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Demotech Releases Year-End 2017 Financial Analysis of RRGs

Financial Increase-SF
April 24, 2018

Demotech has released its Analysis of Risk Retention Groups—Year-End 2017, which reports on the overall financial performance of risk retention groups (RRGs). The rating company's senior financial analyst, Douglas Powell, has concluded that "RRGs have a great deal of financial stability and remain committed to maintaining adequate capital to handle losses. It is important to note that ownership of RRGs is restricted to the policyholders of the RRG. This unique ownership structure required of RRGs may be a driving force in their strengthened capital position." 

The following are some specifics drawn from the analysis.

  • From year-end 2016 to year-end 2017, collective RRG policyholder surplus has increased by 7.4 percent.

  • RRGs' liquidity, as measured by liabilities to cash and invested assets, for year-end 2017 was 64.7 percent—a decrease from 66.5 percent at year-end 2016. A value less than 100 percent is considered favorable, as it indicates that there was more than a dollar of net liquid assets for each dollar of total liabilities.

  • Leverage for all RRGs combined (total liabilities to policyholders' surplus) was 138.2 percent—a decrease from 143.7 percent at year-end 2016. Demotech prefers individual RRGs to report leverage of less than 300 percent.

  • The 97 percent combined ratio—the loss ratio (73.3 percent) plus the expense ratio (23.7 percent)—was within a profitable range. This ratio is a decrease from 102.4 percent at year-end 2016.

  • $3.2 billion of direct premium written (DPW) reflects an increase of 5.9 percent over 2016. $1.8 billion of net premium written (NPW) reflects an increase of less than 1 percent over 2016.

  • DPW to policyholders' surplus ratio was 64 percent, down from 64.9 percent in 2016, while the NPW to policyholders' surplus ratio was 35.8 percent, which is a decrease over 2016's 38.2 percent ratio. The analysis notes that an insurer relying heavily on reinsurance will have a large disparity in these two ratios.

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