All Agencies Must Have a Balance Sheet

The surrender charge can start as high as 10% to 35% of your policy cash value. 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. I especially wince if they hire an accountant or consultant who advises that I am being too detailed because that agency is being taken for a ride.

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 insurance deals mainly with the company’s workers and anything that may happen to them while they are working. Publicly owned U.S. insurance companies, like companies in any other type of business, report to the SEC using GAAP.

• Carrier contracts generally stipulate that if an agency is out of trust, the carrier owns the expirations.
• 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.”
• While not always advisable, you may be able to sell your life insurance policy to a third party for cash.
• 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.
• Once you spend down all your cash value, you need to start paying the premiums again or else you lose your coverage.

What you receive for your cash surrender value could be less than your current cash value balance after subtracting these fees. PE investors are increasingly looking outside of P&C and EB retail brokerage for opportunities. The still-fragmented space of life-and-annuities managing general agents (MGAs) and insurance marketing organizations (IMOs) has recently attracted investor attention. A handful of PE firms have acquired IMOs, furthering consolidation in the space. This consolidation occurred despite the expected decrease in overall life and annuities sales, as lower face-amount policies that do not require a medical underwriting exam are more easily sold via phone or digital platforms and may prove resilient.

Persistent low interest rates can also create a tailwind for investors when existing balance-sheet asset owners look to offload risks. The image below is an example of a comparative balance sheet of Apple, Inc. This balance sheet compares the financial position of the company as of September 2020 to the financial position of the company from the year prior. 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.

Research + Data

Investors should consider engaging a financial professional to determine a suitable retirement savings, tax, and investment strategy. You do not owe income tax for borrowing cash value when you take out a loan, but the insurance company will charge interest until you pay the money back. If you die with an unpaid loan, the insurance company will use your death benefit to pay off the loan, and then pay whatever is left to your heirs. Don’t overestimate your cash surrender value, which is not reflective of the amount of coverage you have taken out for the death benefit. A cash value is tied to the policy as a benefit to help offset the rise in premiums as you grow older and offers policyholders access to money they can borrow. Finding, pricing, and managing the risks of the insured aren’t all that insurance companies do.

• This insurance expense will show up on your balance sheet as part of a lower bank balance; however nothing on the balance sheet specifically will indicate that you spent the missing money on insurance.
• These distributors use their homegrown tech as a point of differentiation and a faster route to online channels in some lines.
• The actual cost of each policy to the insurer is not known until the end of the policy period (or for some insurance products long after the end of the policy period), when the cost of claims can be calculated with finality.
• It cannot give a sense of the trends playing out over a longer period on its own.

Whole, universal, variable universal, and indexed universal life insurance often have a cash value component to them. If you surrender the policy, you receive your cash value minus any surrender charges. With universal and variable life insurance policies, cash values are not guaranteed. Sufficient cash value must remain inside the policy to support the death benefit. When determining your cash surrender value, you must consider any fees your company will charge for canceling your policy.

Shareholder Equity

A couple of key metrics can be used to value insurance companies, and these metrics happen to be common to financial firms in general. As we consider the evolving insurance ecosystem and private investors’ role in it, there are bright spots in PE insurance investing, despite the uncertainty. 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. PE firms have owned a few large players for more than a decade and may be looking to exit when there is less volatility. Current PE owners have invested in operational efficiencies and pricing optimization.

Consolidated Balance Sheet as of December 31, 2022

If we take Progressive’s float ($6.5 billion), debt ($1.3 billion), and shareholder’s equity ($6.1 billion) we get $13.9 billion — notice this is about equal to Progressive’s $14.3 billion in investments. In other words, an insurer takes money from policyholders (float) and creditors (debt), and pays out operating expenses, claims and claims expenses, and interest payments. The remainder is left over for the stock holders and taxes — this money is reinvested into investments and increases shareholder’s equity, which increases the value of the insurance company to stock holders. However, if the insurer is taking bad risks it’ll end up owing a lot of claims (if the losses fall to the bottom line, this eats into shareholder’s equity) — the money to pay out claims comes out of float and investments, which is bad. 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.

Book value, which is simply shareholders’ equity, is a proxy for a firm’s value should it cease to exist and be completely liquidated. Price to tangible book value strips out goodwill and other intangible assets to give the investor a more accurate gauge of the net assets left over should the company close shop. Beyond the above core insurance operations, insurers run and manage investment portfolios. The funds for these portfolios come from reinvesting profits (such as earned premiums, where the premium is kept because no claim occurred during the policy’s duration) and from premiums before they get paid out as claims. Likewise, the increasingly granular segmentation and data usage enabled by technology providers will continue to gain traction in the marketplace. Both digital-native and traditional insurers are becoming more adept at identifying niche customer segments and using data and analytics to serve them well.

How do you record a payment for insurance?

Different accounting systems and ways of dealing with depreciation and inventories will also change the figures posted to a balance sheet. Because of this, managers have some ability to game the numbers to look more favorable. Pay attention to the balance sheet’s footnotes in order to determine which systems are being used in their accounting and to look out for red flags. Some companies issue preferred stock, which will be listed separately from common stock under this section. Preferred stock is assigned an arbitrary par value (as is common stock, in some cases) that has no bearing on the market value of the shares.

In fact, amid the COVID-19 pandemic, traffic to online life insurance sites has increased, suggesting a near-term, growing interest in life insurance products. Adding to the fray are the increasing numbers of digital-native distributors that build their own technology. These distributors use their homegrown whos included in your household tech as a point of differentiation and a faster route to online channels in some lines. Because they often struggle to manage costs—for customer acquisition, for example—digital distributors are also adding products and acquiring balance-sheet capabilities to expand their presence along the value chain.

For insurance companies, balance sheet reserves represent the amount of money insurance companies set aside for future insurance claims or claims that have been filed but not yet reported to the insurance company or settled. The levels of balance sheet reserves to be maintained are regulated by law. A term which refers to a list of assets, investments and liabilities held by an insurance company.

In addition, we articulate the rationale for investing in insurance balance sheets as permanent sources of capital. 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. Some permanent life insurance policies build cash value as you pay premiums.