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US captives pay dividends despite soft market

US captive insurers lifted their dividends to policyholders in 2010, as they sought to reward clients who chose not to flee to the commercial market in search of better pricing, according to a survey by AM Best.

Dividends paid out by the group of 194 captives followed by the ratings agency increased by 73 percent to $454mn, on a 49 percent increase in profitability.

The captives held their pricing line, which led them to lose out on premium growth, but enabled them to drive underwriting profits. Captive managers are prepared to let business go if rates are too low, AM Best discovered.

But in some cases they were able to lower rates thanks to higher realised capital gains, the agency noted.

Captives' investment portfolios tend to be short-duration and include high-quality assets, which helped them recover substantially from the financial crisis, bringing most captives' investments back to pre-crisis levels.

AM Best has a stable outlook on the industry. It said pure captives gain financial flexibility from their relationship with parent companies, leaving them well positioned to ride out a soft market and ready for a turn in the market. Group captives, however, come under more pricing pressure,the agency noted.

New captives were still being formed despite the soft market, but new domiciles were finding it difficult to establish their place in the market, the report found.

The survey comes as the industry continues to digest the potentially damaging impact of Europe's Solvency II regime, which may make many captives effectively uneconomic because of the capital charge that will be imposed upon them.

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