Reading an Insurer's Financial Statements
How an insurance company earns money from underwriting and from investing premiums, the ratios that measure each, and why its reserves are the number to watch.
The short version
An insurer is paid first and finds out its costs later, sometimes years later. It earns money two ways: from underwriting, when premiums exceed claims and expenses, and from investing the premiums it holds in the meantime. The combined ratio measures underwriting: below 100% is an underwriting profit and above it is a loss. The largest number on the balance sheet is the reserve for claims not yet paid, which is an estimate, so today's reported profit depends on whether yesterday's reserves were enough. The disclosures that show how past estimates turned out are the best test of how cautious an insurer has been.
By the end of this lesson, you'll be able to
- Calculate the loss ratio, expense ratio, and combined ratio, and explain what each means
- Explain how investing held premiums adds to an insurer's profit
- Use reserve development to judge how reliable an insurer's reported results are
Why this matters
In most businesses the cost of a product is known when it's sold. An insurer sells a promise to pay for events that haven't happened yet. It collects the price today and discovers the cost over the following months or years. Its profit for the year is therefore partly a forecast, and reading an insurer's accounts is largely a matter of judging how good its forecasts have been.
This lesson concentrates on property and casualty insurers, which cover things like cars, homes, and business liability. A note on life insurers follows near the end.
Two sources of profit
Underwriting. The insurer collects premiums and pays claims and running costs. If premiums exceed the other two, it makes an underwriting profit.
Investing. Premiums arrive before claims are paid, so the insurer always holds a pool of money that belongs, in effect, to future claimants. It invests that pool, often largely in bonds, and keeps the income. Investors often call the pool "float". An insurer can lose a little on underwriting and still be profitable overall, if the investment income is larger than the underwriting loss.
Premiums: written and earned
A premium is written when the policy is sold and earned as the coverage period passes. Written premium is the total received on policies sold. Earned premium is the portion that belongs to the period so far.1 A one-year policy sold on July 1 for $1,200 is all written premium on that day, but only $600 has been earned by December 31. The rest is a liability called unearned premium, which works exactly like the deferred revenue in Revenue Recognition.
The gap between the two is a growth signal. Written premium running well ahead of earned premium means the insurer is expanding.
The combined ratio
Three ratios measure underwriting:1
- The loss ratio is losses incurred as a percentage of earned premiums. It shows how much of each premium dollar goes to claims.
- The expense ratio is the percentage of premium used to acquire and service policies: commissions, staff, and systems.
- The Combined ratio. An insurer's claims and running costs as a percentage of the premiums it earned. Below 100% means it made a profit on underwriting before any investment income. Glossary adds the two. Below 100%, the insurer made money on underwriting before any investment income. Above 100%, it paid out more than it took in.
| Amount | Share of earned premium | |
|---|---|---|
| Premiums written | 520 | |
| Premiums earned | 500 | |
| Losses and claim costs incurred | (325) | 65% loss ratio |
| Underwriting expenses | (150) | 30% expense ratio |
| Underwriting profit | 25 | 95% combined ratio |
| Investment income, 4% on $900 of investments | 36 | |
| Profit before tax | 61 |
The insurer kept 5 cents of each premium dollar from underwriting and earned more than that again from investing. Its investments are almost twice its yearly premiums, because it holds several years' worth of unpaid claims. More than half of its profit comes from money it's holding for other people.
A single year's combined ratio can mislead, because disasters are uneven. A year without a major storm flatters a property insurer, and a bad hurricane season does the opposite. Averaging over five or ten years gives a better view of whether the insurer prices its risks properly. Some insurers also report the ratio with and without catastrophe losses.
The rest of this lesson is for members
Still to come in this lesson: Reserves: the number to watch, The investment side, Reinsurance and catastrophes, A note on life insurers, What to check, the key takeaways, and 2 quiz questions with explanations.
Membership opens every lesson in the curriculum, the capstone projects, the interactive tools, and the members-only channels in the Hyperion Entities Discord. The first lesson of every module stays free.
Go deeper
- Software and Subscription MetricsFinancial Statement Analysis in Depth (depth track)
- Reading a Bank's Financial StatementsFinancial Statement Analysis in Depth (depth track)
- Quality of EarningsFinancial Statement Analysis in Depth (depth track)
Notes and sources
- National Association of Insurance Commissioners (NAIC). Glossary of Insurance Terms. Checked 2026-10-11. Back to text
- Financial Accounting Standards Board. Accounting Standards Update No. 2015-09, Financial Services: Insurance (Topic 944), Disclosures about Short-Duration Contracts. Checked 2026-10-11.