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Risk Retention Groups’ Assets, Surplus Continue to Rise

Risk retention groups (RRG) reported an underwriting loss but a net income gain in the first half of 2012, according to a review of their financial data by the Ohio-based actuarial firm Demotech Inc.

RRGs continued to grow and improved their combined ratio in the second quarter. Assets and policyholder surplus continued to increase at a quicker rate than liabilities. Since second quarter 2008, short-term assets have increased 35.7 percent and total admitted assets have increased 28 percent. Also, Demotech said, policyholders surplus increased 64.2 percent, while total liabilities only increased 10.5 percent.

In its report on RRGs, Demotech noted:

• A $7.6 million net underwriting loss was reported by RRGs collectively through second quarter 2012. However, RRGs did collectively report $108.2 million net income for the first six months of 2012.
• Liquidity, as measured by liabilities to cash and invested assets, for Q2 2012 was approximately 71.5 percent. A value less than 100 percent is considered favorable, as it indicates that there is more than $1 of net liquid assets for each $1 of total liabilities. This also indicates an improvement for RRGs collectively over second quarter 2011, as liquidity was reported at 75.7 percent.
• Leverage, as measured by total liabilities to policyholders surplus, for second quarter 2012 was approximately 150 percent. Demotech said it prefers companies report leverage of less than 300 percent. This indicates an improvement for RRGs collectively over second quarter 2011, as leverage was reported over 161 percent.
• The combined ratio, as measured by loss ratio plus expense ratio, for second quarter 2012 was 88.1 percent. This indicates an improvement for RRGs collectively over second quarter 2011, as the combined ratio was reported at 90.6 percent.

“The financial ratios calculated based on the second-quarter results of the various lines of business for RRGs appear to be reasonable. It is typical for insurers’ financial ratios to increase and decrease period over period. Moreover, the reported underwriting losses are not indicative of a continuing trend. Equally as important, RRGs have collectively reported a net income at year-end each year since 1996. The second-quarter results of RRGs indicate that these specialty insurers continue to exhibit financial stability,” said Douglas A. Powell, senior financial analyst with Demotech.

The report, “Analysis of Risk Retention Groups – Second Quarter 2012,” which contains commentary pertaining to the financial stability of RRGs, is available at www.demotech.com.