What Is Adjusted Surplus?
Adjusted surplus is one indication of an insurance company's financial health. It is the statutory surplus adjusted for a possible drop in asset values. Similar to owners equity or net worth, the statutory surplus is the excess of assets over liabilities as determined by the accounting treatment of assets and liabilities by state insurance regulators.
Understanding Adjusted Surplus
Insurance companies are required by the National Association of Insurance Commissioners (NAIC) to maintain reserves as a cushion for potential losses. Adjusted surplus takes the statutory surplus and adds to it the interest maintenance reserve and the asset valuation reserve. Like the asset valuation reserve, the interest maintenance reserve is an amount that insurance companies are required to maintain to protect against a possible loss in the value of its assets that may occur as a result of a rise in interest rates. These reserves set aside financial resources to protect against insolvency and the possibility that the company will be unable to pay customers' claims. The adjusted surplus grows when the insurance company makes an operating profit and/or experiences gains in its investment portfolio.
Insurance companies are highly regulated, and this includes their financial statements. They must follow Statutory Accounting Principles (SAP) that are established by the NAIC. These principles apply to all insurance companies, not just those that are publicly traded.