Bermuda, Cayman Islands and Barbados captives: resilient amid competitive conditions
Robert Gabriel of AM Best explores why captive insurers regard these three domiciles so favourably.
Bermuda, the Cayman Islands, and Barbados (BCIB) have long been major players on the global captive insurance scene and compete directly with the top domiciles in North America, Europe and Asia. The captives segment is resilient and can offer tailored solutions for insureds during times of limited capacity and increasing rates. Even as competition from new as well as old captive domiciles has intensified, the hard insurance market has provided stable growth opportunities for the BCIB-domiciled captives.
Among the roughly 200 captives that AM Best rates globally, 26 comprise our BCIB Composite domiciled in one of these three island countries. Approximately two-thirds of the rated BCIB captives are owned by US-based companies or, in the case of group captives, are aligned with US groups and associations.
For over six decades, BCIB domiciles have been top destinations for captive owners from across the globe and currently house over 1,600 active captives. What makes them so attractive are their sophisticated legislative and regulatory frameworks, tax-advantaged environments and deep bench strength when it comes to highly specialised captive insurance service providers.
Island life
Bermuda is a jurisdiction with longstanding ties to the insurance industry that offers captive owners ready access to brokers, reinsurers and other insurance industry intermediaries. This provides the captives industry with a built-in advantage, as it offers a one-stop shop for owners.
The Cayman Islands, which has a well-established captive insurance support industry of its own, has become a leading captive domicile due to its moderate capitalisation requirements and the business-centric regulations around its captives sector.
Barbados is the smallest of the three in terms of active captives, and has negotiated a network of tax treaties with outside countries, which offer foreign businesses preferential status. Barbados has long been one of the primary destinations for Canadian-owned captives, as the two countries have a comprehensive tax agreement in place.
Poor investment results lead to a decline in profitability
BCIB companies remained profitable from a total operating results perspective in 2022 (the most recent full-year results available). However, there was a 63.9 percent decline in operating profits from the prior year, driven by the composite’s poor net investment results.
Investment returns, which include net investment income, and both realised and unrealised capital gains and losses, were negative for the first time in five years. While net investment income from interest and dividends received remained consistent with prior years, realised and unrealised capital losses experienced a steep decline into negative territory. This was due to significant stock market volatility impacting the fair values of investments on the companies’ balance sheets.
The segment’s investment leverage, which measures a company’s exposure to its investment risks, continued to show high levels of equity holdings relative to surplus on its balance sheets. In 2022, the composite’s equity leverage reached a five-year high of approximately 36 percent. This strategy can be fruitful for insurers during times of equity market upswings, but it does expose surplus to stock market volatility and brings with it a level of downside risk to the balance sheet.
The BCIB captives’ operating results between 2018 and 2022 show that income generation was evenly split between underwriting profits and investment returns.
Underwriting results remain favourable
Despite 2022’s significant investment losses, BCIB captives maintained profitability overall due to another stellar year of underwriting results. For 2022, the composite reported improved underwriting profitability from the prior year, as measured by the group’s combined ratio of 82.5 percent, a 3.6 percentage-point improvement from the prior year.
The decline in the combined ratio was twofold, as expense and loss and loss adjustment expense (LAE) ratios improved. The favourable underwriting results were widespread among the majority of captives in the composite, with 23 of the 26 captives in the composite reporting underwriting profits in 2022.
The lack of public data makes it difficult to determine whether the experience of the much larger base of unrated captives is comparable. A positive indicator that helps gauge whether captive solutions are working as an alternative risk transfer option is that the number of global captives continues to grow each year, as emerging risks from climate change and growing cyber threats continue to impact the marketplace.
Based on its monitoring of the captives it rates, AM Best believes that virtually all of the highly rated parent organisations operate well-run captives due to the integration and links between the parents’ risk management processes and their captives’ insurance operations.
Premium growth among the BCIB captives was strong again in 2022, growing at 9.4 percent from the prior year, which also marked the slowest pace since 2018. The BCIB captives’ written premiums grew for several reasons, which can generally be attributed to still hardening market conditions, actuarially recommended rate increases on existing risks, and the addition of new business lines.
Premium growth for BCIB captives over the previous five-year period has outpaced AM Best’s commercial casualty composite, which speaks to the increase in utilisation of captives as a result of the hard market cycle.
In 2022, loss and LAE reserves increased by 14 percent, and have grown at an increasing rate in each of the previous three years. Among the benefits that captives offer parents are the patience and flexibility to resolve claims to their best results over a longer period if necessary. Should temporary liquidity be required to cover an unexpected low-frequency, high-severity event, non-insurance parents typically are able to offer additional financial flexibility and interim capital support if necessary.
The BCIB composite’s overall capital levels are supportive of the risks underwritten, with increases in the group’s retained earnings driving the strong surplus growth. Unlike traditional property/casualty insurers, captives are not under pressure from stakeholders to generate competitive returns on equity or revenue. From 2018 to 2022, the BCIB composite produced surplus growth of $1.1 billion, despite paying out $2.9 billion in common dividends. This translates into $4 billion in savings from the use of captive vehicles as an alternative to organisations using the commercial insurance market.
The parents of the BCIB captives that AM Best rates support their captive subsidiaries by holding large amounts of capital; we believe that these insurance vehicles have the ability to absorb large shock losses without requiring additional funding. This supportiveness is reflected in the captives’ robust risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), and excellent regulatory solvency ratios, which show that available capital well exceeds the rated captives’ capital requirements.
AM Best’s BCIB ratings
AM Best’s ratings involve using a building block approach to analyse and assess an insurer’s balance sheet strength, operating performance, business profile and enterprise risk management (ERM), among other factors. BCIB captives remain highly rated and have Financial Strength Ratings (FSR) within the A to A- range. Their ratings reflect the BCIB captives’ robust balance sheets, stable operating results and solid integration into their parents’ ERM framework.
A further breakdown of the building block assessments shows the following:
• Balance sheet strength is the foundational assessment of the rating; 25 of the 26 companies in our BCIB composite have a balance sheet strength assessment in the “Very Strong” to “Strongest” range.
• Operating performance is a main indicator of future balance sheet strength and focuses on the stability and sustainability of a company’s earnings. Among the 26 captives rated by AM Best, 96 percent have an assessment of “Strong” or “Adequate”.
• The business profile assessment is “Neutral” for 70 percent of the companies in the BCIB composite, with the remaining 30 percent assessed as “Limited”.
• The ERM assessment entails a thorough evaluation of a company’s risk framework and risk management capabilities relative to its risk profile. The BCIB captives, along with virtually all globally rated captives, have been assessed as “Appropriate” with regard to ERM, reflecting the close ties with their owners’/sponsors’ risk management frameworks.
Robert Gabriel is a senior financial analyst at AM Best and oversees a portfolio of companies that includes captive insurers. He can be contacted at: robert.gabriel@ambest.com
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