Decoding revenue and P&L statements of general insurers

In our previous story , we laid out the unique business model of general insurance businesses, detailing how they make money and what their major expenses are. We now move on to decoding their financial statements and understanding how to assess them. In any business, financial performance revolves around three elements: income, expenses, and profit. General insurance companies capture these metrics in two disclosures: the revenue statement and the profit & loss (P&L) statement, each serving distinct purposes. We have detailed their components below. Revenue statement (Policyholder's statement) The revenue statement or policyholder's statement presents the profitability of a general insurer's core operations, which is offering insurance coverage against various risks. It breaks down the performance by each type of insurance policy the company offers, like motor, health, and property insurance. The key components include: Net premiums earned : This is an insurer's primary income source. These are premiums kept after deducting reinsurance premiums—fees paid to another insurer to share some of the risk. Net premiums include gross premiums collected from policyholders, minus any paid to reinsurers, ensuring the company accounts only for premiums it directly retains. For example, in FY24, about 85 per cent of ICICI Lombard 's revenue came from net premiums. Investment income (policyholder funds) : Unlike most businesses, insurers receive funds upfront and hold them until claims arise. During this holding period, they invest policyholders' funds in various assets to generate returns through interest, dividends, capital appreciation, or rent. This income helps companies offset claims and operational costs. However, since not all funds can be invested (due to reserves needed to account for risks), insurers have to balance the need for liquidity with the desire for investment returns. Reserves for unexpired risks : To manage potential claims, insurers set aside reserves based on assessed risk and claim projections for policies still in force. These reserves are a buffer that ensures the company can meet future obligations. Adjustments for these reserves are factored into net premiums and detailed in the financial notes. Claims incurred : Claims incurred, including claims paid out on reinsurance, represent an insurer's primary expense. This cost arises from settling policyholder claims, a fundamental component of the insurance business. Commissions and operating expenses : Commissions are paid to agents and brokers who help sell policies, crucial for expanding distribution. Operating expenses include employee salaries, travel, training, and office rent, covering the general administrative costs. Operating profit or loss: This is the bottom line in the revenue statement, which indicates an insurer's core underwriting profitability, meaning it shows how well the insurer is managing its underwriting—the process of pricing, assessing risk, and managing policies. Revenue statement of ICICI Lombard Particulars (Rs cr) Fire Marine Miscellaneous Total Premiums earned (net) 615 523 15,729 16,866 Income from investments Profit on sale / redemption of investments 20 8 530 558 Loss on sale/redemption of investments -2 -1 -63 -67 Interest, Dividend & Rent

This article was originally published on November 08, 2024.