The Annual Statement is the report that is required to be filed with regulators by all companies operating in a particular state.
GAAP vs. SAP
Generally accepted accounting principles (GAAP) are used to create financial statements for investors. The most comprehensive report to investors is the annual statement to shareholders, or the 10-K statement. Specific precepts of GAAP give way to unique accounts for insurers. For example, GAAP's matching principle states that any expenses that result from sales should be recognized in the same accounting period that income is earned. For manufacturing companies, these means recognizing inventory costs (cost of goods sold) when the product is sold. For insurers, this means recognizing new business expense as the premium becomes earned over the life of the policy. As a result, acquisition expenses are capitalized as a deferred acquisition charge (DAC) that is amortized over part of the policy's life.
Statutory accounting principles (SAP) are considerably more conservative than GAAP since regulators have the public interest in mind when performing their analysis of insurers. Regulators review insurers' operations to ensure that they can meet their obligations to policyholders. As a result, instead of looking at companies as a going concern, SAP looks at insurers on a liquidation basis. This typically depresses asset values and income while conservatively valuing liabilities.
Some differences in GAAP and SAP include:
- Non-admitted assets - Items recognized in GAAP such as office furniture and automobiles are not typically used to pay claims to policyholders. Therefore, they are excluded from the statutory balance sheet.
- Deferred acquisition costs (DAC) - Instead of capitalizing new business expenses, SAP deducts these costs immediately, directly reducing surplus.
- Reserve estimates - In many cases, statutory reserves are not discounted despite the likely lag between recognition and claim payment. GAAP allows reserves to be reported after reflecting the effects of the time value of money.