Analysis of Risk Retention Groups – First Quarter 2012


July 18, 2012

Analysis of Risk Retention Groups – First Quarter 2012 contains commentary pertaining to the financial stability of RRGs provided by Douglas Powell, Senior Financial Analyst, Demotech, Inc.

Access Analysis of Risk Retention Groups – First Quarter 2012 by clicking here.

According to first quarter 2012 reported financial information, risk retention groups continue to exhibit financial stability.  In analyzing the reported results of RRGs, Demotech, Inc made the following observations:

  • Assets and policyholders surplus have continued to increase at a quicker rate than total liabilities.  Since first quarter 2008, short-term assets have increased 36.8 percent and total admitted assets have increased 29.5 percent. More importantly, policyholders surplus has increased 64.3 percent during this time, while total liabilities have only increased 13.5 percent.
  • Liquidity, as measured by liabilities to cash and invested assets, for first quarter 2012, was approximately 76.2 percent.  A value less than 100 percent is considered favorable as it indicates that there was more than $1 of net liquid assets for each $1 of total liabilities.  This also indicates an improvement for RRGs collectively over for first quarter 2011 as liquidity was reported at nearly 80 percent.
  • Leverage, as measured by total liabilities to policyholders surplus, for first quarter 2012, was approximately 150 percent.  Demotech prefers companies report leverage of less than 300 percent.  This indicates an improvement for RRGs collectively over first quarter 2011 as leverage was reported over 161 percent.
  • The combined ratio, as measured by loss ratio plus expense ratio, for first quarter 2012 was 88.1 percent. This indicates an improvement for RRGs collectively over first quarter 2011, as the combined ratio was reported at 90.6 percent.
  • A $10 million net underwriting loss was reported by RRGs collectively for first quarter 2012. However, RRGs did collectively report a $49.8 million net income for first quarter 2012.

 

The financial ratios calculated based on the first quarter results of the various lines of business of 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. In fact, the first quarter results of RRGs indicate that these specialty insurers continue to exhibit financial stability.

This issue also marks the debut of On the SpotOn the Spot is a featured column that utilizes a format of an informative and interactive discussion.  The discussion is between Douglas A. Powell and a member of the RRG community.  During the discussion, the member is asked a series of questions pertaining to the economic, jurisdictional, political or competitive factors influencing RRGs as well as other current factors.  The purpose of the column is to present the expertise and point of view of the RRG community member.

Access Analysis of Risk Retention Groups – First Quarter 2012 by clicking here.