Capital Structure And Financial Performance Of Life Insurance Companies In Nepal: A Review With Reference To NEPSE-Listed Insurers

Abstract

Capital structure is an important financial decision because the proportion of debt and equity employed by a firm can influence profitability, financial risk, solvency and long-term sustainability. The issue assumes greater significance in life insurance companies because these institutions operate with long-term contractual obligations, considerable investment commitments and continuing requirements relating to liquidity, capital adequacy and financial stability. The present paper reviews the relationship between capital structure decisions and the financial performance of life insurance companies with particular reference to Nepalese insurers listed on the Nepal Stock Exchange (NEPSE). The study is review-based and draws exclusively upon selected theoretical and empirical studies contained in the literature reviewed for the underlying Ph.D. research. The review demonstrates that the relationship between leverage and financial performance is not uniform. Classical capital-structure theory initially suggested that financing mix is irrelevant under perfect market assumptions, while later theoretical developments recognised tax benefits from debt as well as the potential costs of financial distress, agency conflict and excessive leverage. Empirical evidence similarly presents mixed findings. Studies on Nepalese insurance companies indicate that appropriately managed leverage may improve Return on Assets, Return on Equity and shareholder returns, whereas excessive debt may increase financial risk and adversely affect profitability. Some recent evidence specifically relating to Nepalese life insurance companies also reports statistically insignificant effects of conventional capital-structure ratios, indicating that profitability cannot be explained by financing mix alone. Liquidity, firm size, solvency, tangibility, investment management and managerial efficiency also influence financial performance. The paper concludes that there is no universally optimal debt-equity structure for life insurers. Capital-structure decisions must instead be evaluated in relation to the distinctive long-term obligations, solvency requirements and operating environment of individual insurance companies. The review further identifies a need for more focused empirical research using updated data for NEPSE-listed life insurers rather than combining life and non-life companies within a common analytical framework.