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Captives may rethink investments after U.S. debt rating downgrade

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Standard & Poor's Corp.'s recent downgrade of the United States' debt rating to AA+ from AAA isn't expected to have a significant impact on captive insurance companies' investment portfolios, though it could prompt some captive parents to review their captives' investment strategies, experts say.

“I think everybody's going to go back and look at their investment policies and their investment practices. I think that's a healthy thing anyway,” said Dianne Salter, senior vp at Jefferson Health Systems Inc. in Radnor, Pa., and chair of the Vermont Captive Insurance Assn. “But I don't see any wholesale changes.”

“I think it will be discussed,” said David F. Provost, deputy commissioner in the Captive Insurance Division of the Vermont Department of Banking, Insurance, Securities and Health Care Administration. “Captives are very conservative. I don't know that they're that much invested in Treasurys.”

“I doubt we're going to see a wholesale change in people's investment strategies,” Mr. Provost said.

Carl E. Terzer, principal at CapVisor Associates L.L.C. in Chatham, N.J., said that while he's advising clients not to change investment strategies in response to the downgrade, it could have an impact on some captives.

“It really depends on the existing portfolio of the captive,” Mr. Terzer said. For example, he said, for a captive with a conservatively managed portfolio invested primarily in U.S. Treasury securities, “the effect would probably be larger and market values of the Treasury securities should go down as yields and requirements go up in the market.”

He's urging his clients to stand pat, though, “because the events over the past two weeks have yielded really no surprises, and the market had priced in almost precisely what actually happened.”

He said he's advising clients not to “make any knee-jerk reactions tactically to the portfolio until we get some better direction as to what's happening in terms of the real factors that could impact the tactical portfolio allocation.”

Robert Miller, managing director at Conning & Co. in Hartford, Conn., said he doesn't anticipate the downgrade having a significant impact on captives. Most of his clients have about half their portfolio in cash, he said. There might be an impact on some captives holding municipal bonds tied to the federal government that have been downgraded since the S&P cut the U.S. government's rating, he said.

Martin G. Ellis, senior vp at Comerica Bank in Detroit, said his concern for captive investors is the potential effect on existing U.S. Treasury securities in their portfolios if Treasury yields increase as a result of the downgrade. But, he noted, “So far, yields and valuations have been holding up and the 10-year Treasury yield has actually dropped a little bit in the last few days.”

“I think investors are realizing that U.S. Treasurys and agencies are still a safe bet and a good place to keep your money,” Mr. Ellis said. “So what we've been doing is checking those who don't have a lot of excess collateral and continuing to monitor the situation closely.”

“Captive insurers are going to stay in the U.S. market in terms of their investment holdings,” said Nancy Gray, regional managing director-Americas at Aon Global Insurance Managers in Burlington, Vt. “What are they going to move them to?”