The Challenge
SecureLife Insurance Agency, aiming to expand its market presence through strategic acquisitions, identified Shield Commercial Insurance Services Insurance as a potential target. However, to secure a sound investment, SecureLife needed to ensure the reliability and sustainability of Shield Commercial Insurance Services's earnings. Key challenges included inconsistent revenue recognition due to varied commission structures, a significant portion of non-recurring revenue, variable expense allocations, working capital fluctuations, and the presence of non-recurring and unusual items potentially inflating reported earnings. Addressing these issues was crucial for making an informed acquisition decision.
The Solution
SecureLife Insurance Agency engaged O'Connell Advisory Group to conduct a detailed Quality of Earnings (QoE) analysis. The decision was driven by O'Connell's expertise in the insurance industry and their ability to provide a comprehensive assessment of financial health and earnings sustainability. The analysis involved a thorough review of Shield Commercial Insurance Services's revenue recognition policies, commission structures, expense allocations, working capital fluctuations, and identification of non-recurring items. According to a SecureLife representative, 'The detailed Quality of Earnings analysis provided by O'Connell Advisory Group was instrumental in our acquisition process. Their thorough work gave us a clear understanding of the financial realities of Shield Commercial Insurance Services Insurance and allowed us to confidently move forward with the deal.'
The Results
The QoE analysis delivered by O'Connell Advisory Group provided SecureLife with several key benefits. Firstly, it normalized revenue reporting, ensuring accurate financial statements. Secondly, it offered a clearer understanding of the cost structure, particularly in relation to commission and agent compensation. Thirdly, the analysis improved profitability assessment by distinguishing between recurring and non-recurring revenue. Additionally, enhanced working capital management was achieved by clarifying the timing differences between premium collections and commission payouts. Finally, the risks of inflated earnings were mitigated by identifying non-recurring and unusual items. Metrics achieved included normalized revenue reporting, improved profitability assessment, enhanced working capital management, and risk mitigation of inflated earnings.
