NU Online News Service, Aug. 3, 2:09 p.m. EDT

Captives are “starting to feel the squeeze” of market conditions, low-investment yields, and issues in the global-financial markets, according to A.M. Best, which reports that a composite of 209 captives it follows reported a decline in net income for 2011.

A.M. Best says the group of captives saw net income fall to a combined $2.01 billion, down 21 percent compared to 2010. The ratings agency blames decreases in underwriting income, net investment income and realized capital gains.

A.M. Best says underwriting income decreased because of increases in loss and loss adjustment expenses, driven by a decay in losses in the medical professional liability insurance line of business.

Net investment income decreased because of a 30-basis-point decrease in yield on fixed-income securities, the report states, while net-realized-capital gains decreased because of the leveling off of the stock market and “steady, albeit very low, interest rates.”

The ratings agency adds that captive management teams are saying they expect realized capital gains to continue to decrease over the next few years unless there is significant government involvement in the financial markets.

Net premiums written increased in 2011 to $8.35 billion, compared to $7.66 billion in 2010. A.M. Best says that captives it interviewed for its analysis indicated that the exposure base increased not from an increase in insureds or their payrolls, but rather from “a drive toward the most efficient use of existing captives by taking on more risk retention and purchasing less reinsurance, and/or taking lines of coverage into their captives that previously had been placed in the commercial market.”

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