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

1
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

2
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

3
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.

4
 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

5
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

6
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

7
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

8
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
9
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

10
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

11
 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

12
 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

13
Acquisitions in the insurance industry and by extension its impact on

the nation’s economy.

14
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.

15
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.

16
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.

17
 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.

18
 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

19
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

20
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).

21
 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).

22
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

23
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

24
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

25
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

26
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
27
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

28
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).

29
 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

30
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
31
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.

32
 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

33
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

34
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

35
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

36
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.

37
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

38
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

39
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

40
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

41
 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.

42
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.

43
- 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.

44
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.

45
 - 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.

46
 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.

47
Tony, I. (2007): Mergers and Takeovers Procedures under ISA 2007.

Practitioners Perspective. A publication of the Guardian

Newspaper.

48
 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.
49
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?

50
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.

51
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.
52
 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.

53
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.

54
 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

55
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.

56
 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.
57
 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 Nem Insurance LASACO Intercontinental ADIC Insurance

Assurance Plc. Plc. Assurance Plc. WAPIC 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.
58
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 MAXIMUM MEAN STANDARD

(N) (N) 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

59
 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 5
(LIST
WISE)
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) 1.000 .900 (*)
N . .019
5 5
AVGPAT Correlation Coefficient
Sig. (1.tailed) .900 (*) 1.000
N .019 .
5 5
Correlation is significant at the 0.05 level (1-tailed)

KEYS: AVGSHF = AVERAGE SHAREHOLDERS FUND;

AVGPAT = AVERAGE PROFIT AFTER TAX.

60
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

61
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.

62
 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.
63
 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

64
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.

65
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

66
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

67
emerged insurance firms and appropriate legal backing should be

given to policyholders in the Nigerian insurance industry.

68
 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.

69
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.

70