DEFINITION of 'Adjusted Earnings'

The sum of earnings, increase in loss reserves, increase in new business, increase in deficiency reserves, increase in deferred tax liabilities, and capital gains for an insurance company from the previous time period to the current time period. Adjusted earnings provides a measurement of how current performance compares with performance in previous years.

BREAKING DOWN 'Adjusted Earnings'

Calculating adjusted earnings can vary slightly according to what type of insurance business an insurer is in. A property and casualty insurance company will calculate its adjusted earnings by taking the sum of its net income, catastrophe reserves, and reserves for price changes, and subtracting gains or losses from investment activities. A life insurance company will subtract capital transactions, such as increases in capital, from increases in premiums written.

Investors and regulators can examine the performance of an insurance company a number of ways, and often use multiple analytical approaches to ensure that many aspects of the insurance company are reviewed. A qualitative analysis of the insurer’s operations will show how the company plans on growing in the future, how it compensates employees, how it manages its tax obligations, and how effective management is in directing operations. A quantitative analysis will show how it manages its investments, how it determines the premiums to charge for policies that it underwrites, how it manages risk through reinsurance treaties, and how much it requires to retain business and acquire new customers. Investors will also look at the insurer’s adjusted earnings, net worth, and adjusted book value.

Because outside investors do not have access to the same amount of information as internal employees it can be difficult to ascertain an insurer’s adjusted earnings. Approaches may vary according to how they examine expenses and premiums.

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