How to Interpret the Financial Statements of Insurance Companies

How to Interpret the Financial Statements of Insurance Companies
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Investors interpret financial statements in order to choose the best stocks. The financial statements of insurance companies show assets just like any other company. Unlike most other companies, however, insurers are liable for paying claims. The National Association of Insurance Commissioners (NAIC) regulates all U.S. insurance companies to make sure they can meet these liabilities. Each U.S. state elects or appoints a state insurance commissioner, and they all belong to the association. The NAIC dictates how U.S. insurance companies write their financial statements.

Turn to the insurance company's "combined ratio" to see how efficiently it handles its claims liability. The National Association of Insurance Commissioners explains that an insurer's combined ratio includes: accounts receivable (net written premiums and premiums earned), accounts payable (losses incurred, loss expenses incurred, other underwriting expenses incurred and aggregate write-ins for underwriting deductions) and dividends to policyholders.

Note whether the insurance company's combined ratio is less than or greater than 100 percent. A combined ratio of less than 100 percent means the insurer's income exceeds its liabilities and expenses. Mercury's letter to its shareholders, in its 2009 annual report, brags of a much improved 2009 combined ratio of 96.9 percent, as compared with its 2008 combined ratio of 101.8 percent.

Subtract the company's liabilities and surplus from its total assets to get the company's "statement of condition." State Farm's 2009 statement of condition balanced to exactly zero, with assets equal to liabilities. This is a neutral statement of condition, as compared to a positive condition if assets are greater or a negative condition if liabilities are greater.

Turn to the company's summary of operating data. See if it paid any dividends to its shareholders, and if it enjoyed a net income or suffered a net loss. Although State Farm enjoyed a net income of $570 million in 2009, it did not pay any dividends to its shareholders.


  • The A.M. Best Company rates all U.S. insurers as investments, with A++ being the best possible rating.

    Insurance companies often enjoy net incomes even with combined ratios over 100 percent, because they earn from investments.


  • Catastrophic losses affect the value of insurance companies; the 2000 bombing of the World Trade Center caused fear that insurers would go insolvent, according to

    Net income does not guarantee an insurer will pay dividends to its shareholders.