Captives domiciled in Bermuda and the Cayman Islands continue to report strong operating performance despite somewhat declining underwriting results, according to a report released Friday by A.M. Best Co. Inc.
Captive insurers rated by the Oldwick, New Jersey-based rating agency in the two largest domiciles posted profitable results in line with historical averages in 2016, according to The Beat Goes On: Rated Bermuda & Cayman Captives Continue Their Strong Operating Performance. Last year marked the 5th year of above-par operating results, measured by a total return on revenue of 23%, down from 24% in 2015, according to the report.
Underwriting results deteriorated somewhat, to a combined ratio of 85.3% in 2016 from 80% in 2015, but were well above the results posted by A.M. Best’s composite of U.S. commercial casualty insurers, according to the report. The Bermuda and Cayman five-year average combined ratio of 82.5% between 2012-2016 was significantly better than the U.S. commercial casualty segment of 98.9% over the same period, according to the report.
Capital levels for the captives grew at a rate of 8%, buoyed by strong operating earnings, according to the report.
“On the whole, capital levels are healthy and more than supportive of the risks underwritten,” the report said.
The Bermuda and Cayman captives saw their net premiums earned decrease for the first time in five years, by 4.7% compared with a high single-digit growth that averaged 7% in the prior four years, according to the report. This included a 10.1% growth in 2014.
“For some captives, product re-pricing has been emphasized to combat ongoing low interest rates,” the report stated. “For others, the parent either sold assets or entered into joint ventures, which resulted in lost premium revenue at the captive. Both kinds of initiatives are perfectly normal for a captive insurer.”
Unlike traditional property/casualty insurers, captives are not pressured by stakeholders for returns on equity or revenue growth, according to the report. Extensive use of reinsurance allows the captives to transfer a significant amount of catastrophe risk, resulting in less volatile results compared with traditional insurers.
Most of A.M. Best’s current ratings on Bermuda and Cayman captives are in the A to A- range. The company rates 19 captives domiciled in Bermuda and 11 Cayman captives.
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