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Europe’s captive market has been rejuvenated – Paul Eaton

Luke Harrison
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Europe’s captive market has been rejuvenated – Paul Eaton

The European captive market has been rejuvenated over the last four years, having “levelled off” during much of the 2010s, according to Paul Eaton, CEO of Artex International.

The captive manager, owned by Arthur J. Gallagher & Co, appointed Eaton as its International CEO at the start of the year, with Nick Heys transitioning to the role of chairman of the company.

Eaton spoke to Captive Intelligence in an exclusive interview following Artex’s acquisition of Irish captive manager Allied Risk Management in May.

“We were really nicely positioned with our business development team and received a large amount of inquiries and proceeded with a good number of formations,” he said.

“It’s been great to see such a rejuvenation in the captive industry. I think most practitioners in Europe would agree that captive formations had levelled off during the 2010s.”

Eaton highlighted that new business is deriving from a number of regions.

“Historically, the UK has been the natural home market for Guernsey, and we had some interesting formations from that region, but also from EMEA and Australasia,” he said.

“We’ve had success in those regions before, but particularly in relation to Australia, we saw some strong demand for cell business as a result of the distressed market.”

He noted that a lot the new formations were single-parent structures.

“Though the majority of these were more interested in the cell option, which is not a huge surprise given the cost and operating efficiencies cells provide,” he said.

“We have also seen a number of limited company formations.”

As Artex International CEO, Eaton serves on the company’s executive leadership team and drives Artex’s strategy on talent, organic growth, M&A, and operational efficiency for its international operations, including Guernsey, Gibraltar, Malta, London and Singapore.

“It is a wonderfully challenging role, which I’m really enjoying,” he added.

“Having worked for a long time with my predecessor Nick Heys, I felt pretty well placed given the variety of roles I’d previously covered from business development and account management to running parts of the European business.”

Lines of business

Eaton revealed there has been an expansion in the lines of business clients are looking to write though captives, with Artex seeing a growing number of cyber and D&O enquiries, for example.

“The other area where we’ve had some impact in the past, and where we’re seeing renewed interest is employee benefits,” he said.

“It’s exciting to think of these new coverage options that clients are considering for their captives, and I guess that’s been partly brought about by the more challenging market conditions and also a desire to diversify captive retained risk.”

He highlighted that cyber in particular can generate substantial losses, so it is important that clients balance the ability to retain risk within their captive, while also accessing risk transfer options in order to prevent a disproportionate net risk being retained in the captive.

“Cyber as a coverage for captives is still a fairly new and developing market,” he added.

“I believe clients will start to use their captives more to incubate risk and to grow risk retention in this class.”

Group captives

Eaton highlighted that there are some notable distinctions between the US and European markets when it comes to attitudes towards group captives.

“Generally speaking, the US premium spend is much higher, there’s much more exposure to catastrophe risk, and importantly I think culturally, risk sharing is more acceptable than it has been in Europe,” he said.

He noted that Artex has received a number of inquiries over the years about group captive formations in Europe “and we’ve worked on potential solutions to show how we could manage risk more effectively”.

“In many cases I believe what holds this back is the willingness of people to collaborate and needing to convince a number of stakeholders that some risk sharing doesn’t mean that you’re sharing any of your trade secrets or your USPs, so perhaps there is a cultural issue,” he said.

Singapore

Eaton noted that although there has not been much activity of late, Artex has an interest in working with clients who currently have captives in Singapore or are wanting to launch new captives in the region.

“From our perspective, it makes sense for us to have an offering where Gallagher has a presence as we can work alongside each other as sister companies,” he said.

“Gallagher has a strong presence in Australia, New Zealand and a growing presence in Asia, so, we think it’s a domicile that could attract more captive business.”

He noted that within Singapore, Artex is currently focussed on feasibility studies and captive health checks.

“But that could convert into captive management quickly,” he said.

“My understanding is that there has not been much growth in Singapore captives over the last few years. I’m sure market conditions have encouraged some increased captive retentions, but I don’t think we’ve seen growth in numbers.”

AM Best affirms ratings of Shell captives

Luke Harrison
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AM Best has affirmed the financial Strength Ratings of A (Excellent) and the long-term issuer credit ratings of “a+” (Excellent) of Switzerland-domiciled Solen Versicherungen AG (SVAG) and Texas-domiciled Noble Assurance Company. The ratings outlook is stable.

The ratings agency said SVAG’s business profile assessment reflects its role in supporting its ultimate parent’s overall risk management framework, as Shell’s principal captive.

The captive’s non-life business mostly consists of offshore and onshore property and liability risks, as well as the associated business interruption cover.

SVAG also writes a small book of life business derived from reinsurance of the group’s pension liabilities.

As a captive domiciled in Texas, Noble underwrites Shell’s US business and cedes 100% of its risks to SVAG, its sister company, through a quota share reinsurance agreement.

The ratings reflect SVAG’s balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management.

The ratings of Noble reflect its status as a member of the SVAG rating unit and a subsidiary of Shell.

SVAG’s balance sheet strength is underpinned by its risk-adjusted capitalisation, which recovered from the very strong level at year-end 2021 to the strongest level at year-end 2022, as measured by AM Best’s capital adequacy ratio (BCAR).

The improvement in risk-adjusted capitalisation was supported by organic capital generation arising from the full retention of earnings in 2022.

The balance sheet strength assessment also factors in a concentration of assets in intragroup investments and the large gross and net line sizes offered by the captive, relative to its capital base.

However, AM Best expects capital to be managed to a level that is sufficient to absorb a series of large losses, in line with the captive’s capital management strategy.

AM Best said SVAG has a track record of strong operating performance, underpinned by robust underwriting results, as demonstrated by a five-year (2018-2022) weighted average combined ratio of 27%.

Prospective operating performance is subject to potential volatility due to the captive’s exposure to high-severity, low-frequency losses, given its large net line sizes relative to its premium base.

The captive is also exposed to elevated market risk through its management of the Shell group’s foreign currency warehousing activities, which drives a level of variability in overall earnings.

Nissan captive has Excellent AM Best rating affirmed

Luke Harrison
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AM Best has affirmed the financial strength rating of A (Excellent) and the long-term Issuer credit rating of “a” (Excellent) of the Bermuda-domiciled Nissan captive, Nissan Global Reinsurance (NGRe). The outlook for the ratings is stable.

In its role as a single-parent captive for Nissan, NGRe provides Nissan with a host of insurance coverages in the United States and abroad, including, but not limited to, extended service contracts, product liability and inland marine.

AM Best said the ratings reflect NGRe’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.

The ratings agency said the neutral business profile considers NGRe’s strategic role as a captive insurer for its parent, Nissan Motor Co.

Favourable cash flows provide ample liquidity for the captive’s selected risks and exposures, while NGRe’s adequate operating performance reflects its profitable results through the last decade, with its combined ratio improving year over year during the last five-year period.

The primary drivers of NGRe’s profitability are its global product liability and extended service contract lines. The captive continues to penetrate its current market with fresh product offerings.

As a member of the Nissan family of companies, NGRe benefits from the group’s proprietary data warehouse, extensive risk management practices and loss control programmes.

GCP #87: MGAs and captives – political violence and cyber

Richard Cutcher
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Ryan Dodd, Intangic
Mark Heath, Intangic
Charlie Hanbury, Samphire Risk
Andy Hulme, SRS

In episode 87 of the Global Captive Podcast, supported by the EY Global Captive Network, we share two interviews with MGAs that are particularly interested in providing unique underwriting expertise and capacity to captive owners.

1.40 – 14.14: Senior reporter Luke Harrison is joined by Charlie Hanbury, CEO of Samphire Risk, and Andy Hulme, director of underwriting at captive manager Strategic Risk Solutions. Samphire is an agency focused on providing cover for malicious and hostile risks, such as terrorism, political violence, kidnap & ransom and other broader crisis response products.

14.15 – end: Ryan Dodd, CEO and founder at Intangic, and Mark Heath, head of insurance and chief underwriting officer at Intangic MGA, outline their unique take on cyber being underwritten as a high frequency, low severity product and the role of the capacity, backed by AXA XL, they are providing as a parametric product, for corporates in supporting the CISO and cybersecurity budgets.

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Actuarial expertise and cat bond potential part of Allied attraction for Artex

Luke Harrison
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Actuarial expertise and cat bond potential part of Allied attraction for Artex

Artex International CEO Paul Eaton has said the acquisition of Dublin-based Allied Risk Management and the addition of Ireland as a domicile option for its clients was a “natural progression” for the captive manager.

Captive Intelligence reported in May that Artex had completed the acquisition of Allied, bringing across Frank Coyle and his team with seven captives under management in the jurisdiction.

“We already have operations in Malta, Gibraltar and Guernsey, so adding Ireland complements our European business and offers another excellent choice of domicile for our existing and new clients,” Eaton told Captive Intelligence.

“We were delighted to acquire the Allied business as not only is it a fantastic team with a great client base, but also, it’s an excellent cultural fit which is vitally important in any expansion.”

Eaton believes that the combined expertise of the two companies will deliver greater value for their joint client base.

He also revealed that Artex is keen to build out its actuarial and analytics capabilities, and the addition of Allied will add another five actuaries with strong captive expertise to the team.

“We’re confident that this is an area that’s going to grow for Artex significantly over the next few years, so being able to add that talent to our team was part of the attraction, as it will help us grow that part of the business,” Eaton said.

He also highlighted that the Allied acquisition will allow the company to make the most of Ireland’s active catastrophe bond market.

“There have been some cat bonds that have been launched and managed in Ireland and this acquisition will also help support our Capital Solutions business should any of our clients decide to use Ireland in the future,” Eaton added.

Artex Capital Solutions already provides ILS, fund administration and reinsurance management in Bermuda and Guernsey.

SIIA labels proposed 831(b) rules “over-regulation”, renews call for guidance

Richard Cutcher
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SIIA labels proposed 831(b) rules “over-regulation”, renews call for guidance

The Self-Insurance Institute of America (SIIA) has submitted its comments in response to the Internal Revenue Service’s latest proposed rules for captives making the 831(b) tax election.

Captive Intelligence reported in April the IRS had proposed new regulations for “micro captives” at the same time as obsoleting Notice 2016-66, having had it struck down by the courts in March 2022.

Proposed Rule 109309-22 has prompted extensive debate across America’s captive industry with it threatening to label a wide range of 831(b) captives “listed transactions” or “transactions of interest”.

The deadline for submitting comments in response to the proposed rule was 12 June, with a public hearing scheduled for 19 July.

SIIA has engaged with the IRS on the topic of micro captives since 2014 and has now published its submitted comments, saying the proposals will “severely limit access to captive insurance programs for small- and medium-sized businesses in the US”.

In a release accompanying the circulated comments, Ryan Work, SIIA senior vice president of government relations, said the IRS is seeking to “over-regulate certain § 831(b)-electing captives by creating untenable loss ratio requirements (65%), loan back limitations, and 10-year retroactive provisions”.

The 65% loss ratio calculation and limit, outlined in the IRS’ proposed rule, has particularly caught the attention of many across the US captive market since it is not uncommon for captives, whether taking the 831(b) tax election or not, and commercial insurers to perform at or better than that level.

In the submitted comments, SIIA writes on the issue: “Treating electing captives differently than other captives or commercial insurance companies is arbitrary and capricious, where similar loan-backs or less than 65% loss ratios exist.

“This discrimination and singling-out of a federally-enacted statute is not only wrong, but lacks an understanding of how the insurance market and risk mitigation works. The IRS cannot pick and choose criteria among different groups within a larger captive insurance marketplace.”

In SIIA’s accompanying release, Work emphasised that the rule was trying to “legislate through regulatory action”, contrary to congressional intent and would “prevent middle market American companies from mitigating against critical and evolving legitimate business risk”.

“None of the four criteria identified by the IRS in the proposed regulations are abusive, either separately or in their own right, nor should they be used under the proposed criteria to label a transaction as a listed transaction or transaction of interest unless they are always tax avoidance,” he added.

Work repeated SIIA and other’s previous calls for the IRS to develop and issue criteria for industry to follow that is in line with the existing 831(b) law, arguing that the Service has access to documents concerning thousands of captives that complied with data requests.

“Treating § 831(b)-electing captives differently than other larger captives or commercial insurance companies is harmful and an over-reach,” he said.

“For these reasons, SIIA continues to recommend that the IRS engage with the captive insurance industry and business owners to more appropriately craft regulations that combat abuse, while further understanding the intent, the need, and the appropriateness of risk mitigation.”

AM Best affirms ratings of NextEra Energy captives

Luke Harrison
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AM Best has affirmed the financial strength rating (FSR) of A (Excellent) and the long-term issuer credit rating (Long-Term ICR) of “a” (Excellent) of Cayman Islands-domiciled Palms Insurance Company (Palms).

AM Best has also affirmed the FSR of A- (Excellent) and the long-term ICR of “a-” (Excellent) of Delaware-domiciled Palms Specialty Insurance Company (Palms Specialty).

Both companies are owned by NextEra Energy Capital Holdings, which, in turn, is owned by NextEra Energy (NextEra). The outlook for all ratings is stable.

Palms is a single-parent insurer, providing specialised direct and assumed property, casualty, workers’ compensation, automobile liability and employers’ liability coverages to NextEra and his affiliates.

Palms Specialty was formed in 2022 as a specialty insurer focusing on the US E&S lines accounts, providing coverage for specialty property, professional lines and other specialty lines with manageable gross limits.

The ratings of Palms reflect its balance sheet strength, which AM Best assesses as strongest, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM).

The ratings of Palms Specialty reflect its balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, limited business profile and appropriate ERM.

The very strong balance sheet assessment is based on Palms Specialty’s supportive risk-adjusted capital that meets AM Best’s guidelines for newly formed organisations.

AM Best expects that Palms Specialty will continue to maintain supportive risk-adjusted capital levels throughout its start-up phase, based on balance sheet projections provided by Palms Specialty’s management.

The ratings agency assesses Palms Specialty’s operating performance as adequate, based on its clear business plan and income statement projections that contemplate a level of implementation and execution risk for a newly formed entity.

AM Best views Palms Specialty’s business profile as limited, given the execution risk associated with a start-up entity and the degree of competition in its selected market.

This risk is mitigated by the management team’s experience in the targeted business class, along with the parent company’s brand and record of success.

Negative rating action could occur if Palms Specialty’s actual operating performance or balance sheet strength materially differ to the downside from its initial business plan.

AM Best affirms financial strength rating of Waste Management’s captive

Luke Harrison
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AM Best has affirmed the financial strength rating of A- (Excellent) and the long-term issuer Credit Rating of “a-” (Excellent) of National Guaranty Insurance Company of Vermont (NGIC).

NGIC is owned by Waste Management, one of the largest providers of waste management environmental services in North America. The outlook for the ratings is stable.

The ratings reflect NGIC’s balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, limited business profile and appropriate enterprise risk management (ERM).

AM Best said that as an integral part of Waste Management’s ERM programme, the parent wholly funded the captive’s capitalisation in the form of a demand note that generates net investment income to augment surplus annually.

Further supplements have been provided in the form of letters of credit as changes in exposures warrant.

NGIC also benefits from Waste Management’s robust risk management strategies, which enable it to support a portion of Waste Management’s financial assurance programme appropriately.

The ratings agency said NGIC’s surplus growth is organic and steady as it has been able to enhance its profitability over the past five years by significantly reducing its underwriting expenses.

NGIC has not had any losses in the programme, but the captive has an expense ratio that is higher than others in the surplus lines composite due to the nature of the financial assurance line of business and expenses focused on risk mitigation.

Positive rating action could occur if a sustained positive trend in balance sheet strength continues in the near term.

Negative rating action could occur if AM Best’s perception of the parent’s ability to support the captive changes significantly or if the company’s balance sheet strength or risk-based capitalisation weakens materially to a level that does not support its risks.

Lloyd’s Captive Syndicate would complement multi captive strategy

Richard Cutcher
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Lloyd’s Captive Syndicate would complement multi captive strategy

The much anticipated Lloyd’s Captive Syndicate is expected to be used as a complement to existing captive strategies and likely by organisations that already own one or more captives in traditional domiciles.

Captive Intelligence reported in April that Lloyd’s of London was working with an applicant to establish the first Captive Syndicate in more than 20 years, with the concept piquing the interest of large multinational corporates.

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GCP Short: What is a Lloyd’s Captive Syndicate and how will it work?

Richard Cutcher
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GCP Short: What is a Lloyd’s Captive Syndicate and how will it work?
Keith Nevett, Asta
Bob Stevenson, Asta

In this GCP Short we provide more context and detail on what the much mooted Lloyd’s Captive Syndicate is, how it will work and what kinds of companies it might be suitable for.

In April, Captive Intelligence reported that the historic insurance marketplace is working with an applicant that could establish the first Captive Syndicate in Lloyd’s in more than 20 years.

Richard is joined by two professionals that know Lloyd’s and the business of launching and managing syndicates like the back of their hand.

Keith​ Nevett is Head of Business Development at managing agent Asta, which is part of the Davies Group, and Bob Stevenson, a Consultant with Asta.

Whittington, the precursor to Asta, was in fact the managing agent for those three original captive syndicates in the 1990s.

Bob worked for Lloyd’s from 2005 to 2017, and prior to that he was buyer of reinsurance at several large multinational insurers.

Keith and Bob demystify much of how Lloyd’s operates, what the benefits of a Captive Syndicate may be and how it is managed, and the different ways they can see a Lloyd’s Captive can fit into and complement a multi-captive strategy.

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