The effect of mergers and acquisitions on the financial performance of insurance firms in Kenya

Abstract

Mergers and acquisitions continue to enjoy importance as strategies among insurance companies for achieving growth. However, their success in creating shareholder value remains contested. The objective of this research project is to establish the effect of mergers and acquisitions on the financial performance of insurance firms in Kenya. This study took on a causal research design. Causal research design is consistent with the study’s objective which is to determine the effect of mergers and acquisition on financial performance of insurance companies in Kenya. The study was limited to a sample of pair that merged/acquired between the years 2002-2012. The data required was drawn from Association of Kenya Insurers database, public disclosures and annual reports of the respective companies. Comparisons were made between the mean of 3-years premerger/acquisition and 3-years post-merger/acquisition financial ratios. Excluded from the sample is M&A deals that were pending or non-binding, vertical mergers that have no competitive effects, as well as acquisitions of a minority interest. Using financial ratio analysis and paired t- test, the study reveals that mergers/acquisitions have significant effect on the overall financial performance of insurance firms in Kenya. Also, there is improvement in the firms’ performance after the merging/acquisition takes place. Overall, the research found mergers and acquisitions on profitability and financial performance in general. The study recommends that insurance companies seeking growth should seek to consolidate their establishments through M&A’s. Mergers and acquisitions enable insurers to expand their pool of policyholders and reduce underwriting risk more rapidly than other growth strategies hence creating value.