Rated Captives Keep Outpacing Commercial Market Despite Softer Recent Results

AM Best-rated U.S. captives posted a five-year average combined ratio of 89.1, before dividends, compared with 96.7 for the commercial casualty composite, according to a new report from the ratings agency.

The five-year average operating ratio for the captive composite came in at 78.1, versus 84.8 for the commercial casualty composite. AM Best said the outperformance by rated captives stems from disciplined underwriting, effective risk controls and a focus on loss mitigation and capital preservation rather than profit-seeking. The rating agency estimated that rated captives generated $8.2 billion in savings for their parent organizations from 2021 through 2025, made up of $4.1 billion in surplus growth and $4.1 billion in dividends that would otherwise have flowed to the commercial market. AM Best said it expects captives to post favorable results again in 2026, absent unforeseen systemic catastrophic events.

Growth Continues Even as Commercial Capacity Loosens

AM Best said the captive market remains in growth mode even as commercial insurers grow more flexible on pricing in competitive lines such as property, while staying more cautious in casualty lines including commercial auto and excess casualty. Organizations increasingly treat captives as long-term strategic components of their risk management rather than temporary responses to hard markets, according to the report.

Vermont reported 51 new captive formations in 2025, bringing its total to 707 active captives, plus 36 new cell captives. Utah reported 605 total captives, including cells, as of year-end 2025, marking significant growth from the prior year. Delaware added 21 new captives, including cells, for a total of 638, while North Carolina added 21 new formations, excluding cells and series, bringing its total to 263.

AM Best rates more than 220 captive companies globally, with about 70% domiciled in the U.S., 17% in the Caribbean and the remaining 13% spread across other domiciles. Among rated U.S. captives, medical professional liability is the largest line of business at 38%, followed by other liability and commercial casualty at 34%, commercial property at 9% and workers’ compensation at 6%.

The report noted growing use of captives for Side A directors and officers coverage, cyber risk and participation in reinsurance structures to fill layers or take thin slices of a tower when justified economically. AM Best also pointed to expansion into employee benefits and, to a lesser extent, parametric coverage for climate-related risks and supply chain disruptions.

Loss Activity Pressures Underwriting, but Captives Still Lead

Despite the overall outperformance, AM Best noted pressure on captive underwriting results over the past two years, driven by higher loss and loss-adjustment-expense ratios, particularly in workers’ compensation and fire lines. The loss and LAE ratio rose nearly 10 points compared with the prior five-year average, and net underwriting income deteriorated in 2024 and 2025, with a total $654.1 million underwriting loss attributed to elevated loss activity.

Even so, the captive composite’s total underwriting expense ratio of 17.7 points remained well below the commercial casualty composite’s 28.1 points, aided by a commission expense ratio of 3.1 points versus 12.1 points for the broader market. The dividend ratio nearly doubled from 2024 to 2025, reaching 10.6 points, the second-highest level of the past five years, with a five-year average of 8.8 points. AM Best said captives paid more than $2.5 billion in policyholder dividends over the five-year period.

Single-parent captives, which AM Best said benefit from their close alignment with policyholders’ loss data, recorded a five-year average operating ratio of 54.1, with surplus rising 34.5% over five years to $15 billion despite $1 billion in dividends paid out. AM Best said single-parent captives retained close to $3.8 billion that would otherwise have gone to the commercial market.

Risk retention groups showed more strain, with net income declining 0.9% in 2025 as underwriting losses grew, offset in part by net investment income and realized capital gains. Their combined ratio before dividends deteriorated to its highest level in five years, driven by an increase in the underwriting expense ratio and pure loss ratio, partially offset by an improvement in the LAE ratio. AM Best identified commercial auto, auto physical damage, inland marine and allied lines as loss leaders among risk retention group segments, with the pure loss ratio rising 6 points year over year amid higher claims severity linked to inflation and adverse reserve development.

Return on invested assets for the overall captive composite averaged 3.7% over five years, trailing the commercial casualty composite’s 4.3%, which AM Best attributed to captives’ more conservative, capital-preservation-focused investment strategies.

Obtain the full report here. &