Analysis of Risk Retention Groups – First Quarter 2013


July 9, 2013

Analysis of Risk Retention Groups – First Quarter 2013 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 – First Quarter 2013 by clicking here.

Summary

According to first quarter 2013 reported financial information, risk retention groups continue to exhibit financial stability.  In analyzing the reported results of RRGs, Douglas A Powell, Senior Financial Analyst, made the following observations:

  • Assets and policyholders surplus have continued to increase at a faster rate than liabilities.  Since first quarter 2009, cash and invested assets have increased 44.4 percent and total admitted assets have increased 33.4 percent.  More importantly, over a five year period from first quarter 2009 through first quarter 2013, RRGs collectively increased policyholders’ surplus 81.7 percent. This increase represents the addition of more than $1.5 billion to policyholders’ surplus.  During this same time period, liabilities increased only 14 percent, approximately $597 million.
  • Liquidity, as measured by liabilities to cash and invested assets, for first quarter 2013 was approximately 72.4 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 75.9 percent at first quarter 2012.  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 first quarter 2013 was 237.7 percent and indicates an improvement over first quarter 2012, as this ratio was 220.5 percent.  These results indicate that RRGs remain conservative in terms of liquidity.
  • Leverage, as measured by total liabilities to policyholders’ surplus, for first quarter 2013 was 136.4 percent.  This indicates an improvement for RRGs collectively as leverage was reported at 148.7 percent at first quarter 2012.
  • The loss and loss adjustment expense LAE reserves to policyholders’ surplus ratio for first quarter 2013 was 79.3 percent and indicates an improvement over first quarter 2012, as this ratio was 88.8 percent.  The higher the ratio of loss reserves to surplus, the more an insurer’s stability is dependent on having and maintaining reserve adequacy.
  • RRGs collectively reported $1.3 billion of direct premium written (DPW) through first quarter 2013, an increase of 4.9 percent over first quarter 2012.  RRGs collectively reported $541 million of net premium written (NPW) through first quarter 2013, an increase of 16.6 percent over first quarter 2012.
  • The DPW to policyholders’ surplus ratio for RRGs collectively through first quarter 2013 was 150.5 percent and indicates an improvement over first quarter 2012, as this ratio was 156.4 percent.  The NPW to policyholders’ surplus ratio for RRGs through first quarter 2013 was 60.6 percent and indicates a diminishment over first quarter 2012, as this ratio was 56.7 percent.  Please note that both of these amounts have been adjusted to reflect projected annual DPW and NPW based on first quarter 2013 results.
  • RRGs reported an aggregate underwriting gain for through first quarter 2013 of  $3.6 million, an increase of $14.2 million over first quarter 2012, and a net investment gain of nearly $57.1 million, a decrease of $4.3 million over first quarter 2012.  RRGs collectively reported net income of over $56.4 million, an increase of $8.3 million over first quarter 2012.
  • The combined ratio, as measured by loss ratio plus expense ratio, through first quarter 2013 was 87.4 percent and is comparable to first quarter 2012, as the combined ratio was reported at 88.5 percent.  This ratio measurers an insurer’s overall underwriting profitability.  A combined ratio of less than 100 percent indicates an underwriting profit.

Despite political and economic uncertainty, RRGs remain financially stable and continue to provide specialized coverage to their insureds.  The financial ratios calculated based on first quarter results of RRGs appear to be reasonable, keeping in mind that it is typical for insurers’ financial ratios to fluctuate over time.  The first quarter 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, 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 regarding the liability of individual RRG members.  Also in this issue, Rachel Wilkins, Analyst, Demotech, Inc., has provided her review of the reinsurers of RRGs.

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 – First Quarter 2013 by clicking here.

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