Adjusted Net Worth: What it is, How it Works

What Is Adjusted Net Worth?

Adjusted net worth calculates the value of an insurance company, using capital values, surplus values, and an estimated value for business on the company's books. It starts with the estimated value for the business and adds unrealized capital gains, the capital surplus, and the voluntary reserves.

How Adjusted Net Worth Works

The adjusted net worth represents a measure of the value of an insurance company, making it a useful way to compare the company's relative value to other insurance companies. The word "adjusted" in the phrase is a clue that it is meant to reflect economic value which can be compared between multiple firms.

It is common to standardize values that are generated from the financial statements to use in analyzing an industry. This allows a particular company's relative value to be statistically compared across the industry.

Special Considerations

Businesses typically use current market value as the value of an asset. This calculation should also consider taxes. Large companies often use a cost approach to valuing assets. This method accounts for the original purchase price of all assets and the costs of any improvements, less depreciation.

Requirements for Adjusted Net Worth

Adjusted net worth provides a snapshot of your business finances from a certain perspective. The calculation is done on a balance sheet, which lists all assets and liabilities. Subtracting liabilities from assets provides the business's adjusted net worth.

Assets and liabilities should be classified according to how long they will be held—current, intermediate, or long term. Current assets should be limited to cash and cash equivalents. Cash equivalents include assets that you expect to be sold during the current year. Intermediate assets are typically kept for more than a year. This could include manufacturing equipment, computers, or raw materials to be used in future production. Long-term assets are typically limited to business-owned real estate.

Liabilities can be divided similarly. Current liabilities include accounts payable and regular loan payments. Intermediate liabilities are debts that might be paid over three to seven years, such as vehicle and equipment leases. Long-term liabilities typically apply to a business's long-term assets, like mortgage payments.

Payments due on intermediate and long-term liabilities in the current financial period should be included in the current liabilities category. For example, if you have 10 years left on a mortgage, one year of payments should be listed in the current liabilities section and the remaining nine years should be included in long-term liabilities.