AN INVESTIGATION ON THE IMPACT OF CAPITAL SYSTEM ON THE PROFITABILITY OF INSURANCE COMPANIES IN NIGERIA

ABSTRACT: This study examines the influence of the capital structure on the financial performance of insurance businesses in Nigeria during the period from 2011 to 2016. The data were derived from the publicly available financial records of a subset of companies. The study utilised panel data analysis. The results indicate that the total debt ratio and debt-to-equity ratio had no significant positive influence on the return on assets of the chosen insurance companies in Nigeria. Additionally, the combined effect of these two ratios on the return on assets of the selected insurance firms in Nigeria was found to be statistically insignificant. The findings of this study indicate that the total debt ratio (β= 0.14; p>0.05) and debt-to-equity ratio (β= 0.08; p>0.05) had a statistically insignificant positive effect on the return on equity of the selected quoted insurance firms in Nigeria. The study found that the combined effect of the total debt ratio and debt-to-equity ratio does not have a statistically significant impact on the return on equity of the selected quoted insurance firms in Nigeria (F= 1.95; p>0.05). Additionally, the total debt ratio (β=0.08; p>0.05) was found to have an insignificant positive impact on the net profit margin, while the debt-to-equity ratio (β=0.04; p<0.05) had a significant positive impact on the net profit margin of the selected quoted insurance firms in Nigeria. Furthermore, the combined effect of the total debt ratio and debt-to-equity ratio was found to be statistically insignificant on the net profit margin of the selected quoted insurance firms in Nigeria (F= 3.55; p<0.05). The research findings indicate that the capital structure, encompassing both loan financing and equity financing, has a discernible impact on the profitability of specific insurance companies listed in Nigeria. However, it is worth noting that the influence of capital structure on profitability is very insignificant. The study proposes that insurance companies should consider incorporating additional debt, particularly long-term debt, into their capital structure composition. This strategic decision is expected to yield a reduction in the overall cost of capital due to the tax advantages associated with debt. Consequently, such a measure has the potential to enhance the profitability of these organisations.