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Demotech Releases Second Quarter 2018 Financial Analysis of RRGs

Financial Analysis 480x377
October 19, 2018

Demotech has released its Analysis of Risk Retention Groups—Second Quarter 2018, 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.

  • Since first quarter 2017, collective RRG policyholder surplus has increased by 4.9 percent.

  • RRGs' liquidity, as measured by liabilities to cash and invested assets, for second quarter 2018 was 68.1 percent. 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 148 percent—as compared to 149.8 percent reported in the second quarter of 2017. Demotech prefers individual RRGs to report leverage of less than 300 percent.

  • The 96.7 percent combined ratio—the loss ratio (78.5 percent) plus the expense ratio (18.2 percent)—was within a profitable range. This compares to second quarter 2017's 92.6 percent combined ratio, which is loss ratio (73.5 percent) plus expense ratio (19.1 percent).

  • A $2 billion of direct premiums written (DPW) through the second quarter of 2018 reflects a slight decrease of 2.3 percent over second quarter 2017.

  • DPW to policyholders' surplus ratio through second quarter 2018 was 80.1 percent, down from 83.4 percent in 2017, while the net premiums written to policyholders' surplus ratio was 48.5 percent, similar to 2017's 48.6 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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