Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Six – The awkward squad
4.1.3 Insurance company financial statements – the fundamentals
We outlined the four key core accounting issues in insurance accounting above.
We shall now address each of these core issues before moving on to some of the
additional detail that will help in analysing insurance companies.
A typical income statement and balance sheet for an insurance company is shown
in Exhibit 6.12 below.
Exhibit 6.12: Accounts for typical insurance company
Income statement of typical insurance company €
Net earned premiums 100
Claims incurred (75)
Commissions (12)
Operating expenses (14)
Technical result (1)
Investment income 6
Pre-tax profit 5
Balance sheet of typical insurance company €
Intangible assets 400
Investments 200
PP&E 120
Other assets 50
Provisions (technical reserves) (450)
Other liabilities (20)
=Equity 300
Issue 1 – Premium income recognition (net earned premiums)
As we stated above premium recognition is a core issue for insurance company
accounting. We must also bear in mind that under general accounting principles
revenue can only be recognised if two conditions are met. First, the revenue is
realisable, and second, it has been earned. In the case of an insurance company
receiving a premium up front it is obviously realised. It will only be earned if the
risk coverage period has elapsed. Therefore an insurance company will have a
mix of premium sources; some older premiums now earned and recognised as
well as the non-recognition of newer premiums not yet earned.
A standard working is used to illustrate this.
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