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Prepaid Legal Service

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Prepaid Legal Service

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    1. 11/25/2011

    2. 11/25/2011

    3. 11/25/2011 Key Issues Is the capitalization of commission advances accounting distortion or is it justifiable? Is an advanced commission an asset or an expense? Is PPLSI portraying a realistic financial picture for its investors? Is PPLSI’s estimated cancellation rate reasonable? Is PPLSI’s allowance for uncollectable advanced commissions reasonable?

    4. 11/25/2011 Business Strategy Analysis Liu Yang

    5. 11/25/2011 Business Strategy Analysis Industry Analysis 1 Legal service industry overview 2 Porter’s five forces model Competitive Strategy Analysis Differentiation Corporate Strategy Analysis 1 Expand through acquisition and alliance 2 Key success factors 3 Key risk factors

    6. 11/25/2011 Industry Analysis Legal Service Industry Overview 1 History of LS industry started late 1960s, grew 25 times1981--1997 2 Four segments of LS industry Free plans 50% (As Percentage of Total Market) Employee assistance plans 29% & Employer paid plans 6% * Individual enrollment plans 15% 3 Pre-paid Legal Service’s position--* & open panel and closed panel

    7. 11/25/2011 Industry Analysis Porter’s Five Analysis 1 High barrier of entry States regulation and approval 2 High buyer bargaining power Buyers can cancel or change plan without cost/penalty 3 High supplier bargaining power Sales associates and law firms are influential suppliers 4 Low threat of substitutes 5 Medium industry rivalry 21% small firms, 79% large insurance companies

    8. 11/25/2011 Competitive Strategy Analysis Differentiation ? 1 Diverse legal service plans to meet the needs of diverse market including individuals, families and specialized groups like commercial drivers and small business owners etc 2 Bilingual staff for both customer service and marketing service 3 Develop legal service plans for different ethnic groups Cost Leadership? Offer qualified legal service to middle-income Americans at a reasonable cost

    9. 11/25/2011 Corporate Strategy Expand through Acquisition and alliance 1 Acquisition of TPN Increase sales force and provide a powerful communication tool--TPN satellite channel 2 Acquisition of UFL Widen service to life and health insurance. Create an alliance opportunity with Conseco insurance company, gain Conseco’s 160,000 sales agent to market

    10. 11/25/2011 Corporate Strategy Analysis Key Success Factors 1 Pioneer position in industry 2 Relatively low capital investment resulting in no heavy overhead expense 3 Extensive sales force and multilevel marketing program 4 Well established network of lawyers hardly duplicated by competitors.

    11. 11/25/2011 Corporate Strategy Analysis Key Risk Factors 1 Cancellation risk Customers can cancel policies anytime without penalty 2 Adverse selection risk People with higher potential legal service needs will have a greater tendency to purchase the plan 3 Sales associate non-performing risk 4 Advanced commission fees collection risk

    12. 11/25/2011 Accounting Analysis Yoshiro Mishina

    13. 11/25/2011 Accounting Analysis How PPLS recognizes revenue and expenses? The old accounting method (pre-1995) The new accounting method How PPLS treats the unrecoverable commission advances? Charge-backs Allowance for unrecoverable commission advances Uncertainty of the current accounting method

    14. 11/25/2011 How PPLS recognizes revenue and expenses? <The old method (pre-1995)> Revenue Premiums $229 Expenses Commissions $160 ($229*70%) Claims $ 68 ($229*30%) Other expenses $ 23 ($229*10%) Net Income <$ 22>

    15. 11/25/2011 How PPLS recognizes revenue and expenses? <The new method> Revenue Premiums $229 Expenses Commissions $ 57 ($229*25%) Claims $ 68 ($229*30%) Other expenses $ 23 ($229*10%) Net Income $ 81 Assets Cash <$172> ($229*75%) Commission Advances - current $57 ($229*25%) Commission Advances - non-current $57 ($229*25%)

    16. 11/25/2011 Advantage of the new method for PPLS Shows higher net income $81(new method) vs. <$22>(old method) Capitalizes commission advances Boosts associates’ motivation to increase sales and maintain existing customers

    17. 11/25/2011 How PPLS treats the unrecoverable commission advances? Charge-backs Half the charge back out of an associates’ future commissions Half from the associates’ commissions on renewals of policies that were more than 3 years Allowance for unrecoverable commission advances

    18. 11/25/2011 Allowance for unrecoverable commissions

    19. 11/25/2011 Uncertainty of the new method Pro In conformity with the matching concept (GAAP) Unqualified opinion by “Deloitte & Touche” Cons No guarantee that customers keep the month-to -month policies for 3 years Disregard of the concept of conservatism (GAAP)

    20. 11/25/2011 Assumption - Net Income per contract - Revenue Premiums $229 Expenses Commissions $172 ($229*75%) Claims $ 68 ($229*30%) Other expenses $ 23 ($229*10%) Net Income <$ 33>

    21. 11/25/2011 Assumption - Adjusted expenses -

    22. 11/25/2011 Assumption - Income Statements & Balance Sheet-

    23. 11/25/2011 Conclusion “QUESTIONABLE”

    24. 11/25/2011 Hindsight The Wall Street Journal, January 17, 2001 questionable accounting method overstated earning figures undisclosed overstated earning figures financial info. Class Actions

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