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Adjusted Surplus

Adjusted Surplus
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What Is Adjusted Surplus?

Adjusted surplus is one indication of an insurance company's financial health. It is the statutory surplus adjusted for a potential drop in asset values. Like proprietors' equity or net worth, the statutory surplus is the excess of assets over not entirely settled by the accounting treatment of assets and liabilities by state insurance regulators.

Figuring out Adjusted Surplus

Insurance companies are required by the National Association of Insurance Commissioners (NAIC) to keep up with reserves as a cushion for possible 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 keep up with to safeguard against a potential loss in the value of their assets that might happen because of a rise in interest rates. These reserves set to the side financial resources to safeguard against insolvency and the possibility that the company will not be able to pay clients' claims. The adjusted surplus develops when the insurance company creates an operating gain as well as encounters gains in its investment portfolio.

Insurance companies are exceptionally regulated, and this incorporates their financial statements. They must follow Statutory Accounting Principles (SAP) that are laid out by the NAIC. These principles apply to all insurance companies, in addition to those that are publicly traded.

Features

  • Adjusted surplus is one indication of an insurance company's financial wellbeing.
  • Adjusted surplus is the statutory surplus (the excess of assets over liabilities) adjusted for a potential drop in asset values.
  • The adjusted surplus develops when the insurance company creates an operating gain or potentially encounters gains in its investment portfolio.
  • Insurance companies must follow Statutory Accounting Principles (SAP) that are laid out by the National Association of Insurance Commissioners (NAIC).