How to Evaluate Insurance Companies: Embedded Value to Combined Ratio

Insurance is a sector where headline growth can attract investors. A company may report premium income, wider distribution and policy sales, but the key question is whether this growth creates durable value. Insurance is not like a business where revenue today turns into profit. An insurer collects premiums now and may pay claims much later. Hence, investors must study growth, risk selection, retention, claims experience and capital strength.

Premium Growth: The Starting Point

Premium growth shows how fast an insurer is expanding. In life insurance, investors track new business premium, renewal premium and annualised premium equivalent. In general insurance, gross written premium is followed.

However, premium growth alone can mislead. A company can grow aggressively by underpricing products, paying higher commissions or entering risky segments. This may improve market share, but claims and expenses can damage profitability later. Therefore, premium growth should only answer whether the company is scaling. It does not show whether growth is healthy.

Embedded Value: The Worth Already Built

Embedded value is among the most important metrics for life insurers. It represents adjusted net worth plus the present value of future profits expected from existing policies.

This is useful because life insurance policies create value over many years. A policy sold today may generate renewal premiums and profits for a long period. Traditional accounting may not capture this future profit stream immediately. Embedded value helps investors understand the value already built into the existing book.

Investors often compare market capitalisation with embedded value through the price-to-embedded value ratio. A higher ratio may show that the market expects strong growth. A lower ratio may indicate undervaluation or concerns around margins, persistency or product mix. Still, embedded value should not be read blindly. Assumptions matter.

VNB and VNB Margin: Profitability of New Business

Value of new business, or VNB, measures the expected future profit from new policies sold during a period. Premium growth tells us how much business was sold, but VNB tells us how profitable that business may be.

VNB margin shows new business profitability. Two insurers may report similar premium growth, but their value creation can be different. One may sell more protection products, which generally carry better margins. Another may sell more low-margin savings products. Hence, investors should ask whether the insurer is selling profitable policies, not just more policies.

Persistency Ratio: Are Customers Staying?

Insurance is a long-term business, so customer retention is critical. Persistency ratio shows how many policyholders continue paying premiums after buying a policy. The 13th-month ratio shows retention after the first year, while the 61st-month ratio reflects stickiness.

High persistency indicates trust, suitable product selling and future cash flows. Weak persistency may point to mis-selling, poor customer experience or unsuitable products. Since insurers spend heavily on acquiring customers, early policy lapses can hurt profitability.

Combined Ratio: Key Metric for General Insurance

For general insurers, the combined ratio is one of the most important indicators. It combines the claims ratio and expense ratio, showing whether the insurer is making an underwriting profit.

A combined ratio below 100 per cent means the insurer earns more from premiums than it spends on claims and expenses. A ratio above 100 per cent means underwriting losses. Some companies may still report profits because of investment income, but depending too much on investment income is not ideal. A strong general insurer should show underwriting discipline.

The claims ratio shows how much of the premium is used to pay claims. A high claims ratio may suggest weak pricing or poor risk selection. The expense ratio shows spending on commissions, operations and distribution. If expenses remain high, premium growth may not convert into profits.

Solvency Ratio: Strength Behind the Promise

Insurance is built on trust. Customers pay premiums because they expect the insurer to honour claims in the future. The solvency ratio measures whether the company has enough capital to meet obligations.

A comfortable solvency ratio gives confidence during stress periods. If solvency weakens, the company may need to raise capital, reduce risk exposure or slow growth. Fast premium expansion without capital strength can become risky.

Product Mix and Distribution Quality

Not all insurance products are equally profitable. In life insurance, protection, savings, annuity and unit-linked products have different margins and risks. In general insurance, motor, health, fire, crop and commercial lines behave differently across cycles.

Distribution also matters. Bancassurance provides scale through branches. Agency channels build relationships. Digital channels may reduce costs, but require execution and trust. A good insurer should grow while maintaining a healthy product mix.

Final Checklist for Investors

When evaluating insurers, investors should avoid judging them only by premium growth. For life insurers, embedded value, VNB, VNB margin, persistency, solvency and product mix are crucial. For general insurers, combined ratio, claims ratio, expense ratio, solvency and investment income quality deserve attention.

The best insurance businesses price risk sensibly, retain customers, control claims, manage expenses and maintain capital strength. In insurance, the smarter question is not how much premium the company collected. It is how much long-term value it created from the risk accepted.