Insurance companies confound many Americans, with costly premiums that often provide no obvious benefit during good times and with difficult processes to follow when you do need to make a claim. Yet as hard as it is for consumers to understand insurance companies, investors often have a tougher job, as insurers’ financial statements often look a lot different from what you’d see at companies in other industries. In recent years, private equity (PE) firms in the insurance industry have realized impressive returns. They have profited from multiple arbitrage, particularly in the heavily fragmented insurance brokerage space. PE-backed providers of distribution technology—such as performance-marketing and agency-management players—have recorded fast growth while maintaining strong cash flows. This balance sheet also reports Apple’s liabilities and equity, each with its own section in the lower half of the report.
Going forward, stock-traded insurers need to address the issue of where they have unique competitive advantage and can generate capital, such as in certain geographies, lines of business, or parts of the value chain. They might also want to find innovative ways to harness their growth opportunities and ensure they are properly valued by investors. In personal P&C and small commercial lines, many technology companies are vying for a share of insurers’ digital marketing spending and commissions.
- Companies will need to upgrade their ALM capabilities to better manage ALM mismatches.
- An agency cannot legitimately be sold without consideration of a quality balance sheet.
- We briefly go through commonly found line items under Current Assets, Long-Term Assets, Current Liabilities, Long-term Liabilities, and Equity.
- As a result, the entire organization beyond the finance function will be affected by the new standard’s far-reaching strategic implications.
Areas of focus should include the product and investment portfolio, asset and liability management (ALM), key performance indicators (KPIs), and strategy. Total assets is calculated as the sum of all short-term, long-term, and other assets. Total liabilities is calculated as the sum of all short-term, long-term and other liabilities.
Consolidation shifts focus to less trodden paths of opportunity and continued need for value creation
In this article, we offer an update on the industry’s outlook and highlight several areas for investors to consider as they search for value in insurance services, distribution, technology, and balance-sheet plays. The balance sheet includes information about a company’s assets and liabilities. Depending on the company, why compliance is the most important part of business today this might include short-term assets, such as cash and accounts receivable, or long-term assets such as property, plant, and equipment (PP&E). Likewise, its liabilities may include short-term obligations such as accounts payable and wages payable, or long-term liabilities such as bank loans and other debt obligations.
- Regulators, however, closely watch the reserving policies of insurance companies to make sure adequate reserves are set aside on the balance sheet.
- To cover the refunds, the company sets aside a balance sheet reserve of $15,000.
- Is a member of McKinsey’s Risk and Insurance Practices and a leader of Risk Dynamics.
- Balance sheet reserves are entered as liabilities on the balance sheet and represent funds that are set aside to pay future obligations.
- SPAC deal momentum also increased the competition, with several multibillion-dollar announcements since the third quarter of 2020.
This is accomplished with a debit of $1,000 to Insurance Expense and a credit of $1,000 to Prepaid Insurance. This same adjusting entry will be prepared at the end of each of the next 11 months. This account may or may not be lumped together with the above account, Current Debt. While they may seem similar, the current portion of long-term debt is specifically the portion due within this year of a piece of debt that has a maturity of more than one year. For example, if a company takes on a bank loan to be paid off in 5-years, this account will include the portion of that loan due in the next year.
Today, many players in US and European markets are applying insights from their 2020 performance to emerge stronger amid increased consolidation, digitization, and specialization, as well as persistently low interest rates. Insurance expense is the amount that a company pays to get an insurance contract and any additional premium payments. The payment made by the company is listed as an expense for the accounting period.
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You can learn more about depreciation expense and accumulated depreciation by visiting our topic Depreciation. A McKinsey-led benchmarking of insurers shows that while the transition to IFRS 17 is imminent, and most respondents have some understanding of its strategic implications, few have made plans to address potential problems (exhibit). Leaders must ensure all teams across the organization have the right capabilities to manage their business units’ performance under IFRS 17. Member firms of the KPMG network of independent firms are affiliated with KPMG International. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.
In recognition of the power of earning streams from distribution, investors have tended to reward the capital-light earnings generation of pure-play distributors, such as brokerages, independent marketing organizations, and field marketing organizations. Those players have generated 2.6 times the TSR of life insurance companies since 2010 and currently trade at nearly 2.8 times the price-to-earnings multiple of their life insurance counterparts. Structural changes in the US insurance industry—such as heightened risk for directors and officers and ongoing risks related to the pandemic and climate change—will continue into the foreseeable future. Adding to the fray are the increasing numbers of digital-native distributors that build their own technology.
When I asked about his knowledge level, he did not know the difference between a captive agent and an independent agency. Holding money on behalf of other entities is why a fiduciary trust situation exists. It is why, very unusually, an agency can be on cash accounting and still incur bad debt. The reason agencies can is because the bad debt involves other entities’ monies, not the agency’s money. The new revenue recognition rules make agency accounting even more complex. Under the accrual basis of accounting, insurance expense is the cost of insurance that has been incurred, has expired, or has been used up during the current accounting period for the nonmanufacturing functions of a business.
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The term balance sheet refers to a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific point in time. Balance sheets provide the basis for computing rates of return for investors and evaluating a company’s capital structure. To shed light on potential investment opportunities in insurance, we took a comprehensive look at the value-creation levers in the industry. To facilitate our analysis, we classified insurance-related companies as distribution players, service players, or technology providers. In addition to investing in these insurance ecosystem providers, many leading PE firms have shifted to employing permanent capital from insurance balance sheets to drive growth. Here, we articulate potential investment recommendations for the three ecosystem segments to guide PE investors as they navigate this complex and dynamic industry in the years to come.
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Prior to the COVID-19 pandemic, this spending was growing, and that growth continues as face-to-face sales become nearly impossible. Because analytics now make it easier for insurers to assess ROI, they are increasingly comfortable outsourcing to digital intermediaries the work of generating leads, recommending products to clients, and offering them advice. PE firms have historically invested in performance-marketing players to expand their digital marketing capabilities, while other intermediaries have attracted investments from incumbents. Specifically, investors that combine operating capabilities with skill in managing investments and maximizing returns have a clear value proposition, making management teams more comfortable in taking over their blocks and customers. The capital markets are increasingly rewarding intermediaries and insurers that use technology to create value, often by augmenting their internal IT capabilities through third-party vendors. Traditional brokers also seek out tech to support their growth and maximize agent time spent on value-added activities.
In many cases, the key question is when is it appropriate to recognise the expected proceeds from an insurance claim? To determine this, companies need to consider the nature and timing of the insured event. Last, a balance sheet is subject to several areas of professional judgement that may materially impact the report. For example, accounts receivable must be continually assessed for impairment and adjusted to reflect potential uncollectible accounts. Without knowing which receivables a company is likely to actually receive, a company must make estimates and reflect their best guess as part of the balance sheet.
For example, they are increasingly leveraging customer relationship management in conjunction with intelligent lead matching or dashboards and streamlining the digital experience for agents in small commercial lines. In our experience, this can lead to a reduction of up to five hours a week in the work required for submissions, freeing up valuable time for agents. But others, such as products liability and some workers compensation claims, may be settled long after the policy has expired. The most difficult to assess are loss reserves for events that have already happened but have not been reported to the insurance company, known as “incurred but not reported” (IBNR). Examples of IBNR losses are cases where workers inhaled asbestos fibers but did not file a claim until their illness was diagnosed 20 or 30 years later.
Balance sheet reserves, also known as claims reserves, are accounting entries that show money set aside to pay future obligations. Balance sheet reserves appear as liabilities on a company’s balance sheet, one of the three main financial statements. Balance sheet reserves are particularly relevant in the insurance industry because companies must have sufficient funds to pay any claims filed by clients. There are set standards for setting up balance sheet reserves depending on the state where the company is based.
Smaller agencies depend more heavily on their associations, their software and free advice boards as to what they should be doing. Many purchase agency management software and assume it does everything they need. However, their accountants are usually small practitioners doing a little of everything so they know nothing about insurance agency accounting requirements. As part of setting the opening balance sheet, IFRS 17 requires insurers to determine the projected profits of their legacy portfolios. Higher future expected profitability will reduce IFRS 17 shareholder’s equity,¹ meaning that insurers need to make a trade-off between post-implementation profitability and balance-sheet strength.
Includes non-AP obligations that are due within one year’s time or within one operating cycle for the company (whichever is longest). Notes payable may also have a long-term version, which includes notes with a maturity of more than one year. Accounts Payables, or AP, is the amount a company owes suppliers for items or services purchased on credit. As the company pays off its AP, it decreases along with an equal amount decrease to the cash account.
In Asia (excluding Japan), economies grew at a CAGR of 10 percent while premiums grew just 3 percent. Over the past decade, our publications have chronicled the increased instability the life insurance and retirement industry has experienced. They’ve also reckoned with the trends that have been causing industry players to rethink their operating models, such as digital transformations; the rise of environmental, social, and governance (ESG) concerns; and the shifting economic environment.