The good news: The outlook for the captive industry is stable, as participants exercise their financial flexibility in a softening market. The bad news: U.S. captive insurers' net income declined approximately 66% in 2008 for a composite of 186 captive companies represented in an 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.

Additionally, A.M. Best found that 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. And, overall, captives generated gross investment income of $1.8 billion in 2008, down only 7% from 2007.

Other good and bad news from the report:

• 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

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