Sunday, April 21, 2024

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AM Best affirms ratings for BP’s Guernsey and Vermont captives

AM Best has affirmed the financial strength ratings of ‘A-’ (excellent) and the long-term issuer credit ratings of “a-” (excellent) of Guernsey-domiciled Jupiter Insurance Limited, and Vermont-domiciled Saturn Insurance Inc.

Saturn and Jupiter are pure captives owned by energy giant BP Plc with Jupiter being the company’s principal captive providing “substantial” reinsurance to Saturn.

Jupiter does not purchase any outward reinsurance cover, supporting BP’s current strategy to retain risks when possible.

The company’s principal captive’s risks consist mainly of onshore and offshore property damage and business interruption.

Saturn’s risks include terrorism, accessing the United States’ federal backstop under the Terrorism Risk Insurance Act (TRIA), property damage and business interruption, workers’ compensation, environmental protection, and certificate of financial responsibility cover.

The ratings reflect Jupiter’s balance sheet strength, which AM Best assesses as very strong, and Saturn’s balance sheet strength, which AM Best assesses as strong.

Jupiter and Saturn’s balance sheet strength is underpinned by their strongest level of risk-adjusted capitalisation, as measured by AM Best’s capital adequacy ratio (BCAR).

A partially offsetting factor for Jupiter includes its concentrated investment portfolio, as well as its high underwriting limits provided to several facilities, which could result in volatility in the captive’s solvency position in the event of very large losses.

Saturn’s partially offsetting rating factors include the captive’s concentrated investment portfolio and dependence on reinsurance to protect its balance sheet strength against high-severity, low-frequency losses.

The ratings also reflect Saturn’s small capital base, which exposes its risk-adjusted capitalisation to potential volatility.

Jupiter has reported strong operating results over the past five years, demonstrated by a weighted average return-on-equity ratio of 8.1%, while Saturn has a track record of solid underwriting profitability, as demonstrated by a five-year (2018-2022) weighted average combined ratio of 40.9%.

Jupiter’s operating performance is subject to volatility from exposure to high-severity, low-frequency losses in conjunction with the large line sizes offered, relative to the captive’s premium.

This was evident in 2022, when a fire in one of BP’s refineries in Toledo drove the combined ratio up to 108.9%, compared with a five-year weighted average combined ratio of 20.2%.

Declining insured values due to BP’s divestments, lower oil prices and soft market conditions have put downward pressure on Jupiter and Saturn’s premium income in recent years, except in 2022 when some of these trends reversed.