Insurance Financial Statements: A Primer

Introduction

Travelers, one of the largest US property and casualty insurers, earned $43.9 billion of premiums in 2025 and recorded $27.2 billion of claims and claim adjustment expenses. Its combined ratio, claims and underwriting expenses as a share of premiums, was 89.9%, meaning claims and expenses absorbed about 90 cents of every dollar of premium. On top of that underwriting profit, it earned $4.0 billion of investment income on a portfolio of $101.2 billion. Its results also benefited from $1.04 billion of favorable prior year reserve development, a release from reserves set aside for claims in earlier years that turned out to cost less than expected, according to its 2025 annual report.

Each of those figures depends on estimates in a way few other industries' do. An insurer collects premiums before it knows what its products will cost, and its largest liability, the reserve for claims, is an actuarial estimate that can take decades to settle. This primer explains how insurers' statements are built and what bankers read in them; the financial institutions group (FIG) guide covers each piece in depth.

An insurer has two sources of profit. Underwriting profit is premiums earned less claims and the costs of writing and administering policies. Investment income is earned on the float, the premiums held between collection and payment of claims, invested mainly in bonds. A property and casualty insurer can make money with a combined ratio slightly above 100%, an underwriting loss, if its investment income is large enough; a life insurer's results depend even more heavily on the spread between investment returns and what it has promised policyholders.

Combined ratio

The sum of the loss ratio, claims and claim adjustment expenses divided by earned premiums, and the expense ratio, underwriting expenses divided by premiums. A combined ratio below 100% means the insurer made an underwriting profit before investment income; above 100% means an underwriting loss.

Travelers' 2025 combined ratio of 89.9% comprised a loss and loss adjustment expense ratio of 61.4% and an underwriting expense ratio of 28.5%. The year before, its combined ratio had been 92.5%. Dividing the income statement lines by premiums gives slightly higher figures (claims of $27.2 billion over premiums of $43.9 billion is 62.0%), because Travelers counts only underwriting expenses and nets certain fee income against claims and expenses, following the statutory definitions. Catastrophe losses of $3.69 billion in 2025 added 8.4 points to the combined ratio, while favorable reserve development took 2.4 points away, which is why analysts also track an underlying combined ratio that excludes both. The ratios are explained in the FIG guide's article on combined, loss and expense ratios.

The Income Statement

Travelers' income statement shows the structure:

Premiums are recognized as revenue over the period of coverage, not when they are written, so a growing insurer collects more cash than it earns, with the difference held as unearned premiums. The commissions and certain other costs of successfully acquiring policies are deferred and amortized over the same period, the deferred acquisition costs line. Interest expense is small, because the insurer's real funding is its policyholders, not its lenders.

The balance sheet is dominated by investments on one side and insurance liabilities on the other. Travelers held $65.7 billion of gross claims and claim adjustment expense reserves at the end of 2025, about twice its shareholders' equity of $32.9 billion. The reserves cover claims that have been reported but not settled and claims that have occurred but not yet been reported to the insurer, the incurred but not reported (IBNR) reserve, an estimate made by actuaries from past patterns of claims.

Incurred but not reported reserves

The portion of an insurer's loss reserves set aside for claims arising from events that have already occurred but have not yet been reported to the insurer, estimated from historical patterns of reporting and payment. IBNR is often the largest and most uncertain part of reserves for lines such as liability insurance, where claims can emerge years after the event.

Because reserves are estimates, they are revised every year. Favorable development, when earlier years' claims cost less than reserved, adds to current earnings; adverse development reduces them. A long record of favorable development suggests conservative reserving, while adverse development, especially when it recurs, suggests earlier profits were overstated. The loss development tables in the notes show how each accident year's estimates have moved over time, and they are among the most important disclosures an insurer makes, as the FIG guide's article on reserves and reserve development explains.

Investments and Book Value

The investment portfolio is mostly fixed income, classified as available for sale, so unrealized gains and losses go to other comprehensive income. Travelers had $1.86 billion of pre-tax net unrealized investment losses at the end of 2025 ($1.48 billion after tax), a legacy of higher interest rates since the bonds were bought, which reduced book value without affecting net income. Analysts often look at book value both with and without these unrealized gains and losses, because they reverse as bonds approach maturity, the classification mechanics covered in investments in securities. The size and cost of the float, a recurring theme of Warren Buffett's letters to Berkshire Hathaway shareholders (the 2024 letter put Berkshire's float at $171 billion), is examined in the FIG guide's article on insurance float.

Life insurers and annuity writers carry liabilities that run for decades. Their accounting under US generally accepted accounting principles (GAAP) changed significantly in 2023, when large listed insurers adopted Accounting Standards Update (ASU) 2018-12, known as the long-duration targeted improvements (LDTI). Under it, the cash flow assumptions behind future policy benefit liabilities are reviewed, and updated where needed, at least annually; those liabilities are discounted at upper-medium-grade fixed income yields, with changes in the rate recorded in other comprehensive income; guarantees on variable products are measured at fair value; and the amortization of deferred acquisition costs is simplified, as KPMG's handbook on the standard sets out. The result is a balance sheet more sensitive to interest rates and an income statement that reflects assumption changes more promptly, the topics in the FIG guide's article on life insurance long-duration liabilities.

Statutory Accounting

Insurers also report to their state regulators on statutory accounting principles, which are more conservative than GAAP: acquisition costs are expensed immediately, some assets are not admitted and reserves follow prescribed methods. Statutory surplus and risk-based capital ratios, not GAAP equity, decide how much an insurance subsidiary can write and how much it can pay its parent in dividends, so they constrain the group's capital decisions.

Insurers are valued mainly on price to book value and on return on equity, because their balance sheets are their businesses and their liabilities are operating, not financing. Bankers read, in order: the combined ratio and its components, with catastrophes and reserve development separated; the reserve development tables; investment income and the yield and quality of the portfolio; book value per share, with and without unrealized gains and losses; and statutory capital. Travelers' book value per share of $151.21 at the end of 2025, and its return on equity of about 21% (2025 net income over average shareholders' equity), are the figures its valuation is most often benchmarked against.

For acquisitions, insurers bring their own complications: purchase accounting must measure the fair value of insurance liabilities, often creating an intangible asset or liability for the difference from their book value, and regulators must approve changes of control. Those topics, and the full range of insurance business models from reinsurance to brokers, are covered in the FIG guide; this primer sets out the statements they build on.