IMPACT OF CAPITAL STRUCTURE ON PROFITABILITY OF INSURANCE COMPANIES IN NEPAL

Abstract

This study investigates the impact of capital structure on profitability of insurance companies in Nepal. Data was collected from insurance companies in Nepal over a ten-year span (2012/13 to 2021/22). The study employed descriptive analysis, correlation analysis, and multiple regression analysis using SPSS version 26. This study shows that insurance companies have greate contribution to investors fund and strong capital adequacy position due to high debt to equity ratio. Morevoer, in this study, insurance companies shows a large share of financing by the insurers relatively to the owners and there is risky for the insurers due to the high leverage ratio or debt equity ratio. Profitability is the measurement of efficiency. When insurance companies have high Return on Assets (ROA) and Return on Equity (ROE), it indicates that they are efficiently using their total assets. This means investors are receiving better returns on their investments, and the company is performing well. The correlation analysis shows that debt equity ratio (DER) has insignificant positive relation with ROA. At the same time, the debt-to-equity ratio has a significant positive relationship with Return on Equity (ROE). There is also a notable positive correlation between the debt-to-total-assets ratio and both ROA and ROE. However, the size of the companies shows an insignificant negative relationship with ROA and a significant negative relationship with ROE. Regression analysis indicates that the debt-to-equity ratio has a significant negative impact on ROA but an insignificant positive impact on ROE. Conversely, the debt-to-assets ratio has a significant positive effect on the profitability of insurance companies, as measured by both ROA and ROE. Moreover, size of companies has insignificant positive impact on profitability (ROA and ROE) of the insurance companies in Nepal.