US captives resistant to investment losses

04/08/2009

US captive insurance companies have bucked the trend in investment losses experienced by other sectors of the insurance and other financial services sectors, says AM Best.

A report out this week by the rating agency said that, overall, captives had generated a gross investment income of $1.8bn in 2008, down only 7% from 2007.

AM Best also found that for the 186 US captive companies represented in the special report, net income had declined approximately 66% in 2008, reflecting realized losses of $1.2bn for the year, a large percentage of which resulted from one company’s investment losses.

However, said AM Best, net underwriting income actually increased over the prior year – evidence, it said, of the captive industry’s typical underwriting discipline and its inclination not to rely on investment income.

A major factor in the captive industry’s resistance to investment losses is the lack of material exposure to commercial mortgage-backed securities (CMBS) or mortgage-backed securities (MBS) and minimal exposure to Lehman Brothers or Bear Stearns paper in investment portfolios.

The report went on to say that in taking realised capital losses of $1.2bn and unrealised losses of $1.4bn in 2008, the industry had been battling one of the toughest investment markets since the tech bubble of the late 1990s.

Out of the 2008 losses AM Best said, one captive contributed $434.8m (38%) of the realised losses and represented $632m (almost 44%) of the unrealised losses.