An understatement means you're under-exaggerating or not putting enough emphasis on a situation. Such as,
"I stayed in my house all day because it was raining."
"Are you kidding? That's an understatement! There was a category 5 hurricane!"
It means that you are saying less than is actually meant, generally in an ironic way.
A great example of comic understatement is the Mark Twain quote:
"Reports of my death have been greatly exaggerated."