Case Study 10 — An Insurance Company

First published 26 Aug 2026 · Last verified 29 Aug 2026

Case Study 10 — An Insurance Company

Anjali Rai kept her father's life insurance policy document in a plastic folder in the almirah, the kind every Nepali household has somewhere — a folder for birth certificates, land ownership papers (lalpurja), and the one insurance policy someone in the family bought decades ago and never quite understood. Her father had paid premiums to Nepal Life Insurance Company for twenty-two years. In the spring of 2082, the policy matured, and a cheque arrived. Anjali, who by now had a hydropower stock and a development bank stock in her demat account from earlier chapters of her investing life, found herself asking a question she had never asked before: should I actually own shares in the company that just paid my father, instead of only buying its promises?

That question is this chapter. Nepal Life Insurance Company Limited, traded on NEPSE under the ticker NLIC, is Nepal's oldest private-sector life insurer, incorporated in 2058 BS (2001 AD), and for most of its history the largest life insurer in the country by number of policies in force. It is a fitting subject for Case Study 10, because insurance companies break almost every analytical habit a NEPSE investor has built up from studying banks and manufacturers. A bank lends money and collects interest. A manufacturer buys inputs, makes a product, and sells it for more than it cost. An insurance company sells a promise — pay me a small sum now, and I will pay you (or your family) a much larger sum later, if and when a defined event happens. It collects cash today against a liability it may not have to settle for thirty years. That single fact changes everything about how you read its numbers, and it is why Chapter 33 spent so much time on insurance accounting before we ever got here. This chapter puts that theory to work on a real, currently listed company, warts and all — including one number in NLIC's own recent disclosures that should make any careful investor sit up and ask questions rather than simply celebrate the dividend.

Lesson 92.1 — Why Anjali Looked at an Insurer at All

Before opening the annual report, Anjali did what the Canon Score framework has trained her to do from the first case study onward: ask why this business exists and whether people need it. Insurance penetration in Nepal — the total premium collected across the industry each year, divided by GDP — has historically sat below two percent, low even by South Asian standards. That is not a criticism of the industry; it is the opportunity. A country where remittance income from over two million Nepalis working abroad flows home every month, where families are increasingly buying life cover for a child's future education or a daughter's wedding instead of only relying on land and gold, is a country where the insurance market has a long runway to grow simply by more people buying more policies, with no need for anyone to invent anything new.

NLIC sits near the front of that growth story. By the fiscal year ending mid-July 2024 (FY 2080/81 in the Bikram Sambat calendar NEPSE reports use), the company had 1,467,128 policies in force, up 26.5 percent in a single year — a number swollen partly by smaller polices and partly by the aftermath of a merger wave the regulator forced across the industry, which we will come back to in Lesson 92.4. Net premium collected in that year came to roughly Rs 40.11 arba (a NEPSE-disclosure term worth pausing on: 1 arba = 100 crore = 1 billion rupees in the Nepali numbering system, so Rs 40.11 arba means about Rs 40.11 billion), up 9.9 percent on the year before. Paid-up capital — the money shareholders have actually put into the company, at face value — stood at roughly Rs 8.2 arba that year and had grown to about Rs 9.48 arba after a bonus share issue the following year, comfortably above the regulator's minimum. The stock traded, through 2025 and into 2026, in a band roughly between Rs 700 and Rs 870 per share, against a book value per share of only around Rs 126 to 129. That last comparison — price near Rs 700, book value near Rs 127 — is the first number that should make a disciplined investor's eyebrow rise, and we will return to it in Lesson 92.3.

Anjali's instinct, trained by Chapter 64's seven real Canon Score dimensions — Financial Strength & Profitability, Governance & Promoter Behaviour, Liquidity & Tradability, Valuation Reasonableness, Sector & Business Model Durability, Growth Trajectory, and Dividend & Capital Return Discipline — was to resist being charmed by "market leader" and "father's policy paid out fine" and instead go looking for the parts of the story that don't show up in a dividend announcement.

Lesson 92.2 — The Insurance Accounting Logic, Applied

Chapter 33 laid out why insurance accounting is a different animal from banking or manufacturing accounting. It is worth restating the core ideas here, briefly, because this chapter is where they stop being theory.

An insurance company's core product is a promise to pay money later in exchange for money now. The money collected now — the premium — is not profit the moment it lands in the bank account. Some of it must be set aside to cover the expected cost of claims the company will eventually have to pay on that same block of policies, plus a margin for the uncertainty in that estimate. That set-aside amount is called a reserve (sometimes called a technical provision, or in Nepali insurers' own disclosures, the insurance fund or life assurance fund). Reserving is the single most important and most easily misunderstood number in insurance accounting, because it is not a hard fact like a bank's cash balance — it is an actuary's best estimate of the future, revised periodically as new information comes in about how policyholders actually behave (how long they live, how often they lapse a policy, how often they make a claim).

Until that money is needed to pay claims, the insurer gets to invest it. This pool of collected-but-not-yet-paid-out money is called float, a term made famous by Warren Buffett's letters about Berkshire Hathaway's insurance operations. Float is, in effect, a form of financing that costs the insurer nothing (or even pays the insurer, if the business is priced well) for as long as it takes to accumulate. NLIC's life insurance fund — the accumulated pool backing all outstanding policies — stood at roughly Rs 198.33 arba (nearly Rs 2 kharba, where 1 kharba = 100 arba = 100 billion) by mid-2024, up over 21 percent on the year, and total investments held against it came to about Rs 164.16 arba, up over 18 percent. That is the float: a sum larger than the entire market capitalisation of most companies on NEPSE, sitting inside one insurer, invested mostly in government securities, bank fixed deposits, and a smaller allocation to shares and real estate, under rules the regulator sets on how insurers may deploy policyholders' money.

The claims ratio is the insurance-world equivalent of a bank's non-performing loan ratio or a manufacturer's cost of goods sold as a percentage of revenue — it tells you what fraction of the money coming in the front door is going straight back out to pay claims. For a non-life insurer (motor, fire, health, marine — anything other than life), the claims ratio is usually calculated as net claims incurred divided by net premium earned in the same period, and it is meant to be read together with the expense ratio (operating and commission costs as a share of premium) to get the combined ratio: claims ratio plus expense ratio. A non-life insurer with a combined ratio comfortably under 100 percent is making an underwriting profit before it ever touches its investment income — it is being paid to hold other people's risk. A combined ratio above 100 percent means the insurer is losing money on the insurance itself and depends entirely on investment returns on the float to stay profitable, which is a much shakier position, because investment markets are cyclical and claims are not always.

This is exactly the trap a NEPSE investor moving from bank stocks to insurance stocks can fall into. In FY 2080/81, NLIC's net claims came to about Rs 49.46 arba against net premium of about Rs 40.11 arba — claims were roughly 123 percent of premium that year. Read the way you would read a non-life combined ratio, that number looks like a company hemorrhaging money. Read correctly, for a maturing book of long-duration life policies, it mostly reflects a large cohort of older policies reaching their maturity date and being paid out as designed, funded by decades of accumulated reserves and investment income (Rs 15.20 arba of investment income that year, up almost 19 percent) rather than by the current year's premium alone. The two numbers you actually want to track over several years are whether the life fund keeps compounding upward, and whether the company can keep meeting its regulatory solvency requirement — which brings us to the number that made Anjali stop and reread a disclosure twice.

Lesson 92.3 — Reading NLIC's Numbers Line by Line

Anjali built a simple table from four consecutive quarterly disclosures and the annual report, the same habit the Canon Score has taught her to use for every case study in this book: never trust one year's number, always look at the trend.

A few things jump out once the numbers are lined up rather than read one press release at a time. First, premium growth (9.9 percent) is running well below policy count growth (26.5 percent), which usually means the newer policies being sold are smaller in size — cheaper, shorter-duration, or lower sum-assured products — even as the customer base widens. That can be a perfectly healthy strategy (reaching more first-time policyholders, including through remittance-funded household savings, is exactly the growth story Nepal's underinsured population promises) but it is worth distinguishing from premium growth driven by existing customers buying bigger policies, which is a different and arguably higher-quality kind of growth.

Second, book value per share fell 15 percent even as profit rose 31 percent — an odd combination for a bank or manufacturer, but a normal feature of a life insurer, because a bonus share issue increases the share count faster than retained profit increases total equity, diluting book value per share even while the underlying business is compounding, and because actuarial revaluation of the life fund flows through equity in ways that do not track a simple retained-earnings ledger. This is precisely why Chapter 33 urged you to treat an insurer's book value with more humility than a bank's: a bank's book value is mostly cash and marked loans; an insurer's book value has an actuarial reserve sitting in the middle of it, revalued periodically by an appointed actuary rather than by a simple accrual entry.

Third — and this is the number that stopped Anjali cold — the stock, at a price around Rs 700 to Rs 750 through 2025 and into 2026, was trading at somewhere between 5 and 6 times its own recently reported book value, and at a price-to-earnings ratio that ranged, across different quarters' trailing-twelve-month EPS, from roughly 116 times to nearly 194 times annual earnings. The most recent quarterly disclosure available (FY 2082/83, Q4) showed EPS at somewhere between Rs 3.64 and Rs 4.91 depending on which annualization convention the data provider used, against a book value per share that had slipped to about Rs 126 — meaning the market was, at that moment, paying somewhere between roughly 145 and close to 195 times a single year's reported profit, for a company whose quarterly profit had just declined 15 percent year on year even as its premium book kept growing.

Fourth, and most important: the solvency ratio of 3.22 reported for FY 2080/81 looked, on its face, comfortably healthy — roughly double the regulatory minimum. But that single snapshot, taken in isolation, is exactly the kind of number the Canon Score trains you never to accept without a second data point six months or a year apart. Anjali went looking for the next one, and found something that changed her entire read of the company.

Lesson 92.4 — The Solvency Margin, and the Number That Should Worry You

Every insurer in Nepal is regulated not by Nepal Rastra Bank (NRB), which oversees banks and development banks, but by a separate authority — the Nepal Insurance Authority, known until a 2022 rebranding as Beema Samiti (beema is the Nepali word for insurance). This is a distinction worth fixing firmly in your head as a NEPSE investor, because it is easy to assume every financial company answers to the central bank. It does not. NRB sets the rules for deposit-taking institutions; the Nepal Insurance Authority sets the rules for insurers and reinsurers, and its rulebook is built around a different central question than NRB's: not "can this institution meet withdrawal requests," but "does this insurer hold enough capital, over and above its reserves, to withstand claims coming in worse than expected?"

In March 2025, industry reporting on life insurers' second-quarter solvency positions for FY 2081/82 (the fiscal year that began in mid-2024) showed the sector's average solvency ratio at 2.53, comfortably above the floor and slightly better than the 2.47 average a year earlier. Individual companies varied widely: National Life Insurance led the pack at 4.73, followed by LIC Nepal at 3.76 and Himalayan Life Insurance at 3.74. Citizen Life Insurance had improved sharply, from 1.82 the year before to 3.42. And at the bottom of the table, among audited companies, sat Nepal Life Insurance Company — NLIC, the very stock Anjali was looking at — at a solvency ratio of 1.45. Below the regulatory minimum of 1.5.

What could cause a swing that large in so short a window? Anjali's working hypothesis, and the honest answer for a retail investor without access to the actuary's working papers, is that it is most likely the product of an annual (or more frequent) actuarial revaluation of the life fund. Nepal's appointed actuaries reassess the assumptions behind reserves periodically — mortality tables, lapse rates, expense assumptions, the discount rate used to value long-dated future obligations — and any tightening of those assumptions (say, assuming policyholders will live longer, or assuming a lower future investment return to discount liabilities at) can suddenly increase the required reserve and shrink the available solvency margin, even though nothing about the day-to-day insurance business changed at all. It is also possible that a genuinely large single event — a spike in claims, a mark-to-market hit on the equity portion of the investment book during a NEPSE downturn, or the phasing-in of the stricter Risk-Based Capital and Solvency Directive the Nepal Insurance Authority approved in 2082 (2025), which replaces the older, simpler factor-based solvency test with a more granular risk-weighted framework closer to international "Solvency II"-style regimes — played a role. A disciplined investor's job here is not to guess confidently; it is to notice the swing, treat it as unresolved, and demand an explanation before buying, holding through it, or adding to a position.

This is also the reason a merger wave swept Nepal's insurance sector in 2079-80 BS (2022-2023). The regulator raised minimum paid-up capital requirements sharply — to Rs 5 arba for life insurers and Rs 2.5 arba for non-life insurers, with a deadline that was extended into Chaitra 2079 and then further to Ashad 2080 (roughly mid-2023) — forcing smaller, thinly capitalised insurers to either merge, issue rights shares, issue bonus shares, or exit the market. Some non-life insurers needed to raise capital more than nine-fold to comply; the best-capitalised ones, like Shikhar Insurance, needed only a modest top-up. NLIC, already the largest life insurer, cleared the new minimum with room to spare on paid-up capital — but as its solvency ratio shows, having enough paid-up capital and having an adequate solvency margin are two different tests, and passing one says nothing about the other.

Lesson 92.5 — Float, Catastrophe Risk, and the Non-Life Contrast

To see the full range of what "different from a bank or manufacturer" means for insurers, it helps to set NLIC briefly against a non-life peer. Shikhar Insurance Company Limited, ticker SICL, is Nepal's largest non-life insurer by market capitalisation — covering motor, fire, marine, engineering, and other property and casualty risk rather than life and savings products. Its balance sheet tells a different story from NLIC's: paid-up capital of roughly Rs 3.1 arba, book value per share that has moved between roughly Rs 190 and Rs 335 across recent reporting periods, and a business where the whole point of the claims ratio is to test whether the company is pricing risk correctly year to year, because non-life policies are short-tail — a fire policy or a motor policy runs twelve months, and the claims tied to it are mostly known within a year or two, not thirty years later.

That short tail is exactly what makes non-life insurers vulnerable to a different kind of risk than life insurers: catastrophe risk, a single event that generates a flood of claims all at once. Nepal's most vivid real illustration remains the 2015 Gorkha earthquake, which triggered claims across the non-life insurance industry — and, notably, exposed how thin reinsurance cover and inadequate reserving can turn a well-run-looking insurer into a distressed one overnight when a single tail event arrives. Every non-life insurer in Nepal is required to cede a portion of its risk to reinsurers — including Nepal Reinsurance Company Limited, the country's national reinsurer, established specifically to retain more reinsurance premium within Nepal instead of it flowing entirely to international reinsurers — precisely so that no single insurer is left holding an earthquake-sized claim entirely on its own book. When you check a non-life insurer's disclosures, look for its reinsurance arrangements and retention limits the way you would look for a bank's loan concentration by sector; a non-life insurer that retains too much catastrophe risk on its own book, chasing extra premium, is running a risk a claims ratio computed on a normal year will never show you.

Life insurers face their own version of a sudden, correlated shock — not an earthquake, but a pandemic or an epidemic that drives mortality claims up across the whole book simultaneously, exactly the kind of event life insurers worldwide experienced during the COVID-19 pandemic years. The general lesson generalises cleanly to a Nepali life insurer like NLIC: reserves and solvency margin exist precisely to absorb a year where claims run far above the actuary's normal assumptions, which is one more reason a solvency ratio sitting at or below the regulatory floor deserves more weight in your analysis than almost any other single number in an insurer's disclosures. A bank with a thin capital buffer can usually see trouble coming gradually, in a rising non-performing loan trend. An insurer's buffer exists precisely for the shock that arrives without warning.

Both types of insurer share one more structural feature worth naming plainly: the float itself is an interest-rate bet. NLIC's roughly Rs 164 arba investment book, and every non-life insurer's smaller equivalent, sits mostly in government securities and bank fixed deposits, with a modest allocation to listed equities and real estate, all subject to Nepal Insurance Authority rules on permitted asset classes and concentration limits. When Nepal Rastra Bank's monetary stance pushes fixed deposit rates and government bond yields down — as happened repeatedly through the liquidity cycles of the past decade, often tied to swings in remittance inflows and banking-sector liquidity — an insurer's investment income growth slows even if its premium book keeps growing, because the float is re-invested at lower prevailing rates as older, higher-yielding instruments mature. Investment income of Rs 15.20 arba growing at nearly 19 percent in FY 2080/81 was, in part, a story of where Nepal's interest rate cycle happened to be that year, not solely a story of NLIC's investment skill — another reason to look at a multi-year trend rather than one flattering year.

Lesson 92.6 — Hemisphere 1: Liquidity, Governance, and Durability

With the numbers gathered, Anjali sat down to score NLIC across Chapter 64's real seven dimensions — Financial Strength & Profitability (20 points), Governance & Promoter Behaviour (15 points), Liquidity & Tradability (10 points), Valuation Reasonableness (15 points), Sector & Business Model Durability (15 points), Growth Trajectory (15 points), and Dividend & Capital Return Discipline (10 points), applying Chapter 65's insurance-specific guidance — claims and loss ratios, solvency margin, and investment portfolio quality — wherever a dimension needs a sector-specific reading rather than a generic one.

Liquidity & Tradability (out of 10). NLIC is a large, actively traded NEPSE name: roughly 94.8 million shares outstanding, with 51 percent held by promoters and 49 percent — about 46.4 million shares — genuinely floated to the public, a substantial free float for a company of this size. Daily turnover has run in the tens of thousands of units, respectable for a large-cap financial name, though the price has drifted from a 52-week high near Rs 872 to the low Rs 700s, a soft one-year trend. We score this 7 out of 10 — a well-floated, genuinely tradable large-cap insurer, but not a top mark given the cooling price momentum.

Governance & Promoter Behaviour (out of 15). NLIC has a long, clean operating history with no evidence of self-dealing or promoter misconduct, and it cleared the regulator's sharply raised minimum paid-up capital requirement during the 2079–80 BS merger wave without needing to merge, unlike many smaller peers. Against that: a majority promoter block (51 percent) concentrates control in ways worth watching, and — the specific fact that opened this case study's eyes — the solvency ratio's fall from 3.22 to 1.45 arrived without a clear public explanation reaching ordinary shareholders at the time. A company can be entirely honest and still score short of full marks on governance if its disclosure does not keep pace with a material change in its capital position. We score this 9 out of 15 — comfortably above Chapter 64's 5-point override floor, but marked down for the disclosure gap around its own most important number.

Sector & Business Model Durability (out of 15). NLIC's moat is real: the oldest private life insurer in Nepal, the largest policy base, the deepest agent network, operating in a market still meaningfully underpenetrated relative to GDP, with remittance-funded household savings providing a durable long-term tailwind. We score the moat sub-component 6 out of 8 — strong, though tempered by a life insurance market that has grown more competitive as the merger wave consolidated it into a larger number of better-capitalised rivals than a decade ago. The other half of Durability is concentration and correlated-shock risk. As Lesson 92.5 discussed, a life insurer's structural exposure is to a pandemic or epidemic driving mortality claims up across its whole book simultaneously — a risk reserves and solvency margin exist to absorb, but one no single life insurer can diversify away through reinsurance the way a non-life insurer spreads catastrophe risk. Consistent with how this Canon treats similar sector-wide, only-partially-mitigable risks elsewhere, we score this sub-component 4 out of 7. Durability totals 10 out of 15.

Hemisphere 1 comes to 7 + 9 + 10 = 26 out of 40.

Lesson 92.7 — Hemisphere 2: Financial Strength, Valuation, Growth, and Dividends

Financial Strength & Profitability (out of 20). This is where the case study earns its place in this chapter. Return on equity has run in a thin band of roughly 3 to 5 percent across recent quarters — well below what a company trading at multiple times book value would need to justify that premium — and we score the return-on-equity sub-component 2 out of 8. For an insurer, Chapter 65's guidance points us to the solvency ratio as the capital-adequacy analogue of a bank's CAR: a ratio that fell from 3.22 to 1.45 — from comfortably above the regulatory floor to just beneath it — within roughly a year is a serious flag regardless of how the premium and profit lines read, and until at least two further quarters confirm a durable recovery with genuine room above the 1.5 minimum, we score this sub-component 1 out of 7. Earnings quality is also weak: the most recent quarter's profit fell 15 percent year on year even as premium income kept growing, a sign that claims, reserving, or investment income — not the underlying insurance franchise — are currently driving the bottom line, so we score this 1 out of 5. Financial Strength totals 4 out of 20.

Valuation Reasonableness (out of 15). A price near Rs 700 to Rs 750 against a book value of roughly Rs 126, and a trailing price-to-earnings ratio ranging from around 116 to nearly 194 depending on the quarter and data source, is expensive by any standard — and doubly so set against the Life Insurance sector's own average P/E of roughly 64 times, itself the richest of NEPSE's eleven sectors. NLIC trades at two to three times even that already-elevated sector average. We score the P/E sub-component 1 out of 8 and the P/B sub-component 1 out of 7, for a Valuation total of 2 out of 15.

Growth Trajectory (out of 15). The top line is genuinely strong: policies in force and premium income have both grown at healthy double-digit rates across recent fiscal years, and total revenue rose over 25 percent in one recent year. But Chapter 64's Growth Trajectory dimension asks about revenue and earnings growth together, and NLIC's earnings growth has recently reversed — from profit up over 30 percent in FY 2080/81 to a 15 percent year-on-year profit decline in the most recent quarter reported. Strong, real revenue growth paired with a recent earnings reversal earns a moderate score: 8 out of 15.

Dividend & Capital Return Discipline (out of 10). NLIC does have a genuine multi-year dividend record — distributions in the range of roughly 11 to 21 percent across most of the past several fiscal years, including a combined cash-and-bonus distribution of just over 21 percent for one recent year — a real track record, unlike some of the other case studies in this Part. Set against that record: one recent fiscal year paid no dividend at all, coinciding with the capital-raising pressure of the industry's merger wave, and the Solvency Margin Directive gives the Nepal Insurance Authority explicit power to restrict dividend payments if an insurer's solvency ratio falls short — a live risk for a company currently reporting a ratio at or just below the regulatory floor. We score this 6 out of 10: a real but not unbroken record, with a genuine regulatory question mark hanging over whether it can continue uninterrupted.

Hemisphere 2 comes to 4 + 2 + 8 + 6 = 20 out of 40.

Lesson 92.8 — The Full Worked Canon Score

Forty-six out of one hundred places NLIC in Chapter 64's Weak/Avoid band, just under the 55-point Adequate threshold. The governance override does not fire — the Governance sub-score of 9 out of 15 clears the 5-point floor, because this is a disclosure-quality shortfall around one important metric, not fraud or self-dealing. The shape of this score is worth sitting with: NLIC clears 26 of the available 40 points on the dimensions that describe what kind of company it structurally is — tradable, moated, reasonably governed — and manages only 20 of 40 on the dimensions that depend on its current financial results and the price being asked for them. That is a genuinely good business that a disciplined investor should not buy at this price, or with this capital-adequacy question still open — precisely the distinction a single blended "good company" impression would have missed.

Anjali's own conclusion, sitting with her father's matured policy cheque, was to keep her father's payout as proof the company can and does honor its promises, and to leave her own investment cheque in the bank until at least two more quarters confirm the solvency ratio has recovered with genuine room above the regulatory floor, and until the price comes down to something closer to what an insurer trading at five times book value would need to earn to justify itself.