A.M. Best Special Report: Captives Buck Investment Losses With Strong Underwriting Results.

OLDWICK, N.J. -- U.S. captive insurers' net income declined approximately 66% in 2008 for a composite of 186 captive companies represented in this A.M. Best Co. special report. This reflects realized losses of $1.2 billion for the year, a large percentage of which resulted from one company's investment losses. Net underwriting income actually increased over the prior year--evidence of the captive industry's typical underwriting discipline and its inclination not to rely on investment income.

* 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.

* Overall, captives generated gross investment income of $1.8 billion in 2008, down only 7% from 2007.

* Policyholder dividends decreased by 1.6 percentage points to 4.2% in 2008 from a high of 5.8% in 2007, allowing captive companies to return some profits to surplus while remaining attentive to policyholders' needs.

* Captives posted deteriorated results in 2008 as a softening market followed particularly good results in recent years.

* Maintaining steady rates in the hard market has served captives well as the market has softened and captives refrain from chasing rate.

* 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.

* Captive formations continue amid a softening commercial insurance market, but new captive domiciles are finding it challenging to establish a presence.

* The outlook for the captive industry is stable as participants exercise their financial flexibility in a softening market.

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Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.