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Demotech Releases Third Quarter 2019 Financial Analysis of RRGs

Business Analysis Concept SF
December 13, 2019

Demotech has released its Analysis of Risk Retention Groups—Third 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 third-quarter 2018, collective RRG policyholder surplus has increased by 25.7 percent.

  • RRGs' liquidity, as measured by liabilities to cash and invested assets, for third quarter 2019 was 66.7 percent. A value of 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 140.1 percent—as compared to 144.2 percent reported in the third quarter of 2018. Demotech prefers individual RRGs to report leverage of less than 300 percent.

  • There is a 103.0 percent combined ratio—the loss ratio (82.9 percent) plus the expense ratio (20.1 percent). A combined ratio of less than 100 percent typically indicates an underwriting profit. This compares to third quarter 2018's 100.1 percent combined ratio (loss ratio (77.8 percent) plus expense ratio (22.3 percent)).

  • There was $3.0 billion of direct premium written (DPW) through the third quarter of 2019, which reflects an increase of 25.3 percent over third quarter 2018.

  • DPW to policyholders' surplus ratio through third quarter 2019 was 75.0 percent, compared to 73.6 percent in 2018, while the net premium written (NPW) to policyholders' surplus ratio was 43.6 percent, compared with 2018's 39.8 percent ratio.1 The analysis notes that an insurer relying heavily on reinsurance will have a large disparity in these two ratios.

    Demotech also advised, "A DPW to surplus ratio in excess of 600 percent would subject an individual RRG to greater scrutiny during the financial review process. Likewise, a NPW to surplus ratio greater than 300 percent would subject an individual RRG to greater scrutiny."

  1. Please note, according to the report, these ratios have been adjusted to reflect projected annual DPW and NPW based on third quarter results.

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