A composite of 209 U.S. captive insurance entities and alternative risk vehicles followed by A.M. Best saw 2011 net income decrease by $537 million, or 21 percent.
The decline is attributable to decreases in underwriting income, net investment income and realized capital gains, stated the report by the ratings firm.
“Other items also contributed to the decrease in net income, such as increases in other expenses and income taxes,” said the report. “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 percent) and underwriting expenses incurred ($129 million, or 8 percent), partially offset by a decrease in dividends to policyholder/owners of $129 million, or 29 percent, and an increase in net earned premiums of $59 million, or 1 percent.
Net investment income decreased in 2011 by $95 million, or 7 percent, due to a 30-basis-point decrease in yield on fixed-income securities, which was only partially offset by a 3.4 percent increase in invested assets.
“Asset allocations explain the decrease in net investment income, since bond and stock allocations dropped from 59.1 percent and 10.2 percent of invested assets for 2010, respectively, to 58.4 percent and 9.8 percent of invested assets for 2011, respectively."
"Cash and short-term investment allocations increased from 7.3 percent to 8 percent of invested assets for 2011 compared with 2010.”
The changes in allocation have further strained investment yields and net investment income, but A.M. Best state that this makes 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.”
However the report notes that captives’ investment portfolios performed significantly better than commercial insurance companies’ portfolios during the 2008 crisis.