Demotech 2Q Report: Fiscal Health of the RRG Industry

On Oct. 29, 2020, financial analysis firm Demotech, Inc. released its report “Analysis of Risk Retention Groups — Second Quarter 2020.” Douglas A. Powell, Senior Financial Analyst at Demotach, conducted the research for the report and compiled the findings. Demotech specializes in evaluating the financial stability of independent, regional, and specialty insurers. The company reviews more than 400 insurers operating in the U.S.

Below are some highlights from the report.

Introduction
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.

Balance Sheet Analysis
From second quarter 2019 to second quarter 2020, cash and invested assets increased 4.5 percent and total admitted assets increased 5.3 percent. RRGs collectively reported a 3.1 percent increase to policyholders’ surplus. This represents a $163.1 million year-over-year increase to policyholders’ surplus.
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 and able to remain solvent if faced with adverse economic conditions or increased losses.

Income Statement Analysis
In regards to underwriting results, collectively RRGs were unprofitable through second quarter 2020, and reported an aggregate underwriting loss of $39.8 million. However, RRGs collectively reported a net investment gain of $115.6 million and, as a result, a net gain of $70.5 million.

In Conclusion
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. The results of RRGs indicate that these specialty insurers continue to exhibit financial stability.

To read the entire Demotech report, click here.