Analysis of Risk Retention Groups – Third Quarter 2012

January 22, 2013

Analysis of Risk Retention Groups – Third Quarter 2012 contains expert analysis from Douglas A. Powell, Senior Financial Analyst, Demotech, Inc., along with industry perspective on other topics pertaining to Risk Retention Groups (RRGs).

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


According to third 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 liabilities.  Since third quarter 2008, short-term assets have increased 39.5 percent and total admitted assets have increased 31.1 percent. More importantly, policyholders surplus has increased 73.4 percent during this time, while total liabilities have only increased 10.7 percent.
  • Liquidity, as measured by liabilities to cash and invested assets, as of third quarter 2012 was approximately 68.4 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 was an improvement for RRGs collectively over third quarter 2011, as liquidity was reported at 74.6 percent.
  • Leverage, as measured by total liabilities to policyholders surplus, as of third quarter 2012 was approximately 132.4 percent.  Demotech prefers companies to report leverage of less than 300 percent.  This indicated an improvement for RRGs collectively over third quarter 2011, as leverage was reported at 155.2 percent.
  • The combined ratio, as measured by loss ratio plus expense ratio, through third quarter 2012 was 90.5 percent. This indicated an improvement for RRGs collectively over third quarter 2011, as the combined ratio was reported at 92.9 percent.
  • A $43.9 million net underwriting gain was reported by RRGs collectively through third quarter 2012. Also, RRGs collectively reported $185.2 million net income for the first nine months of 2012.

The financial ratios calculated based on the third 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.  In looking further, RRGs have collectively reported an underwriting gain at each year-end since 2004.  Equally as important, RRGs have collectively reported a net income at each year-end since 1996.  The third quarter results of RRGs indicate that these specialty insurers continue to exhibit financial stability.

Additional Information About This Issue

In this issue, the guest for On the Spot is Ken Barrett, Managing Director, Besso ReOn 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 an article to by Sandy Elsass, Chairman, NRRA.  Mr. Elsass has provided his comments regarding the need some RRGs have for capital as well as potential sources.

This issue marks the premier articles from David Provost, Deputy Commissioner, Captive Insurance, Vermont Department for Financial Regulation, and Josh Magden, Vice President of Insurance and Institutional Marketing, Sage Advisory Services.  Mr. Provost provides his insight on the financial examination process that an RRG would be subjected to in Vermont.  Mr. Magden provides his insight on how insurance investment management pertains to RRGs.

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