Yash and Chaitanya meet over a cup of tea and with the buzz of LIC IPO they started discussing about the metric used in valuing an insurance company.

Yash: Hey! There’s a lot of buzz in the market regarding LIC’s valuation being close to its embedded value(EV). What is the EV actually?

Chaitanya: Yes, it is a valuation measure for life Insurance companies.

Yash: I get that, but do you know what it is, its significance and how is it calculated?

Chaitanya: Embedded value (EV) is the sum of the present value of future profits and net asset value (NAV). The future profits is represented by premium receivable from policy holders, less any claims, and other expenses. NAV on other hand, is the net of assets and liabilities held by an insurance company. Assets of Insurance companies generally consists of investments made out of premiums collected which can range from bond, commercial paper or even real estate, depending on the duration of the policies and the liabilities include any borrowings or provisions etc.

Yash: How do we get future profits? How can they determine future policies sold or future business?

Chaitanya: Embedded value considers the active policies of the company i.e. policies active as of today and the premium it will fetch in the upcoming years.

Yash: The calculation looks fine, but what does Embedded Value signify?

Chaitanya: Embedded Value represents the consolidated value of shareholder interest in an insurance company. We can say that it tells us about the value of the company based on its current book or policies of the insurer.

Yash: Coming to LIC, what is its EV?

Chaitanya: Milliman Advisors, a global actuarial firm, had estimated the embedded value of LIC at ₹5.4 lakh crore as of September 30, 2021. The IPO is priced at ₹902-₹949 a share. At this price, the IPO is sized at ₹21,000 crore approximately and in terms of EV, LIC’s valuations work out to about 1.1x FY22 price to EV. This is lower compared to the earlier numbers doing rounds at 2-2.5x price to EV.

Yash: So, can we say that embedded value is the worth of the insurance company?

Chaitanya: Not really. Embedded Value is conservative benchmark of valuing the company, and may not represent the real value of business as it gauges only the future premium income from existing policies and NAV on a certain date. It excludes the business potential or the value of new business that a company can generate, and the goodwill accrued. Therefore, the insurance company’s actual value may be more than its EV.


Lets consider this. A company with market capitalisation of ₹12,000 crore and EV of ₹4,000 crore indicates that investors are willing to pay 3x its EV. Listed Indian Insurance companies tend to trade 2x price-to-embedded value which is higher than its global peers and this is because India is considered as an under penetrated market and therefore scope for growth is there.

Yash: What else does Embedded Value imply, and can it be used as an indicator?

Chaitanya: This number can be used to make comparison across companies in the sector. Even on a standalone basis, tracking EV is important as it gives an insight to a company’s performance over a period. EV can be used as an indicator. In fact, it is used as one. If the EV is consistent and growing at a steady pace, it is considered stable. When EV fluctuates – that is, rises and drops significantly year after year, then investors should be cautious and take a closer look into the financials.

Yash: Thanks, Chaitanya. This discussion was quite helpful.