- Analysis of Risk Retention Groups
- P&C Research and Analysis
- Analysis of Risk Retention Groups – Second Quarter 2012
Analysis of Risk Retention Groups – Second Quarter 2012
November 6, 2012
Analysis of Risk Retention Groups – Second Quarter 2012 contains commentary pertaining to the financial stability of RRGs provided by Douglas A. Powell, Senior Financial Analyst, Demotech, Inc. as well as other professionals from the industry.
According to second quarter 2012 statutory 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 liabilities. Since second quarter 2008, short-term assets have increased 35.7 percent and total admitted assets have increased 28 percent. More importantly, policyholders surplus has increased 64.2 percent during this time, while total liabilities have only increased 10.5 percent.
- Liquidity, as measured by liabilities to cash and invested assets, for second quarter 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 139.5 percent. Demotech prefers companies report leverage of less than 300 percent. This indicates an improvement for RRGs collectively over second quarter 2011, as leverage was reported at 152.4 percent.
- The combined ratio, as measured by loss ratio plus expense ratio, for second quarter 2012 was 92.8 percent. This indicates an improvement for RRGs collectively over second quarter 2011, as the combined ratio was reported at 93.5 percent.
- 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.
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.
Also in this issue, the guest for On the Spot is Michael Rogers, Chairman and CEO, Risk Services, LLC. On the Spot is a featured column that utilizes a format of an informative and interactive discussion. The discussion is between Mr. 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.
Also in this issue, the National Risk Retention Association (NRRA) contributed its debut article to Analysis of RRGs. Joseph Deems, Executive Director, NRRA, has provided their comments relating to topics recently discussed at the 2012 NRRA Conference in Washington, DC.