They also need to keep up with the pace of digital transformation seen in the private sector, all while balancing these large investments with their solvency position. Finally, these insurers may have to address talent attraction—for example, to improve their underwriting capabilities and compete with insurers in the private sector. Insurance companies are likely to focus on some combination of these themes based on their ownership type and specific owners. Even within the broader classifications sales and use tax 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. In the past two decades, economies grew faster than insurance premiums, indicating insurers haven’t been growing at the same rate as the economies in which they operate.
- In the past, PE firms have generated value in claims through acquisition—they realized scale efficiencies and expanded to additional products and parts of the value chain.
- Long-term liabilities, on the other hand, are due at any point after one year.
- As the company pays off its AP, it decreases along with an equal amount decrease to the cash account.
- Insurance accounts for more than half of all PE deals in financial services.
- Compared to other industries, life insurers have still not structurally addressed their cost base.
The policies are designed to protect the company – and employees – from anything adverse that might happen. 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.
While consolidation opportunities remain, in a competitive market a business-as-usual approach is increasingly insufficient to acquire attractive targets and achieve multiples arbitrage. Depending on the company, different parties may be responsible for preparing the balance sheet. For small privately-held businesses, the balance sheet might be prepared by the owner or by a company bookkeeper.
Accelerated digitization encourages investments
As they did, a special insurance accounting standards, known as statutory accounting principles and practices, or SAP, developed. The term statutory accounting denotes the fact that SAP embodies practices prescribed or permitted by state law. Consolidation will continue across sectors, but accessible targets that are both mature and profitable are becoming increasingly sparse. Many available nonpublic entities are either very small or very large, especially in the technology space, and PE investors face increasing competition from other forms of capital. SPAC deal momentum also increased the competition, with several multibillion-dollar announcements since the third quarter of 2020.
If your company has made other prepayments, such as for accounting support or software licenses, your balance sheet will include a line summarizing these prepayments but not specifically naming prepaid insurance expense. If your insurance prepayment is the only prepayment your business has made, you might include it on your balance sheet on its own line tagged as «insurance prepayment.» The accounting treatment of car insurance and product liability insurance will show up on your income statement rather than your balance sheet. Insurance expense will be one of the categories that your income statement lists as an expenditure. Because the income statement reflects business activity over a period of time, this line on your income statement will aggregate any insurance payments your business made during the period that the statement covers.
Insurance accounts for more than half of all PE deals in financial services. 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. In most cases, the goal is to get them paid by the end of the current period to avoid additional late charges or being dropped by the insurance company altogether. A company’s property insurance, liability insurance, business interruption insurance, etc. often covers a one-year period with the cost (insurance premiums) paid in advance. The one-year period for the insurance rarely coincides with the company’s accounting year.
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. Insurers backed by private capital and alternative-asset-management players.
How PE investors can make the most of these trends
Accounts within this segment are listed from top to bottom in order of their liquidity. They are divided into current assets, which can be converted to cash in one year or less; and non-current or long-term assets, which cannot. Under SAP, when a property/casualty policy is issued, the unearned premium is equal to the written premium.
Breaking Down The Balance Sheet
This balance sheet also reports Apple’s liabilities and equity, each with its own section in the lower half of the report. The liabilities section is broken out similarly as the assets section, with current liabilities and non-current liabilities reporting balances by account. The total shareholder’s equity section reports common stock value, retained earnings, and accumulated other comprehensive income. Apple’s total liabilities increased, total equity decreased, and the combination of the two reconcile to the company’s total assets.
Because it is static, many financial ratios draw on data included in both the balance sheet and the more dynamic income statement and statement of cash flows to paint a fuller picture of what’s going on with a company’s business. For this reason, a balance alone may not paint the full picture of a company’s financial health. As the prepaid amount expires, the balance in Prepaid Insurance is reduced by a credit to Prepaid Insurance and a debit to Insurance Expense. This is done with an adjusting entry at the end of each accounting period (e.g. monthly). One objective of the adjusting entry is to match the proper amount of insurance expense to the period indicated on the income statement.
1 Investments in life insurance contracts
Opportunities exist with distribution players and service and technology providers. By acting quickly and making bold moves using our eight investment recommendations as a guide, private equity investors can create value in this complex and dynamic industry. Technology providers are benefiting from a booming ecosystem of start-ups that help insurers automate their businesses. Influenced by the current environment, insurers are using analytics to increase process efficiencies that reduce costs and to evaluate large sets of data to generate other insights. Robotic process automation and intelligent process automation, combined with cognitive automation and analytics across business lines, drive productivity and accuracy in business processes with near-zero error rates.
For example, after a long track record in insurance vehicles, one investment management firm reported that nearly half of its assets under management were in insurance, amounting to half of all management fees earned. Public companies, on the other hand, are required to obtain external audits by public accountants, and must also ensure that their books are kept to a much higher standard. The balance sheets and other financial statements of these companies must be prepared in accordance with Generally Accepted Accounting Principles (GAAP) and must be filed regularly with the Securities and Exchange Commission (SEC). Balance sheets allow the user to get an at-a-glance view of the assets and liabilities of the company. The balance sheet can help users answer questions such as whether the company has a positive net worth, whether it has enough cash and short-term assets to cover its obligations, and whether the company is highly indebted relative to its peers. Employees usually prefer knowing their jobs are secure and that the company they are working for is in good health.
Depending on the company, 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. This financial statement lists everything a company owns and all of its debt. A company will be able to quickly assess whether it has borrowed too much money, whether the assets it owns are not liquid enough, or whether it has enough cash on hand to meet current demands.
Background on: Insurance Accounting
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. Inventory includes amounts for raw materials, work-in-progress goods, and finished goods. The company uses this account when it reports sales of goods, generally under cost of goods sold in the income statement. This account includes the balance of all sales revenue still on credit, net of any allowances for doubtful accounts (which generates a bad debt expense).