Statutory accounting

Statutory accounting principles (SAP) are the rules U.S. insurers must follow in the annual and quarterly financial statements they file with state insurance regulators. They're codified by the NAIC in its Accounting Practices and Procedures Manual and adopted by the states, sometimes with state-specific variations. Publicly traded insurers also report under generally accepted accounting principles (GAAP) for investors.

The two systems answer different questions. GAAP aims to show earnings over time for a going concern; SAP focuses on solvency, or whether the insurer could meet its obligations if things went wrong. So SAP is more conservative: certain assets, such as furniture, some receivables and part of deferred tax assets, are "nonadmitted" and don't count; acquisition costs like commissions are expensed immediately instead of spread out; and reserves follow prescribed rules. Hypothetically, a fast-growing insurer can show a statutory loss in a year it reports a GAAP profit, because first-year commissions hit statutory surplus all at once.

Statutory surplus is the base for risk-based capital ratios and much of regulators' oversight, and statutory statements are public. Rating agencies use them too. See risk-based capital and life insurer solvency and reading a life insurer's earnings report.