OLDWICK, N.J.--(BUSINESS WIRE)--
A composite of 209 U.S. captive insurance entities and alternative risk
vehicles followed byA.M. Best Co.(herein referred to as
captives) saw 2011 net income decrease by $537 million, or 21%. The
decline is attributable to decreases in underwriting income, net
investment income and realized capital gains. Other items also
contributed to the decrease in net income, such as increases in other
expenses and income taxes. Clearly, captives are starting to feel the
squeeze of a continuing soft market, low investment yields and
continuing global financial malaise.
Underwriting income for 2011 decreased because of increases in loss- and
loss-adjustment expenses (LAE) incurred ($318 million, or 6%) and
underwriting expenses incurred ($129 million, or 8%), partially offset
by a decrease in dividends to policyholder/owners of $129 million, or
29%, and an increase in net earned premiums of $59 million, or 1%.
The increase of incurred loss and LAE primarily reflects decay in losses
in the medical professional liability insurance (MPLI) line of business.
Written and earned premiums for 2011 were essentially unchanged compared
with 2010. The pure loss ratio for MPLI increased 5 points in 2011 due
to rate decreases and increased loss activity in this line of business.
Most other lines of business experienced declines in pure loss ratios or
small increases that were driven by deterioration in premiums as well as
some increases in incurred losses.
The increase in underwriting expenses is attributable to increased net
commissions incurred of $46 million, or 16%, coupled with an increase in
other underwriting expenses of $83 million, or 7%. Other underwriting
expenses are composed of items such as premium taxes, salaries, rent and
equipment, and other expenses. All expenses except salary expense were
essentially flat between 2011 and 2010, and salary expense increased $57
million, or 11%, in 2011 compared with 2010.
Net investment income decreased in 2011 by $95 million, or 7%, due to a
30-basis-point decrease in yield on fixed-income securities, which was
only partially offset by a 3.4% increase in invested assets. Asset
allocations explain the decrease in net investment income, since bond
and stock allocations dropped from 59.1% and 10.2% of invested assets
for 2010, respectively, to 58.4% and 9.8% of invested assets for 2011,
respectively. Cash and short-term investment allocations increased from
7.3% to 8.0% of invested assets for 2011 compared with 2010.
The changes in allocation have further strained investment yields and
net investment income, but they make sense in light of the flat yield
curve coupled with most captives’ investment philosophy, which considers
preservation of asset value as the principal objective. These
reallocations provide for a relatively safe investment portfolio that is
somewhat insulated from downside valuation shocks at the cost of yield.
It should be noted that captives’ investment portfolios performed
significantly better than commercial insurance companies’ portfolios
during the crisis of 2008-2009.
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Assistant Vice President Steven Chirico discusses the A.M. Best special
report on U.S. captives in a segment from the latest episode of A.M.
Best’s “First Monday.” To view the video, go to http://www.ambest.com/v.asp?v=fmchirico812.
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Copyright © 2012 by A.M. Best Company, Inc.ALL RIGHTS
A.M. Best Co.Steven Chirico, CPAAssistant
Vice President(908) 439-2200, ext. firstname.lastname@example.orgJohn
AndreGroup Vice President(908) 439-2200, ext.
MorrowSenior Manager, Public Relations(908)
439-2200, ext. email@example.comJim
PeavyAssistant Vice President, Public Relations(908)
439-2200, ext. firstname.lastname@example.org
Source: A.M. Best Co.