Financial institutions such as banks, financial service companies, insurance companies, securities firms and credit unions have very different ways of reporting financial information. This guide gives you the most pertinent information to analyze an insurance company's financial statements.

I. Underwriting Ratios

Loss Ratio ( Loss Adjustments / Premiums Earned )

USBR calculates the loss ratio by dividing loss adjustments expenses by premiums earned. The loss ratio shows what percentage of payouts are being settled with recipients. The lower the loss ratio the better. Higher loss ratios may indicate that an insurance company may need better risk management policies to guard against future possible insurance payouts.

Expense Ratio ( Underwriting Expenses / Net Premiums Written )

USBR calculates the expense ratio of an insurance company by dividing underwriting expenses by net premiums earned. Underwriting expenses are the costs of obtaining new policies from insurance carriers. The lower the expense ratio the better because it means more profits to the insurance company.

Combined Loss/Expense Ratio ( Loss Ratio + Expense Ratio )

This figure just measures claims losses and operating expenses against premiums earned. The lower the figure the better. The combined ratio is the total of estimated claims expenses for a period plus overhead expressed as a percentage of earned premiums. A ratio below 100 percent represents a measure of profitability and the efficiency of an insurance firms underwriting efficiency. Ratios above 100 percnet denote a failure toearn sufficient premiums to cover expected claims. High ratios can usually occur either because of underpricing and/or because of unexpected high claims.

Ratio of Net Written Premiums to Policyholder Surplus

This ratio measures the level of capital surplus necessary to write premiums. An insurance company must have an asset heavy balance sheet to pay out claims. Industry statuary surplus is the amount by which assets exceed liabilities. For instance: a ratio 0.95 -to 1 means that insurers are writing less than $1.00 worth of premium for every $1.00 of surplus. A ratio of 1.02-to-1 means insures are writing about $1.02 for every $1.00 in premiums.

II. Profitability Ratios

Return on Revenues ( Net Operating Income / Total Revenues )

This figure determines the profitability of an insurance company . It is the profits after all expenses and taxes are paid by the insurance company.

Return on Assets ( Net Operating Income / Mean Average Assets )

USBR calculates the return on assets by dividing net operating income by Mean average assets. This figure shows the profitability on existing investment securities and premiums. The higher the return on assets the better the company is enhancing its returns on existing liquid assets.

Return on Equity ( Net Operating Income (less preferred stock Dividends / Average Common Equity )

This figure shows the net profits that are returned to shareholders. The higher the return on equity, the more profitable the company has become and the possibility of enhanced dividends to shareholders.

Investment Yield ( Average investment Assets / Net Investment Income )

This is the return received on an insurance company's assets. The investment yield is obtained by dividing the average investment assets into the net investment income before income taxes.

The following is a sample Insurance financial statement from : Income Statement -Insurance $ (Millions) 2002 2001 2000 Total Interest Income 95 Total Interest Expense 20 Net Interest Income -9 Provision for Loan Losses Non Interest Income 8 NonInterest Expense 3 Pretax Income 18 Income Taxes -6 Net Operating Income 12 Reserve for Loan Losses Balance, Beginning of Year 16 Provision for Loan Losses 3 Net Charge-Offs -7 Recoveries 3 Balance, at end of year -7 Non performing Loans 55 Balance Sheet Assets Cash 6 Temporary Investments 22 Investment Securities 65 Loans 750 Reserve for Loan Losses -15 Building and equipment 120 Total Assets 1,200 Liabilities Deposits 885 Short Term Borrowings 245 Long Term Debts 33 Total Liabilites 1,030 Stockholders Equity 60 Total Liabilites & Equity 1,200