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The U.S. captive insurance market segment continued to generate profits and surplus gains in 2021 while outperforming the commercial market, according to a new AM Best report.

The Best’s Special Report, “U.S. Captive Insurance: Stepping in Amid Capacity and Pricing Challenges,” shows AM Best-rated U.S. captives reported a pretax operating income of $1.0 billion, down from the $1.1 billion reported in 2021.

Additionally, the five-year average combined ratio of 84.5 posted by the AM Best-rated U.S. captives significantly outstripped the 99.4 of the commercial casualty composite. Year over year, these U.S. captives recorded a 1.8-percentage point improvement on their combined ratio to 85.4 in 2021.

Overall, between 2017 and 2021, captives added $4.3 billion to their year-end surplus while returning $5.8 billion in stockholder and policyholder dividends, representing $10.1 billion in insurance cost savings over purchasing coverage from commercial market third parties.

The number of U.S. captives continues to rise, although the growth of captive formations was tempered by the onset of economic uncertainty resulting from the pandemic, as well as ongoing scrutiny from the IRS and greater regulatory and reporting requirements.

However, these adverse conditions can serve to highlight the benefits of the captive segment and provide businesses an incentive to establish them, said Fred Eslami, associate director, AM Best.

“This current environment allows captives to customize coverage for risks that may be uncommon or difficult to write or place in the standard market,” Eslami said.

Investment returns remain a challenge for rated U.S. captive insurers. In 2021, net investment returns rose slightly, which when combined with higher capital gains, increased investment returns to 4.1 percent from 3.9 percent.

Source: AM Best