Specialty energy insurers and industry captives have managed positive operating results over the last five years, with very strong investment income supplementing more volatile underwriting results, a new report says.

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

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

The volatility in the specialty group's underwriting results is seen 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 an especially challenging year for the specialty group. The high 2012 combined ratio “was largely the result of a few large loses: nuclear plant damage caused by a containment building concrete delimitation, losses from an unprecedented legal decision relating from downed power line electrocutions, and losses from Superstorm Sandy,” says A.M. Best.

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

The specialty group has managed solid investment returns despite the low interest-rate environment, A.M. Best says, noting that investment income has “consistently exceeded underwriting results and hanse strengthened the group's surplus position over the past several years.”

A.M. Best says the group is projected to grow premiums by between 4% and 5% in 2014, and preliminary Q1 results are “favorable, with the population reporting positive underwriting results and investment income.” Although, the ratings agency notes that 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 early 2000s, the line has been challenging for the energy sector due to legal activity involving “several high-profile members” within the group. “Energy industry related events such as the collapse of Enron and the California electrical energy shortages were typical of the situations that led to a spate of class-action lawsuits against the power generators, and hence the losses incurred by their insurers,” says A.M. Best.

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

At the same time, increased electric and gas infrastructure construction projects have begun to respond to increasing demand as older coal-fired plants shut down and gas production increases due to hydraulic fracking.

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

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

The specialty insurers operate as mutuals, with membership available to any utility or member of the energy services industry that meets each insurer's underwriting standards, A.M. Best explains.

Special Reports /

Specialty energy insurers: Favorable operating performance; volatile underwriting results

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