Insurance Captives’ Profitability Soars; Dividends Way Up: A.M. Best

August 8, 2011

Profitability soared by 49 percent and policyholder dividends were up 73 percent for captive insurance entities followed by rating analysts at A.M. Best in 2010.

According to an A.M. Best special report, captives’ underwriting income increased as captives showed underwriting discipline that resulted in significant declines in premium. Premiums fell 11.3 percent to about $7.6 billion, down from $8.6 billion, continuing the downward trend since 2007.

“Higher realized capital gains allowed some decreases in rates for profitable accounts as some captives sought to compete in the continuing soft market. But overall, captives seemed to be holding the line on pricing while returning significant policyholder dividends to bolster retention rates,” the rating agency said.

The report, released Aug 8, is based on a composite of 194 U.S. captive insurance entities.

Other highlights from the A.M. Best report on captives:

  • Policyholder dividends of $454 million in 2010 marked an increase of 73 percent from 2009 as captives sought to reward insureds that did not flee to the commercial market for price.
  • As the soft property/casualty market persists, many management teams of rated captives have told A.M. Best analysts that they continue to hold the line and will let business go if the rates are too low.
  • Captives’ short-duration, high-quality asset portfolios have recovered substantially from the recent financial crisis, bringing most captives’ investments back to pre-crisis levels.
  • Captive formations go on even as the commercial insurance market remains soft, and in the midst of an economic crisis, new captive domiciles are finding it difficult to establish their presence while well-established domiciles update their captive legislation to adapt to the industry’s ever-changing needs.
  • Risk retention groups are hoping for a long-awaited expansion of their turf beyond liability coverage under proposed federal legislation that would allow RRGs to write commercial property insurance.
  • The combined ratio for the captives (after dividends) was 102.1 compared to 103.3 for the property/casualty industry overall. Captives reported an 85.1 operating ratio, compared to 88.9 for property/casualty insurers.

Topics Market Property Casualty AM Best

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