Neco Insurance (NEPSE: NIL) — Company Profile

Executive Summary

Neco Insurance Limited (NEPSE: NIL) is a non-life (general) insurer incorporated in September 1994 (registered 1994 BS) and licensed in May 1996. It is Nepal's sole AIG Network Partner — a structural differentiator for commercial and multinational lines. FY2081/82 was its 30th year of operation. It underwrites across seven classes — property (fire), motor, marine, engineering, agriculture, aviation, and miscellaneous — through a network of 108 offices and 572 employees (FY2081/82, company self-reported). No holding company, subsidiaries, or associates exist in any year. (Source: NECO Annual Report FY2081/82, Note 1 and Note 53 — Primary.)

NECO is the most consistent underwriter among Nepal's listed non-life insurers: net combined ratio 70.4–75.5% over four audited years, the tightest band of the listed peer set. Its largest float (NPR 1,665.7 million, net of reinsurance assets) is carried at a cost of approximately −28.1% (Derived: underwriting result NPR 474.8 million ÷ average float NPR 1,687.4 million) — meaning the company is paid to hold the float, not the reverse. (Source: NECO verified financial file — Primary.)

The central analytical observation: FY2081/82 investment income fell 36.3% (NPR 449.9 million → NPR 286.5 million) against a growing investment portfolio (NPR 6.91 billion). This drove a fall in ROE from approximately 17.5% (FY2079/80 peak) to approximately 10.1% (FY2081/82). Note 29 of the FY2081/82 annual report confirms that approximately 96% of the investment-income drop is fixed-deposit interest repricing — "A"-class bank FD interest fell from NPR 335.1 million to NPR 197.8 million. Dividend income actually rose (NPR 4.7 million → NPR 6.3 million). Note 30 shows net fair-value changes are nil. Management states plainly: "Return on investment declines significantly to 4% from 9%... due to the effect of declining interest rate in interest bearing investment specially fixed deposits." (Source: NECO Annual Report FY2081/82, Notes 29 and 30 — Primary.) The investment portfolio is 74% short-duration — it reprices fast in both directions.

Business Overview

NECO collects gross premiums, cedes approximately 45% to reinsurers, retains approximately 55% of risk, pays claims with a lag, and invests the resulting float — approximately NPR 1.7 billion net technical reserves plus NPR 6.3 billion shareholder capital, approximately NPR 6.9 billion investment book total. It makes money two ways: an underwriting profit of approximately 25 cents per rupee of net earned premium, and interest on the float. (Source: NECO verified financial file — Primary.)

AIG Network Partnership. NECO is the sole AIG network partner in Nepal, providing access to multinational client programs. The FY2081/82 report confirms the partnership continues and lists the reinsurance panel as AIG, GIC Re, New India Assurance, and Sirius International (UK). (Source: NECO Annual Report FY2081/82 — Primary, company self-reported.)

Promoter base. Promoters (51%) are led by Rastriya Banijya Bank (15.00%), Citizen Investment Trust (8.12%), and Agriculture Development Bank (3.34%), plus private holders including Kriti Kumari Mahato (10.88%) and B.K. Vinayak Pvt Ltd (7.01%). The state-bank promoters provide a captive loan-linked insurance distribution channel that does not appear on the balance sheet. (Source: NECO Annual Report FY2080/81, Note 17(a) — Primary.)

Financial Performance

All figures NPR, single-entity standalone. Source: NECO audited annual reports FY2077/78–FY2081/82 — Primary. FY2079/80 recovered from FY2080/81 comparative column.

Five-Year Financial Summary

†FY2077/78 labeled "Net Claims Paid," not full NFRS incurred basis — loss ratio approximate.

Source: NECO primary financials verified file — Primary.

The investment-income collapse is the defining event. Investment income peaked at NPR 456.8 million (FY2079/80) and fell to NPR 286.5 million (FY2081/82) — a 36.3% decline — while the investment portfolio grew to NPR 6.91 billion. Note 29 confirms the cause: "A"-class bank FD interest alone fell NPR 137.3 million (−41%). Dividend income rose; Note 30 shows nil fair-value changes. This is deposit-rate repricing on a 74%-short-duration book, not structural impairment or hidden losses. (Source: NECO Annual Report FY2081/82, Notes 29 and 30 — Primary.)

Underwriting consistency. Net combined ratio (Derived: net claims + net expenses ÷ NEP) held in a band of 70.4–75.5% over four years — a range of 4.67 percentage points — at a net retention of approximately 55%. OCF exceeded PAT in every year: FY2081/82 OCF NPR 883.4 million vs PAT NPR 578.8 million (153%). Reserves are building, not releasing. (Source: NECO verified financial file — Primary.)

Quarterly Snapshot

Unaudited, cumulative YTD. Source: NECO FY2082/83 Q1–Q3 quarterly filings with SEBON — Primary (unaudited).

Source: NECO Q3 FY2082/83 quarterly report — Primary.

Reading Q1 correctly. The Q1 net loss of NPR 83.1 million was driven by a large gross insurance contract liability reserve build associated with Bhadra 2082 (September 2025) floods and the protest-movement losses that hit the sector. The earthquake premium reserve jumped from NPR 7.5 million to NPR 28.9 million in Q1. This was a conservative recognition of incurred losses (reserve build), not an operating collapse. Q2 (standalone PAT NPR 93.9 million) and Q3 (standalone PAT NPR 153.2 million) recovered cleanly. (Source: NECO Q1 FY2082/83 quarterly report — Primary.)

FY2082/83 investment income trajectory. 9M investment income of NPR 144.3 million annualizes to approximately NPR 192 million — still below even the depressed FY2081/82 full-year NPR 286.5 million. The rate trough persisted into FY2082/83 as of Q3. This, not Q1 underwriting, is what constrains the full-year earnings estimate. Our analytical estimate for FY2082/83 EPS: approximately NPR 11.5 (Estimate — inputs: Q1 catastrophe + trough investment income + share dilution from rights issue; invalidated if Q4 produces a very large underwriting profit or investment income accelerates). (Estimate — see Valuation Context.)

Market Position

Market share: 7.52%, ranked 7th of 14 non-life insurers on 9M FY2082/83 gross written premium, per NIA company-by-province data. Sector leader SICL holds approximately 13.23%. (Source: NIA FY2082/83 9M data — Primary.)

Underwriting consistency vs listed peers:

NECO retains approximately twice the risk per rupee of GWP as most peers yet posts the tightest combined-ratio band — an indication of genuine underwriting selection, not a reinsurance-commission subsidy. NIA's 9M FY2082/83 whole-portfolio gross loss ratio ranks NECO among the sector's lowest. (Source: NECO verified financial file — Primary; NIA data — Primary.)

AIG network partnership differentiates NECO in commercial and multinational lines — a real but narrow, relationship-based competitive advantage, not a structural cost moat.

Regulatory and Macro Context

NIA RBC solvency regime. NECO's Risk-Based Capital solvency ratio is 506% (Q3 FY2082/83) against a 130% regulatory minimum — approximately 4× the required cushion. This is a fortress capital position. (Source: NECO Q3 FY2082/83 quarterly report; Annual Report FY2081/82 — Primary.)

Mandatory reinsurance cession — policy reversal. NIA's Reinsurance Directive 2080 set a declining domestic cession to Nepal Re (10% → 2% over FY2079/80–FY2083/84). The FY2083/84 budget (approximately May 2026, effective approximately 17 July 2026) reinstates a mandatory 20% cession of the direct portfolio to Nepal Re (NRIC). The implementing directive is pending. Effect on NECO: pushes net retention lower than today's 55%, shrinking net earned premium and absolute underwriting profit in NPR while raising RI commission income — approximately neutral on combined-ratio but increasing reinsurance dependency. (Source: Beema Post, May 2026 — Secondary.)

Non-life insurance sector growth. Nepal non-life insurance penetration is approximately 3.7% of GDP. Sector gross written premium grew approximately 12.4% in FY2081/82. The sector is growing structurally as credit penetration, vehicle ownership, and construction activity increase. (Source: NIA annual data — Primary.)

NFRS 17 adoption. NECO has engaged an actuarial consultant to begin NFRS 17 implementation. When adopted, NFRS 17 will reshape reserve/liability presentation and could move equity at adoption. The implementation timeline is not disclosed. (Source: NECO Annual Report FY2081/82 — Primary.)

Governance and Capital Allocation

Related-party transactions — clean for NEPSE. No holding company, subsidiaries, or associates in any year (Note 53 confirmed across all five audited reports). Related-party disclosure is limited to KMP compensation — no premium, commission, rental, or asset transactions with any related party appear in any year's RPT table. KMP short-term benefits NPR 57.9 million (FY2081/82); CEO total compensation NPR 31.7 million. (Source: NECO Annual Report FY2081/82, Notes 53 and related-party schedule — Primary.)

CEO and board continuity. CEO Ashok Kumar Khadka has led throughout FY2077/78–FY2081/82 — a stability and continuity signal (30+ years banking/insurance experience). (Source: NECO Annual Reports — Primary.)

Capital allocation record. Over five years, NECO paid dividends every year (mix of cash and bonus shares) and grew equity from NPR 3.08 billion to NPR 6.31 billion. Share count grew approximately 82% from FY2077/78 to Q3 FY2082/83 via bonus and rights issuances — a persistent dilution headwind. NAVPS grew from NPR 202 to NPR 251 (net of dilution). In FY2081/82, NECO shifted to a meaningful 12.79% cash dividend, a rational signal that the business no longer has high-return reinvestment for all its earnings. Earnings quality: OCF consistently exceeded PAT (FY2081/82 153%; FY2080/81 147%). (Source: NECO verified financial file — Primary.)

FY2079/80 NIA-forced restatement. The regulator directed an amendment to FY2079/80 financials, reducing retained earnings by NPR 51.6 million after identifying reporting errors. This is a governance yellow flag; it is four years old and the auditor was changed around the same period. (Source: NECO Annual Report FY2080/81 — Primary.)

Promoter share sale (July 2026). NECO opened a sale of 1.2 million promoter-group shares at par (NPR 100) on approximately 21 July 2026, offered first to existing promoters for 35 days before the public. The par-value price is a regulatory feature of Nepali promoter-share transfers — not a signal that insiders value the equity at NPR 100. The par-value sale mechanism is standard under Nepal law; the selling promoter is not named in available sources. (Source: ShareHub Nepal, 21 July 2026 — Secondary.)

Key Risks

Valuation versus ROE. At NPR 630 (approximately 2.67× NAVPS NPR 251, Derived), the excess-return model implies a sustainable ROE of approximately 23–26%. NECO has delivered 9.2–17.5% over five years and is at approximately 10.1% currently. On a strict cost-of-equity basis (COE approximately 12.5–13.5%), NECO earns near or below its cost of capital — and should trade near to modestly above book, not 2.67× book. (Source: NECO verified financial file — Primary; COE: Estimate, inputs stated in Valuation Context.)

FY2082/83 earnings disappointment. Our FY2082/83 EPS estimate is approximately NPR 11.5 (Estimate — Q1 catastrophe + trough investment income + dilution). This implies approximately 55× trailing P/E at NPR 630, a significant premium for a current-year earnings trough.

Investment income cyclical trough persisting. 9M investment income of NPR 144.3 million annualizes to approximately NPR 192 million — below the FY2081/82 full-year NPR 286.5 million. If NRB maintains the easing stance, the trough persists into FY2083/84.

Mandatory cession reversal. The FY2083/84 mandatory 20% cession requirement will shrink NECO's retained premium (NEP) and absolute underwriting profit in rupee terms, even if the combined ratio holds steady. The implementing directive timing and scope are pending.

Blank claim-development table. Note 46 of the FY2081/82 annual report shows all cells zero — a transparency gap for a 30-year insurer. Independent verification of IBNR reserve adequacy is not possible from the filed disclosure. The building OCF (153% of PAT) and rising reserves argue against under-reserving, but the gap is real.

Analytical Perspectives

The case for the franchise. NECO's underwriting consistency is the most durable analytical finding: net combined ratio 70.4–75.5% over four years at approximately 55% net retention, the tightest band of the listed non-life peer set. Cost of float approximately −28.1% (Derived) — the company is paid to hold the float, not vice versa. OCF consistently exceeds PAT. RBC solvency 506% provides genuine balance-sheet protection. The AIG partnership is a real, if narrow, differentiator in commercial lines. Investment income is demonstrably cyclical (Note 29 confirms 96% is FD-rate repricing) and will recover when NRB deposits normalize.

The analytical tension. At NPR 630, approximately 2.67× book on approximately 10% ROE, the price implies sustainable ROE of approximately 23–26% — levels NECO has never delivered. Normalized EPS (mid-cycle investment income ~NPR 420 million, through-cycle combined ratio, approximately 27.7 million shares) is approximately NPR 22.7 (Estimate — see Valuation Context). At NPR 630, the normalized trailing P/E is approximately 27.7× (Derived: 630 ÷ 22.7). The best non-life underwriting franchise in Nepal is not a cheap stock at this price.

Valuation Context

Reference price NPR 630 (24 July 2026 — Secondary). All multiples and estimates labeled accordingly. Not investment recommendations.

Normalized earnings (Estimate). Inputs: NEP approximately NPR 1,950 million growing; through-cycle net combined ratio 76% (catastrophe-loaded) → underwriting result approximately NPR 468 million; mid-cycle investment income approximately NPR 420 million (7% on NPR 6.0 billion interest-bearing book); normalized PBT approximately NPR 926 million; tax 32% → normalized PAT approximately NPR 630 million; per share on 27.7 million shares → normalized EPS approximately NPR 22.7. (Estimate — inputs stated; invalidated if: NRB deposit rates hold sub-6% for multiple years reducing investment income to ~NPR 280–320 million; or mandatory cession shrinks NEP materially below NPR 1,900 million; or combined ratio rises above 80%.)

FY2082/83 EPS estimate approximately NPR 11.5 (Estimate — Q1 catastrophe + trough investment income + share dilution). (Invalidated if: Q4 produces a large underwriting recovery or investment income accelerates sharply.)

Weighted base fair value approximately NPR 300 (Estimate — intrinsic value methods weighted more heavily than sector premium, reflecting that the premium is fragile and the franchise earns near COE). Scenario range: Bear approximately NPR 200 (NRB rates stay low, combined ratio rises, sector de-rates) — Base approximately NPR 300 — Bull approximately NPR 400 (investment income recovers to NPR 420 million, combined ratio holds, NEPSE sector premium persists). (All Estimates — not investment recommendations.)

At NPR 630: P/B approximately 2.51× (FY2081/82 NAVPS NPR 251, Derived); normalized P/E approximately 27.7× (Derived); current-year P/E approximately 55× (our FY2082/83 EPS estimate NPR 11.5, Estimate/Derived). Reverse-valuation: fair P/B 2.67× at COE 12.5%, g 5% implies sustainable ROE of approximately 26% — a level NECO has never delivered. (Derived from excess-return model.)

What We Are Watching

1. FY2082/83 full-year audited results (expected August–October 2026). Key data: Note 29 investment-income run-rate (is FD interest turning up?); net combined ratio through Q4; EPS vs our approximately NPR 11.5 estimate; and — most importantly — whether the claim-development table (Note 46) is populated in the FY2082/83 annual report.

2. NRB monetary policy direction. The short-duration investment book (74% of portfolio) reprices rapidly. A policy-rate tightening cycle that lifts "A"-class bank FD rates from approximately 5% back toward 8–9% would add approximately NPR 4–5 EPS annually at mid-cycle. The NRB policy decision timeline is the most important external variable.

3. FY2083/84 mandatory cession implementing directive. The scope and timing of the reinstated 20% Nepal Re cession will determine the impact on NECO's net retained premium, underwriting profit, and RI commission income.

References

1. Neco Insurance Limited — Audited Annual Reports FY2077/78–FY2081/82 (five years); FY2082/83 Q1–Q3 Unaudited Quarterly Reports. Auditor: name varies across years (confirmed unqualified FY2079/80 by OCR). Accessible via SEBON filings. Key notes used: Note 29 (investment income sub-split, FD repricing confirmation), Note 30 (nil fair-value changes), Note 53 (no subsidiaries/associates), Note 17(a) (promoter shareholding), contingent liabilities note. Primary, company self-reported.

2. Nepal Insurance Authority (NIA) — 9M FY2082/83 insurer-by-province GWP tables (market share data: NECO 7.52%, SICL 13.23%). nia.gov.np Primary.

3. ShareHub Nepal — NIL market data (price NPR 630, 24 July 2026; promoter share sale announcement 21 July 2026). Accessed 2026-07-25. sharehubnepal.com Secondary.

4. Beema Post — FY2083/84 budget reinstates 20% mandatory domestic cession to Nepal Re. May 2026. Secondary.

5. +16 Capital Nepal Non-Life Insurance Sector Report — sector GWP growth 12.4%, penetration approximately 3.7% of GDP, peer combined-ratio comparison (SICL, SGIC). Internal research citing NIA primary data. Secondary.