Why this year’s profit is the wrong number

A life insurer sells contracts that last 10, 20, 40 years. The costs of selling one — commission to the agent or bank, underwriting, setting up the policy, and the reserves the insurer must set aside up front — land mostly in the year it’s sold. The profit on it arrives slowly, over the whole life of the policy.

So the accounting profit for a year mixes two things: profit released from old policies, and the up-front cost of new ones (often called new business strain). An insurer that sells more this year can report less profit this year. That’s why profit after tax (PAT), and so the P/E (price-to-earnings) ratio built on it, says little about a growing life insurer.

The sector’s answer is to value the future profits directly:

  • Embedded value (EV) — what the business already on the books is worth to shareholders: the shareholders’ adjusted net worth, plus the present value of future profits from policies already in force.
  • Value of new business (VNB) — the present value of future profits from the policies sold this year.
  • VNB margin — VNB per unit of new business sold, measured in APE (annualised premium equivalent).
  • Persistency — how many customers keep paying. Every future profit in EV and VNB assumes a certain share will.

The formulas

Embedded value (EV)  =  adjusted net worth
                        + present value of future profits on policies in force

VNB margin           =  VNB  /  APE

APE                  =  annualised first-year regular premiums
                        + 10% of single premiums

Operating return on EV (RoEV)  =  EV operating profit (EVOP)  /  EV at start of year

13-month persistency =  share of policies (by number or premium) still paying
                        in their 13th month; 61-month likewise

“Present value” is the discounting from the time value of money post: future profits are shrunk back to today’s rupees at an assumed rate. EV and VNB are calculated by the insurer’s actuaries using their own assumptions about lapses, mortality, costs and investment returns — they are not accounting line items.

Worked example: HDFC Life, FY26

From HDFC Life’s press release on its FY26 results (standalone), dated 16 April 2026. ₹ crore. Historical, for illustration only.

FY26 FY25
Total APE 16,641 15,479
Value of new business (VNB) 4,034 3,962
VNB margin 24.2% 25.6%
Embedded value (EV), end of year 62,139 55,423
Operating return on EV 15% 16.7%
Profit after tax 1,910 1,802
13-month / 61-month persistency 85% / 64% 87% / 63%
Renewal premium 43,291 37,680
Total premium 79,387 71,045

Step 1: VNB margin

  1. 4,034 ÷ 16,641 = 24.2%. For each ₹100 of annualised new premium sold in FY26, the insurer expects about ₹24.2 of profit over the policies’ lives, in today’s money.
  2. APE grew 7.5% but VNB only 1.8%, so the margin slipped from 25.6% to 24.2%. The company says that excluding the effect of GST (goods and services tax) changes and new surrender regulations, the margin would have been 25.5%. Product mix moves this number too: the release shows unit-linked plans rising from 39% to 44% of individual APE, and non-participating savings plans falling from 32% to 18%.

Step 2: profit vs value

  1. PAT was ₹1,910 crore. VNB — the value added by one year’s sales alone — was ₹4,034 crore, about 2.1 times PAT.
  2. Operating RoEV is EV operating profit over opening EV, so EV operating profit was roughly 15% × ₹55,423 crore ≈ ₹8,313 crore — about 4.4 times PAT. (Approximate, because the printed RoEV is rounded.) PAT, by contrast, was 3.4% of opening EV.
  3. So a P/E built on ₹1,910 crore measures a small slice of what the business added in EV terms. That’s why, in our experience, life insurers are more often discussed against EV than against earnings. This post doesn’t compute that multiple for HDFC Life; the point is which denominator makes sense.

Step 3: persistency

  1. A 13-month persistency of 85% means roughly 15 in every 100 policies (or premium rupees) had stopped paying by their 13th month. By month 61, about 36 in 100 had. The 13-month figure slipped 2 points; the company says the trends “reflect the underlying product and tier mix”.
  2. Persistency is what turns EV into cash. Renewal premiums were 54.5% of FY26’s total premium and grew 14.9%. If fewer customers keep paying than the actuaries assumed, future profits already counted in EV and VNB don’t arrive.

The release also reports a solvency ratio (available capital against the regulatory requirement) of 177%, down from 194% — the insurer’s version of a bank’s capital adequacy — and board approval to raise up to ₹1,000 crore from its parent to add to it.

None of this is a view on HDFC Life. It’s one year’s release, read through the sector’s metrics.

🧒 Explain it like I'm 10 (optional — skip if this is already clear)

You start a newspaper-delivery round. To sign up each new house you spend ₹50 on a flyer and a free first week. Each house then pays you ₹20 a month for years.

In the month you sign up lots of houses, you lose money — all those flyers. But you’re actually much richer, because all those houses will pay you for years.

Embedded value is adding up all the future payments from the houses you already have. VNB is the future payments from the houses you signed up this year. Persistency is how many houses keep paying instead of cancelling.

Common mistakes

  • Using P/E on a growing life insurer. New business strain pushes current profit down when sales go up. PAT understates a growing insurer and can overstate a shrinking one that’s just releasing profit from old policies.
  • Treating EV as a hard number. EV is a present value built on the insurer’s own assumptions. Change the discount rate or the lapse assumption and EV changes. Operating RoEV, which (by HDFC Life’s definition) excludes changes in economic variables and capital flows to and from shareholders, is the steadier gauge of what the business earned.
  • Comparing VNB margins across different product mixes. Pure life cover, unit-linked savings, annuities and guaranteed plans carry different margins, so a company’s margin can move because of what it sold, with no change in efficiency. Read the mix alongside the margin.
  • Ignoring persistency. A high VNB margin on policies customers abandon after a year is profit that never arrives. Watch the 13-month and 61-month figures over time.

Takeaway: A life insurer’s yearly profit mostly reflects old policies and the up-front cost of new ones, so P/E misreads it. Read embedded value for what’s on the books, VNB margin for what this year’s sales are worth, and persistency for whether customers stay long enough to make either real.