Traditional valuation fails. Use EV and VNB.
An insurer sells a promise today and pays out years or decades later, which is why normal profit and PE mean almost nothing here. It collects premiums, invests the float, and hopes it priced the risk correctly. The profit in a life policy is spread across its whole life, so the industry invented its own yardsticks: the value baked into each new policy sold, and the embedded value of the whole book. Read a life insurer through those, plus how many customers keep paying their renewals, because a policy that lapses in year two was an expensive sale that earned nothing.
An insurer is one of the few businesses where this year’s profit tells you almost nothing.
An insurer takes premiums from many people today and promises to pay out to the unlucky few later, sometimes decades later. In between, it invests that pool of money. So its profit is not this year’s premiums; it is spread across the entire life of the policies it sold, which is why normal profit and PE mean almost nothing here.
The pile of premiums an insurer holds before it pays claims is called the float, and investing it is a big source of profit. But the core skill is pricing risk correctly, charging enough to cover the claims that will eventually come. Underprice, and it grows fast then loses fortunes when the claims arrive.
Because profit is spread over decades, the industry invented its own yardsticks. The value of new business, and its margin, measure the profit embedded in the policies sold this year. Embedded value measures the worth of the whole book. A life insurer is read through these, and usually priced on its embedded value, not PE.
A policy only makes money if the customer keeps paying the renewals. Persistency measures how many stick around. High persistency means the sales were genuine and the book is healthy; low persistency means policies were mis-sold and lapse, wasting the cost of every sale.
Life insurance is long-term: decades of premiums, read on embedded value and new-business margin. General insurance (health, motor, fire) is short-term: you insure for a year and renew, and it is read on the combined ratio, which is claims plus costs as a share of premiums. Below 100% means the insurance itself makes money; above 100% means it loses on insurance and leans on investment income.
The two classic failures are underpricing risk, where a wave of claims wipes out years of premiums, and mis-selling, where policies lapse or the book was built on false promises. Watch the solvency ratio, the cushion that proves the insurer can pay future claims.
For life insurers, use price-to-embedded-value and the new-business margin, plus persistency and solvency. For general insurers, the combined ratio is king. PE will mislead you in both.
Every sector reduces to a demand metric, a pricing metric, an efficiency metric, a capital metric, and a risk metric. For insurance, these are the ones that matter.
What each number tells you, and how to read it.
| Metric | Why it matters |
|---|---|
| APE Growth | Annualised premium equivalent, the sales-volume topline for life insurers. |
| VNB Margin | Value of new business margin, the profitability of each new policy sold. Above 25% is excellent. |
| Persistency Ratio | Policy renewals. 13th-month above 85% is good. It measures stickiness and the quality of the sale. |
| Embedded Value (EV) | Intrinsic value: adjusted net worth plus the present value of future profits. The PE equivalent for insurers. |
| EV Growth | The long-term compounding indicator. 15%+ EV growth signals a strong franchise. |
| Solvency Ratio | The ability to pay future claims. IRDAI minimum is 150%. Higher means more financial strength. |