A clear, friendly guide to understanding carrying value and how it helps measure the true worth of an investment on financial statements.
Carrying value (amount) is a financial term that represents the adjusted value of an investment on the books of an insurance company or other financial institution. It’s not just the original purchase price—it’s a number that reflects book value under Statutory Accounting Principles (SAP), plus any interest that has built up, and minus any reductions such as valuation allowances or nonadmitted adjustments.
If that sounds a bit technical, don’t worry. Let’s break it down in a simple, easy way.
What Carrying Value (Amount) Really Means
Carrying value is basically the “official” value of an investment on a company’s financial statements. Under SAP (which is the accounting method insurers use), the carrying value reflects not only what the company paid for the investment, but also the adjustments that have happened over time.
It takes into account:
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SAP book value (the base value under statutory accounting)
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Accrued interest (interest earned but not yet received)
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Valuation allowance (a reduction if the investment may have lost value)
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Nonadmitted adjustments (reductions for items that cannot be counted toward solvency)
This combination gives a more accurate picture of what the investment is really worth for regulatory and financial reporting purposes.
Breaking Down the Components
SAP Book Value
This is the starting point. It represents the investment’s value based on statutory accounting rules, which are more conservative than standard accounting rules.
Accrued Interest
Accrued interest is interest that the investment has earned but hasn’t been paid out yet. Even though the money isn’t in hand, it increases the carrying value because it technically belongs to the investor.
Valuation Allowance
Sometimes investments lose value or carry more risk. When that happens, a valuation allowance may be applied to reduce the carrying value. This helps ensure the financial statements stay realistic and cautious.
Nonadmitted Adjustments
In statutory accounting, certain assets or portions of assets cannot be used to measure the company’s solvency. When an investment includes one of these items, a nonadmitted adjustment reduces its carrying value.
A Simple Example
Let’s imagine an insurance company buys a bond for $10,000.
After some time:
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It earns $200 in accrued interest
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A valuation allowance of $300 is applied because the bond issuer had financial difficulties
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A nonadmitted adjustment of $100 is required under SAP
To calculate the carrying value:
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Start with SAP book value: $10,000
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Add accrued interest: + $200
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Subtract valuation allowance: – $300
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Subtract nonadmitted adjustment: – $100
Carrying value = $9,800
This number is what the company reports on its statutory financial statements.
Why Carrying Value Matters
Carrying value (amount) is important because it shows the real, regulatory-approved value of an investment. For insurance companies, accuracy is essential because regulators use these values to make sure the insurer is financially strong enough to pay policyholders.
Carrying value helps with:
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Assessing solvency
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Keeping financial reports consistent
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Showing the true economic value of investments
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Providing transparency for regulators and stakeholders
Since insurance companies manage large investment portfolios, even small adjustments can have major financial implications.
How Carrying Value Affects Financial Decisions
Because carrying value reflects both gains and risks, it helps companies understand:
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Whether an investment is performing well
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Whether risk levels are increasing
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When to consider selling, holding, or revaluing an asset
It also helps insurers stay compliant with regulatory standards, which are designed to protect policyholders.
Final Thoughts
Carrying value (amount) may sound like a technical accounting term, but at its core, it simply reflects the realistic value of an investment after all necessary adjustments. By combining SAP book value, accrued interest, valuation allowances, and nonadmitted adjustments, companies get a clear and conservative measure of an asset’s worth.
For insurance companies, this value is essential for accurate reporting, strong financial management, and maintaining the trust of regulators and customers alike.
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