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A.M. Best’s

EUROPEAN CAPTIVE REVIEW

2012 EDITION

Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED. A.M. Best’s European Captive Review 1

Contents

2 FOREWORD By Clive Thursby, Senior Director, Market Development EMEA & South Asia

3 PUBLISHED REPORTS AND ARTICLES 3 Solvency II to Transform the EU Captive Industry 7 Benchmarking Captive Performance

9 CREDIT RATINGS FOR CAPTIVES

10 A.M. BEST RATING PROCESS

11 RELATED CRITERIA REPORTS 11 Alternative Risk Transfer (ART) 13 Rating Protected Cell Companies

15 EUROPEAN CAPTIVE RATING ANNOUNCEMENTS – EXAMPLES 15 A.M. Best Upgrades Ratings of Delvag Luftfahrtversicherungs-AG and Delvag Rueckversicherungs-AG 16 A.M. Best Affirms Ratings of National Grid Insurance Company (Isle of Man) Limited 17 A.M. Best Affirms Ratings of Jupiter Insurance Limited 18 A.M. Best Assigns Ratings to Builders’ Credit Reinsurance Company S.A.

19 SAMPLE CREDIT REPORT ENI Insurance Limited

24 A SELECTION OF CAPTIVES CURRENTLY RATED BY A.M. BEST

25 APPENDICES 25 Guide to Best’s Financial Strength Ratings 26 Guide to Best’s Issuer Credit Ratings

27 CONTACT US

2 A.M. Best’s European Captive Review Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

T he European captive insurance sector remains in generally robust health and continues to expand, although the atmosphere surrounding these op-erations has tended to be more cautious as uncertainties about the impact of Solvency II continue. It is still unclear what the impending regulatory

changes within the EU will mean for captives, or indeed when these changes will take effect.

This is an unsatisfactory position for captive practitioners to find themselves in, but one nonetheless that they can benefit from. Much of what Solvency II is designed to achieve has little or no relevance to captive ventures (but they cannot expect any exemptions on that account). Nevertheless, the promotion of greater risk awareness by insurers of all types is to be welcomed. Likewise, the new regulatory regime may, from a captive perspective, tend towards the cumbersome and the bureaucratic, but it should prompt captive owners to question how a captive can play a more efficient and effective role in the risk management programme of the group it serves.

Measuring a captive’s contribution to better corporate risk management is not easy and typically has often been very subjective. In an environment where the costs of operation are likely to increase and more attention is being given to capital efficiency, captives will need to justify more explicitly the contribu-tion they are making. Some may fail that test and close – as a result, the captive run-off market is one that is expected to grow. In other cases, this pressure to perform will be an incentive for captives to be used more imaginatively, for example by extending the scope of coverage provided. These trends will also

be evident in captive centres outside the EU, regardless of whether or not these domiciles seek Solvency II equivalence.

Europe may have seen the continued expansion of its captive sector but in many respects captive usage remains under-developed, particularly when compared to the USA. The US is a smaller economic bloc but it is still the location or origin of a majority of the world’s captives, whilst in Europe captives are commonly used in only a few countries. The reasons for this contrast are varied and complex but it does suggest that there is considerable potential for further captive participation in corporate insurance programmes in Europe.

The US experience, about which there is more available information, demonstrates that captives generally out-perform the conventional market. A.M. Best’s Special Report Captives Feeling the Squeeze As Global Pres-sures Intrude [published in August 2012] revealed, for example, that the average Combined Ratio achieved in 2011 by those captives rated by A.M. Best was 67.9% as compared to 100.3% for a composite of commercial insurers.

Captives are able to be more responsive to the particular risk features of their parent organisations and, therefore, for a well-managed risk portfolio the captive option should offer efficiencies in risk financing. Once the fog of Solvency II has cleared we may expect more European captives being established as well as better utilisation of existing captives. For new ventures the growing availability of cell captive facilities in most domi-ciles should facilitate these developments.

In this booklet we bring together various A.M. Best publications which focus on the captive sector. These include a selection of rating announcements; our rating coverage of captives continues to expand in numer-ous locations, ranging from Hawaii in the west to Labuan in the east. Rated captives can often improve their interaction with the conventional market and more easily meet corporate governance requirements. Ratings are also a useful benchmarking tool for captive professionals. n

CLIVE THURSBYSenior Director,

Market Development EMEA & South Asia

Foreword


Published Reports and Articles

PUBLISHED: MAY 16, 2011

Solvency II to Transform The EU Captive IndustryThe looming implementation of Solvency II is bound to change the market environment dramatically for cap-

tive insurers, as parent organizations take a fresh look at captives’ role in light of increased regulatory require-ments under the new regime. Regulatory capital requirements appear certain to increase dramatically – as much as three- to fourfold for EU-domiciled captives.

• Most captives operate with multiples of the current regulatory capital require-ments, but A.M. Best believes many owners will have to commit more capital to their captives under Solvency II.

• Pillars II and III of the new regime will tighten standards for enterprise risk management (ERM), processes and reporting, leading to higher operating costs.

• Captives writing business inside the EU but domiciled elsewhere will find their fates tied to the achievement and application of regulatory equivalence with the new EU system.

• Since many captives operate as reinsurers, equivalence could be a key con-sideration, as some reinsurance business is already supported by collateral or deposits of reserves with a fronting company.

• Captive centres clearly have a difficult balance to strike between obtaining equivalence and remaining attractive to captives; decisive factors are likely to be how proportionality is implemented within the EU and the impact of col-lateral posting on captives.

• It is unclear whether proportionality – simplification provisions designed for smaller insurers – will apply to the captive sector, and each captive likely will be viewed on its own merits, given that proportionality under Solvency II is more about risk profile than size.

• Captives, to minimise the impact of Solvency II, should prepare for a worst case scenario – no grant of proportionality – and try to mitigate the new regime’s effects.

• Key steps would be participation in the European Insurance and Occupa-tional Pensions Authority’s (EIOPA) quantitative impact studies (QIS) and the parallel development of partial capital models that best reflect each captive’s risks.

• A.M. Best believes that captives able to obtain a secure financial strength rating should not have major difficulties adapting to Solvency II; strong risk-based capital, robust risk management and governance, close integration with a securely rated parent and effective reporting systems will leave captives well positioned to satisfy the demands of the new regime.

A CHALLENGE OF MAJOR PROPORTIONSWith Solvency II implementation deadlines fast approaching, A.M. Best believes that captives’ current market environment is bound to change dramatically. The increased requirements that the European risk-based regula-tory regime represents will lead parent companies to re-evaluate the role of their captives and the value added to their organisations.

It seems inevitable that regulatory capital requirements for captives operating within the European Union (EU) will increase dramatically, with the latest indications pointing toward a three- to fourfold increase in minimum capital requirements for EU-domiciled captives. The small size of most captives, their lack of diversification of risks and their high counterparty exposures seem to be the main drivers for this regulatory capital increase as captives move from Solvency I to Solvency II. While most captives operate with multiples of the current regula-tory capital requirements, A.M. Best believes a material proportion of captive owners will have to increase the capital committed in their captives under Solvency II.

On an ongoing basis, the application of Pillars II and III of the new regime will impose much higher standards

Related Reports2011 Special Report:Solvency II — Rating Implications Issue Review

2009 Special Report:European Captive Insurance — Market Review

2008 Special Report:European Solvency II — Issue Review

Related Resources:http://www.ambest.com/captive

Rating AnalystCarlos Wong-Fupuy, London+44 207 397 0287 [email protected]

Vasilis Katsipis, London+44 207 397 [email protected]

Editorial ManagementBrendan Noonan, Oldwick+1 (908) 439-2200 Ext. [email protected]


for enterprise risk management (ERM), processes and reporting than what currently exists. For captives, as for all small insurers, this is likely to significantly increase their operating costs.

Captives writing business inside the EU but domiciled elsewhere may be only marginally better off. The whole viability of such operations will hinge on the question of regulatory equivalence and how this would be applied. Lack of regulatory equivalence for these companies’ home regimes will probably mean greater regulatory scru-tiny of reinsurance transactions and requests to post collateral. Even for captives that already post collateral with fronting companies, the cost of the transactions is likely to increase.

EU captives have lobbied hard for the blanket application of proportionality to their sector. It is unclear wheth-er this will be granted, and it is likely that each captive will be viewed on its own merits, given that proportional-ity under Solvency II is about risk profile and not the size of the undertaking.

Captives, to minimise the impact of Solvency II, will have to understand better its impact on their capitalisation and expenses, assuming that they will not be granted proportionality, i.e., they should prepare for a worst case scenario and try to mitigate its effects. A key step would be participation in the European Insurance and Occu-pational Pensions Authority’s (EIOPA) quantitative impact studies (QIS) and the parallel development of partial capital models that best reflect their own risks.

One of the basic principles expected to guide the practical implementation of Solvency II is “proportionality.” A number of simplification provisions are embedded in the specifications, not only for captives but for small insurers in general. While the implementation of proportionality itself has come under increased scrutiny, it is still unclear as to how it will be implemented and to which companies it will apply. This creates an additional uncertainty for captives in what is already promising to be a challenging new regime.

The definition of a captive under Solvency II excludes captives that write third-party compulsory business or have policyholders who are not legal entities of the group, regardless of their materiality. Furthermore, if the latest proposals of Level 2 implementation measures were to be applied, they would also exclude captives that belong to a group owning a non-captive insurer or where the ultimate insured entity is not a member of the group. This is a particularly narrow definition but probably necessary for regulatory purposes, as it provides for a clear-cut demarcation between captives and conventional insurers. But even when the sole policyholder is the parent company and its affiliates, it can be argued that there are third parties who benefit from strict regulation and disclosure. This is particularly the case for liability lines and employee benefits. Still, the end result of this nar-row definition of captives is that almost half of the companies that would “normally” be viewed as captives will be treated as conventional insurers by regulators.

This is significant because there have been loud voices from the captive lobby arguing that the simplifications of Solvency II should apply to their whole sector and not on a piecemeal basis. The main arguments tend to boil down to the captives’ relatively small size, low number of product lines and single ultimate policyholder: the parent company. Based on this reasoning, the calculation methods to evaluate solvency capital, the company’s risk management and governance, and the disclosure requirements (respectively the three pillars of Solvency II) should be simplified, and some argue less strict, than those that would apply to conventional insurers.

The great majority of captives fit in the “small” category of insurers; less than 3% of the respondents in the QIS 5 exercise had premiums exceeding EUR 100 million and thus were considered of medium size. However, until now the definition of proportionality has been based not on financial size but on the company’s risk profile. This, while more realistic, is far more ambiguous to define, thus creating great uncertainty among captive owners and managers as to the impact on specific companies. Most captive insurers write a reduced number of product lines, but this often includes complex risks that are difficult to price or unavailable in the open market, mean-ing that while certain captives may be considered small as measured by premiums, they are anything but when viewed by risk exposure.

CAPTIVES AND NEW SOLVENCY CAPITAL REQUIREMENTSIt has been argued that the Solvency II standard formula to calculate solvency capital requirements (SCRs) is not appropriate for captives. A.M. Best believes that given their generally small size and highly volatile claims, captive insurers are likely to be among the hardest hit in terms of additional capital requirements upon implementation of Solvency II. Moving from a very simplified parametric model, as Solvency I is, to one that focuses on risk, has the potential to provide diversification benefits. Unfortunately, small insurers, including captives, are less likely to benefit from this diversification. First indications from the QIS 5 results are that both the insurance risk is proportionately higher among captives and the diversification benefit lower when compared with the rest of the market segments.

The debate over how much regulatory capital a captive needs to hold seems set to continue for a long time. What worries A.M. Best is the lack of preparation among the majority of captives. They are taking very few steps to prepare their own fully or partly customised capital models, which would be the easiest way to tailor their capital requirements around their true risk profiles. The latter does not have to be unnecessarily complex, as long as the entity is able to explain its reasoning, the particular nature of the risks involved and the discrepancies with the standard formula. Straightforward captives’ risk profiles should lead to equally simple internal capital models.




Any deviation from the standard formula should also be balanced by a strong risk management and governance (Pillar II) framework. The principles-based nature of Solvency II, the existence of transitional periods in a num-ber of areas (as per the Omnibus II directive) and the concentration of most captives in a few domiciles should also contribute to domestic regulators’ flexibility and receptiveness in approaching specialised entities such as captives. However, the first step of this process is to actively engage with the regulators, which seems to be a low priority for many captives.

DOMICILE AND THIRD-COUNTRY EQUIVALENCEThe evaluation of different regulatory regimes as Solvency II equivalent is likely to impact the captive sector, especially as many of the captive centres have decided not to apply for regulatory equivalence at this stage. Non-equivalent regimes can obtain transitional equivalence, which is likely to run for as long as five years. However, this is not the route that most captive domiciles seem inclined to take. Furthermore, the treatment of reinsurance cessions is a matter for EU member states, which means that individual state regulators can undertake their own regulatory equivalence assessments for reinsurance transactions.

Traditionally, captives tend to be concentrated in a few locations that offer preferential tax treatment, less stringent solvency regimes and specialised infrastructure. Some of them are clearly within the scope of the new EU regulatory environment (Dublin, Malta, Luxembourg, Gibraltar), while others are not (e.g., Guernsey, Isle of Man, Switzerland, Bermuda and the U.S. state of Vermont). Out of the latter group, some are actively working on obtaining third-country equivalence (e.g., Switzerland and Bermuda although it seems that most of the Bermuda Monetary Authority’s activity on equivalence is focused on large reinsurers).

The corollary to non-equivalence will be seen in the implications for fronting companies operating within the EU. Reinsurance contracts with companies established under a nonequivalent regime are likely to attract greater regulatory scrutiny. At the same time, solvency requirements for European direct writers will be linked to the credit quality of their reinsurers. If the reinsurer in question is not Solvency II compliant, additional require-ments are likely, so that further demands for solvency capital can be met. The additional requirements may take the form of cut-through clauses, explicit guarantees or letters of credit. In these situations, the cost of transacting business through captives is likely to increase. A financial strength rating on the captive should also help to as-sess its credit default risk, mitigating the severity of any capital charges or the cost of guarantees.

Since many captives operate as reinsurers, equivalence could become a key consideration for companies domiciled in nonequivalent regimes. In several cases, reinsurance business is already supported by collateral or deposits of reserves with the fronting company, regardless of the reinsurer’s domicile. This and the overall uncertainty surrounding proportionality seem to be the main drivers behind the calls for some captive centres to avoid applying early on for equivalence.

It is clear that captive centres have a difficult balance to strike between obtaining equivalence with the EU regulatory system and remaining attractive and flexible for captives. It seems that the decisive factors are likely to be the clarification of how proportionality will be implemented within the EU and the impact of collateral post-ing on captive populations. It is therefore unlikely that most of these centres will decide before the full imple-mentation of Solvency II within the EU, and even if they were to apply, EIOPA is unlikely to have the time and resources to respond by January 2013.

In the long run, A.M. Best believes that, Solvency II equivalent or not, international markets are inevitably mov-ing towards risk-based regimes alongside integrated ERM approaches. Captive domiciles are not exempt, and attaining convergence with global standards should be just a question of time.

SOLVENCY II PREPAREDNESS AND IMPACT ON CAPTIVESInsurance companies throughout Europe have been participating in the different QIS exercises, with more than two-thirds of eligible companies having taken part in the latest, QIS 5. It is fair to say that the emphasis of devel-opment among the leading companies has started shifting toward the requirements of Pillar II and away from the quantitative requirements of Pillar I.

At the same time, there has been some strong lobbying from the captive sector toward the European Com-mission to highlight the uniqueness of their business model and to further define proportionality as it applies to captives. While participation in QIS 5 increased dramatically among captive insurers, it still is low, with less than half the qualifying captives taking part in the exercise, a phenomenon also seen among other segments that have a high preponderance of small entities. Nevertheless, this can be a dangerous development for the sector, as it is likely to be among the hardest hit by the implementation of Solvency II.

Initial evaluations of the impact of QIS 5 suggest that minimum solvency requirements for captives could in-crease between three- and fourfold. The main drivers for this seem to be the significant impact of the catastrophe model, the high levels of counterparty risk and the reduced benefit of diversification. A.M. Best believes that some of the high levels of counterparty risk can be explained by the pattern many captives follow under which a large proportion of the original risk is reinsured, while investments are characterised by loan-backs to the parent com-pany. Unless there is a change in how Solvency II views captives, the counterparty risk will remain high for them.


The majority of underwriting risk under QIS 5 for captives comes from the natural catastrophe model. This has attracted significant criticism from across the industry, making it one of the likely candidates for simplification because of the severity involved. Both the impact of liability and windstorm scenarios have attracted criticism for being too penal. While they might be revised, A.M. Best believes that regardless of any changes implemented, natural catastrophe exposure is likely to remain a principal driver for captives’ capital requirements.

A.M. Best believes that the great majority of captives’ Solvency II capital requirements (even if the QIS 5 were to be implemented unchanged) will be less than their current capital levels. Several captives have been operating with capital well in excess of the current regulatory capital requirements. Among the captives that will need to raise additional capital, the rationale for their existence will be questioned, while for others, the additional capital resources will only have a marginal impact on their cost of transacting business.

For those captives rated by A.M. Best, a strong capital position is not always sufficient to maintain a secure rat-ing. A comprehensive ERM framework fully embedded with that of the parent company (similar to the guidelines behind Pillar II) is often also needed.

The majority of captive insurers rated by A.M. Best are within the secure range (a Financial Strength Rating of “B+” or higher). This is usually supported by healthy levels of risk-adjusted capitalisation (as per the propri-etary Best’s Capital Adequacy Ratio [BCAR] model) capable of absorbing volatility in claims. In particular cases, comprehensive reinsurance/retrocession programmes and/or explicit parental guarantees play a key role in the protection of capital strength. Higher rating levels are frequently based on risk management and governance frameworks well integrated with those of their (typically highly rated) parent companies.

Pillar II has the potential to affect the captives operating costs. The increased emphasis on processes and evalu-ation of own risk will have a significant impact on operating costs for most insurers, and it is likely to be higher for smaller insurers (as most captives are). Even captives that would consider their processes to be Solvency II ready will incur significant additional costs to document those processes.

Most captives tend to outsource the majority of their operational processes to professional captive managers. This, among other benefits, allows them greater scalability and adaptability of processes, especially when changes are required for the whole industry. A.M. Best believes this means that captives can still meet the requirements of Solvency II but will incur significant costs. While the application of proportionality may limit the cost impact, the net effect is likely to cause certain captive owners to re-examine the viability of their operations under the increased cost burden.

The impact of implementing Pillar III is also likely to have far-reaching implications for captives. It already is among the most debated topics for captive owners. They have argued that there is no need for disclosure, since sufficient information is usually already published at the parent level. Moreover, since the sole, ultimate, insurable interest lies on the parent company, there would not be external parties to benefit from additional disclosure. Furthermore, disclosure of certain items, e.g., technical provisions for specific pending claims, may have signifi-cant commercial implications and could cause claims payments to increase as claimants are able to learn the amount an insurer is prepared to pay.

Conventional insurers also have raised the argument of commercially confidential information inadvertently being released through the Pillar III public disclosure. The regulators seem to be receptive to such arguments, but they will have to balance this with the need to provide relevant information to stakeholders. Although the current definition of captive under Solvency II limits it to an entity transacting business only within its group, the ultimate beneficiary, especially in cases of liability, is outside their group of companies.

CAPTIVES IN A SOLVENCY II WORLDA.M. Best believes that captives able to obtain a secure financial strength rating should not have major difficulties adapting to Solvency II. Companies with strong levels of risk-based capital, robust risk management and governance structures, high levels of integration with a securely rated parent, and effective reporting systems are in a good position to satisfy the demands of the new regime. Certainly, there will be additional costs. These will have to be balanced against the value that numerous captives have demonstrated for their parents over a long period. Cap-tives need to take the initiative, and through intensive discussions with their regulators on an individual basis, they should be able to shape the application of the new regime accordingly to their particular characteristics. A.M. Best does not foresee a material impact from Solvency II on captives’ ratings in the short term, although improvements in risk management in general may translate into improved ratings in particular cases in the long run.

There are certainly some cases where, due to small size, weak capitalisation or lack of activity, adapting to the new regime may prove uneconomical. Some parent companies will have to reassess their captives’ roles, consid-er innovative structures such as protected cells, or ultimately plot their exit strategies. In a few cases, where EU admissibility is not an issue, redomiciling to a third country may be a short-term option. In any case, some degree of consolidation and realignment is expected at this end of the captive spectrum. A.M. Best does not see this nec-essarily as a bad outcome. Generally speaking, it should lead to a more competitive and efficient market. n




PUBLISHED IN: CAYMAN CAPTIVE, NOVEMBER 2011

Benchmarking Captive PerformanceBY STEVEN M. CHIRICO, CPA Assistant Vice President, A.M. Best Company

For years, we at A.M. Best have found it interesting that the captive industry outperforms the commercial insur-ance market year after year. This article will point out how the captive industry, using a proxy of rated captives,

substantially outperformed the commercial insurance industry in 2010 and over the last five years taken as a whole. Through the discussion, some of the reasons for the outperformance will be isolated. It will hopefully also allow captive owners and managers the ability to benchmark their captive(s) against a rated captive benchmark.

A.M. Best has compiled statistics from 194 captives which they formed into a captive composite that can be used as a proxy for the captive industry. The major line of business weightings of this composite are 48% medi-cal malpractice, 22% liability, 7% auto warranty, 6% workers’ compensation, and 17% other (mostly composed of short-tail property coverages). This weighting compares reasonably well with the Cayman Islands Monetary Authority (CIMA) Captive Insurance Company Statistics (excluding life) which contemplate premium weighted statistics of approximately 40% medical malpractice, 26% workers compensation, 11% liability, and 23% other. Ad-mittedly there is some juxtaposition of liability and workers’ compensation between A. M. Best’s composite and CIMA’s statistics, but for our benchmarking purposes this should still lead to meaningful comparisons.

From a pure underwriting performance perspective it is interesting to note the 5-year average pure loss ratios of the captive composite by major line of business as medical malpractice 36.2%, liability 55.9%, auto warranty 59.6%, workers’ compensation 62.1%, and other 55.8%. It is clear that while these pure loss ratios compare favor-ably with the commercial Property/Casualty Industry, they resonate the value of the customized policy coverages, lasered loss control, and specific claim mitigation qualities found as a matter of course in the Alternative Risk Industry. What is also interesting to note is the declining pure loss ratios of the captive composite over the last five years with 2006 at 51.2%, 2007 at 47.8%, 2008 at 49.9%, 2009 at 48.1%, and 2010 at 44.6%. What is remarkable is that these declining pure loss ratios were accomplished during the trough of a soft commercial insurance market.

When A. M. Best analysts speak with captive owners and managers during the ongoing rating process it is ap-parent that captives have the ability and willingness to let underpriced business go. As an example, a few rated group captives serving the residential homebuilders market have seen premiums shrink by 50% or more without issue. There is little incentive for a group captive to chase underpriced business in the marketplace since market share tends to be a minor objective of a group captive. The incentives are of the management teams differ. A cap-tive officer is incentivized to maximize policyholder owner benefit generally by reducing the cost of insurance to policyholder owners. On the other hand, publically traded or privately held commercial insurance companies’ officers are incentivized to maximize shareholder returns, which adds to the cost of insurance for policyholders.

The 5-year average pure loss ratio of the captive composite was 48.5% as of 2010, which compares favorably to the commercial casualty composite of 55.0% for the same period. However, the Loss Adjustment Expense (LAE) component of underwriting performance was skewed in favor of the commercial composite whose 5-year aver-age was 13.7% as of 2010 compared to 18.9% for the captive composite. As a result, the 5-year average captive composite loss and LAE ratio was 67.4% as of 2010, which still compares favorably with the commercial com-posite of 68.7%. The difference, following discussions with several captive and commercial management teams, appears that there is an overriding factor at work.

The captive industry tends to only pay liability claims where there is reasonable assessment of liability, and they will fight the claims where they believe no liability is present. This has a bilateral effect on increasing LAE. These costs increase because a thorough assessment of liability is somewhat more costly than doing more of a cost benefit liability assessment. In addition, fighting claims is much more expensive than settling them from an expense perspective.

The difference in approach is the captive industry seems to invest in LAE to avoid unnecessary claims pay-ments, while the commercial insurance industry appears to take a cost benefit approach to spending LAE, which is their right when they are writing a guaranteed cost insurance policy. Thinking about this another way, the cap-tive industry spends 5.2% more LAE to save 6.5% in loss dollars. If the qualitative impact of this dynamic is con-sidered, the captive industry, driven by its owner service focus, seems to demonstrate a willingness to more often pay legitimate demonstrable liability claims without regard to spending reasonable investigation and defense costs. This can have positive reputation consequences for the policyholder owner(s) of a captive.


Another significant difference in operating performance between the captive industry and the commercial insurance industry is the expense ratio. The 5-year average expense ratio for the captive proxy as of 2010 was 21.6% versus 29.4% for the commercial insurance industry. This is a significant difference that needs some analysis to understand. If we consider bifurcating expenses between commission expense and other operational expenses, then we can see where the divergence manifests itself. The 5-year other operational expense ratio for the captive composite as of 2010 was 17.1% versus 18.2% for the commercial industry. It appears that captives are somewhat more efficient than the commercial market. The larger driver though was evidenced in commis-sions as the 5-year average commission ratio for the captive composite as of 2010 was 4.5% versus 11.2% for the commercial industry. Because captives generally either don’t pay commission at all, or pay a “skinny” commission because the agent or broker has a limited role due to the captive manager’s involvement, there are substantial savings that can be passed on to policyholders.

On a combined ratio before policyholder dividends argument, captives significantly outperform the commer-cial insurance market. The captive proxy 5-year combined ratio before policyholder dividends as of 2010 was 89.0% versus 98.0% for the commercial insurance industry. That’s a huge difference in terms of real dollars since, depending on how it is measured, somewhere between a quarter and a third of the commercial premium is now in the alternative risk marketplace. Similarly, the captive proxy 5-year operating ratio as of 2010 was 75.3% versus 83.1% for the commercial insurance industry. Where the commercial insurance industry shines compared with the captive industry is on the investment portfolio returns. Commercial insurance companies tend to have more sophisticated investment policies that take more risk and generate more return than captive companies. Cap-tives, by and large invest relatively conservatively with an eye toward principal preservation, while commercial companies need to get yield since they make far less profit from underwriting.

Another interesting financial measure to note as a difference between the captive proxy and the commercial composite is the policyholder dividend. The captive proxy 5-year policyholder dividend ratio as of 2010 was 4.5% versus 0.3% for the commercial insurance industry. To be fair to the commercial side, the 5-year policyhold-er dividends for mutual commercial insurers as of 2010 was 1.3%, and most captives have a similar alignment of interest from policyholder owners as mutual insurers experience. Still, 4.5% for the captive composite versus 1.3%, a difference of 3.2 points of premium is quite significant. If you add to the 3.2% extra savings that captive policyholder owners experience from additional policyholder dividends, coupled with the 9.0% savings from the captive combined ratio before policyholder dividends, we get 12.2% savings from the captive composite com-pared to the commercial composite.

It is apparent based on this data that the captive industry clearly outperforms the commercial insurance indus-try on all measures except investment income. What is not so apparent, perhaps, is the fact that from a policyhold-er owner perspective, a captive insurance solution saves a significant and substantial amount of insurance cost. n



Rating Captives

Credit Ratings for CaptivesT raditionally, few captives have considered it necessary to obtain a public rating of their financial strength. The

special relationship that typically exists between a captive insurer and its insureds was generally seen as not warranting such action. However, increasingly, captive operators are recognising that a rating can serve a useful purpose.

Captives are becoming more complex. For many they now have a wider set of stakeholders who are more closely interested in their operations, and who will value an independent and authoritative assessment of the captive’s status. Accreditation in this fashion can facilitate the captive realising its potential.

Circumstances in which a captive can benefit from a rating include:

• Fronting is required but it is inefficient. A rated captive may be able to reduce the collateral that it is required to provide. In some countries a rating is necessary for a captive to be permitted to act as an authorised rein-surer behind a front.

• Reinsurance availability is problematic. Many reinsurers prefer to deal with rated cedants. The “flight to qual-ity” that current financial market turbulence may promote will impact how captives access rationed reinsur-ance capacity of high quality.

• A demand for increased accountability and transparency (e.g. as driven by corporate governance or where operating management need to appreciate that the captive is working for them). A captive with a rating has market-based credentials that allow benchmarking against international best practice.

• Questions are raised about the captive’s rationale following some major change (e.g. a merger or a new CFO). A rating can be a proxy for a quality mark.

• Third party business is being written, including employee and customer insurances. These insureds may need greater reassurance that the captive is well founded.

• Joint ventures involving risks suitable for the captive. The partners will be more confident about the use of the captive if it is rated.

• Leasing and other financial constraints restrict captive participation. A captive with a rating should be more acceptable.

• Heightened regulatory oversight. If the parent company is in a regulated industry its insurance programme may be subject to official scrutiny. A rating on a captive could be useful information to the regulator. The same applies to the supervision of the captive itself in its domicile, including the greater requirements follow-ing the introduction of Solvency II.

The rating process is interactive, leveraging information that management should be collecting and monitoring itself. Under A.M. Best’s specific ART methodology the dynamics of the captive are taken into account; it is not viewed as simply another insurer nor is its parentage seen to be the overriding factor. A rating reflects a captive’s financial strength in the context of its own risk profile, rather than merely derivative of the rating that the parent have (and such rating is not a cap on what the captive can achieve).

A.M. Best currently rates over 200 captives and similar facilities in various domiciles ranging from Hawaii in the west to Labuan in the east. This expertise and experience is focused through a specialist ART team situated in the US and London. A selection of current captive ratings is included later in this Review. n


STEP 1 Rating

Engagement and Contract(Weeks 1-2)

STEP 2 Pre-Rating Preparation(Weeks 3-6)

STEP 3Rating

Meeting(Week 7)

STEP 4A.M. Best’s

Analysis(Weeks 8-16)

STEP 5Rating

Decision and Dissemination(Weeks 16-18)

Best’s Credit Ratings: The Rating ProcessAn A.M. Best Market Development Manager can help get you started by answering your questions and supply-

ing the information necessary to make an informed decision about obtaining a Best’s Credit Rating.

Upon determination of rating feasibility, a contract and quotation of a rating fee will be distributed to the requestor by the Market Development Manager. Once the necessary information and signed contract are returned to A.M. Best, your company will then be assigned an analyst for the interactive rating process to begin.

THE RATING PROCESS, STEP BY STEP

STEP 1: Rating Engagement and Contract:A.M. Best explains its rating methodologies and procedures at this stage.

STEP 2: Pre-Rating Preparation: Once a contract is signed and returned, the company is assigned an analyst, the rating agenda is sent with a detailed list of information required, and the interactive rating process begins.

STEP 3: Rating Meeting: A.M. Best analysts meet with management from the entity seeking a rating.

STEP 4: A.M. Best’s Analysis: A rating recommendation is determined and taken to the Rating Committee for review and final determination.

STEP 5: Rating Decision and Dissemination:• Theratingiscommunicatedtotheratedentity.• Oncetheratingisacceptedbytheratedentity,itisreleasedpublicly.• Thecompanyiscontinuouslymonitoredaftertheratinghasbeenaccepted.OpendialoguewithA.M.Best’s analytical team is encouraged and is helpful for the ongoing maintenance of the company’s rating. n

A.M. Best Rating Process


PUBLISHED: DECEMBER 27, 2011

Alternative Risk Transfer (ART)The purpose of this Alternative Risk Transfer (ART) criteria report is to delineate the rating considerations

specific to ART vehicles in the following broad categories: Single-parent (or pure) captives, group captives, Risk Retention Groups, and Self-Insurers Funds. Some ART vehicles operate in a manner similar to a commer-cial insurer, while others operate in a distinct manner that differs substantially from a commercial insurance carrier. Protected Cell Corporations or “cell captives” are covered under a separate A.M. Best criteria report.

There are three distinct features of ART insurers that are more or less universal to all types of captives: the use and equity treatment of a specific type of letter of credit; the emphasis on capital preservation over operating perfor-mance; and the emphasis on business retention over market share. The latter two features are also apparent with many mutual insurers where persistency and surplus accretion are key reasons for their long-standing position in the market.

TREATMENT OF LETTERS OF CREDIT FOR ART ENTITIESLetters of credit (LOCs) take many forms and typically are treated as debt in the rating process, whether for a commercial insurance carrier or for an ART entity (most often a single-parent captive). However, A.M. Best is aware of the use of a particular type of LOC to capitalize an ART entity, and this arrangement is encouraged by a number of captive insurance regulators to assist a regulator in accessing an ART entity’s capital if needed. The details of the LOC must be presented to A.M. Best for capital consideration and determination of equity credit. The LOC generally must have all or most of the follow-ing characteristics: stand-alone; irrevocable; evergreen; funded; in favor of the ART entity; and drawn on a highly rated bank. Certain types of LOCs may receive up to 100% capital credit, and that capital credit may not be subject to the usual threshold of 20% of surplus.

By stand-alone, it is meant that the instrument is not part of a credit facility or agreement that may have covenants and terms that can impair the liquidity of the LOC. It should be evergreen and irrevocable, which means that the instrument au-tomatically renews and cannot be canceled except by prior written agreement by all parties. It should be funded with assets on deposit with the bank from which the LOC is drawn, and that bank takes the risk if the assets fall short of the face amount. Finally, the LOC should be drawn on a highly rated bank so that the credit risk of the bank does not cause an undue “haircut” of equity credit.

It should be noted that under similar conditions, qualifying New York Regula-tion 114 trusts can receive equity credit as well.

CAPITAL PRESERVATION AND OPERATING PERFORMANCEThe ART marketplace was born out of insurance capacity shortages and price volatility of the commercial insurance market that historically have resulted from the vagaries of the underwriting cycle. ART vehicles invariably have the mis-sion to provide consistent, tailored coverage at stable pricing to policyholder owners. This dynamic results in a focus on capital preservation, with less emphasis on profit and return measures. Rated ART entities generally record solid profit-ability before policyholder and stockholder dividends. As a result, while ART vehicles may appear to have lower levels of underwriting and net income available to common shareholders, consideration is given in the rating process to return measures both before and after policyholder and owner dividends, depending on the historical use of these dividends.

MARKET PROFILEMost ART entities have a limited market share and therefore a limited market profile compared with many commercial in-surers. While market profile is still important in the rating process for any insurer, A.M. Best recognizes the unique nature of the relationship between the ART entity and the insured and its impact on market profile. ART vehicles can be different in that they can have customized coverages, customer-specific claims and loss-control solutions, and board representation from owner insureds. Accordingly, retention ratios for ART vehicles tend to be much higher than those of commercial insurers, averaging more than 90%. ART vehicles gain and retain business by narrow and very specific products that are meant to address specific needs. Historically, the “value added” services such as loss control and engineering, in addition to policyholder dividends, have enabled ART vehicles to hold onto customers even in soft insurance cycles.

SINGLE-PARENT (PURE) CAPTIVESMarket Profile – Given that the customary definition of market profile of a commercial insurer does not apply to a sin-gle-parent captive, A.M. Best looks for signs of how well the single-parent captive is entrenched in the risk management

RELATED REPORTSCriteriaUnderstanding BCAR for Property/Casualty Insurers

Rating Protected Cell Companies

Risk Management and the Rating Process for Insurance Companies

RATING ANALYSTSSteven M. Chirico CPA, Oldwick+1 (908) 439-2200 Ext. [email protected]

John Andre, Oldwick+1 (908) 439-2200 Ext. [email protected]

Related Criteria Reports


and commercial activities of the parent company’s business. The continuum ranges from the captive being used simply as a risk financing tool, which represents a relatively weak substitute market profile, to being used as the platform from which the parent company’s enterprise risk management program is implemented. A.M. Best will assess the risk man-agement contribution of the captive to the parent company’s business operations in this manner.

Volatility of Operating Results – Since a single-parent captive has a relatively narrow scope of risk, there tend to be periods of very low loss activity contrasted with periods of significant losses. What A.M. Best looks for in these cases of volatility is the parent company’s previous demonstrated support or documented support agreement, which outlines the intent and ability to support the captive with economic resources if needed.

Net Retention to Surplus – Akin to the rating of a commercial writer, an ART rating can be adversely impacted if the company writes a net aggregate per-occurrence limit that is greater than 10% of surplus. This is especially an issue with ART, as the companies often have limited spread of risk and very specific operating plans. For instance, one misinterpretation of building codes can be very problematic to a group captive that specializes in home con-struction. In the case of a single-parent captive, the probability of the full limit loss is determined, and then financial resources at the captive and the parent company are assessed for their ability to sustain a full limit loss under stress conditions. For instance, if a single-parent captive writes coverage for several properties in one city, the probability of all of these buildings experiencing a full limit loss in any one accident year is considered in assessing the capital adequacy of the captive.

Loan-Backs to the Parent Company – A.M. Best recognizes that there are a number of reasons why a captive would want to make a loan of working capital back to the parent organization. Domicile-approved loan-backs must be documented properly with an arms-length loan agreement. Then the loan-back is charged a risk factor that contemplates the risks associated with the loan. The largest risk is generally the credit risk of the parent company, which is assessed via external (credit ratings) and internal financial analyses. Other risks may be present in a loan-back situation, such as the strength of the loan-back agreement and the parent company’s cash-flow volatility, and the analyst will assess these on an ad hoc basis.

GROUP CAPTIVESGroup captives are ART vehicles that offer insurance to several or many unrelated policyholder owners and can take many forms. Some group captives dedicate themselves to a particular industry, while others choose to write in a limited geographic area, such as a single state. Group captives are the ART vehicle that most resembles a commer-cial insurer, and the rating dynamics for a group captive are closer to those of a commercial insurer as well.

RISK RETENTION GROUPSRisk Retention Groups (RRGs) are governed under the Liability Risk Retention Act of 1986, which is a U.S. federal statute, and therefore states’ insurance departments have less authority over RRGs than they do over state licensed insurers. This fact makes RRGs distinct in some respects and requires particular attention to the analysis of those differences. The major difference between the rating process of a commercial insurer or group captive and that of a RRG is the treatment of substitute forms of capital, particularly qualifying LOCs and New York Regulation 114 trusts. RRGs are distinct from other types of insurers in that only owners can contribute capital to the group, and only policyholders can be owners. So a managing general agent (MGA) or third-party administrator (TPA) that runs a program utilizing a RRG for writing the liability insurance cannot make a capital contribution to the organization (MGAs and TPAs don’t make contributions to regular commercial insurers). What they can do is sponsor a qualify-ing LOC to bolster equity capital. A.M. Best can give a substantial percentage equity credit in these situations if conditions warrant consideration. This includes a detailed analysis of the sponsor’s long-range intentions.

SELF-INSURERS FUNDSSeveral U.S. domiciles allow for self-insurers funds as an alternative form of insurance. By definition, these types of ART instruments can write only selected coverages for policyholder owners doing business in that particular state. self-insurers funds have two main differences that set them apart from commercial insurers: joint and sev-eral liability for any claims, and being governed under a specific charter where the surplus is wholly composed of Subscribers’ Savings Accounts. Joint and several liability requires that all of the Subscribers’ Savings Accounts and all of the policyholder owners’ assets can be used to satisfy any claims. The joint and several conditions can be compared to an unlimited policy assessment feature. A.M. Best generally gives full equity credit to the Sub-scribers’ Savings Accounts, depending on the specifics of the individual self-insurers’ fund. These funds, by statute, distribute all net income to the Subscribers’ Savings Accounts, so operating performance for this type of ART entity is evaluated pre-distribution.

CONCLUSIONWhile the rating process is substantially the same for ART vehicles as it is for commercial insurers, there are some key differences in the way these vehicles operate that do get reflected in the rating process of these types of entities. n




PUBLISHED: MARCH 1, 2012

Rating Protected Cell CompaniesThe protected cell company (PCC) is a highly complex and flexible structure that can be utilized in a variety of

ways by multiple users and sponsors. It is used to hold any number or combination of insurance and financial operations, transactions or instruments.

Accordingly, the existing criteria used by A.M. Best to rate operating companies and debt issues also are ap-plicable to PCCs. For example, Alternative Risk Transfer would apply to a single-parent captive program that is housed in a PCC.

Evaluating the financial strength of a protected cell or protected cell company requires a clear understanding of the characteristics of the business that is placed in a PCC, the structure of the PCC, the domicile and the program’s ability to handle the exposures of its sponsoring organization. If the insured organization establishes its own PCC and subdivides its risks into a number of protected cells (PCs) within the PCC, then for all practical purposes it will be treated like a pure captive insurer for rating purposes. Also, if a cell has financial flexibility to access additional funding from its sponsoring organization, this option would be treated on terms equivalent with that of a pure captive operation and can be rated in a comparable fashion.

On the other hand, if an organization places its risks into protected cells that either have no access to additional funding and/or are under the umbrella of another entity’s PCC, or core, then that PC must be reviewed carefully to ensure that the anticipated protection will exist should it be needed. It is important to

know the quantity of risk transferred to the cell, based on both expected and worst-case scenarios. The generally smaller size and limited scope of individual PCs make stress testing for various adverse scenarios more impor-tant, particularly if financial flexibility is limited. Nonetheless, due to the flexibility allowed in the contractual arrangements in establishing a PC, mechanisms can be incorporated to allow for various means to either fund the cell adequately up front for all reasonable circumstances, or to have access to on-demand additional funding from the PCC or from the owner of the cell.

The analytical team will examine the PC’s financial condition, its risk profile, its actuarially determined loss and IBNR reserves, and the credit exposures it has accumulated. In addition, its contractual relationships with other protected cells, if any, and with the core PCC will be reviewed thoroughly. Financial flexibility and the adequacy of the PC’s capital relative to the risks assumed are the critical factors in this analysis. Assuming that designated, individual protected cells exclusively bear all the risks placed with a PCC organization, and that the PCC core does not take any of these underwriting risks, then the analysis will focus on the likelihood of the PCC’s own capital base being eroded from any contractual relationships it has with the member PCs. This could take the form of capital maintenance guarantees, stop-loss agreements or similar arrangements with the PCs. Here too, the contracts need to be examined carefully to determine the extent of these liabilities, as well as the potential for attachment of funds by a regulator or a court of law in the case of any member PC becoming insolvent. In these cases, a financial evaluation of all PCs, which could have a potential material impact on the PCC, needs to be conducted, regardless of whether those PCs are rated individually or not, and the aggregate exposure to the PCC

must be compared with the PCC’s resources to respond to those needs. A financial strength rating on a PCC does not automatically extend to the individual PCs within the protected cell company structure.

To date, there has not been a full test in a court of competent jurisdiction of the legality of the walled-off structure between any two or more cells within a cell company. The pre-ponderance of legal opinion on the legislation, however, comes in on the side of the protected nature of each cell. Lingering issues remain that could have an impact on the protected cell movement. These include tax liability matters; insolvencies of sponsoring companies; and run-off situations.

RELATED REPORTSCriteriaAlternative Risk Transfer

2011 Special Report:U.S. Captive Insurance –Market Review

RATING ANALYSTSSteven M. Chirico CPA, Assistant Vice President+1 (908) 439-2200 Ext. [email protected]

Information Needed to RateA Protected Cell Captive

The information needed will vary based on the particu-lar business/issue placed in the PCC. However, most PCCs would have to provide at least the following information:

1) Audited financials for the PCC and each cell2) Actuarial reports3) Contractual agreements between cells4) Collateral agreements5) Reinsurance agreements6) Cell sponsor/user information


Control and monitoring of any protected cell captive program is crucial to ensure that the expectations for re-sponse to claim incidents will be met, given the capabilities and limitations of the cell captive. There are certain overriding themes and issues that will have an impact on the utility of such a program for the insured and on the financial strength associated with it. Fronting and reinsurance agreements will be examined in detail to deter-mine whether the protected cell program will be impacted adversely by the provisions contained in those agree-ments. Other important considerations include the type of protected cell that is employed, whether open, closed or some variation in between; the contractual relationships among the cells in the program and between them and the core; and the ability of each cell to absorb shock losses or adverse development. Finally, as all domiciles offering venues for protected cells have some variations among their enabling legislative and regulatory provi-sions and their enforcement mechanisms, the regulatory framework under which the protected cell company and the PCs are established will be evaluated and monitored. n

From RACs to SACsThere are a variety of terms used in reference to protected cell companies and similar structures. With more

than 30 different domiciles having promulgated PCC legislation and with the differences among the laws, the multiplicity of terms is not surprising. In addition, the protected cell company may be viewed simply as a variation of the rent-a-captive structure or even a special-purpose vehicle. There also are several other legal structures that have similarities to the PCC. Hence, the multitude of terms, structures and perspectives may cause confusion, even for the experienced ART practitioner. Below are some of the terms and acronyms used:

PCC STRUCTURES:The following list of names and acronyms includes examples of the terminology utilized by various domiciles to refer to actual PCCs.

Incorporated Cell Captive (ICC) (e.g., used in Jersey)

Protected Cell Company (PCC) (e.g., used in many U.S. state domiciles)

Segregated Accounts Company (SAC) (e.g., used in Bermuda)

Segregated Portfolio Company (SPC) (e.g., used in Cayman)

Sponsored Captive Insurance Company (SCIC) (e.g., used in Vermont)

OTHER STRUCTURES:Producer Owned Reinsurance Company (PORC) – Captive reinsurance entity established to provide reinsurance for a producer’s business.

Rent-a-Captive (RAC) – (Re)insurance entity that rents its capital, surplus and license to clients and provides administrative services. Clients’ business is separated by accounting and contractual means.

Special-Purpose Vehicle (SPV) – Corporate entity created to enable a specific business transaction and fulfill a narrow objective.

Special-Purpose Financial Captive (SPFC) – Cor-porate entity created for the securitization of insur-ance risk. It may establish protected cells.

Core

CellCellCellCell

CellCell

CellCellCellCell

CellCell

Core

CellCellCellCell

CellCell

CellCellCellCell

CellCell

Ringfencing in Protected Cell Companies

In other jurisdictions, assets of the cell are ringfenced from both the core and other cells.

In some jurisdictions and certain cell company configurations, creditors can claim against the core.



RELEASED: JUNE 28, 2012 COUNTRY: GERMANY

A.M. Best Upgrades Ratings of Delvag Luftfahrtversicherungs-AG and Delvag Rueckversicherungs-AG

A .M. Best Europe – Rating Services Limited has upgraded the financial strength rating to A (Excellent) from A- (Excellent) and the issuer credit ratings to “a” from “a-” of Delvag Luftfahrtversicherungs-AG (Delvag) and

its subsidiary, Delvag Rueckversicherungs-AG (Delvag Rueck) (both domiciled in Germany). The outlook for all ratings is stable.

The rating upgrades reflect Delvag’s increasingly strong risk-adjusted capi-talisation and consistently excellent operating performance, with the company reporting a combined ratio of 54.1% in 2011 (2010: 72%). The ratings also take into account Delvag’s role as the insurance captive of Lufthansa German Airlines (Lufthansa), its ultimate parent. The ratings of Delvag Rueck reflect its importance to the Delvag group and the profit and loss absorption agreement provided by Delvag.

Delvag’s risk-adjusted capitalisation is expected to remain very strong going forward. A profit and loss agreement in place with Lufthansa limits the potential for earnings retention whilst providing protection for Delvag and Delvag Rueck’s balance sheet. Delvag also benefits from substantial reserve redundancies, which further enhances its capital position. While the insurer is dependent on reinsur-ance to protect its fleet business, the associated credit risk is limited through the use of highly rated reinsurers. The improving trend in Delvag Rueck’s risk-adjusted capitalisation due to increases in its equalisation reserve and silent claims reserves is expected to continue.

A.M. Best expects Delvag to report an excellent pre-tax profit in 2012, albeit somewhat lower than that reported in 2011. Following some positive reserve development, Delvag’s pre-tax profit was up 25% to EUR 21.5 million, translating into a return on equity of 26%. Delvag’s disciplined underwrit-ing and comprehensive reinsurance programme are expected to result in stable and low combined ratios (below 80%) going forward. Earnings are expected to continue to be supported by strong investment returns stemming from the upstreaming of profits from subsidiaries. Delvag Rueck’s operating performance is likely to improve going forward, and A.M. Best expects the company to report a good underwriting profit for 2011 as a result of lower catastrophe claims.

Delvag continues to leverage its aviation and transport experience to write a diversified book of business alongside its core Lufthansa fleet portfolio. Delvag’s gross premiums written are expected to decrease slightly in 2012, driven by a small decrease in its aviation book. Delvag Rueck’s business includes a life and health portfolio written for the Lufthansa group, which mainly comprises employee benefits covers. The reinsurer also writes a book of non-life reinsurance business in the open market (predominantly aviation, property and motor business). Delvag Rueck’s premium income is likely to remain relatively stable going forward.

Positive rating actions are unlikely at this time. Negative rating actions could occur as a result of a deterioration in the credit worthiness of Lufthansa, the ulti-

mate parent. Additionally, a significant deterioration in the risk-adjusted capitalisation and performance of Delvag or Delvag Rueck would also be detrimental to the ratings.

For Best’s Credit Ratings, an overview of the rating process and rating methodologies, please visit http://www.ambest.com/ratings.

In accordance with Regulation (EC) No. 1060/2009, the following is a link to required disclosures: http://www3.ambest.com/emea/ambersdisclosure.pdf.

Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED

ANALYST Charlotte VigierSenior Financial Analyst +(44) 20 7626 [email protected] DobbynAssistant Director+(44) 20 7626 6264 [email protected]

PUBLIC RELATIONSJim Peavy+(908) 439-2200, ext. [email protected] Morrow+(908) 439-2200, ext. [email protected]

European Captive Rating Announcements – Examples


RELEASED: FEBRUARY 23, 2012 COUNTRY: ISLE OF MAN

A.M. Best Affirms Ratings of National Grid Insurance Company (Isle of Man) Limited

A .M. Best Europe – Rating Services Limited has affirmed the financial strength rating of A (Excellent) and issuer credit rating of “a” of National Grid Insurance Company (Isle of Man) Limited (NGIC). The outlook for both

ratings is stable.The ratings of NGIC reflect its strong risk-adjusted capitalisation and comprehensive reinsurance programme.

Also, the ratings outcome incorporates a strong integration within the parent’s, National Grid Plc (NG Plc), risk management structure. An offsetting rating factor for NGIC is its historic volatile underwriting performance.

A.M. Best expects NGIC’s business mix to remain largely unchanged. It is ex-pected that the volume of premiums written will increase again in 2012/2013 in line with inflation.

A.M. Best anticipates that NGIC’s risk-adjusted capitalisation is likely to re-main very strong over the next two years. NGIC is likely to continue to release a significant proportion of its reserves for outstanding claims in the next two years as claims are closed or conservative reserves are reduced and hence will reduce risk-adjusted requirements. A.M. Best considers NGIC’s reinsurance programme as comprehensive and adequate.

A.M. Best believes that there is a certain degree of volatility within the com-pany’s portfolio due to the nature of the risks insured by NGIC. However, a recent increase in premium rates is expected to alleviate the impact of high frequency claims on the company’s performance. For the year ending March 2012 and going forward, NGIC is expected to produce good underwriting results.

Upward rating movements are unlikely in the next two years. Negative rating actions could occur if there were a significant deterioration in

NGIC’s risk-adjusted capitalisation linked to no evidence of support from NG Plc to boost capitalisation. In addition, a significant deterioration in NG Plc’s financial position would likely lead to a review of NGIC’s ratings.




ANALYST Anandi Nangy-KotechaAssociate Director+(44) 207 397 0271 [email protected]

Carlos Wong-Fupuy Senior Director+(44) 207 397 0287 [email protected]




RELEASED: MAY 18, 2012 COUNTRY: GUERNSEY

A.M. Best Affirms Ratings of Jupiter Insurance Limited A .M. Best Europe – Rating Services Limited has affirmed the financial strength rating of A (Excellent) and issuer

credit rating of “a” of Jupiter Insurance Limited (Jupiter) (Guernsey). The outlook for both ratings is stable. Jupiter is a captive of BP p.l.c. (BP), an integrated global oil and gas company.

The ratings reflect Jupiter’s strong risk-adjusted capitalisation and good underwriting performance. An offset-ting factor for the ratings remains Jupiter’s high level of risk retention, as well as its concentrated investment portfolio, which is held mostly with its parent, BP.

Jupiter’s risk-adjusted capitalisation deteriorated in 2011, following an increase of 71% in net premiums written to USD 1,948 million (2010: USD 1,140 million), which was largely precipitated by an increase in the underwriting limit. Over the past few years, risk retention per event has increased significantly from USD 700 million in 2010 to USD 1,500 million as at 1 April 2011. Nevertheless, risk-adjusted capitalisation is expected to remain at a strong level over the medium term.

In 2011, the company reported an improvement in its technical performance with an underwriting profit of USD 1,680 million (2010: USD 461 million). This result was largely driven by the increase in earned premium and the reduction in net claims incurred, as a result of a lack of large claims during the year. Given the nature of business underwritten, technical results can be volatile year on year. The significant growth in Jupiter’s underwriting portfolio in recent years could potentially contribute to the underlying volatility inherent in the lines of business underwritten.

Jupiter has over 99% of its asset base (2011: USD 7,952 million) invested in its parent via two discount notes of three months and 30-day duration. Despite Jupi-ter’s lack of reinsurance protection and large underwriting limit, A.M. Best consid-ers that the company’s capital base could adequately absorb a small number of

major claims. Following the Gulf of Mexico oil spill in 2010, improvements in BP’s risk management and safety are ongoing.

These improvements could potentially have a positive impact on Jupiter’s claims experience in the long term.Upward rating actions are unlikely at present. Downward rating actions may occur if there were a significant deterioration in the company’s risk-adjusted

capitalisation and/or a material increase in the retention levels on Jupiter’s fronted programme (COMET). Ad-ditionally, any deterioration in the credit rating of BP could lead to negative actions being taken on Jupiter’s cur-rent rating.




ANALYST Grace Panti-AmoaAssociate Financial Analyst+(44) 20 7397 [email protected] DobbynAssistant Director+(44) 20 7626 6264 [email protected]




RELEASED: DECEMBER 8, 2011 COUNTRY: LUXEMBOURG

A.M. Best Assigns Ratings to Builders’ Credit Reinsurance Company S.A.

A .M. Best Europe – Rating Services Limited has assigned a financial strength rating of A- (Excellent) and an is-suer credit rating of “a-” to Builders’ Credit Reinsurance Company S.A. (BCRe) (Luxembourg), the reinsurance

arm of Hochtief A.G., a large Germany-based construction company. Grupo ACS (Spain) has a majority sharehold-ing in the group. The outlook assigned to both ratings is stable..

The ratings reflect BCRe’s strong risk-adjusted capitalisation and a knowledgeable and proactive in-house man-agement team that is expected to partially mitigate the volatility inherent to its book of business based on U.S.

casualty and surety lines. BCRe provides reinsurance cover on risks emanating from group business, pre-

dominantly in the Americas. This also can include subcontractors that are required to adhere to the group’s strict safety guidelines and maintain a good financial track record. The company writes workers compensation, general liability and subcontractors’ default insurance, and, to a minor extent, surety, auto liability and builders’ risk. Going forward, A.M. Best expects BCRe to slowly expand its busi-ness portfolio to other regions where the group has a presence (i.e., Australia and Europe). During 2010, Contractors’ Casualty and Surety Re (CCSRe), a sister com-pany managed by the same team, was transferred to BCRe, leading to operational efficiencies and an expectation of a more stable performance.

A.M. Best believes BCRe has a strong risk-adjusted capitalisation, underpinned by a regulatory requirement of building up equalization reserves and a compre-hensive reinsurance programme, which is expected to remain supportive of its business plans in the coming two years. Despite a large exposure to off-balance sheet items such as letters of credit, and the potential for volatile underwriting performance, the capitalisation remains sound.

BCRe’s senior management team has managed to significantly grow the book of business over the past decade, focusing on overall profitability (despite the volatile nature of the business lines) and contributing toward the group’s profits. The company is also responding to the recent regulatory require-ments of Solvency II by stepping up the formalization of its in-house processes and dedicating expert staff to the development of a supportive framework.




ANALYST Anandi Nangy KotechaAssociate Director, Analytics+(44) 20 7397 0271 [email protected]

Carlos Wong-FupuySenior Director, Analytics+(44) 20 7397 0287 [email protected]




Sample Credit ReportREPORT REVISION DATE: AUGUST 9, 2012COUNTRY: IRELAND

AMB CREDIT REPORT - INSURANCE PROFESSIONAL FOR

ENI INSURANCE LIMITED RATING RATIONALE

Rating Rationale: The ratings of Eni Insurance Limited (EIL) reflect its strong risk-adjusted capitalisation, comprehensive reinsurance programme and overall strong financial performance. Also, the ratings incorporate a strong integration within the parent’s risk management structure. An offsetting factor is EIL’s cur-rent material fixed income exposure to peripheral European sovereign bonds.

EIL is the sole captive of Eni S.p.A. (Italy) (ENI), an Italian multinational gas and oil company with operations in more than 80 countries. EIL was formed in June 2006 and writes the industrial risks of its parent with fire/property damage being the main line (77% of gross written premiums in 2011), whereas 66% of GWP is written outside of Italy. In January 2007, industrial risks written by the ceased captive Padana Assicurazioni S.p.A (Padana) were transferred to EIL. This portfolio is expected to continue to run off for another few years.

Strong risk-adjusted capitalisation — A.M. Best expects risk-adjusted capitalisation to remain strong over the next two years. The current strong level of risk-adjusted capitalisation is partially a result of earnings retention over the past five years. Despite the introduction this year of large dividend payments to its parent, A.M. Best believes that risk-adjusted capitalisation is expected to remain supportive of EIL’s ratings. An offsetting factor is the fact that about a third of the fixed income portfolio is invested in peripheral European sovereign bonds. A.M. Best will moni-tor this situation closely, and any material deterioration of these exposures may lead to a negative rating action.

Comprehensive reinsurance programme — A.M. Best considers EIL’s reinsurance programme as comprehensive and provides good protection to its balance sheet. EIL’s function as a captive is to absorb attritional losses of ENI on its main lines of business (property damage/construction & engineering and third-party liability). EIL’s reinsurance programme benefits from a strong panel of reinsurers. The main programme covering fire/property damage has a maximum retention for EIL of USD 50 million per event.

Strong overall financial performance — EIL’s disciplined underwriting and excellent reinsurance programme have ensured historic good underwriting results (five-year average combined ratio: 66%). Going forward, an im-proved operating expense ratio is believed to underline this good performance. Stable investment returns stem-ming from a liquid investment portfolio are anticipated to contribute to a good pre-tax profit in 2012. Investments are highly liquid with 33% invested in cash, 33% bonds and 34% intercompany loan.

Best’s Financial Strength Rating: A Outlook: Stable Best’s Issuer Credit Rating: a Outlook: StableBest’s Financial Size Category: IX

RATING HISTORY Date Best’s FSR Best’s ICR

07/30/12 A a

09/19/08 NR NR

BUSINESS PROFILEEni Insurance (Ireland) Limited (EIL) is the sole captive insurer of Eni S.p.A. (ENI), an Italian multinational gas

and oil company with operations in more than 80 countries that generates revenues of EUR 95 billion. EIL was established in July 2006 with the objective to contain and stabilise the insurance costs of ENI’s business units. EIL provides insurance cover mainly for industrial risks that are typical for the oil industry, and it insures on a direct or indirect basis only the risks related to the ENI Group. Also, EIL accepts construction and erection risks.

In January 2007, Padana Assicurazioni S.p.A. (Padana), an ENI insurance company, transferred its industrial risks portfolio to EIL. This transferred sub-portfolio does not contain any policy written after 30 June 2006. EIL’s func-tion is to both reduce insurance costs for ENI and absorb ENI’s insurable attritional losses. In addition, it enables ENI to purchase adequate reinsurance cover for the company’s catastrophic risks. A.M. Best does not anticipate any changes to the business profile for EIL in the immediate future.

EIL is based in Ireland (Dublin) as this jurisdiction has a number of features that the company considers to be at-tractive; such as a stable business environment as well as a regulator with an open door policy.

EIL’s premium income was fairly stable over recent years (five-year average: EUR 196 million) with only 2009

Operating Company Non-Life Ultimate Parent: Eni S.p.A.AMB#: 090115Ultimate Parent#: 052210


experiencing a significant drop in premium income (2009: EUR 180 million) due to the appreciation of the dollar and the cessation of business in Egypt. Major movements in foreign exchange rates can cause a certain degree of volatility in premium income due to the fact that ENI carries out business mainly in US dollars, pounds sterling and Norwegian kro-ner but reports in euros. Going forward, premium income is expected to drop in 2012 by around 12% to about EUR 182 million. This is mainly due to the sale of group companies which will reduce ENI’s asset size and policies written.

In 2011, EIL’s main lines of business, by gross written premium (GWP), were predominantly fire/property damage (77%) and general liability (13%). The remaining business was split between marine & transit (7.5%) and other, which includes primarily business interruption (2.5%). Going forward, the premium split is expected to be similar. EIL generates about 59% of its business in Europe, whereas Italy contributes about 34%. The remaining 41% is written outside of Europe. In Europe, all business is written directly, while jurisdictions outside of Europe require EIL to use fronting companies.

RISK MANAGEMENTEIL has a corporate governance structure in place with an audit and risk management committee set up that

are closely linked to the respective departments in ENI Group. In addition, it can be noted that EIL’s strategy is set by the board of directors.

Although the company has a prepared set of guidelines for its operations a weakness at the execution level was noted when the company chose to pursue a more flexible approach in light of the high investment volatility that is accompanying the sovereign debt issues in Europe. In October 2011, EIL’s investment guidelines, which demanded a credit quality for individual securities of Aa3/AA-, were adjusted to the group investment guidelines of Baa2/BBB. However, the reliability of its corporate governance was partially undermined when a deliberate decision was taken by EIL not to sell sovereign bonds which dropped below the qualifying rating of Baa2/BBB. Although A.M. Best understands the financial drivers behind this deliberate decision, it will continue to monitor any deviation of EIL’s policy execution against guidelines on an evolving financial market framework.

EIL is expected to be Solvency II compliant based on the QIS5 results and fully complies with Irish regulatory requirements.

OPERATING PERFORMANCEOperating Results: EIL’s financial performance has been strong since its inception in June 2006, despite

a reduction of pre-tax profit of 8.1% to EUR 31.7 million at year-end 2011. This equated to a return on equity (ROE) of 9.3% compared to 11.3% in 2010. The strong performance was predominantly driven by EIL’s con-tinuously disciplined underwriting and complemented by stable investment results.

Underwriting Results: EIL has historically produced a strong underwriting performance with a five-year average combined ratio of 66%. This was achieved due to disciplined underwriting combined with a comprehensive reinsurance programme, which minimises the company’s net exposure to USD 50 million per event on property damage risks.

EIL produced an underwriting profit in 2011 of EUR 23.3 million (a decline of 25% from 2010) which equals a combined ratio of 58.3% (2010: 67.6%). This was mainly the result of favourable claims experience as well as the release of prior year reserves primarily originating from fire claims that have been closed since or have been reduced due to conservative reserves set in the past. The reduction in underwriting profit in 2011 com-pared to the previous year occurred as a result of lower earned premiums.

EIL’s efficient captive structure has ensured a low level of management expenses, with the company’s expense ratio being about 12% on a five-year average. Going forward, it is expected that the expense ratio will drop signifi-cantly to around 5% as a result of the full amortisation of acquisition costs that were incurred in 2006 in relation to the transfer of contracts acquired from the Padana portfolio. The amount was fully amortised during this year.

Going forward, in 2012 and 2013 A.M. Best expects EIL to maintain a very good underwriting performance underlined by an improved expense ratio leading to combined ratios of around or below 60% and underwrit-ing results of approximately EUR 50 million.

Investment Results: EIL has a generally conservative and liquid investment portfolio with investments spread between sovereign bonds (32%), cash and cash equivalents (34%) and intragroup loans (34%). However, due to changes in economic conditions and accompanying deterioration in credit quality, EIL’s fixed income portfolio is currently exposed to 36% of peripheral European sovereign bonds which A.M. Best believes to be high given the macroeconomic turbulence in those countries. The general credit quality of the fixed income portfolio as of June 2012 is reasonably good with 85% above investment grade of which 64% is rated A- or above. However, 15% of sovereign bonds are currently rated below investment grade and are intended to be held until maturity.

In 2011, a stable investment return (including realised and unrealised gains) of EUR 8.4 million was achieved, which was substantially stronger than the EUR 3.3 million achieved in 2010.

Overall, it is noted that EIL’s investment portfolio is very liquid with a ratio of liquid assets to total assets of 78% in 2011. Also, in spite of a low investment yield, with a five-year average of 2%, it is nevertheless contributing to EIL’s good overall financial performance with an average net investment income ratio of 12%.

For 2012, A.M. Best is anticipating that the asset allocation will remain similar and that a low but stable in-vestment return within the range of a five-year average of 2% will be achieved.

Sample Credit Report



BALANCE SHEET STRENGTHCapitalization: In A.M. Best’s opinion, the strong risk-adjusted capital position is expected to remain support-

ive of the current ratings and will continue to strengthen further over 2012 and 2013, despite the introduction of variable discretionary dividend payments of up to 100% of net profit this year. This is mainly as a result of an expected decrease in net premiums in 2012, accompanied by a largely unchanged business mix, as well as the current strong capital base, which is partially a result of earnings retention over the past five years.

A.M. Best believes that EIL’s reinsurance programme is also a key in capping the impact of any large losses. Additionally, the excellent credit quality of the majority of EIL’s reinsurance panel contributes to the robust-ness of the captive’s capitalisation. EIL’s financial flexibility benefits from the availability of a loan facility of up to USD 150 million provided by ENI Group, if needed. The parent also issues guarantees in favor of EIL when required, expressing its support for the company.

Loss Reserves: A.M. Best believes that EIL has a conservative reserving approach, which is likely to be maintained over the next two years. EIL’s reserves are independently assessed and reviewed by external actu-aries on an annual basis, which were of the opinion that the reserves were adequate at year-end 2011.

Liquidity: A.M. Best expects the current liquidity ratio (total investments to net liabilities) for EIL in the coming two years to be very good and in excess of 120%. The terms of EIL’s loans to ENI Group specify that EIL can call in the loans at any time if requested by the Irish regulator. A.M. Best believes that the investment portfolio (with its mix of cash deposits, loans to the group and bond portfolio) enables EIL to meet its day-to-day liquidity requirements. However, a certain element of liquidity risk regarding the bond portfolio is existent as 35% is exposed to peripheral European sovereign bonds, whereas the remaining 65% of the bond portfolio is rated A- or higher as at the year-end 2011.

An independent audit of the company’s affairs through December 31, 2011, was conducted by Ernst & Young.

Source of Information: Company Financial Statement Summarized Accounts as of December 31, 2011US $ per Local Currency Unit 1.295 = 1 Euro (EUR)

STATEMENT OF INCOME 12/31/2011 12/31/2011 EUR(000) USD(000) Technical account:

Direct premiums 197,788 256,135

Gross premiums written 197,788 256,135

Reinsurance ceded 74,573 96,572

Net premiums written 123,215 159,563

Increase/(decrease) in gross unearned premiums 24,185 31,320

Increase/(decrease) in reinsurers share unearned premiums -1,434 -1,857

Net premiums earned 97,596 126,387

Total underwriting income 97,596 126,387

Net claims paid 85,143 110,260

Net increase/(decrease) in claims provision -39,855 -51,612

Net claims incurred 45,288 58,648

Management expenses 2,897 3,752

Acquisition expenses 11,760 15,229

Net operating expenses 14,657 18,981

Other technical expenses 14,320 18,544

Total underwriting expenses 74,265 96,173

Balance on technical account 23,331 30,214

Non-technical account: Net investment income 11,485 14,873

Unrealised capital gains/(losses) -5,331 -6,904

STATEMENT OF INCOME (continued) 12/31/2011 12/31/2011 EUR(000) USD(000)

Exchange gains/(losses) 2,269 2,938

Profit/(loss) before tax 31,754 41,121

Taxation 4,224 5,470

Profit/(loss) after tax 27,530 35,651

Retained Profit/(loss) for the financial year 27,530 35,651

Retained Profit/(loss) brought forward 183,324 237,405

Retained Profit/(loss) carried forward 210,854 273,056

MOVEMENT IN CAPITAL & SURPLUS 12/31/2011 12/31/2011 EUR(000) USD(000)

Capital & surplus brought forward 283,324 366,905

Profit or loss for the year 27,530 35,651

Total change in capital & surplus 27,530 35,651

Capital & surplus carried forward 310,854 402,556

ASSETS 12/31/2011 12/31/2011 12/31/2011 EUR(000) % of total USD(000)

Cash & deposits with credit institutions 462,340 52.7 598,730

Bonds & other fixed interest securities 219,985 25.1 284,881

Liquid assets 682,325 77.7 883,611


MANAGEMENTEIL plays a vital role in ENI’s risk management framework. In A.M. Best’s opinion, EIL benefits from a management team with extensive experience in insurance and risk management. The board of directors is composed of two independent directors and three directors from the ENI group.

OfficersGeneral Manager: Luigi Marnetto Secretary: MASON HAYES & CURRAN (Outsourced function)

DirectorsBrendan CroweLuigi Marnetto (General Manager)Fabrizio Mastrantonio (Chairman) John PerhamAngelo Vanelli

ANALYSIS OF GROSS PREMIUMS WRITTEN EUR (000) 2011 EUR (000) 2010 EUR (000) 2009 EUR (000) 2008 EUR (000) 2007

Fire 152,394 151,877 147,851 159,379 170,122

Liability 25,532 33,847 24,465 24,686 27,838

Marine, aviation & trans 14,909 5,112 5,449 9,131 7,123

Non-life 4,953 2,213 2,222 4,756 4,403

Total non-life 197,788 193,049 179,987 197,952 209,486

REINSURANCEAs a property writer operating in Panama, ASSA Compania de Seguros S.A. is susceptible to catastrophic losses, with earthquakes being the largest potential peril. The company utilizes both proportional and non-proportional reinsur-ance contracts and catastrophe coverage to protect against large and aggregate losses. The excess of loss catastrophe reinsurance coverage is $95 million excess $10 million with a maximum net retention per risk of $2 million. Major re-insurers used by the company at the latest year-end include Munich Re, SCOR Reinsurance Company, and QBE Europe.

ASSETS (continued) 12/31/2011 12/31/2011 12/31/2011 EUR(000) % of total USD(000)

Inter-company investments 11 0.0 14

Total investments 682,336 77.7 883,625

Reinsurers’ share of technical reserves -

unearned premiums 164 0.0 212

Reinsurers’ share of technical reserves - claims 89,649 10.2 116,095

Total reinsurers share of technical reserves 89,813 10.2 116,308

Insurance/reinsurance debtors 23,573 2.7 30,527

Inter-company debtors 39,612 4.5 51,298

Other debtors 36,607 4.2 47,406

Total debtors 99,792 11.4 129,231

Fixed assets 123 0.0 159

Prepayments & accrued income 5,831 0.7 7,551

Total assets 877,895 100.0 1,136,874

LIABILITIES 12/31/2011 12/31/2011 12/31/2011 EUR(000) % of total USD(000)

Capital 100,000 11.4 129,500

Paid-up capital 100,000 11.4 129,500

Retained earnings 210,854 24.0 273,056

Capital & surplus 310,854 35.4 402,556

Gross provision for unearned premiums 63,771 7.3 82,583

Gross provision for outstanding claims 399,983 45.6 517,978

Total gross technical reserves 463,754 52.8 600,561

Insurance/reinsurance creditors 3,260 0.4 4,222

Other creditors 4,347 0.5 5,629

Total creditors 7,607 0.9 9,851

Other liabilities 95,680 10.9 123,906

Total liabilities & surplus 877,895 100.0 1,136,874




BALANCE SHEET ITEMS EUR (000) 2011 EUR (000) 2010 EUR (000) 2009 EUR (000) 2008 EUR (000) 2007

Liquid assets 682,325 637,496 615,712 543,498 445,265

Total investments 682,336 637,507 615,722 543,509 445,275

Total assets 877,895 858,576 913,213 764,715 767,384

Total gross technical reserves 463,754 483,966 553,120 421,272 564,615

Net technical reserves 373,941 385,520 382,291 342,275 419,283

Total liabilities 567,041 575,252 660,093 526,016 600,242

Capital & surplus 310,854 283,324 253,120 238,699 167,142

INCOME STATEMENT ITEMS EUR (000) 2011 EUR (000) 2010 EUR (000) 2009 EUR (000) 2008 EUR (000) 2007

Gross premiums written 197,788 193,049 179,987 197,952 209,486

Net premiums written 123,215 129,947 109,811 145,328 141,886

Balance on technical account(s) 23,331 31,197 1,055 53,174 46,839

Profit/(loss) before tax 31,754 34,520 16,547 80,421 68,150

Profit/(loss) after tax 27,530 30,204 14,421 71,557 58,456

LIQUIDITY RATIOS (%) 2011 2010 2009 2008 2007

Total debtors to total assets 11.4 12.6 11.4 14.2 17.7

Liquid assets to net technical reserves 182.5 165.4 161.1 158.8 106.2

Liquid assets to total liabilities 120.3 110.8 93.3 103.3 74.2

Total investments to total liabilities 120.3 110.8 93.3 103.3 74.2

LEVERAGE RATIOS (%) 2011 2010 2009 2008 2007

Net premiums written to capital & surplus 39.6 45.9 43.4 60.9 84.9

Net technical reserves to capital & surplus 120.3 136.1 151.0 143.4 250.9

Gross premiums written to capital & surplus 63.6 68.1 71.1 82.9 125.3

Gross technical reserves to capital & surplus 149.2 170.8 218.5 176.5 337.8

Total debtors to capital & surplus 32.1 38.1 41.0 45.4 81.2

Total liabilities to capital & surplus 182.4 203.0 260.8 220.4 359.1

PROFITABILITY RATIOS (%) 2011 2010 2009 2008 2007

Loss ratio 46.4 54.8 84.5 48.8 32.6

Operating expense ratio 11.9 12.8 12.3 11.5 13.2

Combined ratio 58.3 67.6 96.9 60.3 45.9

Other technical expense or (income) ratio 11.6 5.8 2.7 1.7 8.5

Net investment income ratio 11.8 8.9 9.3 13.8 14.6

Operating ratio 58.2 64.5 90.4 48.2 39.8

Return on net premiums written 22.3 23.2 13.1 49.2 41.2

Return on total assets 3.2 3.4 1.7 9.3 12.8

Return on capital & surplus 9.3 11.3 5.9 35.3 42.4

Visit www.ambest.com/ratings/notice for additional information or www.ambest.com/terms.html for details on the Terms of Use.

AMB Credit Report - Insurance Professional BCR08092012



A Selection of Captives Currently Rated by A.M. BestCaptive Location Formed Parent Sector

Rating

OutlookFSR ICR

Builders’ Credit Re Luxembourg 2000 Hochtief (Germany) Construction A- a- stable

Casiopea Re Luxembourg 1988 Telefonica (Spain) Telecommunications A- a- stable

Delvag Germany 1924 Lufthansa (Germany) Airlines A a stable

Electric Insurance Ireland Ireland 2005 General Electric (US) Conglomerate A a stable

ENI Insurance Ireland 2006 ENI (Italy) Energy A A stable

Jupiter Guernsey 1994 BP (UK) Energy A a stable

National Grid Ins Isle of Man 1987 National Grid (UK) Utility A a stable

Nissan Global Re Bermuda 2005 Nissan Motor Co (Japan) Automobile A- a- stable

Park Assurance USA (VT) 2003 JP Morgan Chase (US) Banking A A stable

PMG Assurance Bermuda 1975 Sony (Japan) Electronics A a negative

Rembrandt Bermuda 2000 Vitol (Netherlands) Commodities A A stable

Risk Reinsurance Cayman Is 2001 Transpower (NZ) Utility A+ aa- stable

Transmonde Services Bermuda 1978 SGS (Switzerland) Services A- a- stable

FSR = Financial Strength ratingICR = Issuer Credit ratingAs at 17 September 2012Source: Statement File Global

Captive Ratings


Appendices

Guide to Best’s Financial Strength RatingsGUIDE TO BEST’S FINANCIAL STRENGTH RATINGSA Best’s Financial Strength Rating is an independent opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations. The rating is based on a comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and business profile.

Financial Strength RatingsRating Descriptor Definition

Sec

ure

A++, A+ Superior Assigned to companies that have, in our opinion, a superior ability to meet their ongoing insurance obli-gations.

A, A- Excellent Assigned to companies that have, in our opinion, an excellent ability to meet their ongoing insurance obligations.

B++, B+ Good Assigned to companies that have, in our opinion, a good ability to meet their ongoing insurance obliga-tions.

Vuln

erab

le

B, B- Fair Assigned to companies that have, in our opinion, a fair ability to meet their ongoing insurance obliga-tions. Financial strength is vulnerable to adverse changes in underwriting and economic conditions.

C++, C+ Marginal Assigned to companies that have, in our opinion, a marginal ability to meet their ongoing insurance obli-gations. Financial strength is vulnerable to adverse changes in underwriting and economic conditions.

C, C- Weak Assigned to companies that have, in our opinion, a weak ability to meet their ongoing insurance obliga-tions. Financial strength is very vulnerable to adverse changes in underwriting and economic conditions.

D Poor Assigned to companies that have, in our opinion, a poor ability to meet their ongoing insurance obliga-tions. Financial strength is extremely vulnerable to adverse changes in underwriting and economic con-ditions.

EUnder Regulatory Supervision

Assigned to companies (and possibly their subsidiaries/affiliates) placed under a significant form of regulatory supervision, control or restraint - including cease and desist orders, conservatorship or reha-bilitation, but not liquidation - that prevents conduct of normal, ongoing insurance operations.

F In Liquidation Assigned to companies placed in liquidation by a court of law or by a forced liquidation.

S Suspended Assigned to rated companies when sudden and significant events affect their balance sheet strength or operating performance and rating implications cannot be evaluated due to a lack of timely or adequate information.

Positive Indicates possible rating upgrade due to favorable financial/market trends relative to the current rating level.

Negative Indicates possible rating downgrade due to unfavorable financial/market trends relative to the current rating level.

Stable Indicates low likelihood of a rating change due to stable financial/market trends.

Rating ModifiersModifier Descriptor Definition

u Under Review Indicates the rating may change in the near term, typically within six months. Generally is event driven, with positive, negative or developing implications.

pd Public Data Indicates rating assigned to insurer that chose not to participate in A.M. Best’s interactive rating process. (Discontinued in 2010)

s Syndicate Indicates rating assigned to a Lloyd’s syndicate.

Not Rated Designation

NR: Assigned to companies that are not rated by A.M. Best.

Rating DisclosureA Best’s Financial Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance obligations. The ratings are not assigned to specific insurance policies or contracts and do not address any other risk, including, but not limited to, an insurer’s claims-payment policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. A Best’s Financial Strength Rating is not a recommendation to purchase, hold or terminate any insurance policy, contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. In arriving at a rating decision, A.M. Best relies on third-party audited financial data and/or other information provided to it. While this information is believed to be reliable, A.M. Best does not independently verify the accuracy or reliability of the information. For additional details, see A.M. Best’s Terms of Use at www.ambest.com.

Best’s Financial Strength Ratings are distributed via press release and/or the A.M. Best Web site at www.ambest.com and are published in the Credit Rating Actions section of BestWeek®. Best’s Financial Strength Ratings are proprietary and may not be reproduced without permission.Copyright © 2012 by A.M. Best Company, Inc. Version 021712

OutlooksIndicates potential direction of a Financial Strength Rating over an intermediate term, generally defined as 12 to 36 months.


Guide to Best’s Issuer Credit RatingsGuide to Best’s issuer credit ratinGsA Best’s Issuer Credit Rating assigned to an insurance company is an independent opinion of an insurer’s financial strength and ability to meet its ongoing senior financial obligations. It is based on a comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and business profile.

rating descriptor definition

inve

stm

ent

Gra

de aaa Exceptional Assigned to insurance companies that have, in our opinion, an exceptional ability to meet their ongoing senior

financial obligations.

aa Superior Assigned to insurance companies that have, in our opinion, a superior ability to meet their ongoing senior financial obligations.

a Excellent Assigned to insurance companies that have, in our opinion, an excellent ability to meet their ongoing senior financial obligations.

bbb Good Assigned to insurance companies that have, in our opinion, a good ability to meet their ongoing senior financial obligations.

no

n-in

vest

men

t G

rad

e bb Fair Assigned to insurance companies that have, in our opinion, a fair ability to meet their ongoing senior financial obligations. Financial strength is vulnerable to adverse changes in underwriting and economic conditions.

b Marginal Assigned to insurance companies that have, in our opinion, a marginal ability to meet their ongoing senior financial obligations. Financial strength is vulnerable to adverse changes in underwriting and economic conditions.

ccc, cc Weak Assigned to insurance companies that have, in our opinion, a weak ability to meet their ongoing senior financial obligations. Financial strength is very vulnerable to adverse changes in underwriting and economic conditions.

c Poor Assigned to insurance companies that have, in our opinion, a poor ability to meet their ongoing senior financial obligations. Financial strength is extremely vulnerable to adverse changes in underwriting and economic conditions.

rsRegulatory Supervision/Liquidation

Assigned to insurers placed under a significant form of regulatory supervision, control or restraint - including cease and desist orders, conservatorship or rehabilitation that prevents conduct of normal, ongoing insurance operations, or in liquidation by a court of law or by a forced liquidation.

Ratings from “aa” to “ccc” may be enhanced with a “+” (plus) or “-” (minus) to indicate whether credit quality is near the top or bottom of a category.

not rated designationThe Not Rated (NR) designation may be assigned to issuers that are not rated.

rating disclosureWhen assigned to an insurance company the Issuer Credit Rating opinion addresses the relative ability of an insurer to meet its ongoing senior financial obligations. The rating is not assigned to specific insurance policies or contracts, or any other financial obligations, and does not address any other risk, including, but not limited to, liquidity risk, market value risk, an insurer’s claims-payment policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. The Insurer Issuer Credit Rating is not a recommendation to purchase, hold or terminate any insurance policy, contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract, or any other financial obligation for a specific purpose or purchaser.

Best’s Issuer Credit Ratings are distributed via press release and/or the A.M. Best Web site at www.ambest.com and are published in the Credit Rating Actions section of BestWeek®. Best’s Credit Ratings are proprietary and may not be reproduced without permission.Copyright © 2012 by A.M. Best Company, Inc. Version 061212

rating outlooksIndicates the potential direction of a Credit Rating over an intermediate term, generally defined as 12 to 36 months.

Positive Indicates possible rating upgrade due to favorable financial/market trends relative to the current rating level.

Negative Indicates possible rating downgrade due to unfavorable financial/market trends relative to the current rating level.

Stable Indicates low likelihood of a rating change due to stable financial/market trends.

rating ModifiersModifier descriptor definition

u Under Review Indicates the rating may change in the near term, typically within six months. Generally is event driven, with positive, negative or developing implications.

pd Public Data Indicates rating assigned to a company that chose not to participate in A.M. Best’s interactive rating process. (Discontinued in 2010)

Appendices


Contact Us

For more information about A.M. Best’s ratings of captives, please contact:

NICK CHARTERIS-BLACKManaging Director, Market Development – EMEA

+44 (0)20 7397 0284 [email protected]

CLIVE THURSBYSenior Director, Market Development – EMEA & South Asia

+44 (0)20 7397 0279 [email protected]

Market Development


Notes

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518

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Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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