12 September 2014Accounting & tax analysis

US captives continue to outperform commercial insurers

US captive insurers rated by AM Best have continued to outperform the commercial sector in every key financial measure. This is according to the rating agency’s latest report on the captive insurance sector.The captives analysed for Best’s report were taken from a subset of more than 200 captive companies, all of which currently are rated. These companies range in size from $2 million in surplus to more than $3.5 billion, writing medical malpractice, inland marine, general and automobile liability, property, workers’ compensation and other lines.

2013 saw a 12.4 point improvement in the loss and loss-adjustment expense ratio over the prior year, mainly due to the lack of any major, outsize property loss. The 2012 results were driven largely by Superstorm Sandy.

Underwriting expenses also improved to a five-year low in 2013. AM Best noted that captives’ expenses are normally lower than conventional insurance markets, primarily because they have lower overhead and associated expenses, and most, if not all of them, do not rely heavily on items such as agents’ commissions.

Over the longer term, the five-year average combined ratio for the captive composite of 85.2 continued to compare extremely favourably with the commercial composite’s average of 103.2.The captives’ operating ratio over the same five-year period was tighter, with the captives generating a five-year operating ratio of 69.7 versus 88.3 for the commercial composite.

Best said it believes it to be common knowledge that, given the majority of single-parent captives use loan-back instruments with their parents, that captives’ investment portfolios tend to be significantly more conservative, and therefore generate less income, than typical investment portfolios for commercial companies.