9 June 2022Analysis

Demotech reveals RRGs remaining financially stable

Demotech’s latest review of the reported financial results of risk retention groups (RRGs) reveals insurers that continue to collectively provide specialised coverage to their insureds are remaining financially stable.

In its first quarter 2022 review, Demotech senior financial analyst Douglas Powell said that based on reported financial information, RRGs have a great deal of financial stability and remain committed to maintaining adequate capital to handle losses.

From first quarter 2021 to first quarter 2022, cash and invested assets increased 4.2 percent and total admitted assets increased 4.4 percent. RRGs collectively reported a less than 1 percent increase to policyholders’ surplus, an increase of $6.3 million. 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 2022 was 136.6 percent. A value more than 100 percent is considered favourable 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 said it 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 2022 was 163.7 percent.

The loss and loss adjustment expense reserves (loss reserves) to policyholders’ surplus ratio for first quarter 2022 was 100.1 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, Powell said that the ratios pertaining to the balance sheet appear to be appropriate and conservative. These reported results indicate that collectively RRGs remain adequately capitalised and able to remain solvent if faced with adverse economic conditions or increased losses.

Powell concluded: “Despite political and economic uncertainty, RRGs remain financially stable while providing specialised 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. The results of RRGs indicate that these specialty insurers continue to exhibit financial stability.”