US captives outperform commercial market counterparts for profitability: AM Best
US captives rated by AM Best continued their run of strong financial results in 2019, according to AM Best’s Market Segment Report, titled Commercial Market Dislocation Could Provide New Opportunities for Captives to Fill the Void.
The US captives AM Best rates generated pre-tax operating income of $918 million, the report said. Although this was down 16 percent from the $1.1 billion in earnings reported in 2018, it still represents a healthy profit, and outperformance relative to the commercial market, the rating agency added.
The captive composite’s most recent five-year period average combined ratio (after policyholder dividends) of 92.0 percent also compares favorably with the 100.8 percent posted by the commercial casualty composite.
Between 2015 and 2019, captives added $3.8 billion to their year-end surplus, while returning $4.4 billion in stockholder and policyholder dividends. That represented $8.2 billion in insurance cost savings that captives retained for their own organisations, AM Best said.
AM Best argued captives may use this cash to expand their coverages to new lines of business, especially where commercial rate increases have been greatest. These lines include employee benefits and medical stop loss, with companies keen to improve the overall health and well-being of workers and to cut overall medical costs, AM Best said.
“Rate increases for lines such as directors and officers, errors and omissions and commercial automobile may also spur captive interest and help reduce claims costs,” AM Best added.