Effects of Mergers and Acquisition on the Financial Performance of Insurance Companies in Kenya

Abstract

The objective of this study is to determine the effect of M & A on financial performance of insurance companies in Kenya. The study adopted descriptive cross-sectional design. The population of the study was made up of all the 12 insurance companies that had merged and/or had been acquired over the duration of 17 years between 2000 and 2016. The study used secondary data from financial statements of the merged companies before and after the merger. The pre and post M&A performance ratios was compared to see if there is any statistically significant change in value of the companies after M&A firms using paired sample t-test. Also Pearson Correlation coefficient test and regression was employed to assess the significance level. From the analysis of the companies’ financial performance before and after merger, it was found that all the M & A resulted in an increase in financial performance after the merger. It also found that Pioneer Insurance, APA Insurance and UAP Insurance recorded the significant improvement in the profitability after merge and acquisition. Further, results shows that Metropolital Lite recorded a fairly high profitability ratio after merger while and UAP Old Mutual recorded a slightly small increase after merger. The profitability ratio for Saham dropped drastically after merger. The analysis of the companies’ liquidity before and after merger showed that the average liquidity ratio for all the insurance firms increased after merger. The analysis of the companies’ liquidity before and after merger showed that the average liquidity ratio for all the insurance companies except for Britam Insurance increased after merger. ICEA Lion posted the highest increase in liquidity after merger. This was followed closely by APA Insurance and Pioneer Insurance respectively. The results imply that merger and acquisition boosts the liquidity state of insurance firms. The analysis of the companies’ total assets before and after merger showed that the average total assets increased for all the insurance firms post-merger. Results showed that UAP Insurance and UAP Old Mutual realized the highest increase in total assets after merger. This was followed closely by Britam Insurance. The results imply that firm size measured in total assets increases after merger. Further, the analysis of the companies’ leverage revealed that the post-merger leverage was lowest in UAP Insurance followed by Pioneer Insurance. Results further showed that UAP Old Mutual, Saham and First assurance operated at highest leverage after merger. Less leveraged company attracts more investors than a more leveraged company. Regression results before and after merge and acquisition was presented. Before merge, profitability, firm size, liquidity, leverage had a positive and significant relationship with financial performance of insurance companies. After post merge and acquisition regression results showed that profitability, firm size, liquidity, leverage the beta coefficients improved significantly. Model summary results indicated that value of R square before merger was 65.5 percent and 74.8% after merger. There was a significant change in R square before and after merge in indication of improved explanatory power of the predictor variables. From the study, insurance firms can improve their value by merging. By doing so the firms can identify synergies arising from economies of scale, increasing efficiency and diversifying risks. Through merge and acquisition, insurance firms can increase their asset base which will boost their competiveness in the market place. They are also able to minimize liabilities by reducing the debt equity ratio. Large organizations are able to access financial resources at a lower cost as well. Large corporations also diversify their assumed risks effectively and respond more quickly to changes in the operating environment and market. The Insurance Regulatory Authority may find it useful when recommending for M & A, their positive impacts and /or their negatives effects to the performance of the firms involved.