BURLINGTON, Vt.—Captive owners can use a variety of methods, including ratings, to measure their captive insurer's success.

Speaking Wednesday on measuring captives' performance at the annual conference of the Vermont Captive Insurance Assn. in Burlington, Brain C. Donovan, president of Vermont-domiciled STICO Mutual Insurance Co., RRG, said among the factors he tracks in monitoring STICO's success are member retention, new business, profitability and loss ratio.

STICO's A- rating from A.M. Best Co. Inc. is another gauge of the company's success, Mr. Donovan said.

“I think the other area that I look at to define our success and our performance is the fact we have reinsurance,” Mr. Donovan said. “We have long-term relationships with the reinsurance parties, we have stable rates.”

Another panelist, Steven M. Chirico, assistant vp at Oldwick, N.J.-based A.M. Best, said the rating agency considers a number of qualitative and quantitative factors in assigning ratings to captives and other insurers.

Among factors considered in assigning captive ratings are capital, the captive's ability to generate cash flow and net income as well as volatility in its cash flow, operating result, liquidity, financial flexibility, the captive's enterprise risk management program and the captive's management.

“A rating is not a badge of quality,” Mr. Chirico said. “It simply speaks to a predicted default rate.” It's possible to have a well-run captive that writes risky business that has a lower rating than a less well-run captive that writes a more stable book of business, he said.

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Mr. Chirico said the rating process can be a difficult undertaking for a captive initially. “It is onerous,” he said. “We require a lot of information, but it gets easier as you go on.”

For captives that are rated, the rating agency can be a resource they can use to help guide decisions, he said. For example, a captive can seek the rating agency's input on the impact that paying a dividend might have on its rating as a way to gauge how the dividend might affect the captive's business.

“Working for a rating agency, you see a lot of stuff. I'm directly involved with about 300 captives across the globe,” Mr. Chirico said. “That interactivity needs to be taken advantage of.”

“I think the relationship we developed over time with A.M. Best is just one of honesty,” said Mr. Donovan. “If I'm contemplating making a change to our reinsurance structure, I want to know what that's going to do to our rating.”

John M. Lochner, director at Towers Watson & Co. in Weatogue, Conn., and the session's moderator, said that measuring a captive's success “is a mix of art and science.” For example, he said, one can't set a hard benchmark such as “your expense ratio should be 20% or less” because some captives might emphasize loss control programs, which would increase their expenses but ultimately improve their overall performance.

From an “overarching perspective,” another consideration in measuring a captive's success is, “Why did you form this captive in the first place and is it allowing you to achieve that objective?” Mr. Lochner said.