017. The overall financial performance of the insurance companies was the dependent variable and was determined using the Return on Assets (ROA) ratio. Quantitative models were adopted because this study used secondary data which was collected from financial statements as per the audits from the selected institution. The study targeted five listed insurance companies and five non-listed insurance companies, this constituted twenty-five percent of all insurance firms in Kenya which is sufficient for generalizing. The recorded data was then analyzed using SPSS version 20.0. Regression analysis was used to find the effect of financial distress on financial performance. The period under study was from 2013 to 2017. For this purpose, firm key indicators such as financial distress, leverage, productivity and size, were regressed against profitability measured using Return on Assets. This study led to the conclusion that profitability of insurance industry in Kenya was negatively and significantly influenced by financial distress, leverage, and productivity. Size of the firm (measured as the natural logarithm of total assets) had a positive and significant effect on the financial performance of the insurance industry in Kenya. The study recommends that for insurance industry in Kenya to perform better in terms of their return on assets, they should improve on their financial distress, leverages, and productivity.