Risk Retention Groups Maintain Financial Stability in First Quarter 2020
August 10, 2020
An analysis of risk retention groups (RRGs) financial results from the first quarter of 2020 finds that RRGs have a great deal of financial stability and remain committed to maintaining adequate capital to handle losses.
The analysis, from Demotech, Inc., stressed that RRG ownership is restricted to RRG policyholders. "This unique ownership structure required of RRGs may be a driving force in their strengthened capital position," Demotech said in its first-quarter 2020 analysis of RRGs titled Risk Retention Groups Report Stable Results Despite Pandemic.
Demotech found that from first-quarter 2019 to first-quarter 2020, RRGs' cash and invested assets increased 1.1 percent and total admitted assets increased 2.4 percent. RRGs collectively reported a 2.9 percent decrease to policyholders' surplus, Demotech said, representing a $150.4 million decrease in policyholders' surplus.
The Demotech analysis of RRG results, written by Douglas A Powell, senior financial analyst, noted, "The level of policyholders' surplus becomes increasingly important in times of difficult conditions by allowing an insurer to remain solvent when facing uncertainty."
RRGs' liquidity, as measured by cash and invested assets to liabilities, for the first quarter of 2020 was 135 percent, according to Demotech, which said a value greater 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.
The loss and loss adjustment expense reserves (loss reserves) to policyholders' surplus ratio for the first quarter was 103.1 percent for RRGs, Demotech said, noting that the higher the ratio of loss reserves to surplus, the more an insurer's stability is dependent on having and maintaining reserve adequacy.
Collectively, RRGs first-quarter balance sheet ratios appear to be appropriate and conservative, Demotech said, indicating RRGs' first-quarter results showed they remain adequately capitalized and able to remain solvent if faced with adverse economic conditions or increased losses.
RRGs underwriting was profitable in the first quarter of 2020, Demotech said, reporting an aggregate underwriting gain of $6.7 million. RRGs did report a collective net investment loss of $78.6 million for the quarter and, consequently, a first-quarter net loss of $65.9 million.
RRGs combined ratio for the first quarter was 99.6 percent.
"Despite the investment losses, the ratios pertaining to the income statement appear to be appropriate for RRGs collectively," Demotech said.
RRGs collectively reported $1.8 billion of direct premium written during 2020's first quarter, according to Demotech, an increase of 11.2 percent over the same period in 2019. Net written premium during the first quarter was $1.1 billion, a 12.5 percent increase over the first quarter of 2019.
August 10, 2020