Captives Remain Profitable, Outperform Commercial Insurers, Reports A.M. Best

July 30, 2019

U.S. captive insurance companies rated by A.M. Best continued their run of strong financial results in 2018, as well as their outperformance of the segment’s counterparts in the commercial casualty sector, according to an A.M. Best special report.

The new Best’s Special Report, titled, “Rated Captives Continue to Build Upon Strengths,” states that the rated captive composite reported a pretax profit of approximately $1.1 billion. Although this result is down 16% from the $1.3 billion reported in 2017, the market remained profitable. The composite posted a post-dividend combined ratio of 96.0% in 2018 and a net underwriting profit of $160.0 million. Net premiums written increased in 2018 by 4.4% as well, reversing the 6.7% decline reported in the previous year, driven mainly by premium increases in medical professional liability and commercial multi-peril insurance lines of business.

A.M. Best said its favorable view of the captive segment is driven partly by the “segment’s continuously positive underwriting results every year,” which the rating agency said are “testament to the segment’s close alignment of interests with stakeholders and deeply ingrained risk management culture.”

The favorable view also reflects the composite companies’ “exceptionally conservative reserve philosophies and their close proximity to insureds, which allows them the ability to quickly identify and manage risk as it emerges,” A.M. Best added.

A.M. Best said its captive composite also continues to outperform the broader commercial market, as the 88.8% five-year combined ratio average compares favorably with the 99.9% posted by the commercial composite.

Between 2014 and 2018, captives added $3.1 billion to their year-end surplus and paid $1.6 billion in stockholder dividends and $1.9 billion in policyholder dividends. Therefore, $6.6 billion during this period remained with the captives or was paid back to their policyholders and stockholders instead of going to the commercial market.

The performance of risk retention groups (representing 15% of A.M. Best’s captive composite premium) weakened in 2018 compared with 2017, with a combined ratio of 100.3%, nearly six percentage points worse than the previous year, owing to higher loss ratios and soft market pricing.

“Captive insurers remain nimble and stable despite headwinds from low interest rates, changes in U.S. tax law and prolonged periods of soft market conditions, which also demonstrates how well these companies readily identify emerging risks, as well as their ability to take advantage of reinsurance pricing when opportunities arise,” said the rating agency.

The report also notes that captives “in general tend to stay away from alternative investment strategies” despite the low interest rate environment.

Source: A.M. Best

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Latest Comments

  • August 5, 2019 at 11:01 am
    Craig Cornell says:
    Without naming names, I have seen one of the biggest captive managers misrepresent the claims history twice, with two different sales representatives intentionally ignoring th... read more
  • July 31, 2019 at 4:48 pm
    Bryan Tsikouris says:
    Craig, The financial results of captives, per the article, are documented to be about 12% better than the standard market over the past five years. In addition, most clients p... read more
  • July 31, 2019 at 10:48 am
    Dan says:
    Craig, Every captive presentation shows the developed claims. Also, the captive tails out the claims after several years, selling the liabilities back to the carrier (because ... read more

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