Captive insurance companies in the US 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 a new report from A.M. Best.
The 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 percent from the $1.3 billion reported in 2017, the market remained profitable. The number of US captives was also relatively flat in 2018, dropping by 1.1 percent year-on-year.
AM Best’s favourable view of the captive segment is driven partly by the segment’s continuously positive underwriting results every year, with a net underwriting profit of $160 million.
AM Best’s captive composite also continues to outperform the broader commercial market, as the 88.8 percent five-year combined ratio average compares favourably with the 99.9 percent 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.
Risk-retention groups accounted for approximately 15 percent of the rated captives’ net premiums in 2018. They saw its performance weakened in 2018 compared with 2017, with a combined ratio from 94.6 percent to 100.3 percent, nearly six percentage points worse than the previous year, owing to higher loss ratios and soft market pricing.
Captives, in general, tend to stay away from alternative investment strategies despite the low-interest-rate environment. Capital preservation is the main goal of captives, which they achieve via conservative investment. A.M. Best said it will continue to monitor captives’ investment portfolios, diversification efforts and strategies.