Captive Insurers in Strong Position: A.M. Best

August 3, 2016

Captive insurance companies rated by A.M. Best ended 2015 in strong form, recording pretax operating income of $1.4 billion, a 13.5 percent increase over 2014, according to a new A.M. Best special report.

The Best Special Report, titled, “U.S. Captive Insurers Benefit From Core Competencies,” states that the favorable overall results for the rated domestic captive group should continue to hold in 2016. This view takes into consideration continued modest economic improvement, gross domestic product growth of approximately 2.5 percent to 3 percent, moderate loss cost inflation between 2 percent to 4 percent and an incremental rise in interest rates by year-end 2016.

This view also assumes a similar degree of price discipline on the part of group captives. A.M. Best said it believes that today’s prevailing low interest rate environment will help to keep aggressive pricing on the sideline.

During 2015, while net written premium contracted by a modest 0.4 percent to $4.9 billion, it was mainly due to an increase in cessions. Net income for the captive insurance composite, although strong at $1.2 billion, remained relatively flat when compared with the previous year. Additionally, approximately half of the profits were retained, as dividends were paid to shareholders.

Net investment income saw a sharp increase, rising by nearly 10 percent in 2015 after decreasing by 2.8 percent in 2014.

Altogether, the U.S. rated domestic captive group continues to outpace the underwriting and operating results of the U.S. commercial insurance composite, as evident in the captive composite’s 89.3 and 88.9 for five- and 10-year combined ratios, compared with 101.2 and 98.0, respectively, for the commercial composite. The 2015 combined ratio for the captive insurance composite after policyholder dividends is 88.9.

In general, the market position of captive insurers continues to be profitable, well-capitalized and consistent, which in A.M. Best’s view can be attributed to “effective risk management practices, steadfast strategic analysis and each captive insurer’s in-depth knowledge of underlying risks.”

A.M. Best said it views the captive market as stable from a ratings perspective and expects that the vast majority of captive insurers will have their ratings affirmed.

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