Life insurers are large index constituents in India and are analysed wrongly more often than almost anything else. The reason is structural: an insurer collects a premium today and pays a claim in thirty years, so accounting profit in any single year tells you very little about whether the business is any good.
Embedded value
- Net worth
- The shareholders’ capital, as on any balance sheet
- Value in force
- The discounted profit expected from the existing book, actuarially estimated
Example: This is the insurance equivalent of book value, and it is what price-to-EV compares against. Note that the second term is an actuarial estimate involving assumptions about mortality, lapse rates and investment returns — it is a model output, not an observed fact.
Value of new business
VNB is the present value of expected profit from policies sold this year. It is the closest thing to an insurer’s real annual earnings, and the VNB margin — VNB as a percentage of premiums written — is the profitability ratio that matters.
| Metric | What it tells you | What to look for |
|---|---|---|
| VNB growth | Whether the business written this year is growing | Consistent growth. This is the real top line. |
| VNB margin | How profitable the new business is | Rising margins usually mean a better product mix — protection over savings. |
| Persistency | What share of policies are still being paid after 13, 25, 61 months | Higher is better. Lapsed policies destroy the profit that was assumed at sale. |
| Product mix | Protection versus savings versus ULIP | Protection is far more profitable. A shift towards it lifts VNB margin. |
| Solvency ratio | Regulatory capital cushion | Comfortably above the regulatory minimum, or a capital raise is coming. |
General insurance is a different business again
- Below 100%
- The underwriting itself is profitable
- Above 100%
- Underwriting loses money; profit depends entirely on investing the float
Example: Most general insurers run combined ratios above 100 and make their money on the float — the premiums held between collection and claim, invested in the meantime. That makes them partly an investment business, and it makes their profitability sensitive to interest rates.
Insurance analysis
2 questions. Answers are revealed once you submit all of them.
1.A life insurer grows new business strongly, and its reported net profit falls. What is the most likely explanation?
2.Why does falling persistency undermine embedded value?
Insurance company aaj paisa leti hai aur claim shayad 20 saal baad dena padega. Toh uska "profit" bahut kuch andaze pe tika hai — kitne log claim karenge, kitna jiyenge. Isiliye normal PE se yahan kaam nahi chalta; embedded value jaise alag paimane lagte hain.
- For a life insurer, writing profitable new business reduces this year’s reported profit.
- Embedded value is the book-value equivalent; price-to-EV replaces P/B.
- VNB and VNB margin are the closest thing to real annual earnings.
- Persistency determines whether the profits baked into EV ever arrive.
- Embedded value is a model — read the sensitivity tables.
Mark it done to track your progress through the curriculum.
Common questions
Short, direct answers to what people ask about this topic.
- embedded value meaning in insurance
- Embedded value is a life insurer’s net worth plus the present value of future profits from the policies it has already sold. It is the industry’s substitute for book value, and price-to-EV is the multiple analysts compare across insurers the way price-to-book is used for banks. The second half of that sum is an actuarial estimate built on assumptions about mortality, lapse rates and investment returns — a model output rather than an observed fact.
- the present value of expected profit from policies sold during the year is called
- Value of new business, usually shortened to VNB. It is the closest thing a life insurer has to real annual earnings, and VNB expressed as a percentage of premiums written gives the VNB margin, the profitability ratio the sector actually watches. Reported net profit for the same year can move in the opposite direction, because selling costs are booked immediately while the profit emerges over decades.
- why does a life insurer report lower profit when new business grows
- Because the cost of selling a policy hits the income statement immediately while the profit from that policy emerges over the following twenty or thirty years. An insurer writing more profitable new business therefore depresses this year’s reported earnings, which makes P/E close to meaningless for the sector. That accounting mismatch is precisely why the industry reports embedded value and VNB alongside statutory profit.
- what is the minimum solvency ratio for insurers in india
- IRDAI requires Indian insurers to hold a solvency ratio of at least 1.5, meaning 150% of the required solvency margin. Listed insurers generally run above that floor and disclose the figure every quarter, and a company drifting towards the minimum is usually approaching a capital raise. The ratio measures regulatory capital adequacy, not profitability.
- what does a combined ratio above 100 mean
- A combined ratio above 100% means a general insurer pays out more in claims and expenses than it collects in premiums, so the underwriting itself loses money. Profit then depends entirely on the float — the premiums held between collection and claim and invested in the meantime — which makes the insurer partly an investment business and sensitive to interest rates. Below 100% means the underwriting is profitable on its own.