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Demotech Releases Second Quarter 2019 Financial Analysis of RRGs

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October 03, 2019

Demotech has released its Analysis of Risk Retention Groups—Second Quarter 2019, 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 "continue to collectively provide specialized coverage to their insureds while remaining financially stable. Based on reported financial information, RRGs have a great deal of financial stability and remain committed to maintaining adequate capital to handle losses."

The following are some specifics drawn from the analysis.

  • Since second quarter 2018, collective RRG policyholder surplus has increased by 26.6 percent.

  • RRGs' liquidity, as measured by liabilities to cash and invested assets, for second-quarter 2019 was 67.6 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 142 percent—as compared to 148 percent reported in the second quarter of 2018. Demotech prefers individual RRGs to report leverage of less than 300 percent.

  • The 103.7 percent combined ratio—the loss ratio (84.9 percent) plus the expense ratio (18.8 percent)—was within a profitable range. This compares to second-quarter 2018's 96.7 percent combined ratio (loss ratio [78.5 percent] plus expense ratio [18.2 percent]).

  • There was $2.1 billion of direct premium written (DPW) through the second quarter of 2019, which reflects an increase of 29.9 percent over second-quarter 2018.

DPW to policyholders' surplus ratio through second-quarter 2019 was 80.4 percent, compared to 80.1 percent in 2018, while the net premium written to policyholders' surplus ratio was 48 percent, similar to 2018's 48.5 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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