Captives have evolved from being insurers that facilitate corporate insurance needs to becoming sophisticated entities that assist with the control and management of corporate risks and returns. Maximising investment returns has become an important part of enhancing the captive's role as profit centre.

Mike Thompson, director of the insurance investment group at US asset management firm Standish, Ayer & Wood, told delegates at the ICAP conference yesterday that there are side benefits to having an offshore captive.

''A captive is able to help an entity put assets offshore and relieve the tax burden on those assets. But taxation is a little less of a key issue nowadays with offshore captives,'' he said.

''Investment portfolios are a key piece of cash flow and return for a captive, and we feel they are underutilised. In many cases these assets have been left with a bank or put with a pension fund manager.''

Mr. Thompson described some strategies generally used by captives such as taxable and tax exempt bonds. He said that if a captive employs a multi-asset class investment strategy it is important to use a manager able to deal in these classes.

''An experienced multi-asset class manager can play those markets off against each other. They have to balance sometimes contradictory objectives within the mandate such as economic return versus accounting results.''

He said when deciding on an investment manager, ``You must make sure he can help you do your job and not throw things back at you.

''The manager must be able to adjust dynamically to interplay of market activity and your financial goals. He must have knowledge of statutory, GAAP and/or tax reporting. And he should provide information and support in interactions with important external constituencies such as the C.E.O., board of directors and regulators.''

A captive has specialised benchmarks and demands creative solutions. A 'hub and spoke' fund structure for offshore investors allows you to participate in the same portfolio that someone in the US invests in. It allows you to invest through an offshore spoke of a fund that enjoys full SEC regulation.''

Mr. Thompson said, ''There is a tremendous amount of untapped potential in captive portfolios. Offshore captives are lucky in being domiciled in very open regulatory environments with few outside competitive and market pressures.''

The optimal investment strategy must fully integrate the complexities of a company's risk management objectives. This does not only apply in current circumstances but in the ever changing business and regulatory environment. The process begins with detailed discussions about business mix, future plans and management's vision and involves building a detailed model of the company.

Proper and creative investment strategies maximise portfolio returns and after tax investment income. Unique solutions are necessary for captives.