A.M. Best Special Report: Group Captives Feeling the Squeeze, Single Parent Captives Winning the Race

OLDWICK, N.J.--()--Despite a general increase in the level of loss and loss-adjustment expenses (LAE) in 2014, U.S. captive insurers (captives) rated by A.M. Best continue to outperform the commercial sector in most key financial measures. After a relatively benign loss year in 2013, the loss and LAE expense ratios for a number of the larger captives increased in 2014, resulting in a 12-point deterioration in the overall loss and LAE expense ratio, according to a new special report from A.M. Best.

The Best’s Special Report, titled, “Group Captives Feeling the Squeeze, Single Parent Captives Winning the Race,” states that the underwriting expense ratio improved for the second consecutive year in 2014, surpassing the previous four years. In addition, the five-year average combined ratio for the captive composite of 79.6% (before policyholder dividends) continues to compare extremely favorably with the commercial insurance composite’s average of 102.7%. The captives’ operating ratio over the same five-year period has a thinner spread, with the captives generating a five-year operating ratio of 71.3%, versus 88.6% for the commercial composite.

Captives’ surplus grew by USD 1.41 billion, or 6.8%, with a USD 325 million, or 19%, decrease in net income in 2014. The decrease was mainly attributable to the higher loss and LAE expenses. In 2014, net income was USD 1.44 billion, which was supplemented by USD 99 million of unrealized capital gains but reduced by USD 119 million of other surplus events. Capital contributions received by the captives during the year compensated for the dividends paid to owners. Generally, single parent and group captives are not intended as profit-making vehicles, but captive owners utilize dividends to optimize capital levels at these entities.

The report also states that single parent captives have not only outperformed key metrics against the A.M. Best commercial insurance composite, but also the captive composite. The 2014 combined ratio for single parent captives was 64.8%, versus 101.1% for the commercial composite and 88.2% for the captive composite after policyholder dividends. Rated Risk Retention Groups’ five-year average performance metrics also continue to significantly outperform those of the commercial composite.

Overall, A.M. Best believes that the values captives add in terms of their strategic, operational and financial benefits to their groups or parents remain solid and valid.

On Tuesday, August 4, 2015, A.M. Best will have its annual webinar on “State of the Captive Insurance Market,” from 2:00 p.m. to 3:00 p.m. (EDT). Register at no charge at http://www.ambest.com/webinars/captive15.

To access a copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=240126.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

Contacts

A.M. Best Company, Inc.
Fred Eslami, 908-439-2200, ext. 5406
Senior Financial Analyst
fred.eslami@ambest.com
or
Ricardo Longchallon, 908-439-2200, ext. 5676
Senior Financial Analyst
ricardo.longchallon@ambest.com
or
Christopher Sharkey, 908-439-2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com

Contacts

A.M. Best Company, Inc.
Fred Eslami, 908-439-2200, ext. 5406
Senior Financial Analyst
fred.eslami@ambest.com
or
Ricardo Longchallon, 908-439-2200, ext. 5676
Senior Financial Analyst
ricardo.longchallon@ambest.com
or
Christopher Sharkey, 908-439-2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com