Captive owners wooed by better investment returns

The velocity of new captive formations is continuing to increase – but an additional driver of this momentum is captive owners realising the lucrative investment returns now possible.

That is the view of Anjanette Fowler, managing director and senior vice president, Insurance & Specialised Industries Group at PNC Institutional Asset Management, speaking to Captive International ahead of the annual CICA conference taking place March 5-7 in California.

She said the velocity of new captive formations is greater than she has ever seen. She believes this is partly driven by a persistent hard insurance market, which is filtering down to drive captive formations – and the way capital is deployed in captives.

Fowler said that there have been some dramatic changes in the timing and deployment of both capital and premiums, certainly as it relates to the work PNC Institutional Asset Management does investing those assets or funds.

“The biggest change that we've noted is that given the dramatic shift in Fed policy, we’ve seen yields go up dramatically, which has completely changed the investment landscape for captive owners,” she said.

According to Fowler, it used to take new captive owners quite a long time before they felt it was worth the time and effort to invest their capital, whether it was fixed income, equity, or both.

“We were in such a low-rate environment you were kicking up a lot of dust to earn very little in keeping with an investment risk posture that aligned with a conservative approach to support claims emergence as the captive seasoned,” she said.

As a result, when the yields were well below 2% on 10-year US Treasury notes, Fowler said it could be a challenge to get captive owners excited about deploying that capital. They felt more comfortable just knowing that the liquidity was there even if the funds weren’t earning much.

Pivot to today and, according to Fowler, all that has changed. Now, on day one of setting up a captive, any capital and premium can earn more than a 4% yield with a low risk, short duration, high credit quality risk posture. If those assets can be deployed slightly longer in duration and across varying asset classes beyond US Treasuries, a yield in excess of 5% can be achieved.

“There’s urgency, perhaps maybe an awakening, out there,” she told Captive International. “I think captive owners are realising that now it's worth the effort and the time to focus on taking an active approach in their investment strategy and deployment of their capital.

“There are opportunities to lock in some of these higher yields right now without a lot of duration risk. We think it's prudent for captive owners to take advantage of some of these very appealing yield levels.”