conquering financial statements - wsia.org financial... · •expenses/productivity •financial...

10/24/2016

1

2016 Marcus Payne Advanced E&S

November 6 - 9, 2016

Conquering Financial Statements

Keith BartzDivisional CFO

Risk Placement Services, Inc.

www.napslo.org

Objectives

• Understand key financial results for agents and brokers

• Identify benchmarks for evaluating agents and brokers’ financial performance

• Review current conditions that are impacting insurer’s financial results

• Understand financial statements for non-financial industries

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Agents and Brokers: Key Financial Areas

• Revenues

• Profitability

• Expenses/Productivity

• Financial Stability

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Agents and Brokers: Key Financial AreasRevenues

Income statement

• Commissions and fees are the primary source of revenue– Core commissions

– Profit sharing contingent commissions

– Supplemental commissions

• Change in revenues– What is the Trend?

• Organic/acquired – year over year change– How much revenue is generated from an increase in core business

compared to the amount of revenue acquired?

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Consolidated Statements of Income

(in Millions except per share data) 2014 2013 2012

RevenuesCommissions and fees 2,612.6$ 2,274.2$ 1,997.6$

Supplemental Commissions 77.3 67.9 56.0

Contingent Commissions 52.1 42.9 38.1

Investment Income 8.1 10.4 8.1

Other net revenues 429.5 124.9 34.9

Total revenues 3,179.6 2,520.3 2,134.7

ExpensesEmployee Compensation 1,685.0 1,493.4 1,326.1

Operating Expenses 552.4 483.2 419.0

Other Expenses 437.3 111.6 32.0

Interest 50.1 43.0 40.8

Depreciation 53.4 41.4 35.9

Amortization 125.2 99.0 79.3

Change in Estimated acquisition earnout payables 1.7 3.4 (6.2)

Total Expenses 2,905.1 2,275.0 1,926.9

Earnings before income taxes 274.5 245.3 207.8

Provision for income taxes 5.9 50.3 63.7

Net earnings 268.6$ 195.0$ 144.1$

Basic net earnings per share 2.08$ 1.61$ 1.29$

Diluted earnings per share 2.06 1.59 1.28

Dividends declared per common share 1.40 1.36 1.32

Year ended December 31,

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Results of Operations

(in Millions except per share data) 2014

Percent

Change 2013

Percent

Change 2012

RevenuesCommissions and fees 2,612.6$ 14.9% 2,274.2$ 13.8% 1,997.6$

Supplemental Commissions 77.3 13.8% 67.9 21.3% 56.0

Contingent Commissions 52.1 21.4% 42.9 12.6% 38.1

Investment Income 8.1 -22.1% 10.4 28.4% 8.1

Other net revenues 429.5 243.9% 124.9 257.9% 34.9

Total revenues 3,179.6 26.2% 2,520.3 18.1% 2,134.7

ExpensesEmployee Compensation 1,685.0 12.8% 1,493.4 12.6% 1,326.1

Operating Expenses 552.4 14.3% 483.2 15.3% 419.0

Other Expenses 437.3 291.8% 111.6 248.8% 32.0

Interest 50.1 16.5% 43.0 5.4% 40.8

Depreciation 53.4 29.0% 41.4 15.3% 35.9

Amortization 125.2 26.5% 99.0 24.8% 79.3

Change in Estimated acquisition earnout payables 1.7 -50.0% 3.4 -154.8% (6.2)

Total Expenses 2,905.1 27.7% 2,275.0 18.1% 1,926.9

Earnings before income taxes 274.5 11.9% 245.3 18.0% 207.8

Provision for income taxes 5.9 -88.3% 50.3 -21.0% 63.7

Net earnings 268.6$ 37.7% 195.0$ 35.3% 144.1$

Basic net earnings per share 2.08$ 29.2% 1.61$ 24.8% 1.29$

Diluted earnings per share 2.06 29.6% 1.59 24.2% 1.28

Dividends declared per common share 1.40 2.9% 1.36 3.0% 1.32


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• Organic revenue growth impacted by:

– Economy

• Insurable exposure limits

• Property values

• Sales

• Payroll

• “Soft market” conditions

– Premium rate levels

• Ability to hire new producers

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Insurance BrokerageComposite Organic Growth

-0.9

%

1.0

%

2.8

%

4.1

%

3.7

%

3.4

%

2.6

%

2.2

%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16E

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Profitability Measurement

• Year over year change

• Pre-tax income / net revenues

• EBITDA* / net revenues

• *EBITDA = Earnings before interest, taxes, depreciation and amortization

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Calculating EBITDAC

Earnings – net income $268.6

Interest 50.1

Taxes 5.9

Depreciation 53.4

Amortization/Change in Earnout 126.9

EBITDAC $503.2

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Consolidated Statements of Income

Year over year earnings change 38% Pre-tax income / net revenues 8.6%EBITDAC / net revenues 15.9%

(in Millions except per share data) 2013 2012 2011

RevenuesCommissions and fees 2,612.6$ 2,274.2$ 1,997.6$

Supplemental Commissions 77.3 67.9 56.0

Contingent Commissions 52.1 42.9 38.1

Investment Income 8.1 10.4 8.1

Other net revenues 429.5 124.9 34.9

Total revenues 3,179.6 2,520.3 2,134.7

ExpensesEmployee Compensation 1,685.0 1,493.4 1,326.1

Operating Expenses 552.4 483.2 419.0

Other Expenses 437.3 111.6 32.0

Interest 50.1 43.0 40.8

Depreciation 53.4 41.4 35.9

Amortization 125.2 99.0 79.3

Change in Estimated acquisition earnout payables 1.7 3.4 (6.2)

Total Expenses 2,905.1 2,275.0 1,926.9

Earnings before income taxes 274.5 245.3 207.8

Provision for income taxes 5.9 50.3 63.7

Net earnings 268.6$ 195.0$ 144.1$


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Agents and Brokers: Key Financial AreasExpenses

• Employee compensation ratio

– Employee expenses as a percent of revenue

• Other operating expense ratio

– Operating expenses as a percent of revenue

– Operating expenses include rent, utilities, IT, supplies, education, and equipment

• Revenue per headcount

• Spread per employee

– Revenue per employee less compensation per employee

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Agents and Brokers: Key Financial AreasFinancial Stability

Balance Sheet

• LiquidityMeasures the ability to meet short-term obligations and to convert current non-cash items into cash.

– Current ratio = current assets to current liabilities

– Cash + receivables to premiums payable

– Restricted cash + premiums receivable to premiums payable

• LeverageIndicates the mix of funding provided by owners and creditors.

The greater the number the “more leveraged” the company is.

– Liabilities to equity

– Long-term debt to equity

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Agents and Brokers: Key Financial AreasFinancial Stability

Consolidated Balance Sheets(in millions) 2014 2013

Assets

Cash and cash equivalents 298.1 302.1

Restricted cash 1,027.4 851.6

Premium and fees receivable 1,288.8 1,096.1

Other current assets 261.3 179.7

Total Current Assets 2,875.6 2,429.5

Fixed assets - net 160.4 105.4

Deferred income taxes 279.8 251.8

Other noncurrent assets 320.7 283.3

Goodwill - net 2,145.2 1,472.7

Amortizable intangible assets - net 1,078.8 809.6

Total assets 6,860.5 5,352.3

Liabilities and Stockholders' Equity

Premiums payable to markets 2,154.7 1,819.7

Accrued liabilities 370.6 306.7

Unearned fees 84.5 70.6

Other current liabilities 44.5 36.9

Corproate borrowings - current 630.5 129.0

Total current liabilities 3,284.8 2,362.9

Corporate borrowings - noncurrent 825.0 725.0

Other noncurrent liabilities 665.2 605.8

Common Stock 133.6 125.6

Capital in excess of par 1,358.1 1,055.4

Retained earnings 596.4 510.4

Other (2.6) (32.8)

Total stockholders' equity 2,085.5 1,658.6

Total liabilities and stockholders' equity 6,860.5 5,352.3

At December 31,

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P&C Insurers

What are the conditions currently impacting P&C Insurer’s financial results?

• Slow premium growth

• Rate adequacy

• Reserve development and adequacy

• Catastrophe-related losses

• Low interest rates

• Too much capital

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P&C Insurers: Key Financial AreasProfitability

• Two Major Sources of Income

– Underwriting result

– Investment income

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P&C InsurersProfitability

Net Income

38.4

46.8

64.4 63.6

3.7

32.2

37.2

20.1

38.4

63.0

55.3 56.6

0

20

40

60

80

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$ B

illio

ns

www.napslo.org


Net Underwriting Profit

5.4

(3.8)

34.7

21.6

(19.6)

1.4

(8.3)

(35.3)

(13.8)

14.0 12.3

8.7

(40)

(30)

(20)

(10)

0

10

20

30

40

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$ B

illio

ns

Source: SNL Financial

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U.S. P&C Combined Ratio Forecast

68.70% 69.50% 71.90% 74.20%

28.30% 28.10% 27.90% 27.90%

97.0% 97.6% 99.8% 102.1%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

2014A 2015A 2016E 2017E

Loss Ratio Expense Ratio Total

Source: KBW Research

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E&S Direct Premium

8.5

8.8

9.2

9.2

9.4

9.9

10.6

11.7

15.8

25.6

32.8

33.0

33.3

38.7

36.6

34.4

33.0

31.7

31.1 34.8

37.8

40.2 38.9

0

10

20

30

40

50

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$ B

illio

ns

Source: A.M. Best

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Factors Impacting Premium Growth

• Weak economic conditions

– No exposure growth

– Limited economic expansion

• “Soft market” conditions

– Competitive pricing

– Over supply of capital/surplus

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Average Commercial Rate ChangeAll Lines, (1Q2004 – 1Q2013)

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.Source: Council of Insurance Agents & Brokers; Insurance Information Institute.

-12

.0%

-13

.5%

-12

.9% -1

1.0

%

-6.4

% -5.1

%

-4.9

%

-5.8

%

-5.6

%

-5.3

%

-6.4

% -5.2

%

-5.4

%

-2.9

%

-0.1

%

0.9

% 2.7

% 4.4

%

4.3

%

3.9

% 5.0

%

5.2

%

4.3

%

3.4

%

2.1

%

1.5

%

2.0

%

0.1

%

-0.7

%

-2.3

%

-3.3

%

-3.1

%

-2.8

%

-3.7

%

-3.9

%

-16%

-11%

-6%

-1%

4%

9%

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

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Rates Impact Underwriting Profits

Source: Statutory Filings

YearEarned

PremiumChangeIn Price

IncurredLosses

LossRatio

1 100 60 60%

2 90 -10% 60 67%

3 81 -10% 60 74%

1 100 60 60%

2 110 10% 60 55%

3 121 10% 60 50%

Rates Decreasing

Rates Increasing

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Rates Impact Underwriting Profits

Source: Statutory Filings

Rates Decreasing

Increase in Loss Costs

YearEarned

PremiumChangeIn Price

IncurredLosses

Incurred Losses

5% InflationLossRatio

1 100 60 63.0 63.0%

2 90 -10% 60 66.2 73.6%

3 81 -10% 60 69.5 85.8%

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P&C Reserve Development ($ millions)

Accident Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Earned Premium 387,855 418,176 421,174 440,651 444,018 442,375 428,322 424,976 437,323 452,112

2003 246,503

2004 235,753 261,251

2005 232,362 247,002 277,685

2006 230,905 242,169 267,351 260,702

2007 230,207 238,434 262,276 254,609 280,691

2008 229,873 235,713 258,524 256,064 281,978 321,594

2009 229,623 233,661 255,094 246,308 272,102 319,213 290,602

2010 229,381 232,711 253,197 242,170 270,240 315,661 287,073 288,361

2011 229,118 232,221 251,995 240,233 268,053 311,299 283,443 287,029 321,045

2012 228,748 231,648 251,252 239,087 266,695 306,647 282,914 286,076 316,750 309,525

Net Cumulative

Change(17,756) (29,604) (26,433) (21,615) (13,996) (14,947) (7,688) (2,285) (4,295) 0

-4.6% -7.1% -6.3% -4.9% -3.2% -3.4% -1.8% -0.5% -1.0% 0.0%


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P&C InsurersCapital & Surplus Reached Record Level in 2014


432.3

497.1529.1

461.8

518.0561.8 560.3

596.7 607.2

683.0 679.9

0

100

200

300

400

500

600

700

800

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$ B

illio

ns

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U.S. P&C Estimated Excess Capital

-$100

-$50

$0

$50

$100

$150

$200

$250

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14E

20

15E

20

16E

Surp

lus

Re

du

nd

ancy

(D

efi

cie

ncy

) –($

bil

lio

ns)

Source: Vela Insurance

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General Financial Underwriting

• Why is it important to know the financial state of the company

• What are the key items to look at with financial statements

• Financial distress and when to stay away from a company

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Elements of the Financial Statements

• Auditors’ Report

• Income Statement

• Balance Sheet

• Statement of Cash Flow

• Notes to the Financial Statements

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Types of Financial Statements

• Audited – GAAP financials (most reliable)

• Reviewed

• Compiled

• Internally prepared (least reliable)

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Audit Opinions

• Unqualified (clean)

• Qualified

• Adverse

• Disclaimer

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Financial Underwriting: What is Important

Income statement

1. Sales growth – if the company isn’t growing, it is dying, MAYBE

2. Gross margin – if the cost to produce each additional unit increases, the future isn’t good

3. Operating expense ratio – here is where sales growth can be leveraged to produce great returns

4. What is the trend on all the ratios

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Income Statement Ratios

• Gross Margin = Gross Profit/Net Revenue

• Net Profit Margin = Net Income/Net Revenue

• Operating Expense ratio = Operating Expenses/Net Revenue

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Balance Sheet

1. Current ratio – you want to make sure the company can make it through the next year

2. Leverage ratio – if the company can’t afford it’s capital structure, the operations might not matter as much

3. Retained earnings – how much of the profits are left in the company

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Balance Sheet Ratios

• Current Ratio = Current Assets/Current Liabilities

• Quick Ratio = Current Assets – Inventory/ Current Liabilities

• Debt to Equity = Long Term Debt/Stockholders Equity

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Statement of Cash Flows

• Three critical parts

– Cash flow from operations

– Cash flow from investing activities

– Cash flow from financing activities

• Free Cash flow

– Operating cash flow less capital expenditures

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Notes to the financials

1. What are the terms of any debt – if the bank doesn’t consider them a good risk, should you?

2. Nature of operations – this is often filled with things you did not know about the company

3. Significant customers – it is good to have strong customer relationships but what happens if one big customer goes away

4. Intercompany/affiliated transactions

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Microsoft Corporation Income Statement (in millions)

30-Jun-15 30-Jun-14 30-Jun-1393,580 86,833 77,84933,038 27,078 20,38560,542 59,755 57,464

Research Development 12,046 11,381 10,411Selling General and Administrative 20,324 20,488 20,289Non Recurring 10,011 127 - Others - - - Total Operating Expenses 42,381 31,996 30,700

18,161 27,759 26,764

Total Other Income/Expenses Net 346 61 288Earnings Before Interest And Taxes 18,507 27,820 27,052Interest Expense - - - Income Before Tax 18,507 27,820 27,052Income Tax Expense 6,314 5,746 5,189Minority Interest - - - Net Income From Continuing Ops 12,193 22,074 21,863

Discontinued Operations - - - Extraordinary Items - - - Effect Of Accounting Changes - - - Other Items - - -

12,193 22,074 21,863- - -

12,193 22,074 21,863

Preferred Stock And Other AdjustmentsNet Income Applicable To Common Shares

Income from Continuing Operations

Non-recurring Events

Operating Expenses

Operating Income or Loss

Period EndingTotal RevenueCost of RevenueGross Profit

Net Income

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Microsoft Corporation Balance Sheet(in millions)

PeriodEnding 30-Jun-15 30-Jun-14 30-Jun-13

CashAndCashEquivalents 5,595 8,669 3,804ShortTermInvestments 90,931 77,040 73,218NetReceivables 19,823 21,485 19,118Inventory 2,902 2,660 1,938OtherCurrentAssets 5,461 4,392 3,388TotalCurrentAssets 124,712 114,246 101,466LongTermInvestments 12,053 14,597 10,844PropertyPlantandEquipment 14,731 13,011 9,991Goodwill 16,939 20,127 14,655IntangibleAssets 4,835 6,981 3,083OtherAssets 2,953 3,422 2,392TotalAssets 176,223 172,384 142,431

AccountsPayable 12,385 13,569 10,182Short/CurrentLongTermDebt 7,484 2,000 2,999OtherCurrentLiabilities 29,989 30,056 24,236TotalCurrentLiabilities 49,858 45,625 37,417LongTermDebt 27,808 20,645 12,601OtherLiabilities 13,544 11,594 10,000DeferredLongTermLiabilityCharges 4,930 4,736 3,469MinorityInterest - - -NegativeGoodwill - - -TotalLiabilities 96,140 82,600 63,487

CommonStock 68,465 68,366' 67,306RetainedEarnings 9,096 17,710 9,895OtherStockholderEquity 2,522 3,708 1,743TotalStockholderEquity 80,083 89,784 78,944NetTangibleAssets 58,309 62,676 61,206

AssetsCurrentAssets

CurrentLiabilitiesLiabilities

Stockholders'Equity

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Microsoft Corporation Cash Flow(in millions)

30-Jun-15 30-Jun-14 30-Jun-13

12,193 22,074 21,863

5,957 5,212 3,755

9,417 4,321 4,590

1,456 -1,120 -1,807

-79 2,562 1,841

-272 -161 -802

408 -657 -607

29,080 32,231 28,833

-5,944 -5,485 -4,257

-7,324 -17,802

-4,189 -6,024 -1,752

-23,001 -18,833 -23,811

-9,882 -8,879 -7,455

-13,809 -6,709 -4,429

13,661 6,962 3,537

362 -39 -10

-9,080 -8,394 -8,148

-73 -139 -8

-3,074 4,865 -3,134

Total Cash Flow From Operating Activities

Period Ending

Net Income

Operating Activities, Cash Flows Provided By or Used In

Depreciation

Adjustments To Net Income

Change In Cash and Cash Equivalents

Total Cash Flows From Investing Activities

Financing Activities, Cash Flows Provided By or Used In

Dividends Paid

Sale Purchase of Stock

Net Borrowings

Other Cash Flows from Financing Activities

Total Cash Flows From Financing Activities

Effect Of Exchange Rate Changes

Investing Activities, Cash Flows Provided By or Used In

Capital Expenditures

Investments

Other Cash flows from Investing Activities

Changes In Accounts Receivables

Changes In Liabilities

Changes In Inventories

Changes In Other Operating Activities

2016 Marcus Payne Advanced E&S

November 6 - 9, 2016

Conquering Financial Statements

Keith Bartz

https://www.surveymonkey.com/r/KeithBartz

conquering financial statements - wsia.org financial... · •expenses/productivity •financial...

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