Specialty energy insurers and industry captives have managedpositive operating results over the last five years, with verystrong investment income supplementing more volatile underwritingresults, a new report says.

A.M. Best, in its report, “Specialty Energy Insurers Keep Pacewith U.S. Customers, Competitors,” measures the specialty groupagainst its competitors in the commercial-insurance market, andconcludes the specialty group's operating performance has been“favorable.”

“The group's operating ratio—which is the combined ratio lessthe net investment income ratio—of 91.1 for 2009-2013 was worsethan the [commercial] composite's 88.3, but it outpaced thecomposite in three of the most recent five years,” A.M. Bestsays.

The volatility in the specialty group's underwriting results isseen in the wide combined ratio swings over the five-year period,from a low of 90 to a high of over 140 in 2012, which was anespecially challenging year for the specialty group. The high 2012combined ratio “was largely the result of a few large loses:nuclear plant damage caused by a containment building concretedelimitation, losses from an unprecedented legal decision relatingfrom downed power line electrocutions, and losses from SuperstormSandy,” says A.M. Best.

Still, the group's five-year combined ratio of 104 was onlyslightly more than the 102.9 posted by its competitors in thecommercial casualty composite.

The specialty group has managed solid investment returns despitethe low interest-rate environment, A.M. Best says, noting thatinvestment income has “consistently exceeded underwriting resultsand hanse strengthened the group's surplus position over the pastseveral years.”

A.M. Best says the group is projected to grow premiums bybetween 4% and 5% in 2014, and preliminary Q1 results are“favorable, with the population reporting positive underwritingresults and investment income.” Although, the ratings agency notesthat Q1 growth has lagged the 4% to 5% projection.

D&O appears to be a bright spot in this sector now,management teams within the group tell A.M. Best. Since the early2000s, the line has been challenging for the energy sector due tolegal activity involving “several high-profile members” within thegroup. “Energy industry related events such as the collapse ofEnron and the California electrical energy shortages were typicalof the situations that led to a spate of class-action lawsuitsagainst the power generators, and hence the losses incurred bytheir insurers,” says A.M. Best.

The energy industry in general has faced numerouschallenges—from the economy to political and regulatory shifts.A.M. Best says utilities still face a challenging businessenvironment, with recent regulatory focus on weakness ininfrastructure “such as natural gas leaks, storm preparation andthe Fukushima nuclear plant shutdown….”

At the same time, increased electric and gas infrastructureconstruction projects have begun to respond to increasingdemand as older coal-fired plants shut down and gas productionincreases due to hydraulic fracking.

“What this means for insurers within the specialty group is thatthey need to be ahead of the curve by remaining responsive to theneeds of their insured constituents,” A.M. Best says. “Managementmust assure the power generators that they are taking all stepsnecessary to ensure long-term financial strength.”

The specialty insurers in the energy sector emerged in the 1970sin response to the difficulties energy companies experienceddefining broad-form insurance coverage with adequate policy limits,A.M. Best says. “Currently, the specialty group, led by AEGIS andEnergy Insurance Mutual, provides capacity to approximately 94% ofthe electric utility sector,” the ratings agency adds.

The specialty insurers operate as mutuals, with membershipavailable to any utility or member of the energy services industrythat meets each insurer's underwriting standards, A.M. Bestexplains.