What Is Statutory Accounting Principles (SAP)? Definition

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Statutory accounting principles (SAP) are the accounting rules that U.S. insurance companies follow when they prepare the financial statements they file with state insurance regulators. The rules are prescribed by the National Association of Insurance Commissioners (NAIC) and carried out under state law. SAP is built to show whether an insurer is solvent, meaning whether it holds enough capital and surplus to pay policyholders and meet its other legal obligations.

What statutory accounting measures

The central figure is statutory capital and surplus, the insurer’s equivalent of net worth measured under SAP rules. Regulators compare that figure with the minimum the insurer is required to hold. A wide gap above the minimum signals a cushion against bad claims years or falling asset values. A thin or negative gap can trigger regulatory action.

Because the question is whether the company could pay its obligations, SAP looks at the balance sheet first. The income statement mainly records how surplus changed over the period.

How statutory accounting principles work

Insurers prepare statutory filings and submit them to the regulator in each state where they are licensed. The NAIC codified the principles in its Accounting Practices and Procedures Manual, which gives states a common baseline. States may still prescribe or permit specific practices that differ from that baseline, and an insurer reports under the rules of its state of domicile.

SAP was developed within the framework of generally accepted accounting principles (GAAP), but it departs from GAAP wherever GAAP would make an insurer look stronger than its ability to pay claims justifies.

The three pillars

1. Conservatism. Assets and liabilities are valued cautiously, so the reported position protects policyholders against adverse changes in the company’s finances. When there is a choice, SAP leans toward the lower asset value or the higher liability.
2. Recognition. Only assets that are liquid and available to meet obligations when they come due count toward solvency. Assets that are illiquid or tied up by other obligations are excluded and charged directly against surplus. These are known as nonadmitted assets.
3. Consistency. The rules are applied the same way across insurers so regulators can compare filings in a meaningful way.

SAP vs. GAAP

The two frameworks answer different questions. GAAP aims to portray a company’s operations accurately for investors, creditors and other users of financial statements, which includes matching expenses to the revenue they help produce. SAP aims to show whether policyholders are protected right now.

That difference shows up in specific treatments:

• Nonadmitted assets. An item can qualify as an asset under GAAP, such as office furniture, equipment or certain overdue receivables, yet be excluded under SAP because it cannot readily pay a claim.
• Policy acquisition costs. Commissions and other costs of writing new policies are generally spread over time under GAAP. Under SAP they are expensed immediately, which reduces surplus in the period the business is written.

A publicly traded insurer therefore often reports two sets of numbers: GAAP statements for shareholders and statutory statements for regulators.

Worked example (hypothetical)

Assume an insurer reports the following, in millions of dollars:

Assumptions: the $10 million of acquisition costs is deferred under GAAP and expensed under SAP, and liabilities are measured the same under both, which simplifies a real filing. The company shows $110 million of GAAP equity but $80 million of statutory surplus. Against a required minimum of $60 million, the regulator sees a $20 million margin, not the $50 million the GAAP figure suggests.

Real-world example

Insurers that file with the SEC often disclose statutory figures in their annual reports. American International Group (AIG) did so in a note titled “Statutory Financial Data and Restrictions” in its 10-K for 2019. As of Dec. 31, 2019, its general insurance segment held about $33.7 billion of statutory capital and surplus against a required minimum of $12.8 billion. Its life and retirement segment held $14.5 billion against a $4.6 billion minimum.

How SAP is used

• Solvency monitoring. State regulators review statutory filings to confirm that capital and surplus stay above required levels.
• Restrictions on dividends. Statutory surplus typically governs how much an insurance subsidiary can pay its parent, which is why groups like AIG disclose statutory restrictions.

Limitations

SAP’s conservatism can understate an insurer’s economic value. Expensing acquisition costs up front can make a fast-growing insurer look weaker, because new business reduces surplus immediately even when the policies are expected to be profitable. Excluding nonadmitted assets also removes items that do have value, just not claims-paying value.

The framework is built for regulators, not investors, so statutory statements are not designed to produce measures such as EBITDA or free cash flow. State-permitted practices can also make two insurers’ statutory figures less comparable than the consistency principle suggests.

FAQs

The Bottom Line

Insurance regulators, policyholders and investors reading an insurer's filings need to know which framework produced the numbers. Statutory figures measure claims-paying capacity right now, so they often show less surplus than GAAP equity, as in the hypothetical where $110 million of GAAP equity became $80 million of statutory surplus. Statutory data is the better gauge of solvency and dividend capacity, while GAAP statements better reflect economic value and growth.