AM Best reaffirms ratings for Southwest Airlines’ captive

AM Best has affirmed the financial strength rating of A- and the long-term issuer credit rating of “a-” of Triple Crown Assurance. The outlook of these ratings is stable.

The ratings reflect TCA’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management (ERM).

TCA is a captive insurance company wholly owned by Southwest Airlines Co. (SWA), a Texas-based company that operates Southwest Airlines, a major passenger airline that provides scheduled air transportation in the United States and near-international markets.

TCA’s balance sheet strength assessment is underpinned by the strongest level of risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), as well as its adequate liquidity measures, consecutive years of surplus growth and favourable loss reserve development in recent years. Offsetting factors include the captive’s elevated exposure to credit risk, higher-than-average underwriting leverage metrics and sizeable annual dividends, which commenced in 2024. TCA’s elevated credit risk relates to its participation in a contractual reinsurance arrangement with several creditworthy captives. Despite exiting the agreement in late 2024, TCA will continue to have quarterly transactions on the remaining loss reserves for its participating treaty years until ultimately commuted. Also noteworthy is the significant percentage of assets that TCA has loaned to its ultimate parent, SWA. However, the loan is repayable on demand with limited counterparty risk due to the affiliation and the aligned interests of the companies.

TCA’s operating performance has been profitable primarily driven by favourable underwriting results, and to a lesser extent, investment income. Additionally, the captive benefits from having minimal acquisition costs and administrative expenses, driving its favourable expense ratio. TCA’s business profile assessment considers its role as a single-parent captive providing various coverages for its only policyholder, SWA.

ERM is considered appropriate as an extension of the ultimate parent’s ERM. TCA is an integral component of SWA’s ERM program as it provides specific insurance coverages to SWA more efficiently than the traditional market.

Did you get value from this story?  Sign up to our free daily newsletters and get stories like this sent straight to your inbox.