What are the Statutory Accounting Principles (SAP)?

The Statutory Accounting Principles (SAP) are a set of accounting regulations prescribed by the National Association of Insurance Commissioners (NAIC) for the preparation of an insurance firm's financial statements. The overarching objective of SAP is to assist state regulators in monitoring the solvency of insurance companies.

Understanding Statutory Accounting Principles (SAP)

Filings prepared using the Statutory Accounting Principles are submitted to individual state regulatory bodies, which check for solvency levels, so that they may ensure that policyholders, contract holders, and other legal obligations can be discharged when they are due. State regulators look for sufficient capital and surplus at all times and in such forms as required by SAP to provide a "margin of safety," according to the NAIC.

SAP is constructed under the framework of generally accepted accounting principles (GAAP), but SAP's main emphasis is recording and maintaining solvency measures, whereas GAAP is primarily designed to uphold best standards for the accurate portrayal of a firm's operations for the benefit of investors, creditors, and other users of financial statements. Thus, SAP-prepared books are more useful to insurance regulators than GAAP-prepared accounts.

Pillars of SAP

The NAIC developed SAP to adhere to:

  1. Conservatism: Conservative valuation procedures provide protection to policyholders against adverse fluctuations in financial condition or operating results. Statutory accounting should be reasonably conservative over the span of economic cycles and in recognition of the primary responsibility to regulate for financial solvency.
  2. Recognition: The ability to meet policyholder obligations is predicated on the existence of readily marketable assets available when both current and future obligations are due. Assets having economic value other than those which can be used to fulfill policyholder obligations, or those assets which are unavailable due to encumbrances or third party interests should not be recognized on the balance sheet but rather should be charged against surplus when acquired or when availability otherwise becomes questionable.
  3. Consistency: The regulators' need for meaningful, comparable financial information to determine an insurer's financial condition requires consistency in the development and application of statutory accounting principles.

(Source: NAIC)

Example of SAP at Work

American International Group, Inc. (AIG) presents "Statutory Financial Data and Restrictions" under Note 19 in its 2016 10-K's consolidated financial statements. The table in Note 19 shows actual statutory capital and surplus for the insurer's property-casualty and life insurance lines of business compared to the minimum required statutory capital and surplus. For the property-casualty segment, AIG had approximately $34.5 billion in capital and surplus versus $12.7 minimum required; for the life insurance segment, AIG held $12.9 billion in capital and surplus against $3.3 billion minimum required. These numbers as of December 31, 2006, indicated a comfortable margin of safety in terms of solvency.