Bermuda's large pool of captive insurance companies have seen "minimal impact" from the sub-prime mortgage crisis, writes Jonathan Kent. That is the view expressed by Yvette Pierre, principal of research and risk assessment policy at the Bermuda Monetary Authority, yesterday at the Bermuda Captive Conference.

Ms Pierre said the BMA, the Island's financial regulator, had decided last summer to take a "proactive approach" to the sub-prime crisis.

"We issued a survey last August to see how captives were being affected by the crisis," Ms Pierre said. "We conducted another survey in November and some in-house stress testing. Generally speaking, we found captives were minimally affected by the sub-prime crisis."

There were some companies in the insurance sector, however, which had been impacted. "We let them know what we discovered and have worked with them to help them through it," she added.

Following up on the surveys, the BMA issued a guidance note on reserving for financial guaranty companies. The financial guaranty industry has been badly hit by the crisis, as the value of the mortgage-backed securities it insures have plummeted. Corporations form captives as either fully or partially owned entities to provide self-insurance.

The effects felt by Bermuda's captive insurers have included a decline in the value of investments, even seemingly "safe" and conservative investments that were rated AAA by credit ratings agencies.

Delegate William Dalziel, executive director of London & Capital Asset Management, said he was concerned the "sub-prime contagion" would continue to affect captives.

Many captives had invested significantly in municipal bonds, he said, which were under a cloud of uncertainty because of the troubles that have afflicted the downgraded financial guarantors that insure them. Securities linked to Alt-A mortgages — not as risky as sub-prime — were coming under pressure.

Thomas Kelly, insurance practice director for KPMG, said scrutiny of investments would inevitably be higher going forward.

"The onus is on risk managers and captive managers to understand the products they are entering into," Mr. Kelly said.

"How many managers really understand the correlation risks?

"Challenge your asset manager and if you read something in the paper that bothers you, then ask him how it affects your portfolio."