IMPACT OF CAPITAL STRUCTURE ON PROFITABILITY OF LIFE INSURANCE COMPANIES IN NEPAL

Abstract

This research examines how capital structure affects the profitability of life insurance companies in Nepal. It utilizes secondary data from Nepalese microfinance companies over a ten-year period (2013/14 to 2022/23). The study employs descriptive statistics, correlation analysis, and multiple regression analysis using SPSS version 26. The findings reveal that insurance companies play a significant role in contributing to investors' funds and maintain a strong capital adequacy position, largely due to their high debt-to-equity ratios. Additionally, the study indicates that life insurance companies are primarily financed by insurers rather than owners, which exposes the insurers to higher risks due to the elevated leverage or debt-to-equity ratio. Profitability serves as a measure of efficiency. Life insurance companies with high values of ROA (Return on Assets) and ROE (Return on Equity) demonstrate effective utilization of their total assets, leading to better returns for investors and strong company performance. The correlation analysis shows that the debt-to-equity ratio (DER) has an insignificant positive relationship with both ROA and ROE. Similarly, the debt-to-total-assets ratio exhibits an insignificant negative correlation with ROA and an insignificant positive relationship with ROE. Additionally, the size of the companies is found to have a significant negative relationship with both ROA and ROE in the insurance sector. The results of the multiple regression analysis indicate that the debt-to-equity ratio has an insignificant positive effect on the profitability (ROA and ROE) of insurance companies. Similarly, the debt-to-assets ratio shows an insignificant negative impact on profitability (ROA and ROE). However, the size of the companies has a significant negative effect on the profitability (ROA and ROE) of life insurance companies in Nepal. Based on these findings, the study concludes that capital structure has an insignificant impact on the profitability of life insurance companies in Nepal.