30 July 2018Analysis

AM Best rates BP’s Vermont and Guernsey captives 'Excellent'

Ratings agency AM Best has affirmed the 'Excellent' financial strength ratings of Vermont-based Saturn Insurance (A) and Guernsey-based Jupiter Insurance (A-), both captive insurance subsidiaries of oil and gas company BP.

Saturn's ratings reflect its balance sheet strength, which AM Best categorises as strong, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management.

The ratings also consider rating lift from Saturn's reinsurer, Jupiter, which is the principal captive of the BP group and provides substantial reinsurance support to Saturn.

Jupiter's rating reflect its balance sheet strength, which the ratings agency categorises as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management.

Both Saturn and Jupiter's balance sheet strengths are support by their risk-adjusted capitalisation being at the strongest level, as measured by Best's Capital Adequacy Ratio (BCAR).

Saturn writes large gross lines relative to the size of its capital base. However, reinsurance protects its balance sheet against high severity, low frequency losses. Offsetting factors remain Saturn's high reinsurance dependence, and relatively small capital base, which is exposed to potential volatility from the exposure to large losses.

BP's captive Saturn also benefits from low investment risk with approximately half of its assets invested in cash and cash equivalents. The remainder is composed of callable loans with a BP affiliate, with excellent liquidity terms.

Offsetting Jupiter's rating factors include the captive's high underwriting limits provided to a number of different locations and facilities, as well as its concentrated investment portfolio, which predominantly consists of financial instruments linked to its ultimate parent, BP.

The ratings agency expects Jupiter's isk-adjusted capitalisation to remain at the strongest level, supported by strong internal capital generation and a capital base of approximately $6.5 billion as at year-end 2017 that continues to support the captive’s high maximum line size of $1.5 billion.

Jupiter does not purchase any outward reinsurance cover, and AM Best noted that its investments are highly concentrated, with 99 percent invested in discount notes issued by BP International (durations between one and 12 months). Consequently, the ratings agency considers Jupiter’s financial strength to be linked closely to that of BP.

Between 2013-2016 Saturn achieved strong operating results, however a large workers’ compensation claim negatively impacted its performance in 2017, demonstrating its exposure to volatility, AM Best noted. Saturn’s strong performance track record has supported growth in capital and surplus of 43 percent since its incorporation in 2011, with no dividends paid out during this period.

Jupiter also reported strong operating results over the past five years, mainly driven by strong underwriting profits in the absence of large losses.

However, AM Best noted that softening market conditions, lower insured values due to BP’s divestments and lower oil prices have put significant downward pressure on Jupiter’s premium income.

Jupiter’s business profile assessment reflects its key role in BP’s overall risk management framework, as its principal captive. Jupiter’s underwritten risks consist largely of offshore and onshore property, and business interruption cover. The captive allows BP to optimise its insurance protection in terms of scope and cost.

Saturn’s business profile is assessed as limited, reflecting its small and concentrated portfolio of high-risk products provided to the BP group in the United States. Saturn’s portfolio consists primarily of terrorism cover, certificate of financial responsibility, workers’ compensation insurance and environmental protection agency cover. AM Best added that the captive's premiums have been impacted negatively by the soft rate environment over the past three years, with its gross written premiums reducing by approximately 60 percent since 2014.