Capital Structure in the Property-Liability Insurance Industry: Tests of the Tradeoff and Pecking Order Theories

This study examines whether property-liability insurers have an optimum capital structure by testing the tradeoff and pecking order theories for this industry. Capital structure is measured with the net premiums written to surplus ratio, and alternatively, with the liability to asset ratio. The results indicate that the tradeoff theory dominates the pecking order theory in explaining property-liability insurer capital structure. Further, mutual and stock insurers appear to have different target capital structures, as agency theory suggests. Finally, mutual and stock insurers do not adjust at different speeds to their optimal capital structure.