Analysis of Risk Retention Groups – Year-End 2012


May 3, 2013

Analysis of Risk Retention Groups – Year-End 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).  Based upon feedback, more financial statement results as well as more key performance ratios are presented in this issue.

Access Analysis of Risk Retention Groups - Year-End 2012 by clicking here.

Summary

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

  • Assets and policyholders surplus have continued to increase at a faster rate than liabilities.  Since 2008, cash and invested assets have increased 40.5 percent and total admitted assets have increased 33.9 percent.  More importantly, over a five year period from 2008 through 2012, RRGs have collectively increased policyholders’ surplus 71.5 percent. This increase represents the addition of more than $1.4 billion to policyholders’ surplus.  During this same time period, liabilities increased only 13.7 percent, slightly more than $500 million.
  • Liquidity, as measured by liabilities to cash and invested assets, for year-end 2012 was approximately 65.4 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 as liquidity was reported at 69.5 percent at year-end 2011.  Moreover, this ratio has improved steadily each of the last five years.
  • Loss and loss adjustment expense (LAE) reserves represent the total reserves for unpaid losses and unpaid LAE.  This includes reserves for any incurred but not reported losses as well as supplemental reserves established by the company.  The cash and invested assets to loss and LAE reserves ratio measures liquidity in terms of the carried reserves.  The cash and invested assets to loss and LAE reserves ratio for year-end 2012 was 236.9 percent and indicates an improvement over 2011, as this ratio was 214 percent.  These results indicate that RRGs remain conservative in terms of liquidity.
  • Leverage, as measured by total liabilities to policyholders’ surplus, for year-end 2012 was 123.3 percent.  This indicates an improvement for RRGs collectively as leverage was reported at 138.4 percent at year-end 2011.
  • The loss and loss adjustment expense LAE reserves to policyholders’ surplus ratio for year-end 2012 was 79.7 percent and indicates an improvement over 2011, as this ratio was 93 percent.  The higher the multiple of loss reserves to surplus, the more an insurer’s stability is dependent on having and maintaining reserve adequacy.
  • RRGs collectively reported $2.6 billion of direct premium written (DPW) at year-end 2012, an increase of nearly 5 percent over 2011.  RRGs collectively reported $1.3 billion of net premium written (NPW) at year-end 2012, an increase of 3.7 percent over 2011.
  • The DPW to policyholders’ surplus ratio for RRGs collectively for year-end 2012 was 74.3 percent and indicates an improvement over 2011, as this ratio was 78.1 percent.  The NPW to policyholders’ surplus ratio for RRGs collectively for year-end 2012 was 36.6 percent and indicates an improvement over 2011, as this ratio was 38.9 percent.
  • RRGs reported an aggregate underwriting gain for 2012 of nearly $181 million, an increase of 19.7 percent over the prior year, and a net investment gain of nearly $221 million, an increase of 6.7 percent over the prior year.  RRGs collectively reported net income of over $324 million, an increase of 8.6 percent over the prior year.
  • The combined ratio, as measured by loss ratio plus expense ratio, for year-end 2012 was 84.5 percent and indicates an improvement over 2011, as the combined ratio was reported at 87.6 percent.  This ratio measurers an insurer’s overall underwriting profitability.  A combined ratio of less than 100 percent indicates an underwriting profit.
  • The one-year loss development to prior year’s policyholders’ surplus for 2012 was -7.2 percent and indicates an improvement over 2011, as this ratio was reported at -6 percent.  The two-year loss development to second prior year-end policyholders’ surplus for 2012 was -12.2 percent and indicates a diminishment over 2011, as this ratio was reported at -14.1 percent.

The financial ratios calculated based on year-end results of RRGs appear to be reasonable, keeping in mind that it is typical for insurers’ financial ratios to fluctuate  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 year-end results of RRGs indicate that these specialty insurers continue to exhibit financial stability.  It is important to note again that while RRGs have reported net underwriting gains and net profits, they have also continued to maintain adequate levels of policyholders’ surplus while increasing premium written year over year.  RRGs continue to exhibit exceptional financial stability.

Additional Information About This Issue

In this issue, the National Risk Retention Association (NRRA) contributed an article by Joseph Deems, Executive Director, NRRA.  Mr. Deems has provided his comments regarding the ruling from the US Ninth Circuit of Appeals declaring the right of RRGs to operate free of most regulation by states other than the RRGs state of domicile.  Karrie Hyatt, Managing Editor, Risk Retention Reporter, has provided her thoughts on the industry trends in formations and retirements of RRGs as well as the policyholders and insureds of RRGs.  Josh Magden, Vice President of Insurance and Institutional Marketing, Sage Advisory Services, has continued his article from the previous issue, providing his insight on how insurance investment management pertains to RRGs. W. Burke Coleman, Esq., Legal Counsel and Compliance Manager, Demotech, Inc., has provided additional legal analysis on the ruling by the US Ninth Circuit Court.  Also in this issue, Lewis Bivona, Jr., Insurance Practice Leader, WithumSmith+Brown, PC, has provided his insight on how RRGs can weather a risk focused examination.

Company profile pages are provided by SNL Financial and give an in-depth look at the RRGs that have been assigned a Financial Stability Rating® (FSR).

Please keep in mind that neither the NAIC or its authorized vendor, SNL, endorse any analysis or conclusion based upon the use of the NAIC’s data.

Access Analysis of Risk Retention Groups - Year-End 2012 by clicking here.

If you have any questions, comments or suggestions, please contact Douglas A. Powell.