Demotech Releases Year-End 2018 Financial Analysis of RRGs

Human Arrow

April 26, 2019 |

Human Arrow

Demotech has released its Analysis of Risk Retention Groups—Year-End 2018, which reports on the overall financial performance of risk retention groups (RRGs). The rating company's senior financial analyst, Douglas Powell, 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."

Mr. Powell noted that RRGs were domiciled in 21 Jurisdictions during 2018. The largest RRG domicile was Vermont, with 82 RRGs. South Carolina housed 34 RRGs, and the District of Columbia housed 32 RRGs, followed by Hawaii and Nevada, each with 16 RRGs. According to Demotech, the remaining jurisdictions had 10 or fewer RRGs during 2018.

The following are some specifics drawn from the year-end 2018 analysis.

  • From year-end 2017 to year-end 2018, collective RRG policyholders' surplus has increased by 12.6 percent.
  • RRGs' liquidity, as measured by liabilities to cash and invested assets, for year-end 2018 was 66.7 percent. The 2018 results indicate an increase for RRGs collectively as liquidity was reported at 65.2 percent for year-end 2017. 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 144.3 percent—an increase from 133.4 percent reported for year-end 2017. Demotech prefers individual RRGs to report leverage of less than 300 percent.
  • There was a 101 percent combined ratio—the loss ratio (76.6 percent) plus the expense ratio (24.4 percent)—for year-end 2018. This compares to year-end 2017's 101.7 percent combined ratio (loss ratio [77.1 percent] plus expense ratio [24.6 percent]). A combined ratio of less than 100 percent typically indicates an underwriting profit.
  • There was $3.3 billion of direct premium written (DPW) through year-end 2018, an increase of 14.1 percent over 2017.
  • DPW to policyholders' surplus ratio through year-end 2018 was 68.4 percent, up from 67.5 percent in 2017, while the net premium written (NPW) to policyholders' surplus ratio was 35.7 percent, down from 2017's 37.6 percent ratio. The analysis notes that an insurer relying heavily on reinsurance will have a large disparity in these two ratios.

For context, the report said, "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."

April 26, 2019