13.5 Key differences between SAP and US GAAP (2024)

The principal differences between NAIC statutory accounting principles (SAP) and GAAP include:

• Statutory financial statements are presented for each legal entity insurer and subsidiaries of each entity are not consolidated with the parent company. Under GAAP, entities under common control are presented on a consolidated basis.
• SAP rules follow the type of business (e.g., life, property and casualty) but make no distinction between long-duration and short-duration contracts. GAAP accounting is not based on the type of business but has separate accounting models for short duration and long-duration contracts.
• Long duration insurance policies without significant mortality or morbidity risk are classified as investment contracts and are accounted for using a deposit method under GAAP. SSAP 51 classifies contracts that have any mortality or morbidity risk, regardless of significance, and contracts with a life contingent annuity purchase rate guarantee option as insurance contracts.
• Qualifying policy acquisition costs are capitalized and amortized over the policy term under GAAP, while under SAP these costs are expensed as incurred.
• SAP generally allows companies to recognize commission income received under property and casualty reinsurance contracts immediately when it does not exceed the acquisition costs incurred. For prospective life insurance contracts, amounts are recognized as commission income without limitation. For reinsurance of in-force life insurance contracts, SAP requires commissions to be included in surplus and amortized to income over the life of policies. GAAP requires the recognition of income to be delayed into future periods.
• Statutory reserves are established for life and health companies using specified mortality and morbidity tables and estimates of future investment earnings, lapses, and expenses, based on state law or regulation, while GAAP reserves are established based on company or industry experience. Statutory reserves do not consider withdrawal assumptions. This generally results in SAP reserves being higher than GAAP reserves because the SAP assumptions are generally more conservative than GAAP.
• Beginning January 1, 2020, insurers will be required to calculate statutory reserves for certain life insurance products using “principle-based reserving” (PBR) requirements, which will replace reserving formulas with a set of principles that allows an insurer to reflect its own credible experience and risks in calculating reserves. The guidance is effective for new business only. Because PBR requirements impose a minimum reserve, it is expected that statutory life reserves may still exceed GAAP reserves.
• Certain assets and investments recognized under GAAP are non-admitted under SAP. These include certain receivables in excess of 90 days past due (whether or not collectible), prepaid expenses, furniture and equipment, investments not authorized by statute or in excess of statutory limitations, goodwill in excess of 10% of capital and surplus (for purposes of the calculation of this limitation, capital and surplus is reduced by admitted goodwill, net deferred tax assets, and electronic data processing (EDP) equipment), certain portions of deferred tax assets, and EDP equipment in excess of 3% of capital and surplus (net of goodwill, deferred tax assets and EDP equipment). Life insurance companies are required to treat policy loan balances that exceed the underlying cash surrender values credited to policyholders under their policies as non-admitted assets. For property and casualty direct and group billed uncollected premiums, bills receivable for premiums, and amounts due from agents and brokers, the date for purposes of aging premiums is the policy effective date, not the contractual due date to the insurer.
• Income tax effects of differences between tax and book accounting are recognized under SAP and GAAP. However, changes in the deferred tax balance for SAP are an adjustment to surplus, not income tax expense. Deferred tax assets net of any valuation allowance under SAP are subject to recoverability and calculated admissibility tests, while GAAP deferred tax asset balances are evaluated for realizability.
• For SAP purposes, investments in subsidiaries and controlled and affiliated entities (SCAs) arereported using an equity method based on the reporting entity’s shares of the audited statutory equity of the SCAs financial statements (for insurance SCA entities), audited GAAP equity, or audited GAAP equity with specified adjustments depending on the type of SCA entity. The change in the carrying value between reporting periods must be recorded as an unrealized gain/loss through surplus (rather than in income or equity as required under GAAP). Dividends received are recorded in net investment income. For SAP, the definition of an SCA entity is ownership of more than 10% of the voting shares of the entity. For GAAP, SCAs should be evaluated to determine if they are required to be consolidated because the insurer is considered to the primary beneficiary of a variable interest entity or the insurer is deemed to have control under the GAAP voting interest model (refer to CG 2 (VIE) and CG 3 (VOE)). If equity method accounting is deemed appropriate, entities following GAAP should look to the guidance in ASC 323, Investments - Equity Method and Joint Ventures. The SAP guidance on accounting for investments is SSAP 97.
• For SAP, investments in joint ventures (JVs), limited liability companies (LLCs), and limited partnerships (LPs) in which more than 10% of the entity is owned by the insurer, control is a rebuttable presumption, and SSAP 97 is required to be followed as described above. JVs, LLCs, and LPs that are less than 10% owned by the insurer, or for which presumptive control has been rebutted, are subject to SSAP 48, and valued using an equity method at audited GAAP equity or audited tax equity or audited IFRS (SSAP 48, paragraph 9) if audited US GAAP financial statements are not available. For GAAP, if an investor has determined it does not have a controlling financial interest in an investee, it should then determine if the equity method of accounting prescribed by ASC 323, Investments – Equity Method and Joint Ventures applies (refer to EM 2).
• Statutory accounting has not adopted GAAP guidance for business combinations; under SAP, the difference between the purchase price of an acquired entity and its book value (based on GAAP or SAP equity as applicable) is considered goodwill and is amortized to unrealized capital gain or loss over the period in which the acquiring entity benefits economically, not to exceed 10 years.
• The risk transfer provisions are the same under GAAP and SAP for property/casualty reinsurance contracts. However, certain differences in reinsurance accounting exist for GAAP and SAP, as follows:
  • The practice of reporting assets and liabilities relating to reinsured contracts net of the effects of reinsurance is still applied for SAP but prohibited under GAAP when the ceding entity is not relieved of its legal liability to its policyholder for reinsurance accounting (because there is no right of offset between the two parties) (refer to ASC 944-310-25-2).
  • SAP and GAAP differ on the accounting for retroactive reinsurance; GAAP for retroactive reinsurance precludes immediate gain recognition unless the ceding enterprise's liability to its policyholders is extinguished (refer to ASC 944-605-35-9). Under SAP, retroactive reinsurance does not require discounting of recoverables, so an immediate increase to surplus is recognized.
• When assessing risk transfer in a life reinsurance contract, SAP makes a distinction between proportional and non-proportional risk transfer. Proportional risk is deemed to be transferred when the underlying risks (per a chart of components in the statutory APP Manual Appendix A-791) are transferred. Under GAAP, a test is performed to determine whether significant insurance risk is transferred. SAP non-proportional risk transfer is tested in a similar manner as GAAP.
• ASC 944-805-25-5, which contains guidance on accounting by the purchaser for a seller's guarantee of the adequacy of liabilities for losses and loss adjustment expenses of an insurance enterprise acquired in a business combination, is rejected by SAP (see IG 12).
• Statutory accounting rules require a liability to be recorded for net reinsurance balances due from unauthorized reinsurers that exceed collateral held. In addition, property and casualty insurers must establish a special formula-based liability for overdue reinsurance balances due from authorized reinsurers and certified reinsurers. Such liabilities are not required for GAAP; however, insurers assess collectability of reinsurance recoverables and may record an allowance.
• Under SAP, investments in bonds are generally carried at amounts that differ from the carrying value under GAAP. For life and health insurers, bonds rated "1" through "5" by the NAIC’s Securities Valuation Office are carried at amortized cost. Bonds rated "6" are carried at the lower of cost or fair value. For property/casualty companies and HMOs, bonds rated "1" and "2" are carried at amortized cost. All other bonds are valued at the lower of cost or fair value. Under both GAAP and SAP, all investments in debt and equity securities must be evaluated for impairment; however, SAP has a different impairment model for bonds than GAAP. Under GAAP, both pre and post adoption of ASU 2016-13, the non-credit portion of impairments relating to debt securities that the entity does not intend to sell and for which it is not more likely than not that the entity will be required to sell before anticipated recovery is recorded in other comprehensive income. Also, under SAP, non-loan backed bonds, which are considered to be other-than-temporarily impaired and under which the insurer does not have the ability and intent to hold the securities to maturity, are written down to fair value with a realized loss recognized in the income statement.
• Under SAP, life insurance companies are required to establish a formula-driven Asset Valuation Reserve for unrealized gains and losses by a direct charge to surplus to offset potential future credit-related investment losses. Under GAAP, no similar reserve is required.
• Under SAP, life insurance companies are required to establish an Interest Maintenance Reserve for realized gains and losses on sales of debt securities, mortgage loans, preferred stocks, and certain derivatives that arise as a result of changes in the level of interest rates. This reserve is amortized into income over the original life of the investment. Under GAAP, capital gains and losses are recognized in the income statement in the period in which the asset is sold.
• Under SAP, accounting changes (i.e., corrections of errors, changes in principles, and changes in estimates) are, in certain circ*mstances, recognized differently than they would be under GAAP. Under SAP, restatements of prior periods in an Annual Statement are generally not required unless mandated by a state insurance regulator. Capital and surplus, or policyholders' surplus in the case of mutual companies, is the statutory equivalent of stockholders' equity under GAAP. Under SAP, it represents the net admitted assets of an insurance company.
• Under SAP, surplus notes approved by the state insurance commissioner are classified as surplus on the balance sheet, and interest is reported as an expense and a liability only after payment has been approved by the commissioner, while GAAP requires accounting for surplus notes as a debt instrument.
• Under SAP, pension and other postretirement benefit calculations are required, and SSAP 92 and SSAP 102 require companies to recognize a net liability or asset to report the funded status of defined benefit pension and other postretirement benefit plans on the balance sheet. SSAP 92 and SSAP 102 were effective for January 1, 2013, and companies could elect a ten-year phase-in period. Unlike GAAP, any prepaid asset resulting from the excess of the fair value of plan assets over the benefit obligation is non-admitted under SAP.
• SAP requires additional reporting of summarized investment information in a supplemental schedule, in greater detail than the disclosures required in audited GAAP financial statements, e.g., foreign currency exposures to a single country for each NAIC sovereign rating category).
• SSAP 11 requires an accrual for postemployment vested benefits for both employees and agents while GAAP guidance regarding postemployment benefits (refer to ASC 712-10-15-3 and ASC 712-10-15-4) is only applicable to employees. Under GAAP, contractual obligations to agents should be evaluated under ASC 450-20-60, Contingencies, for liability recognition.
• Economic transactions between sister companies, as defined by SSAP 25, result in immediate gain/loss recognition. For US GAAP, guidance regarding transactions between parties under common control should be followed (see BCG 7).
• SSAP 5R requires liability recognition of related party guaranties in some circ*mstances. GAAP eliminates all intercompany guaranties in consolidation.
• Under SSAP 101, if the estimated tax loss contingency is greater than 50% of the tax benefit originally recognized, the tax loss contingency recorded is calculated as 100% of the original tax benefit recognized. Under GAAP, a tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.
• SSAP 35R requires liabilities and assets related to assessments from insolvencies of entities that wrote long-term care contracts to be discounted. GAAP provides an option to discount accrued guaranty fund liabilities if the amount and timing of the cash payments are fixed or reliably determinable.
• In accordance with SSAP 106, the ACA Section 9010 assessment that is accrued and due in the subsequent year is required to be classified in a segregated surplus account on the face of the balance sheet in the current year. This segregation is not required under GAAP.