31 July 2019

AM Best rated captive composite down but still profitable in 2018

AM Best’s rated captive composite reported a pretax profit of approximately $1.1 billion in 2018, down 16 percent from the $1.3 billion reported in 2017, but still profitable.

In a special report titled Rated Captives Continue to Build Upon Strengths, AM Best said its composite posted a post-dividend combined ratio of 96.0 percent in 2018 and a net underwriting profit of $160.0 million.

Net premiums written increased in 2018 by 4.4 percent, reversing the 6.7 percent decline reported in the previous year. This was driven mainly by premium increases in medical professional liability and commercial multi-peril insurance lines of business, the rating agency said.

AM Best’s captive composite has outperformed the broader commercial market, AM Best noted, with an 88.8 percent five-year combined ratio average comparing favorably with the 99.9 percent posted by the commercial composite.

Captives have continuously delivered positive underwriting results every year, said AM Best, with these strong results testament to the segment’s close alignment of interests with stakeholders and deeply ingrained risk management culture.

They also have exceptionally conservative reserve philosophies, while their close proximity to insureds allows them to quickly identify and manage risk as it emerges, the rating agency added.

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. That means $6.6 billion remained with the captives during this period, or was paid back to their policyholders and stockholders instead of going to the commercial market.

Risk retention groups, which represent 15 percent of AM Best’s captive composite premium, saw their performance weaken in 2018 compared with 2017, with a combined ratio of 100.3 percent. This was nearly six percentage points worse than the previous year, owing to higher loss ratios and soft market pricing.