GAAP v. SAP

Question 1

GAAP vs SAP: deferred acquisition costs

Answer 1

• GAAP: establishes DAC asset to defer recognition of acquisition expenses
• SAP: all acquisition costs are expensed as incurred

Question 2

GAAP vs SAP: deferred tax assets

Answer 2

• GAAP: DTAs are fully recognized, valuation allowance (contra asset) is established if necessary
• SAP: portion of DTAs is admitted, based on a formulaic admissibility test, valuation allowance established if necessary

Question 3

GAAP groupings and valuation of stocks and bonds (3)

Answer 3

• available for sale (AFS), recorded at fair value
• held for trading (HFT), recorded at fair value
• held to maturity (HTN), recorded at amortized cost

Question 4

SAP groupings and valuation of stocks and bonds (9)

Answer 4

• bonds, NAIC 1-2: amortized cost
• bonds, NAIC 3-6: lower of amortized cost and fair value
• common stocks: fair value
• redeemable preferred stocks, NAIC 1-2: cost or amortized cost
• redeemable preferred stocks, NAIC 3-6: lower of cost, amortized cost, and fair value
• nonredeemable preferred stocks, NAIC 1-2: fair value
• nonredeemable preferred stocks, NAIC 3-6: lower of cost or fair value
• SVO-identified investments, NAIC 1-2: fair value, unless systemic value is elected
• SVO-identified investments, NAIC 3-6: fair value

Question 5

GAAP vs SAP: prospective reinsurance

Answer 5

• GAAP: reserves are gross of reinsurance, separate asset for recoveries
• SAP: reserves are net of reinsurance

Question 6

GAAP vs SAP: retroactive reinsurance

Answer 6

• GAAP: asset for ceded reserves, gain is deferred and amortized
• SAP: negative liability for ceded reserves, gain is restricted as special surplus until paid recoveries exceed reinsurance cost

Question 7

GAAP vs SAP: structured settlement if no full release is signed

Answer 7

• GAAP: settlement treated as a reinsurance contract

* SAP: annuity is recorded as paid loss and amount of contingent liability is disclosed in notes

Question 8

GAAP vs SAP: structured settlement if full release is signed

Answer 8

same treatment: purchase price of the annuity is recorded as paid loss and claim is closed

Question 9

GAAP vs SAP: anticipated sal/sub

Answer 9

• GAAP: reserves are net of sal/sub

* SAP: reserves can be either gross or net of sal/sub

Question 10

loss reserve discounting

Answer 10

• discounting may be used only for certain work comp and long-term disability claims (both GAAP and SAP)
• for tabular reserves, no specific SAP discount rate is mandated, but 3.5% is often used
• for non-tabular reserves, the SAP discount rate is capped at the lesser of: the company’s net rate of return less 1.5%, and yield on U.S. Treasury debt
• GAAP may use the SAP discount or alternative reasonable discount

Question 11

GAAP goodwill created by merger or acquisition

Answer 11

• assets and liabilities are recorded at fair value
• goodwill is the difference between the purchase price and the fair value of the net assets of the acquired company
• goodwill is not amortized but is regularly evaluated for impairment

Question 12

SAP goodwill created by merger or acquisition

Answer 12

• goodwill created when a parent-subsidiary relationship is formed, but not for mergers
• assets and liabilities are recorded at historical value
• goodwill is the difference between purchase price and statutory surplus, capped at 10% of the acquiring company’s surplus
• goodwill is amortized to unrealized capital gains over a period up to 10 years