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. From 2016 to 2019, the PE-backed brokerage deals completed in the United States accounted for roughly three-quarters of the total insurance deal volume (in terms of the number of transactions). Given record levels of available capital and successful exits, PE activity and competition for insurance assets has intensified. PE investors also must compete with conglomerates and insurers themselves that are investing more money, more often.
Let’s look at Chubb Industries (CB), a property & casualty company based out of Zurich, Switzerland. Chubb currently has a market cap of $87.3 billion and a market price of $213.02. The use of insurance float is one of the reasons why Berkshire Hathaway’s book value and market value have grown 20% per year since 1965, compared to 10% per year for the S&P for the same period.
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SPAC deal momentum also increased the competition, with several multibillion-dollar announcements since the third quarter of 2020. These trends also light the way for PE investors, who continue to look for ways to deploy large amounts of capital—leading to what some in the industry see as outsize valuations, especially in public markets. While PE’s total insurance investment was lower in 2020 than in 2019, it remained above 2017 levels, primarily driven by distribution and balance-sheet transactions.1McKinsey analysis of Pitchbook and Preqin 2020 insurance transactions. Insurance accounts for more than half of all PE deals in financial services.
- The levels of balance sheet reserves to be maintained are regulated by law.
- If they don’t balance, there may be some problems, including incorrect or misplaced data, inventory or exchange rate errors, or miscalculations.
- An investor has to trust that the firm’s actuaries are making sound and reasonable assumptions that balance the premiums they take in with the future claims they will have to pay out as insurance payments.
It cannot give a sense of the trends playing out over a longer period on its own. For this reason, the balance sheet should be compared with those of previous periods. The good news for companies about such types of insurance is that they can be deducted from tax liability as a business expense. However, most companies can deduct such expenses on their income tax forms in order to get a tax break. On December 31, the company writes an adjusting entry to record the insurance expense that was used up (expired) and to reduce the amount that remains prepaid. This is accomplished with a debit of $1,000 to Insurance Expense and a credit of $1,000 to Prepaid Insurance.
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When you surrender a policy, you receive whatever you paid in premiums back tax-free. If you receive more than you paid in total premiums, you owe income tax on your earnings. By not analyzing these statements on a monthly and annual basis, the agency owner will have a more difficult time understanding the true operation of the business. Under Assets on the balance sheet, the accountant should include both the operating account balance and the trust account balance, and these should be kept separate bank accounts. Under Liabilities on the balance sheet, a separate entry should be made for the amounts due to the Insurance Companies from the trust account. Insurance companies are likely to focus on some combination of these themes based on their ownership type and specific owners.
Recording Unemployment Tax on a Balance Sheet
First we’ll get familiar with the terms and calculations; later on, we’ll see how the statements are linked and flow into each other. What to look forIdeally, an insurance company should have three characteristics. And finally, it should have as much shareholder equity as possible, as this represents the estimated liquidation value of the business when you take out the impact of operations.
By following this practice, the agency owner will have a better understanding of the status of the trust account, and it will help eliminate practices that will result in an illegality. Most P&C agencies do not account for COGS sold because there is no inventory sold by an agency. Some accountants may choose to show commission payments made to the agency’s producers on the COGS line, but they are usually handled as regular expenses. For retail agencies, it is best to not include a COGS entry and for any agency engaged in any wholesale operations, the COGS entry should be the commissions paid to the outside agents. A couple of key metrics can be used to value insurance companies, and these metrics happen to be common to financial firms in general. When I get a call to help an agency prepare to sell and discover their balance sheets are MIA or junk, I cringe and often procrastinate before advising them of the problem.
If you have maxed out contributions to your retirement account, have a cash nest egg saved for emergencies, and you can afford the monthly premiums on a permanent life insurance policy with a cash value benefit, it may be a good choice. However, if you cannot afford a lifetime of high premiums and you are struggling to save for retirement, these accounts are not recommended as a tool for investment. Universal life insurance, universal variable life, and variable life insurance policies typically include a surrender period. If you cancel during this period, you may owe a surrender charge of up to 35% of your cash value balance.
Imperatives and priorities for life insurers
The insurer will deduct this charge from your cash value balance and pay you the remainder for your surrender value. There is no surrender charge when the surrender period ends, usually after 10 to 15 years. All of the practices highlighted in this article and based on common errors or situations that our team has encountered when reviewing agency financial statements. By incorporating the best practices listed above, an agency owner and their accountant will have a better understanding of the state of the business as well as a system to prevent common accounting errors.
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Insurance expense and insurance payable are two different things, yet they are interrelated. There would be no need for an insurance payable account if there were no insurance expense. Obviously, property insurance covers the building and land that a company owns, as well as whatever is inside. Casualty and liability book value accounting insurance deals mainly with the company’s workers and anything that may happen to them while they are working. Dave, a self-taught investor, empowers investors to start investing by demystifying the stock market. Please let me know if you have any questions or need further help to decipher the insurance float.
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Even within the broader classifications of insurers, however, individual insurers will have unique situations—and thus unique expectations. Below we offer a simplified overview of how four broad insurance models could respond to organizational goals and investor expectations by using their strengths to differentiate themselves in the industry. Carriers are now weighing the risks and fiscal costs to operate in developing economies. Companies have started to rethink what it means to be a “global insurer.” Historically, life insurers looked toward markets that were similar to theirs—which also tend to be closer geographically—to expand market share and drive top-line growth.