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1
AN EVALUATION OF MERGER AND
AQUISITION ON THE INSURANCE COMPANY
ON THE NIGERIAN ECONOMY
CHAPTER ONE
1.0 BACKGROUND TO THE STUDY
A business combination may take the form of either a merger or
an acquisition. A merger is defined as the situation where two or more
companies combine together to form a larger business organisation.
On the order hand, an acquisition involves the purchase of controlling
share in another company. Klime Poposki defined acquisition as a
combination of two or more companies in which the resulting firm
maintains the identity of the acquiring company. A merger is defined
in section 590 of CAMA, 1990 as “any amalgamation of the
undertaking or any part of the undertaking of one or more bodies”.
Akanikor, in his paper “mergers and acquisitions” defined acquisition
as including “all business and corporate organizational and
2
operational devices and arrangement by which the ownership and
management of an independently operated properties and business are
brought under the control of a single management”.
Mergers and Acquisitions have been the form of attention in the
decades of the 1980 when such business activity was most prevalent.
In today’s business world, the approach of business organization
considering mergers and acquisitions will be more strategic and
reasons procedure with special consideration of the ethical
consequences on many parties that will be affected.
Corporations may seek external growth through mergers and
acquisitions in order to achieve risk reduction, improve access to the
financial markets through increased size, or obtain tax carry-forward
benefits. A mergers and Acquisitions may also expand the marketing
and management capabilities of the firm and allow for new-product
development. The motives for mergers and acquisitions are both
financial and non-financial in nature. Mergers and Acquisitions
activities allow the acquiring firm to enjoy a potentially desirable
portfolio effect by achieving risk reduction while maintaining the
3
firms’ rate of reform. Risk-averse investors may then discount the
future performance of the resulting firms at a lower rate and thus
assign a high valuation than what was assigned to the separate firms.
The second financial motive is the improved financing posture that a
mergers and acquisitions can create as a result of expansion in size.
Larger firms may enjoy access to financial markets and thus be in a
better position to raise debt and equity capital. Greater financing
capability may also be inherent in Mergers and Acquisitions itself.
This is likely to be the case if the acquired firm has a strong cash
position or low-debt equity ratio can be used to expand borrowing by
the merging or acquiring company. The final financial motive is the
tax loss-carry forward that might be available in a merger and
acquisition exercise if one of the firms have previously sustained a
tax-loss.
The Non-financial motives for mergers and acquisitions include
the desire to expand management and marketing capabilities as well
as the acquisition and development of new products. Particularly,
popular industries in the latest mergers and acquisitions movement are
4
companies realizing in manufacturing, oil and gas, retailing food
product, telecommunications and financial services.
While mergers and acquisitions may be directed towards
horizontal integration (the acquisition of competitors) or vertical
integration (the acquisition of buyers and sellers of goods and services
to the company), anti trust policy generally precludes the elimination
of competition. For this reasons, mergers and acquisitions are often
with companies in allied but not directly related fields. The pure
conglomerate mergers and acquisitions of firm in totally unrelated
field is still undertaken, but less frequently than in the past.
Perhaps, the greater management motive for a merger and
acquisition is the possible synergistic effect, synergy is said to take
place when the whole is greater that the sum of the parts. This
“2+2=5” effect may be the result of eliminating overlapping functions
in production and marketing as well as meshing together various
engineering capabilities. In terms of planning related to mergers and
acquisitions, there is often a tendency to overestimate the possible
synergistic benefits that might accrue.
5
Most of the academic discussions have revolved around the
motives of the merging or acquiring firms that initiate a merger and
acquisition. Likewise, the selling stockholders may be motivated by a
desire to receive the acquiring company’s stocks which may have
greater acceptability or activity in the market place than the stock they
hold. Also, when cash is offered instead of stock, this gives the selling
stockholders an opportunity to diversify their holdings into many new
investments. The selling stockholders generally receive an attractive
price for their stock that may well exceed its current market or book
value. In addition, officers of the selling company may receive
attractive post merger and acquisition management contracts as well
as directorship in the acquiring firm.
In some circumstances, they may be allowed to operate the
company as a highly autonomous subsidiary after the mergers and
acquisitions process. The final motive of the selling stockholders may
simply be the bias against smaller businesses that has developed in
this country and around the world. Real clout in the financial markets
may dictates being part of a larger organization. These motives should
6
not be taken as evidence that all or even most managers of smaller
firms would wish to sell out a matter that shall be examine further
when we discuss negotiated offers versus take-over attempt. Mergers
and acquisitions is a well-known phenomenon in the corporate world.
It has changed the faces of business in most sectors of the economy.
Sectors like oil and gas, manufacturing and banking. However, for the
purpose of this study, my primary focus will be on mergers and
acquisitions in the insurance industry and its effect on the Nigeria
economy.
Recapitalization and consolidation of the insurance industry
which started in September 2005 and ended in February 2007 was
primarily embarked upon to throw up bigger, stronger and more
viable and high-capacity insurance companies which would live up to
their names, playing their adequate risk management role in the
Nigerian economy. The federal government which initiated the
reforms had also envisaged that it would generate more premium
income which would afford insurance firms better and reasonable
reserves to provide short and long term funds as debt instrument to
7
government and businesses, thus contributing more to rapid economic
growth and development, while tremendously increasing the Gross
domestic Products (GDP) through contributions of insurance sectors
to the overall national development of the country. Government had
also envisaged that the reforms would assist stem capital flight
associated with offshore insurance, which had led to the loss of more
than N70 billion insurance premium yearly, especially in the oil, gas,
aviation, and marine industries where foreign insurance companies
dominated and underwrite the build of the business risks in those
industries for Nigeria.
The recapitalization exercise which was supervised by the regulatory
agency, National Insurance Commission (NAICOM) ended in a good
note as 49 of the firms (out of about 104 insurance firms that earlier
existed) were able to meet the minimum capitalization of N2 billion
for life business, N3 billion for non-life operations and N10 billion for
re-insurance firms. It is expected that after this consolidation exercise,
the insurance industry will be in a better position to take its rightful
place in the economic development of the nation as in the words of
8
Chief Emmanuel Chukwulozie, ex - Commissioner for Insurance
who said the success of the exercise would best be measured by the
performance of the firms that would scale through the exercise.
However, taking stocks nearly two years after the conclusion of an
exercise that generated so much interest from investors, analysts and
other stakeholders project the firms that eventually emerged as having
realized the government’s vision in embarking on the reforms. And no
doubt, on the floor of the Nigerian Stock Exchange (NSE), equity
investors have continued to express their appetite for insurance stocks
by grabbing millions of share daily to account for the bulk of the total
volume of business in the Nigeria capital market.
However, while most operators are quick to point at the
successes recorded at the capital market as an indicator of a
prosperous insurance industry in the view of citizens including the
elite, many people are not embracing the insurance culture.
1.1 STATEMENT OF THE PROBLEM
Globally, insurance is seen as drivers of the economy of the
developed nations providing the backbone that allows entrepreneur
9
and business to take risk that would grow the economy. But, has the
insurance industry being of such positive impact on the Nigerian
economy after the reforms? Though, the awareness on the benefits of
insurance and the percentage of Nigerians taking up insurance policies
is still on the low-key in the country. These, however suggested the
negative attitude of Nigerians towards insurance products as seen by
the low patronage of insurance policies being taking up which still
stood at a staggering less than 5%, even after the reform exercise.
Though, the industry had been in existence prior to the Nation’s
independence, the country was yet to benefit from opportunities,
which abound in the insurance industry. This was as a result of several
problems/challenges facing the insurance industry. The major problem
confronting the Nigerian insurance industry is the problem of
insufficient capital base to support the yearning business opportunities
opened to the operators and practitioners in the industry. The
insufficient capital of all the insurance companies put together before
the reform could not sufficiently accommodated and assumes the
insurance of the assets of industries such as oil and gas, maritime and
10
the aviation sectors. This however, led to the problem of premium
flight out of the sector thereby robbing the industry and the nation of
huge reforms as over N70 billions was recorded as being premium
accountable from those sectors to foreign insurance firms who assume
the risk bearing responsibilities of those sectors. Based on these
problems, the federal government initiated the reform in September
2005.
1.2 AIM AND OBJECTIVES OF THE STUDY
The aim of this study is to examine in details the role of
mergers and acquisitions in the Nigerian insurance industry on the
Nigerian economy. One basic objective that motivated the researcher
in carrying out the research is to provide a searchlight for those
managing insurance business in Nigeria as to how the problems of the
insurance industry can be overcome
Another objective of this research work is to analyze
extensively the benefits that will accrue to the insurance industry
through mergers and acquisitions. It is also of interest to the
researcher to examine the control system adopted by the insurance
11
firms, which will enhance their operational capacity. Other objectives
that shall serve as guideline include; to meet possible claims payment
as at when due and to ensure profitability, which will be consistent
with the national economic development of the nation.
1.3 RESEARCH QUESTIONS
At the end of this study, the following research questions would
have been answered.
- What impact does mergers and acquisitions have on the growth
(profitability) of the insurance industry in Nigeria?
- Is there any positive relationship between recapitalization and
consolidation exercise in the insurance industry and the
Nigerian economy?
- What is insurance policy?
- What are the process of mergers and acquisitions?
- What impact does the insurance industry have on the Nigerian
economy?
1.4 STATEMENT OF HYPOTHESES
12
Hypothesis measures the causal relationship between two
variables. It is a tentative statement, a presumption of the result of an
instance. Thus the following hypotheses will be tested in carrying out
this study:
HYPOTHESIS 1
HO: Mergers and Acquisitions will not have impact on the growth
(profitability) of the insurance industry in Nigeria.
H1: Mergers and Acquisitions will have impact on the growth
(profitability) of the insurance industry in Nigeria.
HYPOTHESIS II
HO: There is no positive relationship between recapitalization and
consolidation in Nigeria insurance industry and the Nigerian
economy.
H1: There is a positive relationship between recapitalization and
consolidation in the Nigerian insurance industry and the
Nigerian economy.
1.5 SIGNIFICANCE OF THE STUDY
13
Mergers and Acquisitions is an important aspect of
recapitalization in today’s corporate world, every industry be it
manufacturing, banking, oil and gas and even professional firms in the
past and even at present has and are still embarking on mergers and
acquisitions to consolidate their resources in order to challenge for
bigger and greater opportunities that emerge in the business world and
this will continue to happen in the future.
Mergers and Acquisitions constitute a major part of the survival
strategies adopted by corporate organizations, therefore there is need
for an effective administration of the exercise in order to achieve the
desired result.
Since the continuous existence and growth (profitability) of
insurance, firms depend on how its economic resources and human
resources are managed. This research work is therefore carried out to
reveal to those in position of managing such resources, the various
techniques and control system, which can be adopted in order to
effectively and efficiently managed those resources. This research
work will in no doubt contribute to existing literatures on mergers and
14
Acquisitions in the insurance industry and by extension its impact on
the nation’s economy.
15
1.6 SCOPE AND LIMITATIONS OF THE STUDY
In the course of this research work, there would be factors that
would limit the scope of the work one of which would be the inability
of the researcher to get all the required data for the case study. In
order to achieve the objectives of this study, the scope would be
limited to the activities of some selected quoted insurance firms in
Nigeria.
This research work will not overlook the major problem
confronting the insurance industry but would identify them. This
would be of great benefits to the management of insurance firms and
administrators of mergers and acquisitions because it would give them
a better sense of direction in managing their resources and harnessing
their potentials.
The recommended solution that will be provided in this study
will to an extent go a long way in intimating management of insurance
firms with their areas of strength and also prospect would be
identified.
16
1.7 DEFINITION OF OPERATIONAL TERMS
ACQUISITION: This is a situation where a stronger company
acquiring the weaker one and eventually become
one entity.
INSURANCE: This is defined as an arrangement by which one
party (the insurer) promises another party (the
insured) a sum of money if something should
happen causing the insured to suffer a financial
loss or otherwise.
INSURANCE CLAIMS: This is the money paid to an insured
person or organization as a compensation for the
loss suffered or sustained.
INSURANCE POLICY: This is the contract of insurance taken up
by the insured stipulating the class of insurance
taken up and the terms and conditions of such
policy.
MERGER: This is a situation where two or more companies
combined together to form a larger organization.
17
PREMIUM: A payment made in respect of an assurance or
insurance.
RE-INSURANCE: This is a situation where an insurer re-insures the
risk underwritten by him with another bigger
insurance firm.
SYNERGY: This is the generic term used in the field of
business acquisitions and mergers to cover the
economies which can result through integration,
often expressed as 2+2=5. It means the sum of the
whole is more than the summation of the
individual component parts that make up the
whole.
18
REFERENCES
Akingunola, R.O and Olanrewaju, P.O (1998): Fundamentals of
Finance, Ago-Iwoye CESAP.
Kathleem, L.S (2003): Mergers and Acquisitions West Virginia USA
The Strategic Role of the Management Accountant, a paper
presented at the MPA West Virginia University.
Klime, P. (2007): Merger Activity in the Insurance Industry, FACTA
University Series on Economic and Organization Vol. 4, No. 2,
2007. Pg. 161-171.
19
CHAPTER TWO
2.0 THEORETICAL FRAMEWORK AND LITERATURE
REVIEW
2.1 THEORETICAL FRAMEWORK
The theoretical framework upon which this research work is
based is on the concept of business combination.
Business combination, which may take the forms of merger,
acquisition, amalgamation and takeover are important features of
corporate structural changes. They have played an important role in
the external growth of many leading corporate organizations globally
Pandey (1991). In Nigeria, mergers and acquisitions are not so
common until recently. The first ever merger attempt was in 1982
between United Nigeria Insurance Company Ltd. and United Life
Insurance Company Limited which was not consummated. The first
successful merger was between AG Leventis and Company Ltd. and
Leventis Stores Ltd. In 1983 where 100 share of 50 kobo each of
Leventis Stores Ltd. was exchanged for 81 ordinary shares of 50 kobo
20
each of AG Leventis and Company Ltd. and there have been quite a
fair number of mergers and acquisitions since 1983.
Nevertheless, the present economic climate in the country
which is characterized by shortage of foreign exchange for the
importation of goods, low exchange rate of naira, the restrictive credit
policies coupled with agenda of privatization and globalization
worldwide have increased business risk and pose serious threat to
their long-term survival. As a result, previously autonomous business
have recently since the year 2000 been taking advantage of mergers
and acquisitions, particularly in the oil and gas, textile, insurance,
banking and conglomerates sector of the economy to form larger
concerns needed to reduce their risks and guarantee better chances of
survival Director General, Securities and Exchange Commission (SEC
) 2004.
Across the globe, mergers and acquisitions have been the focus
of attention in the 1980’s when such business activity was most
prevalent. However, in this present age, the approach of many
business in considering mergers and acquisitions will take more
21
strategic role and reasoned procedures with special consideration of
the ethical consequences on many parties that will be affected. The
need to determine whether acquisitions of internal growth is more
efficient in reaching long-term goals requires accounting expertise and
studied analysis of each company’s situation. In certain instances
synergies may be obtained or developed which may result in creating
an even more advantageous position for the merging or acquiring
companies.
Mergers and Acquisitions received a great deal of attention in
the 1980’s when mega deals such as the acquisition of RJR Nabisco
by Kohlbert Kravis Roberts and Company sent shockwaves through
the corporate world. While the great majority of activity prior to the
1990’s took place within National boundaries, the last decade has seen
a sharp increase in the rate of global merger activities. The
international competition require more sophisticated analysis
involving foreign exchange rates, social, political and economic
environment Kathleen, L.S (2003).
22
According to Larsen, (1991) corporations participate in mergers
and acquisitions for a variety of reasons, the most prevalent in recent
years being growth through external rather than internal means. Such
growth may benefit the acquirer by increasing capability for product
diversification, expansion or existing product lines and increasing
market share. Other quantifiable reasons for entering into mergers
include achieving economies of scale for operations and obtaining tax
advantages.
Another aspect of mergers and acquisitions strategy focuses on
strengths and goals before taking actions. Managers and management
accountants, as partners in the strategic planning process, must take a
caution view of potential activity to observe a basic compatibility
between the two companies to determine whether the product mix
makes sense and to determine if the companies core beliefs are the
same. Pouvout, (1991).
23
2.2 LITERATURE REVIEW
2.2.1 MERGERS AND ACQUISITIONS AMONG INSURANCE
COMPANIES
There have been few value studies of European financial sector
mergers and acquisitions of any kind.
According to Cybo-olton and Murgia (2000) in their article
“mergers and shareholders wealth in European financial industry” in
which they analyzed mergers and acquisitions in 13 European
countries over the period of 1988-1997. In their sample, they found
out that either the target or the acquiring firm had to be a bank. Based
on 54 deals that involved a change in control, they also found
significant market value gains for within country, bank-to-bank
acquisitions, and for transactions where banks acquired insurance
companies. However, they did not find market gains for cross-border
transactions or transactions involving banks and securities firms.
Lepetit, et al (2002) study the market value effects of banks mergers
over the period 1991-2001 and found that market value gains exist for
24
geographically focusing and activity diversifying mergers and
acquisitions. In another study, Delong, G.L (1999) he finds that bank
mergers and acquisitions that are activity and geographically focused
create value but that diversifying mergers and acquisitions do not
create value.
The valuation effects of mergers and acquisitions in the
insurance industry have not received adequate scrutiny in the
literature, though insurance companies have been quite active in the
consolidation process. For example Berger, A. (2000) shows that over
1985-1997, consolidation in the insurance industry accounted for
18.9% of the financial intermediaries mergers and acquisitions
activity in the US and 18.6% in European domestic deals. Insurance
companies appear to be more active in international mergers.
Acquisitions of US insurance companies by non-US insurance
companies represent 37% of all international acquisitions concluded
by non-US financial institutions. The percentage increases to 44% if
intre-Europe acquisitions is considered, while acquisitions and
mergers of European insurance companies by non-European insurance
25
companies reached 33% of all transactions concluded outside their
domestic market by the Non-European financial institutions.
Various scholars and authors have carried out research on
mergers and acquisitions in the insurance industry include Cummin et
al (1999), Chamberlain and Tennyson (1998), Barniv and Harthorn
(1997) Floreani and Rigamonti (2001). In their work, Cummin, et al
(1999) considers efficiency effects in mergers and acquisitions
activities for insurance companies, Barniv and Harthorn examined
whether insurance mergers and acquisitions target end to be firms that
are financially distressed. They found this to be true for 20 to 46% of
mergers and acquisitions in the period of 1985-1992. In order to
isolate mergers and acquisitions for financial synergies that are
motivated by information asymmetries rather than regulatory
pressures, their study omits transaction in which the target firm was in
receivership prior to merger and acquisition and all transactions in
which the target firm has merged into the acquirer or retired following
merger. Chamberlain and Tennyson in their article investigates the
prevalence of financial synergies of motive for merger and acquisition
26
activity in the property liability insurance industry. Their hypotheses
were tested via analysis of accounting ratios of mergers and
acquisitions targets from 1980 to 1990 in relation to those of none
acquired firm of similar characteristics and via analysis merger and
acquisition characteristics. The hypothesis that financial synergies are
motive for mergers and acquisitions following negative industry
capital stocks receives strong support. The authors, Floreani and
Rigamonti in their article “Mergers and Shareholders’ Wealth in the
Insurance Industry” examined 56 mergers and acquisitions deals that
occurred between 1996 and 2000 and they tried to address the
question of why mergers and acquisition on the average do not seem
to create value for bidder shareholders. In order to detect the valuation
effects of the merging or acquiring firms, they selected samples,
according to the relative importance of the deal for bidder as
measured by the ratio between the value of the deal and the market
value of the firms involve in mergers and acquisitions. In sharp
contrast to previous literature on financial mergers, they found that
bidder shareholders increase their wealth. Besides, the abnormal
27
returns tends to be larger and the greater the impact of deal value on
bidder value. Hence, it is plausible that mergers and acquisitions in
the insurance industry are mainly motivated by synergistic reasons
rather than management self-interest. Mergers and acquisitions within
National European boundaries are not perceived as a value-increasing
event for the bidder shareholders. Contract with previous evidence on
banks suggests that domestic deals tend to benefit more than
shareholders. The deregulation of the European market, the creation
of the European union as well as social security and private pension
reforms design a future pan-European market. With respect to this, in
country acquisitions may be viewed as a defensive strategy and be
punished by the market.
2.2.2 THE RATIONALE FOR MERGERS AND
ACQUISITIONS WITHIN THE INSURANCE
INDUSTRY.
Perhaps, the most frequently cited rationale for a takeover is
economies of scale. Firms expand to obtain optimal operating scale
and thereby reduce average unit cost of production. The visual source
28
of cost scale economies is the spreading of fixed cost over a broader
output base. For insurers important fixed costs include computer
system and software development costs. The actuarial, underwriting
and instrument operations of insurers also have fixed cost component
that can be sources of scale economies that is expected to be important
for insurers is earnings diversification Cummin et al, (1999).
The basic principle of insurance is the law of large numbers
which holds that, expected losses become more predictable as the size
of the insured pool increases. Enhanced predictability implies that
large insurers have less volatile earnings and thus need to hold less
equity capital per policy underwritten, providing a potentially
powerful source of cost reduction. Increase in underwritten
diversification may also permit insurers to engage in higher risk and
higher return investment strategies without increasing their costs of
capital. Mergers often enable insurers to expand their pool of policy
holders more rapidly through organic growth.
Achieving scope of economies in another motivation often
given for merger transactions. Cost scope economies can arise if a
29
firm can reduce overall production costs by providing different types
of product rather than specializing. Examples include gains from
exploiting shared resources such as customer’s list, brand names,
managerial talent, information technology or customer service
capabilities.
Corporate control theory argues that takeover is an efficient
means to replace inefficient managers of target companies. The target
firm may under perform either because its managers pursue their own
interests at the expense of owners’ interest or because they lack the
knowledge and skills to maximize firm’s value. If managers of
acquiring firms are more capable than those of acquired firms, they
can improve the efficiency of targets. This theory predicts that poorly
performing firms are more likely to be acquired and that the
performance of targets will improve after takeover.
Acquiring firm are also expected to gain from the takeover
activity if they have the ability to bring operating synergy to the post-
takeover entity Jensar Mc 1998, Shliefer A. and Robert , W.V (1988).
30
On the other hand, there is an evidence in the insurance industry
that acquires might prefer efficient targets especially firms that
possess competencies in certain areas or product lines that could bring
the acquiring insurance, market power and more cost and revenue
efficiency.
Therefore, we do not have a clear prediction on whether the
targets are relatively more or less efficient than not targets.
Managers may also intentionally acquire businesses that require
their personal skills in order to make it more expensive for
shareholders to replace them. To this extent, mergers or acquisitions
are primarily motivated by managerial self-interest and they are
unlikely to generate operating or financial synergies that would lead to
improvements in efficiency or productivity. It is obvious that many
firms in the property – liability insurance industry are organized as
insurance groups, where several subsidiaries are operated under
common ownership and management. Unaffiliated single insurance
firms with no group affiliation are also present in the industry. In
general, the managers of targets firms may resist takeover bids
31
because of the threat to their job security. However, resistance is
likely to be stronger among managers of unaffiliated firms than
managers of groups. The mangers of an unaffiliated company face an
uncertain future if their firm is acquired and thus are likely to be more
resistance to takeover offers.
Managers of groups on the other hands, are more likely to view
the purchase and save of firms as important components of their
strategy and as potentially enhancing rather than threatening their
personal economic value. Thus, we hypothesize that unaffiliated firms
are less likely to be targets of successful takeover attempts than
companies that are part of an insurance groups Shleifer A. and Robert
W.V (1988).
2.2.3 EVOLUTION OF CAPITAL REQUIREMENTS IN THE
NIGERIAN INSURANCE INDUSTRY
The Nigerian insurance sector has undergone two rounds of
recapitalization over the past 6 years and in her opinion is additional
proof that the insurance industry is closely linked to the general
economic growth over the same period, the sector has increase its
32
capacity to draw level with economic development and expectations.
Even with this, there were clear indications that the new capitalization
levels were inadequate at each level, industry statistics reveals that
insurance companies lose the opportunity of earning N70 billion in
premiums annually from the oil and gas sector as a result of premium.
Many companies especially multinational ones, have resorted to
insuring their assets overseas, as the capital base of local insurance
firms are inadequate to carry the risks of insuring these assets Busayo
Akanro (2009).
According to her, the first of two rounds of recapitalization
occurred in 2003, which was in line with the passing of the Insurance
Act. Insurance companies were required to increase their capital bases
from N20 million to N150 million for life businesses, N70 million to
N300 million for non-life businesses, and N150 million to N350
million for re-insurance businesses. There were 117 insurance
companies before the recapitalization in December 2002, 14 of them
did not make it and were liquidated.
33
In September 2005, a new capitalization requirement was
announced, increasing the capital base to N26 million for life-
insurance businesses, N3 billion for non-life insurance businesses and
N10 billion for re-insurance businesses. Following the completion of
2005/2006 recapitalization exercise, which also involved quite a
number of consolidations, the number of insurance companies
dropped from 103 to 49.
2.2.4 PRE-MERGERS AND ACQUISITIONS EXERCISE OF
THE NIGERIAN INSURANCE INDUSTRY
The insurance industry before the regulatory induced
recapitalization and consolidation exercise was once confronted with
many challenges. These challenges were mostly responsible for the
sectors inability to attract sufficient businesses both locally and
internationally. It also affected its ability to retain significant
proportion of the risk emanating from assets domiciled in Nigeria.
Insurance premium flight was a key challenge for the industry
as the underwriting capacity of the existing companies was low. The
industry at that time had 103 insurance companies, 4 Re-insurers, 527
34
Brokers and 28 Loss Adjusting Companies. The industry at that point
in time was characterized by the following:
- Under capitalization of existing industry players.
- Death of appropriate human capital and professional skills.
- Poor returns on capital.
- Existence of too many fringe players.
- Poor asset quality.
- Prominence of unethical practices.
- Insurance premium flight.
- Significant corporate governance issues etc.
These factors proved significant in restricting the companies
from achieving any potential development. In 2006, Nigeria total
premium as at percentage of World premium was put at 0.82%
(International Insurance Association 2006), as world premium totaled
US $13.71 trillion (N446.4 trillion) for the same year, a paled
comparison to other emerging markets such as South Africa, India and
Brazil which contributed 1.69% 1.16% and 0.82% respectively. The
United States has the largest contribution with 31.43%. Total
35
premium for Nigeria in 2001 was N33.1 billion (US $283.7 million)
and have grown to an estimated N82.3 billion (US $705.4 million) as
at 2006 respectively a 20% growth over the past six years Busayo A.
(2009).
2.2.5 THE RECAPITALIZATION EXERCISE IN THE
NIGERIAN INSURANCE INDUSTRY
The Federal Government through the former Minister of
Finance, on the 5th of September 2005 announced a new minimum
capital base for insurance companies. All the operators were ordered
to comply by February 28, 2007 or lose their license. The directives
also specified the new capital requirement according to the type of
insurance business. The minimum share capital for life insurance
companies increased from N150 million to 2 billion; general
insurance from N200 million to N36 billion; and re-insurance
companies from N350 million to N90 billion.
The government wanted an insurance industry that will take
advantage of sub-regional and continental grouping on industry that
will align with international best practices, in order to be
36
advantageously positioned to attract businesses from such groupings.
It was therefore encouraged that mergers and acquisitions should be
the drive for the emergence of new capitalize companies.
With the above directives of the federal government, there was
perspiration, anxiety and apprehension in the market. The market
tension and volatility was informed not only because of the possibility
of another round of liquidation and closure of companies (the last
exercise resulted in the liquidation of 14 companies) most
importantly, the fact of consolidation which saw many insurance
companies fusing because of the increased capital requirement for the
emerging restricted risk-bearing sector.
However, when the operators realized that NAICOM was
relentless in pursuing the reform to conclusion, they rushed to the
drawing board to develop strategies, not only to meet the statutory
requirement but to grow their respective businesses. Thus,
consolidation option before them were; to stand alone as general
insurance companies; merge two or more general insurance
companies; composite company to transfer either non-life business or
37
life business to another company; two or more life companies with
strong composite companies to acquire one or more weaker non-life
or life companies; several small-size general or life companies to pool
into a mega company.
At the end of the day, the existing 103 insurance firms for the
purpose of compliance, formed three groups Private Limited Liability
Companies that want to remain private and stand alone, Public
Limited liability companies that want to stand alone, and either
private or public limited liability companies involved in mergers or
acquisitions.
However, not all mergers and acquisitions were successful.
Eight-merger agreement, which went as far as signing M.O.U failed.
This was due largely to the post-merger diligence test by the
companies. Hence, other that were successful were duely issued
licenses to carry on insurance business.
38
2.2.6 THE IMPACTS OF MERGERS AND ACQUISITIONS IN
THE INSURANCE INDUSTRY ON THE NIGERIAN
ECONOMY
The recapitalization exercise, which was concluded in February
28th 2007 was targeted at strengthening the financial capacity of the
firms operating in the sector. The contribution of the insurance
industry to the nation’s GDP was said to be an abysmally low. It was
envisaged that once the capital base of the insurance firms is
increased, the sector would be able to meet the expectation of the
government in enhanced contributions to the nation’s economic
development in terms of G.D.P. With the recapitalization, insurance
business will certainly wear a new face, the ability of the industry to
deliver value will be better enhanced, and the sector will no longer
provide safe haven for lazy practitioners, as only the aggressive,
focused and customer-driven firms in the sector will survive the
flourish.
The insurance sector is a key part of the financial sector. In
developed markets, the insurance sector accounts for a significant
39
portion of the total economy. In collecting relatively small premiums
from many individuals and corporate bodies in the economy, insurers
are able to pull together, like no other institutions, a large pool of
funds that could be invested for short or long-term periods. Due to the
nature of insurance businesses and the attendant recapitalization
exercise, the sector could serve as a means of a long-term financing;
therefore, becoming an important industry for sustained economic
growth. This will in turn deepen and broaden the domestic financial
services, as well as generate higher savings rates and therefore greater
economic development. The insurance sector is critical to the ability
of emerging and transitional economies like Nigeria to grow and
develop as well as provide a reliable cover for risk to the citizens.
Insurance provides stability by allowing large and small businesses
operate with a lesser risk of volatility or failure. Insurance is also seen
as compliment to government’s security programmes and its
privatization processes.
However, with the emergence of a new insurance sector arm
with sufficient financial muscle and expertise, the Nigerian economy
40
is poise to benefiting from the sectors contribution to economic
development of the nation.
The effects of recapitalization in the insurance industry on the
Nigerian economy may be viewed as follows:
- It brings about the emergence of a new and vibrant insurance
industry in the Nigerian economy.
- It brings more professionalism to the insurance sectors.
- It brings to the sector to adopt internationally accepted best
practices in the insurance industry.
- The industry will be able to increase their capacity to retain
huge risk locally, which is associated with large risk sectors of
the economy and thereby curb the problems of premium flights
out of the economy among others.
Also, there is a policy of local contents in the oil and gas and
maritime sectors that is crimed at increasing the participation of
Nigerian underwriters in both sectors to sectors to curtail premium
flight. Maritime, Aviation, Oil and Gas as well as Pension under the
41
new reforms are growth areas for the sector. This in turn means a high
revenue and income prospectus for the government and practitioners.
2.2.7 PROBLEMS ENCOUNTERED IN THE
RECAPITALIZATION EXERCISE
Poorly defined motives have been found to account for almost
83% of failed mergers and acquisitions (KPMG International Survey,
2000). However, the following problems were encountered during the
recapitalization exercise.
- Many companies gave false information on their assets and
liabilities, which made it impossible to assess the value of
their assets and liabilities and negotiate the price.
- Some companies gave insufficient information, which was
inadequate to guide the structure which is financing and
taxing of the deals.
- It was observed that some other companies operate different
accounting procedures which made it almost impossible to
reconcile their books and adapt among those with intention
42
to merge. Hence, they could not agree on any uniform
accounting procedure to be used for due diligence.
- It was also observed that some potential mergers group had
negative shareholder funds and provisions for understanding
premiums, debt, litigations contractual liabilities and rent
arrears.
2.2.8 LEGAL FRAMEWORK FOR MERGERS AND
ACQUISITIONS IN NIGERIA
A legal framework exists for mergers and acquisitions in
Nigeria as in other jurisdictions. The legislations that have impact
directly or indirectly on mergers and acquisitions are:
- The Investment and Securities Act (ISA) No. 45 of 1999 and
thus rules and regulations of SEC pursuant to the ISA.
- The companies and allied Matters Act (CAMA) 1990.
- The Banks and other financial Institutions Act (BOFIA) No
25 of 1991.
- The Insurance Act, 2007.
- The Companies Income Tax Act.
43
2.2.9 INVESTMENT AND SECURITIES ACT (ISA)
This is the principal legislation regulating mergers and
acquisitions in Nigeria. It repealed the specific provisions for the
regulation of mergers and acquisitions in CAMA and transferred the
relevant sections to ISA.
The objective of mergers and acquisitions regulation by the ISA
is to prevent restraint of competition and monopolistic tendencies. The
ISA provides that all other laws shall be read in conformity with it in
respect of capital market issues. This confers the ultimate regulation
of mergers and acquisitions on SEC (Securities and Exchange
Commission). It also mandates the SEC to make rules and regulations
for the market sections 99-122 of the ISA contain specific laws for
regulating mergers and acquisitions.
2.2.10 PROVISIONS IN ISA FOR REGULATING MERGERS
AND ACQUISITIONS
- Provisions are made for reconstruction and mergers of
companies as well as the holding of court-ordered meetings.
44
- Agreement is required at the court-ordered meetings before the
approval of the commission is sought.
- If a scheme is approved by the commission and sanctioned by
the court, it shall become binding on the companies and the
court will by the order sanctioning the scheme provide for the
following:
• Transfer to the transferee of properties and liabilities
• Allotting or appropriation by transferee company shared
debentures, policies or other like interests.
• Continuation by or against the transferee company of any
legal proceedings pending.
• Provision for dissenting shareholders.
- An order for dissolution or winding up of any transferee
company shall not be made unless court is satisfied of adequate
provision by way of compensation or otherwise have been
made with respect to the employee of the company.
45
2.2.11 ENFORCEMENT OF THE LAWS
The ISA makes specific provisions for enforcement of laws
relating to mergers and acquisitions. They are as follows:
- Fines, penalties and terms of imprisonment are provided for
violations.
- Administrative and judicial machinery are available for
enforcement. They include:
• Administrative Proceedings Committee of the Commission
• Investment and Securities Tribunal (IST)
• Other superior courts.
- The provisions of the ISA are quite extensive and covers
registration, monitoring, investigations and enforcement
actions.
- Companies Income Tax Act: mergers and acquisitions
require clearance of FIRS with respect to tax due and
payable under the capital Gains Tax Act.
- Insurance Act also provides for the sanction of mergers and
acquisitions of insurance companies.
46
- Companies and Allied Matters Act CAMA (1990)
provisions for regulating mergers and acquisitions repealed
and transferred to ISA No. 45 of 1999 CAMA 1990, still
provides for incorporation of companies, Memorandum and
Articles of Association and their certification by the CAC
for mergers and acquisitions there it is still relevant.
2.3 CONCLUSION
The ISA is the principal law regulating mergers and
acquisitions in Nigeria. The rules and regulations of SEC makes
extensive provisions for regulating mergers and acquisitions pursuant
to the ISA.
Other laws have impacted on the regulations of mergers and
acquisitions in the country. Hence, there is need for the continuation
of the various institutions implementing the laws for the consolidation
of insurance firms to achieve their objectives.
47
REFERENCES
Afolabi, I. (2008): Impact of Culture on Mergers and Acquisitions.
Lagos. A publication of M.C.S Consulting Limited.
Bailey, D. (2007): Insurance Recapitalization, Risk Shield Publication
Vol. 8, No. 75, pg. 14.
Broadstreet Journal. Broadstreet Lagos. Nigeria’s Authoritative
Business.
Busayo, A. (2003): The Insurance Industry Vs Nigerian Economy
Lagos. A publication of Word Press Ltd.
Daily Champion Newspaper, 7th August 2007.
David, O. (2004): Legal Framework for Mergers and Acquisitions
Abuja Nigeria. A paper presented at the Central and Financial
Management Retreat on Mergers and Acquisitions in the
Banking Industry.
Kathleen, L.S (2003): Mergers and Acquisitions West Virginia
USA. The Strategic Role of Management Accountant, a
paper presented at the MPA West Virginia university.
NAICOM publications on Insurance Regulations.
48
Tony, I. (2007): Mergers and Takeovers Procedures under ISA 2007.
Practitioners Perspective. A publication of the Guardian
Newspaper.
49
CHAPTER THREE
3.0 RESEARCH METHODOLOGY
3.1 INTRODUCTION
Research methodology embraces the specification of steps and
procedures employed by a researcher in assembling the raw data for
processing. The importance of this chapter is to discuss the research
methodology adopted in order to evaluate the impact of mergers and
acquisitions in the insurance industry on the Nigerian economy.
The research methodology provides an organizational principle
by which knowledge can be codified and analyzed. Its objective is to
provide a procedure and parameters employed in the conduct of a
scientific research. It is aimed at explaining the method of data
collection, data analysis and interpretation.
3.2 RESEARCH DESIGN
Research design means the structuring of investigation aimed at
identifying variables and their relationship to one another Asika,
(2000). In the course of this study, descriptive research survey was
adopted.
50
3.3 STATEMENT OF RESEARCH QUESTIONS
The various research questions that were previously highlighted
in chapter one of this research work has been subjected to proper
checking with due consideration to the literature being reviewed in the
proceeding chapter. However, it is sufficient to emphasize that no
modification is made and they will be restated again. The research
questions include:
- What impact does mergers and acquisitions have on the growth
(profitability) of the insurance industry in Nigeria?
- Is there any positive relationship between recapitalization and
consolidation exercise in the insurance industry and the
Nigerian economy?
- What is an insurance policy?
- What are the process of mergers and acquisitions?
- What impact does the insurance industry have on the Nigerian
economy?
51
3.4 RESTATEMENT OF RESEARCH HYPOTHESES
The research hypotheses are hereby stated after proper checking
without any modification.
HYPOTHESIS 1
HO: Mergers and Acquisitions will not have impact on the growth
(profitability) of the insurance industry in Nigeria.
H1: Mergers and Acquisitions will have impact on the growth
(profitability) of the insurance industry in Nigeria.
HYPOTHESIS II
HO: There is no positive relationship between recapitalization and
consolidation in Nigeria insurance industry and the Nigerian
economy.
H1: There is a positive relationship between recapitalization and
consolidation in the Nigerian insurance industry and the
Nigerian economy.
52
3.5 POPULATION OF THE STUDY
A population is made up of all conceivable elements, subject or
observations relating to a particular phenomenon of interest to the
research Asika,, (2000).
It is the sets of all objects (units) or observation about which
conclusions are to be drawn.
The target population for this research work is the Nigerian
insurance industries, which comprises of 49 Insurance companies.
3.6 SAMPLE AND SAMPLING TECHNIQUE
A sample is precisely a part of population. It is a set of items or
individual selected from a larger aggregate or population, while
sampling refers to the procedure for choosing the sample units.
For the purpose of this study, 5 year financial
statements/reports of some selected quoted insurance companies on
the Nigerian Stock Exchange will be chosen as my sample out of the
49 insurance companies in Nigeria. The reason for selecting from the
NSE is due to easy access to data relating to each company on the
exchange.
53
Averages will be taken from the capital base items and profit
after tax of the selected quoted companies, which will in turn be used
in testing of my hypotheses. The financial report to be used covers
period from 2003-2007. These years cover the pre and post
consolidation periods of the insurance industry in Nigeria.
However, the sampling method used in this research work is the
simple random sampling, where each company’s financial report has
equal chances of being selected.
3.7 SOURCES OF DATA
A researcher could gather his data either from primary or
secondary sources or both. For the purpose of this study, secondary
data shall be used. The review of journals, articles, textbooks,
seminars papers and financial statement of concerned companies
among others will form the basis for secondary data. The financial
reports of concerned companies were obtained from the database of a
Lagos-based stock broking firm.
54
3.8 RESEARCH INSTRUMENT
Research instrument refers to the instruments used in gathering
the data for a research work. In this study, all the relevant data were
gathered through empirical enquiry. The enquiry is mainly for the
collection of financial reports of the selected insurance companies,
which covers the pre and post consolidation period of insurance
industry in Nigeria. This is to enable us evaluate the impact of
mergers and acquisitions in the insurance industry on the Nigerian
economy.
Five year financial reports of some selected companies were
collected for use through the enquiry.
3.9 METHOD OF DATA ANALYSIS
The nature of the study comprised the use of historical records.
Hence, the researcher shall therefore make use of secondary data.
Secondary data will be employed in carrying out this project work and
these include the use of library materials, journals, magazines and the
financial reports of those companies.
55
The correlation statistical technique was formed. However, in
order to have a valid result, data gathered will be run on the Statistical
Package for Social Sciences (SPSS) to be most suitable in analyzing
collected data. The technique will be employed in order to establish
the impact of mergers and acquisitions on the growth (profitability) of
insurance industry in Nigeria.
The formula for correlation is hereby given below:
Correlation (r) = N∑xy – (∑x) (∑y) [N(∑x2) – (∑x)2 ] [N∑y2 – (∑y)2] Where N = Sample size
X = Independent variables
Y = dependent variables
∑ = Summation or sigma of all variables
Independent variable = shareholder’s fund
Dependent variable = Profit After Tax (PAT)
3.10 LIMIATIONS OF THE STUDY
This study will be based on the financial sector of the Nigerian
economy. However, in order to drive home the main essence of this
56
study, my searchlight will be primarily beamed on the insurance
industry in order to evaluate the impact of mergers and acquisitions in
the insurance industry on the Nigerian economy.
The constraints encountered in the course of this research work
are highlighted below:
(i) Inability to get all required materials for the purpose of this
study.
(ii) Insufficient funding also serves as a constraint.
(iii) Insufficient time to travel for the purpose of this research
work, as other programs also demanded for attentions.
Due to the constraints listed above, the study will be limited to
five selected quoted insurance companies within the Nigerian
insurance industry.
57
CHAPTER FOUR
4.0 DATA PRESENTATION, ANALYSIS AND
INTERPRETATION
4.1 INTRODUCTION
This chapter contains the detailed analysis of data gathered
through copies of annual reports/financial statements of the selected
insurance firms within the Nigerian insurance industry. Hence, it
attempts to analyze the dependency of the profitability of the
insurance industry on mergers and acquisitions. In accounting,
however, there is no general agreement as to whether mergers and
acquisitions affect the profitability (growth) of Business Corporation.
This chapter is devoted to presenting, analyzing and
interpreting all the relevant data obtained from the selected five
insurance firms. Five-year financial reports of these firms were used
with a view to testing the hypothesis developed in chapter one of this
research work in order to establish validity whether the profitability
(growth) of insurance firms is depend on mergers and acquisitions or
not.
58
4.2 DATA PRESENTATION
The data needed for analyzing the dependency of the
profitability of the insurance industry on mergers and acquisitions as
obtained from the selected insurance firms’ five-year financing reports
covering the period from 2003-2007 through the databased stock-
broking firm.
However, due to time constraints, at this point the data
presentation will be limited to data representing shareholders fund and
Profit After Tax (PAT) covering the same period. The complete data
on these firms will be presented in the appendix to this research work.
Table 4.1: Abridge Financial Reports of Royal Exchange Assurance
Plc. LASACO Assurance Plc, NEM Insurance Plc,
Intercontinental WAPIC Insurance Plc. and Adic
Insurance Ltd. (2003-2007).
Royal Exchange Assurance Plc.
Nem Insurance Plc.
LASACO Assurance Plc.
Intercontinental WAPIC Insurance
ADIC Insurance Ltd.
N'000 N'000 N'000 N'000 N'000 N'000 N'000 N'000 N'000 N'000
2003 1,197,856 194,109 156,566 22,634 541,293 86,519 221,483 107,817 396,996 19,947
2004 1,763,941 217,138 202,811 45,829 617,663 168,558 226,756 (49,511) 425,201 88,548
2005 2,493,244 258,227 522,892 54,629 1,195,516 97,552 246,404 14,386 439,323 85,941
2006 2,727,588 291,796 359,826 (2,267) 1,340,304 141,389 1,308,992 138,618 460,533 108,534
2007 3,20,849 314,826 369,484 8,772 1,515,448 171,531 2,378,703 256,545 496,385 101542
SOURCE: VICAD Securities Ltd.
59
4.3 DATA ANALYSIS
In analyzing the data gathered for the purpose of this research
work, the electronic method of data analysis was adopted so as to
minimize the occurrence of error, which is associated with manual
method of data analysis as the data are quite large in volume and to be
able to have a valid analysis. Hence, the correlation of the data
gathered will be run on the Statistical Package for Social Sciences
(SPSS) at a 50% level of significance.
Due to constraint, only hypothesis one (1) will be tested at 5%
level of significance, for the purpose of this study and the result will
be interpreted afterwards.
DATA ANALYSIS
DESCRITPIVE STATISTICS
N MINIMUM
(N)
MAXIMUM
(N)
MEAN STANDARD
DEVIATION
SHF 1 5 156566.00 1197856.00 502838.8000 416772.20106
PAT 1 5 19947.00 194109.00 86205.2000 71662.13254
SHF 2 5 202811.00 1763941.00 647274.4000 646436.61024
PAT 5 -49511.00 217138.00 82112.4000 96971.52147
SHF 3 5 246404.00 2493244.00 979475.8000 918666.91585
60
PAT 3 5 14386.00 258227.00 102147.0000 939011.65022
SHF 4 5 359826.00 2727588.00 1239448.6000 950001.63163
PAT 4 5 -2267.00 291796.00 135614.0000 105094.82424
SHF 5 5 369484.00 3207594.00 1593522.800 1217560.24447
PAT 5 5 8772.00 314826.00 170843.2000 121776.89855
VALIDN
(LIST
WISE)
5
KEYS: SHF 1 = SHAREHOLDERS FUND FOR YEAR 2003 PAT 1 = PROFIT AFTER TAX FOR YEAR 2003 SHF 2 = SHAREHOLDERS FUND FOR YEAR 2004 PAT 2 = PROFIT AFTER TAX FOR YEAR 2004 SHF 3 = SHAREHOLDERS FUND FOR YEAR 2005 PAT 3 = PROFIT AFTER TAX FOR YEAR 2005 SHF 4 = SHAREHOLDERS FUND FOR YEAR 2006 PAT 4 = PROFIT AFTER TAX FOR YEAR 2006 SHF 5 = SHAREHOLDERS FUND FOR YEAR 2007 PAT 5 = PROFIT AFTER TAX FOR YEAR 2007.
NONPARAMETIC CORRELATIONS AVGSHF AVGPAT Spearman’s rho AVGSHF Correlation co-efficient Sig. (1-tailed) N AVGPAT Correlation Coefficient Sig. (1.tailed) N
1.000 . 5 .900 (*) .019 5
.900 (*) .019 5 1.000 . 5
Correlation is significant at the 0.05 level (1-tailed)
KEYS: AVGSHF = AVERAGE SHAREHOLDERS FUND; AVGPAT = AVERAGE PROFIT AFTER TAX.
61
Decision Rule: At 5% level of significance, the correlation
between insurance firms profitability and mergers
and acquisitions prove significant, that is
profitability in the insurance industry depends on
mergers and acquisitions. Therefore, the null
hypothesis will be rejected while the alternative
hypothesis will be accepted.
4.4 INTERPRETATION OF RESULT
From the outcome of the analysis of data above, it can be
deduced that there is a positive dependency of the profitability of
insurance companies on mergers and acquisitions. That is, as the
shareholders fund of the companies in my sample increases as a result
of mergers and acquisitions, the ability to invest in long-term and high
return yielding investment increases. As a result, the profit of these
firms also improved.
From the result obtained from the data analysis through the aid
of the SPSS, it shows clearly that at 5% significant level, the
correlation was statistically significant which thus, implies that the
62
null hypothesis will be rejected while the alternative hypothesis will
be accepted which states that mergers and acquisitions will have a
positive impact on the growth (profitability) of the insurance industry
in Nigeria.
63
CHAPTER FIVE
5.0 SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 SUMMARY OF FINDINGS
The whole of this research work has to some extent, logically
and extensively ironed out the need and benefit of recapitalization and
consolidation in the insurance industry. It has stated and highlighted
the problems one could encounter while going into mergers and
acquisitions.
The second chapter of this research study discussed and
highlighted at length, the rational of mergers and acquisitions in the
insurance industry. Moreover, the evolution of capital requirement in
the Nigerian insurance industry was also highlighted. Effort was also
made to illustrate the pre-mergers and acquisitions exercise in the
Nigerian insurance industry.
In addition, the chapter made an attempt to analyze, with great
effort, the effect of mergers and acquisition insurance industry on the
Nigerian economy.
64
Furthermore, attempt was also made to discuss the various
problems encountered in the mergers and acquisitions exercise. The
provisions of the law as regard mergers and acquisitions in Nigeria
were also looked into for the benefit of this research work.
5.2 CONCLUSION
During the past decades, the insurance industry has experienced
a wave of mergers and acquisitions. Traditionally, the insurance
industry has been known for its high-cost distribution on system and
lack of price competition, but insurers are increasingly faced with
more intensive competition, from non-traditional sources such as
banks, mutual funds and investment funds. The increased competition
cripple with unethical practices of some insurers in Nigeria and lack
of awareness and insufficient capital has narrowed the profit margins
and motivated the regulatory body to seek ways of solving these
problems and hence, insurers in turn seeking ways to reduce costs.
Technologically advance in sales, pricing underwriting and
policyholders’ services will force insurers to become more innovative
65
and the relatively high costs of the new system may have affected the
minimum efficient scale in the industry.
These development, however suggest that financial synergies
and potential efficiency gains may provide major motivation for the
recent mergers and acquisitions in the insurance industry, enhancing
the efficiency of the target firm and/or the combined post-merger
entity.
Conclusively, mergers and acquisitions in the insurance
industry appear to be driven by economically viable objectives and
have had a beneficial effect on the industry and the economy as a
whole. Thus, it is expected that more consolidation in the industry will
happen in the future, because many insurers are burdened with costly
distribution system that in the long run will loose out to non-
traditional competitors such as the banks and others. Furthermore,
consolidation in the insurance industry will continue to be driven by
the need to offset showing revenue growth, complete in a converging
financial market price, cut costs and achieve economies of scale.
66
5.3 RECOMMENDATION
For the insurance industry to be strong and viable, the following
points should be taken into consideration
Operators in the industry should provide extensive and
sustained public awareness with the aim of mobilizing a major
proportion of the population towards buying insurance policies, the
insurers should also intensify their efforts to embark on research
and come out with economically viable products that would not
only catch the interest of the insuring public, meet their insurance
needs adequately and make the product more affordable and
accessible to people at the grassroots thereby enhancing the
sector’s contribution to the nation’s economy.
Insurance firms should have an eye to be a pace setter in terms
of quality of service and excellent workforce in order to gain
customer loyalty and to be highly referenced, efficient, courteous
with technical competency to partner with their customers.
Insurance firms should embark upon diversification of
investment. Part of the capital released to the firms should be
67
invested in divers but well research port-folios with short or
medium term maturity period as at when calls for claims arises
prompt settlement claims will be achieved through such investment
proceeds.
The regulatory body “NAICOM” should show great deals of
effort in regulating the activities of these companies as we now
have bigger and stronger insurance companies. Critical effort for
sound and prudent regulation and management of insurance
business in Nigeria should adopt in the line with best international
practices. Stick regulation has always been the trend for the
insurance sector globally, considering the relevance of the sector to
the development of the nation’s economy and its entire citizenry.
The issue of corporate governance is also a barrier for the
insurance business in Nigeria. Hence, it is recommended that
appropriate corporate governance mechanism should be put in
place by regulating body in order to ensure the containment of the
excesses of the management of the insurance firms in Nigeria.
Others include; effective and efficient supervision of the various
68
emerged insurance firms and appropriate legal backing should be
given to policyholders in the Nigerian insurance industry.
69
BIBLIOGRAPHY
Afolabi, I. (2008): Impact of Culture on Mergers and Acquisitions
Lagos. A publication of M.C.S. Consulting Ltd.
Akingunola, R.O and Olarenwaju P.O (1998): Fundamental of
Finance, Ago-Iwoye CESAP.
Bailey, D. (2007): Insurance Recapitalization, Risk Shield Publication
Vol. 8, No. 75. pg. 14.
Broad Street Journal, Broad Street Lagos. Nigeria’s Authoritative
Business.
Busayo, A. (2003): The Insurance Industry Vs Nigerian Economy
Lagos. Publication of a Word Press Ltd.
Daily Champion Newspaper, 7th August, 2007.
David O., (2004): Legal framework for Mergers and Acquisitions.
Abuja Nigeria. A paper presented at the central bank and West
African Institute for Economic and Financial Management.
Retreat on Mergers and Acquisition in the Banking Industry.
70
Kathleen, L.S (2003): Mergers and Acquisition. West Virginia USA
The Strategic Role of Management Accountant, a paper
presented at the MPA West Virginia University.
Klime, P. (2007): Merger Activity in the Insurance Industry, FACTA
University Series on Economic and Organization Vol. 4, No. 2,
2007. pg. 161-171.
NAICOM Publications on Insurance Regulations Procedures under
ISA 2007. Practitioners Perspective. A publication of the
Guardian Newspaper.