Oldwick, New Jersey
05 August 2015
Reporter: Becky Butcher

Captive insurers outperform commercial sector


Despite a general increase in the level of loss and loss-adjustment expenses in 2014, US captive insurers continue to outperform the commercial sector in most key financial measures, according to A.M. Best’s market review report.

After a low level of loss in 2013, the loss and loss-adjustment expense ratio for a number of the larger captives increased in 2014, resulting in a 12-point decrease in the overall loss and loss-adjustment expense ratio.

The underwriting expense ratio has improved for the second consecutive year in 2014, surpassing the previous four years.

The five-year average combined ratio for the captive composite of 79.6 continues to compare extremely favourably with the commercial 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, compared with 88.6 for the commercial composite.

Captives’ surplus grew by $1.41 billion (6.8 percent) with a $325 million (19 percent) decrease in net income in 2014. In 2014, the net income was $1.44 billion, which was supplemented by $99 million of unrealised capital gains but reduced by $119 million of other surplus events.

Capital contributions received by the captives during the year compensated for the dividends paid to owners, according to the report.

The decrease in net income was the result of a $450 million (37 percent) decrease in net underwriting income coupled with a reduction in net investment income of $20 million.

This was offset by increases in realised capital gains and other income of $48 million and $39 million, respectively, along with a $59 million (11 percent) decrease in income taxes.

The decrease in underwriting income of $450 million was due to a $1.33 billion (41 percent) increase in incurred loss and loss-adjusted expenses, coupled with a $125 million (15 percent) increase in underwriting expenses.

These were offset partly by an increase in net earned premium of $920 million (16 percent) and a decrease in policyholder dividends of $84 million (22 percent).

Over a five-year and a ten-year time line, captives have lower loss and loss-adjustment expense ratios when compared with commercial lines.

The typical invested asset allocation for this group of captives consisted of approximately 46 percent long-term bonds, 13 percent equities, 9 percent cash and short-term investments, and 32 percent other assets.

Most captives had minimal other investments, and few large group captives and single-parent captives were responsible for the other asset contributions. Affiliated investments accounted for 11 percent of invested assets in 2014.

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