Financial Statements, Accounting, and Reporting
Statement structure
Insurers report a balance sheet, income statement, and cash flow statement, plus statutory filings. The statutory balance sheet is conservative: admitted assets exclude items of low liquidity or doubtful collectibility, and liabilities include unearned premium reserves and loss reserves. Policyholders' surplus is assets minus liabilities and is the regulatory capital cushion. A common trap is treating all assets as admitted; agents' balances over 90 days, furniture, and some receivables are nonadmitted.
Statutory versus GAAP
Statutory accounting (SAP) emphasizes solvency and policyholder protection; GAAP emphasizes matching and investor reporting. Key differences include acquisition costs (expensed immediately under SAP, deferred and amortized under GAAP), deferred taxes, nonadmitted assets, and recognition of reinsurance. Questions often test which framework produces the more conservative surplus-SAP generally does.
Key ratios and metrics
Loss ratio = incurred losses / earned premium; expense ratio = underwriting expenses / written premium; combined ratio = loss ratio + expense ratio; underwriting profit exists when the combined ratio is below 100%. Written versus earned premium matters: unearned premium reserves convert written to earned. Reserve development, reserve adequacy, and the trend of prior-year development signal quality of earnings. Investment income and realized gains can mask underwriting losses.
Worked example
Earned premium $10M, incurred losses $6.5M, underwriting expenses $3.0M. Loss ratio 65%, expense ratio 30%, combined 95%-an underwriting profit of 5% of premium ($500,000) before investment income. Rule of thumb: state which premium base each ratio uses; mixing written and earned bases is the most common arithmetic trap.