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22 November 2022Bermuda analysis

AM Best: Bermuda, Cayman & Barbados captives outperforming US rivals

Rated Bermuda, Cayman Islands and Barbados (BCIB) captive insurance companies have continued to outperform their US commercial casualty peers, according to an AM Best report entitled: “Rated BCIB Captives Still Outperforming Commercial Peers.”

The report said that the BCIB companies had a combined ratio approximately 13 percentage points better over the most recent five-year period.

The new Best’s Special Report, titled, states that current hard insurance market has provided ample growth opportunities for the BCIB captive industries to date. In addition, the BCIB captives’ operating results correlate highly with those of captives domiciled in the United States and continue to outpace those of their peers in the commercial casualty composite.

“The BCIB captive composite’s income generation has been remarkably consistent and tends to be driven by its favourable underwriting results, which are well-supported by the captives’ familiarity and extensive knowledge of the risks that they cover,” said Robert Gabriel, financial analyst, AM Best. “Return on revenue, which takes into account a company’s net income relative to net premiums earned, demonstrates how highly profitable the BCIB captives are.”

All but one of 25 AM Best-rated captives in the BCIB composite reported positive net income in 2021, according to the report. The composite’s net income total of $1.3 billion in 2021 was a 4.7% improvement over the previous year. Although the composite’s return on revenue has been declining since 2019, it is still almost three times that of the commercial casualty composite’s average.

The report also notes that unlike traditional property/casualty insurers, captives are not under pressure from stakeholders to generate returns on equity or revenue. From 2017 to 2021, the BCIB captives were able to grow surplus by $2.3 billion, even after paying out $1.7 billion in dividends. This translates into $4 billion in savings from the use of captive vehicles as an alternative to organizations using the commercial insurance market.

AM Best expects that 2022 surplus gains may be relatively small, as unrealised losses on fixed-income assets due to rising interest rates through the year may fully offset operating income. Further, unrealised losses are also likely to be negatively impacted by significant declines in the market value of captives’ equity holdings in 2022. However, as interest rates rise, captives should benefit from higher reinvestment rates on their fixed-income assets.