Progressive Tops Peers: Analyst's Toolkit

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NEW YORK (TheStreet) -- The importance of insurers in the financial world came into sharp focus after American International Group(AIG Quote) almost collapsed last year, hobbled by bad derivative investments and weak risk management.

Insurance companies differ from other financial stocks when it comes to analysis. They make money by writing policies, collecting premiums and investing the proceeds. They're as vulnerable to market fluctuations as any bank, but unlike Bank of America(BAC Quote) and Citigroup(C Quote), insurers pay claims that can be unpredictable. Bank of America isn't factoring the potential costs of hurricanes and floods, for example.

Evaluating companies' combined ratios can help investors separate promising insurers from unsustainable ones. This measure focuses on a company's loss and expense ratios, and works well for property and casualty, and health insurers. They key is to analyze companies that provide the same services. The comparison loses value if the companies are fundamentally different.

Travelers(TRV Quote), Hartford Financial Services(HIG Quote), Progressive(PGR Quote) and Allstate(ALL Quote) have delivered wildly different results in the past year. Travelers shares are up 11%, while Hartford stock has fallen 56%. Allstate has dropped 34%, and Progressive is down only 1.4%. The stocks' varied performances can be explained by the combined ratio.

To calculate the combined ratio, you must find out a company's loss ratio. This measure takes the total losses an insurer pays in claims, plus adjustments, and divides it by the total earned in premiums. These numbers are available on the income statements in quarterly filings, which you can find on TheStreet.com's stock quote pages by clicking on the link labeled "SEC Filings."