Performance Analysis of Non-Life Insurance Index vs. NEPSE Index

July 15, 2025 | Investopaper

1. Introduction

This study presents a detailed comparative analysis of the Non-Life Insurance Index and the Nepal Stock Exchange (NEPSE) Index over the period from July 2018 to April 2025. The analysis includes descriptive statistics, performance metrics, risk assessments, and visualizations to provide insights into the relative performance, volatility, and correlation between these two indices. The study aims to evaluate how the Non-Life Insurance Index performed compared to the broader market index (NEPSE) during this period.

2. Data and Methodology

Data Source

The dataset was sourced from Nepal Stock Exchange (NEPSE) website containing daily closing values for the Non-Life Insurance Index and the NEPSE Index. The data spans from July 17, 2018, to April, 2025.

Methodology

Key calculations performed in the analysis include:

Daily Returns: Percentage change in index values from the previous day.
Cumulative Returns: Percentage change relative to the first observation.
Moving Averages: 20-day rolling averages to identify trends.
Volatility: 20-day rolling standard deviation of daily returns.
Correlation and Regression: Analysis of the relationship between the indices.
Performance Metrics: Total returns, annualized returns, Sharpe-like ratios, and maximum drawdowns.

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3. Descriptive Statistics

Index Levels

The summary statistics for the index levels are as follows:

Statistic	Non-Life Insurance Index	NEPSE Index
Minimum	3,947	1,101
1st Quartile	6,004	1,319
Median	9,542	2,005
Mean	9,292	1,977
3rd Quartile	12,090	2,545
Maximum	15,486	3,199

The Non-Life Insurance Index exhibits a significantly higher range of values compared to the NEPSE Index, reflecting its higher base value and greater absolute fluctuations.

Daily Returns

The daily returns provide insight into the short-term performance:

Statistic	Non-Life Insurance Returns (%)	NEPSE Returns (%)
Minimum	-7.46	-6
1st Quartile	-0.90	-0.72
Median	-0.13	-0.04
Mean	0.06	0.06
3rd Quartile	0.78	0.69
Maximum	8.22	6

Both indices show similar mean daily returns (approximately 0.06%), but the Non-Life Insurance Index has a slightly wider range of daily returns, indicating higher volatility.

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Advanced Statistics

Additional metrics provide deeper insights:

Metric	Non-Life Insurance	NEPSE
Mean Daily Return (%)	0.061	0.061
Standard Deviation (%)	1.78	1.41
Skewness	0.679	–
Kurtosis	5.55	–
Correlation with NEPSE (Returns)	0.837	–

The high correlation (0.837) suggests that the Non-Life Insurance Index closely tracks the NEPSE Index’s daily movements, though the former exhibits higher volatility.

4. Performance Metrics

Total and Annualized Returns

Non-Life Insurance Total Return: 102.87%
NEPSE Total Return: 122.07%
Non-Life Insurance Annualized Return: 15.3%
NEPSE Annualized Return: 17.26%

The NEPSE Index outperformed the Non-Life Insurance Index in terms of total return over the period, achieving a 122.07% cumulative return compared to 102.87% for the Non-Life Insurance Index.

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Risk Metrics

Non-Life Insurance Volatility: 1.78%
NEPSE Volatility: 1.41%
Non-Life Insurance Sharpe-like Ratio: 0.034
NEPSE Sharpe-like Ratio: 0.044
Non-Life Insurance Maximum Drawdown: 52.25%
NEPSE Maximum Drawdown: 43.26%

The NEPSE Index demonstrates a better risk-adjusted return (higher Sharpe-like ratio) due to its lower volatility and comparable mean returns. The Non-Life Insurance Index’s higher volatility (1.78% vs. 1.41%) indicates greater risk.

Maximum Drawdown Analysis

Maximum drawdown measures the largest percentage decline from a peak to a trough during the period, providing insight into the risk and volatility of each index.

Non-Life Insurance Index

Maximum Drawdown: -52.25%
Peak Date: June 14, 2021 (Value: 15,486.33)
Trough Date: December 22, 2022 (Value: 7,395.38)

NEPSE Index

Maximum Drawdown: -43.26%
Peak Date: August 18, 2021 (Value: 3,199.03)
Trough Date: September 25, 2022 (Value: 1,815.14)

The Non-Life Insurance Index experienced a more significant decline (-52.25%) compared to the NEPSE Index (-43.26%), indicating higher downside risk during the analysis period. The peak and trough dates suggest that both indices faced significant declines in 2021–2022, with the Non-Life Insurance Index reaching its lowest point later than the NEPSE Index.

5. Visual Analysis

5.1 Time Series with Moving Averages

The time series plot compares the Non-Life Insurance Index and NEPSE Index, including their 20-day moving averages, from July 2018 to April 2025.

Figure 1: Performance Comparison of NEPSE Index and Non-Life Insurance Index

The plot shows:

Both indices exhibit upward trends, with the Non-Life Insurance Index generally maintaining higher absolute values.
The 20-day moving averages smooth out short-term fluctuations, highlighting the overall upward trajectory.

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5.2 Cumulative Returns

The cumulative returns plot illustrates performance relative to the starting point (July 17, 2018):

The NEPSE Index achieved a higher cumulative return (122.07%) compared to the Non-Life Insurance Index (102.87%).
Both indices show steady growth, with periods of divergence where NEPSE outperforms.

Figure 1: Cumulative Returns Comparison of NEPSE Index and Non-Life Insurance Index

5.3 Daily Returns Distribution and Correlation

The daily returns scatter plot shows a strong positive correlation (0.837) between the indices, with most points clustered around the origin. The linear regression line (beta = 1.056) confirms the Non-Life Insurance Index’s slight amplification of NEPSE movements.

Figure 1: Daily Returns Distribution and Correlation

The distribution of daily returns for both indices is roughly symmetric, with the Non-Life Insurance Index showing a wider spread (higher volatility). Mean returns are marked, showing similar central tendencies.

5.4 Rolling Volatility

The 20-day rolling volatility plot compares the standard deviation of daily returns:

The Non-Life Insurance Index consistently exhibits higher volatility (peaking around 1.78%) compared to the NEPSE Index (around 1.41%).
Volatility trends are similar, with peaks and troughs aligning, reflecting the high correlation between the indices.

Figure 1: 20-Day Rolling Volatility Comparison

5.5 Drawdown Analysis

The drawdown analysis visualizes the percentage decline from each index’s peak value over time.

Figure 1: Maximum Drawdown Analysis

Key observations include:

The Non-Life Insurance Index shows larger and more prolonged drawdowns, peaking at -52.25% in December 2022.
The NEPSE Index, with a maximum drawdown of -43.26%, experienced a less severe decline, reaching its trough earlier in September 2022.

5.6 Monthly Returns Heatmap

Monthly returns were calculated to assess the performance consistency of both indices. Heatmaps display the monthly percentage returns for each year from 2018 to 2025, with red indicating negative returns and blue indicating positive returns.

Monthly Returns of Non-Life Insurance Index

Figure 1: Heatmap of Monthly Returns of Non-Life Insurance Index

Monthly Returns of NEPSE Index

Figure 1: Heatmap of Monthly Returns of Nepse Index

6. Key Insights

Correlation: The Non-Life Insurance Index and NEPSE Index daily returns are strongly correlated (0.837), indicating that the insurance sector closely follows broader market movements.
Performance: The NEPSE Index outperformed the Non-Life Insurance Index, achieving a total return of 122.07% compared to 102.87% over the period.
Risk: The Non-Life Insurance Index is riskier, with higher daily return volatility (1.78% vs. 1.41%) and a beta of 1.056, indicating greater sensitivity to market movements.
Risk-Adjusted Returns: The NEPSE Index has a higher Sharpe-like ratio (0.044 vs. 0.034), suggesting better risk-adjusted performance.
Beta and Alpha: The Non-Life Insurance Index’s beta of 1.056 and negative alpha (-0.004) indicate slight underperformance relative to the market on a risk-adjusted basis.

7. Conclusion

The analysis reveals that the NEPSE Index outperformed the Non-Life Insurance Index in terms of total return and risk-adjusted performance over the period from July 2018 to April 2025. While the Non-Life Insurance Index achieved significant growth (102.87%), it was outpaced by the NEPSE Index (122.07%). The higher volatility and beta of the Non-Life Insurance Index suggest it is more sensitive to market fluctuations, which may appeal to investors seeking higher risk-reward opportunities but comes with increased uncertainty. The strong correlation between the indices indicates that the non-life insurance sector is closely tied to broader market trends in Nepal.

8. Recommendations

Those seeking lower volatility and better risk-adjusted returns may prefer exposure to the broader NEPSE Index. However, the Non-Life Insurance Index may offer opportunities for higher returns in bullish markets due to its higher beta. Given the high correlation, the Non-Life Insurance Index may not provide significant diversification benefits within a portfolio heavily weighted toward NEPSE constituents.

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This analysis is based on historical data from July 2018, to April 2025, and past performance does not guarantee future results. Investment decisions should consider individual risk tolerance, investment objectives, and current market conditions.

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