DEMOTECH: Report Updates RRG Results

By Douglas A Powell, Sr Financial Analyst at Demotech

A review of the reported financial results of risk retention groups (RRGs) reveals insurers that 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. 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.

Balance Sheet Analysis
From first quarter 2022 to first quarter 2023, cash and invested assets increased approximately 1.0 percent and total admitted assets increased 3.0 percent.  RRGs collectively reported a less than 1 percent decrease to policyholders’ surplus, a decrease of nearly $876K.    The level of policyholders’ surplus becomes increasingly important in times of difficult economic conditions by allowing an insurer to remain solvent when facing uncertainty.
Liquidity, as measured by cash and invested assets to liabilities, for first quarter 2023 was 131.3 percent.  Avalue more 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.
In evaluating individual RRGs, Demotech, Inc. prefers companies to report leverage of less than 300 percent. Leverage for all RRGs combined, as measured by total liabilities to policyholders’ surplus, for first quarter 2023 was 171.6 percent.
The loss and loss adjustment expense reserves (loss reserves) to policyholders’ surplus ratio for first quarter 2023 was 107.6 percent.    The higher the ratio of loss reserves to surplus, the more an insurer’s stability is dependent on having and maintaining reserve adequacy.
Regarding RRGs collectively, the ratios pertaining to the balance sheet appear to be appropriate and

conservative.  These reported results indicate that collectively RRGs remain adequately capitalized.

Income Statement Analysis
In regards to underwriting results, collectively RRGs were unprofitable in first quarter 2023, as RRGsreported an aggregate underwriting loss of $19.6 million.  However, due to net investment gains of $107.6 million, RRGs collectively reported a net income of $76.5 million.
The loss ratio for RRGs collectively, as measured by losses and loss adjustment expenses incurred to net premiums earned, at first quarter 2023 was 79.8 percent.  This ratio is a measure of an insurer’s underlying profitability on its book of business.
The expense ratio, as measured by other underwriting expenses incurred to net premiums earned, at first quarter 2023 was 22.9 percent.  This ratio measures an insurer’s operational efficiency in underwriting its book of business.
The combined ratio, loss ratio plus expense ratio, at first quarter 2023 was 102.6 percent.    This ratio measures an insurer’s overall underwriting profitability.    A combined ratio of less than 100 percent typically indicates an underwriting profit and a ratio of more than 100 percent typically indicates an underwriting loss.
Despite the underwriting losses, the ratios pertaining to the income statement appear to be appropriate for RRGs collectively.

Premium Written Analysis
Since RRGs are restricted to liability coverage, they tend to insure medical providers, product
manufacturers, law enforcement officials and contractors, as well as other industries with professional liability.
RRGs collectively reported nearly $2.2 billion of direct premium written during first quarter 2023, an
increase of 5.5 percent over first quarter 2022.  RRGs reported $1.4 billion of net premium written during first quarter 2023, an increase of 6.3 percent over first quarter 2022.
The direct premium written to policyholders’ surplus ratio for RRGs collectively for first quarter 2023 was 147.5 percent. The net premium written to policyholders’ surplus ratio was 97.3 percent.  Please note, the premium written values for these ratios have been adjusted so they can be compared to year end ratios.
An insurer’s direct premium written to surplus ratio is indicative of its policyholders’ surplus leverage on a direct basis, without consideration for the effect of reinsurance.   An insurer’s net premium written to surplus ratio is indicative of its policyholders’ surplus leverage on a net basis.  An insurer relying heavily on reinsurance will have a large disparity in these two ratios.
A direct premium written to surplus ratio of more than 600 percent would subject an individual RRG to greater scrutiny during the financial review process.    Likewise, a net premium written to surplus ratio greater than 300 percent would subject an individual RRG to greater scrutiny.  In certain cases, premium to surplus ratios more than those listed would be deemed appropriate if the RRG had demonstrated that a contributing factor to the higher ratio is relative improvement in rate adequacy.
In regards to RRGs collectively, the ratios pertaining to premium written appear to be conservative.

Conclusions Based on First Quarter 2023 Results
Despite political and economic uncertainty, RRGs remain financially stable while providing specialized
coverage to their insureds.  The financial ratios calculated based on the reported results of RRGs appear to be reasonable, keeping in mind that it is typical and expected that insurers’ financial ratios tend to fluctuate over time.
It is important to note again that while RRGs have reported net income, they have also continued to
maintain adequate loss reserves while increasing premium written and increasing policyholders’ surplus year over year.  The results of RRGs indicate that these specialty insurers continue to exhibit financial stability.