Kshemora Life Insurance trades at 2.5x embedded value. Given its value of new business and margin, what is the market paying for business it has not yet written?

The market pays Rs 18,000 crore for future new business, 12x this year's VNB. Embedded value covers only policies already sold. At a 13% cost of equity, Rs 18,000 crore is what VNB growing about 3.7% a year for ten years, then 5%, is worth. That is a modest bet if the 26% margin holds; the debate is margin, not volume.

Picture a tuition teacher valuing her business. The fees already paid for this year's batches, less her costs, are money she will almost certainly collect. Next year's batches, not yet enrolled, are a hope. Embedded valueThe capital a life insurer holds plus the present value of future profits from policies already on its books. It excludes any policy not yet sold. is the first kind of value only: net worth plus the discounted profits of policies already sold. Anything a buyer pays above it is a payment for batches not yet enrolled, which for an insurer means policies not yet written.

Each year's VNBValue of new business: the present value of future profits from the policies sold in one year, measured when they are sold. is already a present value at the moment of sale, so the value of all future business is the sum of future VNBs, discounted back. If VNB never grew, that stream would be worth 1,500 / 0.13, about Rs 11,538 crore. The market pays more than that, so it prices some growth: solving for the rate that makes the stream worth Rs 18,000 crore gives about 3.7% a year for ten years, then 5%.

Growth of 3.7% looks too low for a growing insurer, which is exactly why you should ask what else the price is doubting. VNB is premium times margin. If the margin fell from 26% to 22% on the same premium, VNB would drop to Rs 1,269 crore, and the growth needed to justify Rs 18,000 crore would rise to about 6.1%. So the market's price is consistent with healthy volume growth and a lower margin, which is what happens when product mix shifts to thinner-margin savings policies or when rules on commissions and surrender charges change. Say which one you believe and why.

The limitation: embedded value itself rests on assumptions about lapses, mortality and investment returns. If those are optimistic, the Rs 12,000 crore floor is softer than it looks, and the future business number absorbs the error. Check how often embedded value has been revised by assumption changes.