National Grid Insurance USA Ltd's Credit Rating Affirmation and Its Implications for Captive Insurance Investment Strategies

The recent affirmation of National Grid Insurance USA Ltd's (NGIUSA) Financial Strength Rating of A- (Excellent) and Long-Term Issuer Credit Rating of "a-" (Excellent) by AM Best underscores its strategic value as a captive insurer in the energy sector. With a stable outlook, NGIUSA's strong balance sheet, reinsurance support, and role in managing high-value risks for National Grid's U.S. operations position it as a compelling asset in volatile energy markets. This analysis evaluates how NGIUSA's credit profile aligns with broader trends in captive insurance and what this means for risk-adjusted returns in energy sector portfolios.

Balance Sheet Strength and Risk-Adjusted Returns

NGIUSA's balance sheet is a cornerstone of its creditworthiness. As of fiscal year-end 2025, its risk-adjusted capitalisation was rated at the "strongest" level by AM Best's Capital Adequacy Ratio (BCAR), reflecting robust capital reserves and prudent risk management according to AM Best. This strength is critical for energy captives, which often face exposure to high-severity, low-frequency risks such as cyberattacks or natural disasters. However, AM Best notes a caveat: NGIUSA's capitalisation under catastrophe-stressed scenarios is materially lower due to its large net line sizes relative to its capital base. This highlights the importance of reinsurance in mitigating tail risks-a dynamic observed in other energy captives like Eni Insurance S.p.A. and Gaviota Re S.A., which leverage reinsurance to stabilise underwriting volatility.

For investors, NGIUSA's balance sheet strength translates into a lower probability of insolvency, even in stressed markets. This is particularly relevant in the energy sector, where regulatory and environmental uncertainties amplify capital requirements. By maintaining a conservative investment portfolio and retaining earnings, NGIUSA aligns with best practices seen in peers like Stellar Insurance, Ltd., which holds 80% of its assets in promissory notes from its parent company. Such strategies enhance liquidity and reduce exposure to market downturns, supporting long-term risk-adjusted returns.

Reinsurance Support and Strategic Value

Reinsurance plays a pivotal role in NGIUSA's credit profile. The captive benefits from reinsurance support provided by its affiliate, National Grid Insurance Company (Isle of Man) Limited, which acts as a reinsurer. This arrangement mirrors the risk-transfer strategies of energy captives like INPEX Insurance, which relies on reinsurers with "excellent" credit quality to manage underwriting volatility. Reinsurance not only protects NGIUSA from large losses but also enables it to underwrite larger risks, thereby expanding its capacity to meet National Grid's U.S. insurance needs.

The strategic value of reinsurance is further underscored by AM Best's analysis of the broader reinsurance market. In 2024, reinsurance capital reached a record $607 billion, with returns on equity hitting 16%-a trend expected to continue into 2025. This influx of capital has allowed captives to diversify their reinsurance partners and adopt flexible structures such as excess-of-loss treaties, which are tailored to energy-specific risks. For NGIUSA, this means greater resilience against shocks while maintaining cost efficiency-a key advantage in a hardening insurance market.

Operating Performance and Volatility

While NGIUSA's five-year weighted average return-on-equity of 5.9% and combined ratio of 59.0% demonstrate solid operating performance, its 2025 results-a combined ratio of 189.3% due to a significant loss-highlight the inherent volatility of captive insurance. This volatility is not unique; energy captives like Gaviota Re S.A. report similar fluctuations due to exposure to property and casualty risks. However, NGIUSA's limited business profile-focused on high-value covers for National Grid's U.S. assets-reduces diversification risk, as its portfolio is less susceptible to macroeconomic shifts compared to commercial insurers.

For investors, this duality of performance underscores the need to balance short-term volatility with long-term stability. AM Best's stable outlook for NGIUSA suggests confidence in its ability to recover from 2025's loss, supported by its strong capital base and reinsurance arrangements. This aligns with broader trends in the captive sector, where entities with robust risk management frameworks, such as Research Insurance Company Limited (RICL), consistently outperform peers in underwriting results.

Energy Transition Risks and Credit Rating Limitations

A critical challenge for energy captives like NGIUSA is the alignment of credit ratings with long-term energy transition risks. Recent studies note that credit rating agencies often have short-term horizons, which may understate risks such as stranded assets or regulatory shifts in decarbonisation. While NGIUSA's current ratings reflect its operational strengths, future assessments may need to incorporate metrics like revenue diversification into renewable energy or climate transition readiness. This is a lesson from European oil and gas captives, where credit ratings have yet to fully capture the sector's long-term decline.

For NGIUSA, this means that stakeholders must complement AM Best's ratings with forward-looking analyses. For instance, National Grid's investments in renewable infrastructure could reduce NGIUSA's exposure to fossil fuel-related risks, enhancing its credit profile over time. Conversely, delays in the energy transition could strain its balance sheet, particularly if reinsurance markets adjust to new risk paradigms.

Implications for Investment Strategies

The affirmation of NGIUSA's ratings has clear implications for energy sector portfolios. Captives with strong balance sheets and reinsurance support, like NGIUSA, offer a hedge against the volatility of commercial insurance markets. Their ability to customise coverage for parent companies also reduces reliance on external insurers, a strategic advantage in a hard market. For institutional investors, NGIUSA's stable outlook and risk-adjusted returns make it an attractive addition to portfolios seeking downside protection.

However, investors must remain vigilant about sector-specific risks. The energy transition, regulatory changes, and reinsurance market dynamics could alter NGIUSA's risk profile. Diversifying across captives with varying geographic and risk exposures-such as Gaviota Re's international portfolio-could mitigate these risks while maintaining returns.

Conclusion

National Grid Insurance USA Ltd's credit rating affirmation by AM Best reaffirms its role as a resilient and strategically vital captive insurer. Its strong balance sheet, reinsurance support, and focus on high-value energy risks position it to deliver risk-adjusted returns in a volatile sector. While challenges like catastrophe-stressed capitalisation and energy transition risks persist, NGIUSA's stable outlook and alignment with broader captive insurance trends make it a compelling asset for stakeholders prioritising long-term value and risk management.