Understanding "Insurance" Company

P/L: 
Revenue: 
Premium income
Investment income
Fee income
Expenses:
Benefits or Claims paid to the customers.
Increase in reserves for future benefits or claims. (Money kept aside for claims which have been reported but not settled)
Interest expenses on borrowed money(in case there is any)


Balance Sheet: 

For insurance companies, balance sheets show:

Assets, which typically include:

•Cash

•Investments

•Fixed assets (property and equipment)

•Assets held in separate accounts (assets that are managed by the insurance company but belong to customers)

•Deferred policy acquisitions costs (DAC)

•These are costs that a life insurance company has incurred to acquire (or issue) new insurance and investment contracts

•These costs are deferred and amortized over the life of the related insurance or investment contract

•These are amortized over time in recognition of the fact that acquisition costs (e.g., sales commissions) represent a significant percentage of the overall cost associated with issuing long-term policies

Liabilities, which typically include:

•Reserves for future benefits or claims

•Benefits and claims made (or agreed), but not yet paid

•Policyholder account balances (funds owed to customers)

•Long-term debt


Life insurance ratios: 
There are two key financial ratios used to evaluate a company’s life insurance activities.  

•Benefits paid to net premiums written:

•Benefits paid to net premiums written (NPW) represents the amount of benefits paid to customers divided by the amount of premium income earned by the insurer (minus premiums paid to reinsurers)

•Benefits paid to NPW is typically between 45% - 70% and represents the insurer’s ability to absorb the loss of benefit payments made

•Commissions and expenses to net premiums written:

•Commissions and expenses to net premiums written measures a life insurer’s cost of sales

•This ratio is typically between 30% - 55%

General insurance ratios: 

There are three key financial ratios used to evaluate a company’s general insurance activities.

• Loss ratio: measures a company’s ability to manage underwriting losses against a given level of premium income. 
• It is calculated by taking underwriting losses and dividing by premiums earned  
• Underwriting losses are claims paid to customers
• Premiums earned is the amount of premium revenue recognized by the company for the period
• Expense ratio: measures a company’s operating expenses divided by its premiums earned
• Operating expenses represent the costs of acquiring, writing and servicing the business   
• Combined ratio: is the sum of the loss ratio and the expense ratio
• A company with a loss ratio of 70% and an expense ratio of 28% would have a combined ratio of 98%
• A combined ratio lower than 100% represents a profitable period of business (and higher than 100% represents an unprofitable period of business)

Let’s look at an example...

Assume a general insurer had:

•US$1 billion in premiums earned for the year

•US$700 million in underwriting losses

•US$280 million in operating expenses

It would have:

•A loss ratio of 70% (US$700 million divided by US$1 billion)

•An expense ratio of 28% (US$280 million divided by US$1 billion)

•A combined ratio of 98% (70% + 28%)

General insurers typically experience combined ratios between 95% - 105%.

•