Risk retention groups have a great deal of financial stability and remain committed to maintaining adequate capital to handle losses, according to a Demotech report on their Q1 2015 financial results.
During the last five years, cash and invested assets, total admitted assets and policyholders’ surplus have increased at a faster rate than total liabilities, according to Demotech.
Douglas Powell, senior financial analyst of Demotech, suggests the levels of policyholders’ surplus have become increasingly important in difficult economic conditions by allowing an insurer to remain solvent when facing uncertain economic conditions.
Since Q1 2011, cash and invested assets has increased 83.4 percent and total admitted assets have increased 64.6 percent. Over a five-year period from Q1 2011 through to Q1 2015, RRGs collectively increased policyholders’ surplus by 64.7 percent.
This increase represents the addition of nearly $1.9 billion to policyholders’ surplus.
The reported results indicate that RRGs are adequately capitalised in aggregate and are able to remain solvent if faced with adverse economic conditions or increased losses.
Liquidity for Q1 2015 was approximately 70.6 percent. A value less than 100 percent is considered favourable as it indicates that there was more than a dollar of new liquid assets for each dollar or total liabilities.
This also indicates a slight decrease for RRGs collectively as liquidity was reported at 71.9 percent in Q1 2014. This ratio has improved steadily each of the last five years.
Loss and loss adjustment expense (LAE) reserves represent the total reserves for unpaid losses and LAE.
The cash and invest assets to loss and LAE reserves ratio for Q1 2015 was 223.3 percent, a decrease from Q1 2014 when the ratio was 243.7 percent. Powell said these results indicate that RRGs remain conservative in terms of liquidity.
Powell believes that despite political and economic uncertainty, RRGs remain financially stable and continue to provide specialised coverage to their insureds.
The financial ratios calculated based on year-end results of RRGs appear to be reasonable, according to Powell, keeping in mind that it is expected that insurers’ financial ratios tend to fluctuate over time.
