Risk Retention Groups Sustaining Profitability

Since the implementation of the Liability Risk Retention Act of 1986, a number of risk retention groups (RRG) have met the requirements to obtain a Best’s Financial Strength Rating (FSR). Since then, RRGs have continued to sustain opertaing profitability, according to a new report released by A.M. Best.

RRGs continued to show strong results through fiscal year 2005. The RRGs “rated” by A.M. Best had, in aggregate, policyholder surplus of approximately $593 million, compared with $545 million in the prior year. Total assets were $1.69 billion, an increase over the prior year’s $1.5 billion. These increases are attributable to the continuing growth of the RRGs.

During 2006, A.M. Best Co. assigned two initial ratings to RRGs. This compares with one initial rating in 2005, two initial ratings in 2004 and one in 2002. Currently, A.M. Best has letter ratings on 25 RRGs, with the first rating dating back to 1992, an indication of the lasting success of this type of company.

RRGs’ letter ratings range from a FSR of A to a FSR of B. A significant portion of the ratings fall into the A- (Excellent) level at 44 percent, which remains unchanged from 2005. However, this is a significant increase over the 29 percent reported in 2004. The B++ (Very Good) level decreased a further 8 percent from 16 percent in the prior year. The B+ (Very Good) rating level has increased to 16 percent from 8 percent in the prior year, primarily as a result of an initial rating and a rating downgrade.

One RRG was upgraded during the past 12 months, A.M. Best reports, while three other companies were assigned lower ratings, two of which requested to be placed in the NR-4 (Not Rated At Company Request) category following their downgrades. Due to the limited number of groups rated, these results can fluctuate significantly with only minimal changes in the overall rating levels.

Although RRGs have many choices of domicile, the trend is to gravitate toward domiciles that are familiar with alternative risk transfer insurance vehicles. These states usually have more flexible captive laws and a higher level of expertise with this type of insurer, which is an added benefit for the RRGs. The majority of rated RRGs are domiciled in Vermont with 12 and Hawaii comes in second with three groups. The remaining rated companies are distributed equally throughout various domiciles. These results indicate a decrease of one rated company in each of the domiciles of Vermont and Hawaii as compared with 2005. One company redomiciled to Washington, D.C. from Hawaii.

Source: A.M. Best