Owners of captive insurance companies tightened margins and used capital more efficiently in 2012, according to a new A.M. Best financials report on the industry. Over the longer term, the five-year combined ratio for the captive composite of 92.3 compares extremely favorably with the commercial casualty composite of 103.3.

The captives’ operating ratio over the same five-year period is tighter, with the captives generating a five-year operating ratio of 76.0, compared to 88.5 for the commercial casualty composite.

Captives’ surplus grew $1.39 billion, or 6 percent, despite a $539-million, or 26-percent, drop in net income. In 2012, net income was $1.54 billion, which was supplemented by $466 million of unrealized capital gains; capital contributions by owners of $206 million; and other surplus events of $88 million. These additions to surplus were offset in part by dividends to owners of $912 million.

The decrease in net income was the result of a $501-million, or 71-percent, drop in underwriting income, coupled with decreases in net investment income and realized capital gains of $101 million, or 7.8 percent and $135 million, or 21.3 percent. These detrimental items were offset in part by a $198 million, or 37 percent, decrease in income taxes.

The decrease in underwriting income was due to a $630 million, or 11.5 percent, increase in incurred loss and loss-adjustment expenses coupled with a $105 million, or 6.6 percent, increase in underwriting expenses, according to A.M. Best, adding that these items were partially offset by an increase in net earned premium of $226 million, or 2.8 percent, and a decrease in policyholder dividends of $8 million, or 2.5 percent.

Among A.M. Best Co.’s captive composite, the loss and loss-adjustment expense ratio decayed 5.7 points compared with 2011, due to the occurrence of mostly outsize property losses. Underwriting expenses also decayed, as evidenced by a 1.1-point increase in 2012 compared with 2011.

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