Insurance: combined ratio, not EBIT
Insurance companies separate underwriting income from investment income. Combined ratio (loss ratio plus expense ratio) measures underwriting profitability. A combined ratio under 100 means the underwriting business is profitable before investment income[NAIC].
The combined ratio
Combined ratio = Loss ratio + Expense ratio Loss ratio = Incurred losses / Earned premium Expense ratio = Underwriting expenses / Earned premium
Underwriting income vs investment income
A P&C insurer with a 95 combined ratio earned 5 cents of underwriting profit on every dollar of premium. The investment-income leg (float invested in fixed income) is reported separately and is what made Berkshire what it is. Adding the two gives pre-tax income but does not produce a meaningful EBIT.
When EBIT-style analysis still fits
- Insurance brokers (Marsh McLennan, Aon, AJG) earn commission revenue and do run on an EBIT margin model.
- Insurance holdcos with diversified non-insurance segments (asset management, banking) report segment EBIT for those segments.