Best-rated US captives saw 53% increase in net income in 2023
Captives continue to outperform commercial market peers
US captive insurance companies rated by AM Best reported a 53% increase in net income in 2023 together with surplus gains, while continuing to outperform their commercial market peers. AM Best-rated US captives posted net income of $1.4bn in 2023, up from $923m in the previous year. Additionally, the five-year average combined ratio of 86.5 for the AM Best-rated US captives outstripped the 97.5 of their commercial casualty peer composite.
Best noted that the US captive composite did see some volatility in 2023, which led to a 10.2-percentage point deterioration on their combined ratio to 91.1 in 2023. However, it added that between 2019 and 2023, the captives added $4.3bn to their year-end surplus while returning $2.0bn in stockholder and policyholder dividends, “representing $6.3bn in insurance cost savings that the captives retained for their own organisations by not purchasing coverage from the commercial lines market”.
“Although captives are not created with the intention of being profit centres for their organisations, they are highly profitable,” said Dan Teclaw, director, AM Best. “Unlike some of their peers in the commercial market, captives have not been materially impacted by the higher frequency or severity of weather and natural catastrophes in the past five years. Barring any unforeseen systemic catastrophic events, we expect captives’ results to be favourable again in 2024.”
According to Best, the number of US captives continues to rise amid the persisting hard market. “Since the pandemic, business interruption has frequently been customised by captive owners to ensure they have some predictable coverage should a future event emerge. At the same time, group medical stop-loss has emerged as one of the fastest-growing coverages considered by captives due to increased medical inflation and the continued rise in health care-related insurance costs,” said the ratings agency.
It added that the cyber market has generally stabilised, though not softened, “but rapidly escalating pricing has prompted captive owners to contemplate offering higher limits”. Best said that other potential risks and lines that captives are being utilised for include D&O, professional liability, product liability and surety bonds.
“In a hard market, owners-sponsors often broaden the use of their captives to provide coverage for non-traditional risks, or they may replace all or a portion of coverage offered with unfavourable terms, such as workers’ compensation, general liability or auto,” said Teclaw. “Captives and other alternative risk transfer-type entities can also offer an effective and efficient option to support a policyholder’s ERM coverage requirements in periods of difficult commercial market conditions.”
As the hard market has persisted, there has been an increase in the use of captives among owners, sponsors and managers, said Best, noting that the number of US domestic captives grew to 3,365 in 2023 from 3,328 in 2022.
In 2023, premium growth had returned to the trend prior to 2022, with an increase in direct premiums written of 2.6%. “Prior to 2022, premiums had been relatively flat, with a compound annual growth rate of just under 2%. This period includes 2020-2022, which were years skewed by a slowdown in economic growth caused by the Covid-19 pandemic. Notably, an increase of 21.5% in net premiums earned in 2023 reversed a trend of single-digit growth seen in the previous four years,” said Best.
