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
Since second quarter 2018, cash and invested assets (28.2 percent), total admitted assets (26.0 percent), and total liabilities (25.6 percent) all increased. Also, over the same time period through second quarter 2019, RRGs collectively increased policyholders' surplus 26.6 percent. This increase represents the addition of nearly $1.1 billion to policyholders' surplus. These reported results indicate that RRGs are adequately capitalized in aggregate and able to remain solvent if faced with adverse economic conditions or increased losses. The level of policyholders' surplus becomes increasingly important in times of difficult economic conditions by allowing an insurer to remain solvent when facing uncertain economic conditions.
Liquidity, as measured by liabilities to cash and invested assets, for second quarter 2019 was 67.6 percent. A value 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.
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 second quarter 2019 was 142.0 percent. The loss and LAE reserves to policyholders' surplus ratio for second quarter 2019 was 96.8 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.
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 professional industries.
RRGs collectively reported nearly $2.1 billion of direct premium...