Investments Hurt Some U.S. Captives But Underwriting Income Up Overall

August 3, 2009

U.S. captive insurers’ net income declined approximately 66 percent in 2008 for a composite of 186 captive companies represented in an A.M. Best Co. special report. This reflects realized losses of $1.2 billion for the year, a large percentage of which resulted from one company’s investment losses.

However, net underwriting income actually increased over the prior year— evidence of the captive industry’s typical underwriting discipline and its inclination not to rely on investment income, according to the rating firm.

The report says that captive formations continue amid a softening commercial insurance market, but new captive domiciles are finding it challenging to establish a presence.

It rates the outlook for the captive industry as stable.

Other highlights from the A.M. Best report on captives:

  • Captives had no material exposure to commercial mortgage-backed securities (CMBS) or mortgage-backed securities (MBS) and minimal exposure to Lehman Brothers or Bear Stearns paper.
  • Overall, captives generated gross investment income of $1.8 billion in 2008, down only 7% from 2007.
  • Policyholder dividends decreased by 1.6 percentage points to 4.2% in 2008 from a high of 5.8% in 2007, allowing captive companies to return some profits to surplus while remaining attentive to policyholders’ needs.
  • Captives posted deteriorated results in 2008 as a softening market followed particularly good results in recent years.
  • Maintaining steady rates in the hard market has served captives well as the market has softened and captives refrain from chasing rate.
  • Captive management teams are increasing their emphasis on enterprise risk management, and successful single-parent captives have integrated their operations as part of the parent company’s overall risk management program.

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