Although U.S. captive insurers' net income declined approximately 66 percent in 2008, net underwriting income actually increased over the prior year, according to a recent A.M. Best Co. study of 186 captive companies.
The results reflect the captive industry's underwriting discipline and inclination not to rely on investment income, according to the rating firm.
The report finds that captive formations are continuing in spite of the ongoing soft commercial insurance market, although new captive domiciles are having difficulty in establishing a presence.
Other findings include:
o 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
o Captives generated gross investment income of $1.8 billion in 2008, down only 7 percent from 2007
o Policyholder dividends decreased by 1.6 percentage points to 4.2 percent in 2008 from a high of 5.8 percent in 2007, allowing captive companies to return some profits to surplus while remaining attentive to policyholders' needs
o Captives posted deteriorated results in 2008 as a softening market followed particularly good results in recent years
o Maintaining steady rates in the hard market has served captives well as the market has softened and captives refrain from chasing rate
o 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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