Third Quarter Results for RRGs Indicative of Exceptional Business
By Douglas A Powell, Senior Financial Analyst
There is a shared perception by many analysts that any business or industry is only as good as its bottom line. If this is the case, business continues to be exceptional for risk retention groups (RRGs). RRGs have already withstood the political and economic uncertainties that have negatively impacted industries such as retail and manufacturing. More importantly, over the past five years, RRGs have remained vigilant in their capitalization and surplus needs to adequately address claims and losses.
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. By law, the insureds of an RRG must also be owners of the RRG. Based on collective performance, this unique ownership structure appears to be successful as the knowledge specialists have been able to work in conjunction with the insurance specialists to maintain a profitable business model.
Balance Sheet Metrics
Over a five year period from third quarter 2008 through third quarter 2012, RRGs have collectively increased policyholders surplus more than 73 percent. This percentage represents the addition of nearly $1.45 billion to policyholders surplus. During that same time period, liabilities increased approximately 11 percent, a little more than $436 million. The reported results indicate that RRGs collectively are adequately capitalized and able to remain solvent if faced with adverse economic conditions or greater losses.
Further analysis, through third quarter 2012, of the five primary lines of business for RRGs (commercial auto, medical professional claims-made, medical professional occurrence, other liability claims-made and other liability occurrence) also supports this conclusion. RRGs, on a primary line of business basis, collectively reported financially stable results as measured both by liquidity and leverage. These collective results also imply that RRGs are appropriately reinsured. If they were not, net operating results would be skewed.
DPW by Jurisdiction and Line of Business
In analyzing direct premium written (DPW) on a jurisdictional basis, 32 of the 57 reported jurisdictions have increased DPW over a five year period through the third quarter 2012. The greatest increases in DPW, based on dollar amount, were seen in New York, Pennsylvania, Florida and Maryland, which all reported increased DPW of more than $20 million.
Through the third quarter 2012, 25 jurisdictions reported decreased DPW during the previous five year period. The greatest decreases in DPW, based on dollar amount, were seen in the District of Columbia, Texas, Washington, California and Ohio. Each of these jurisdictions reported a decrease in DPW of at least $8 million.
A majority of DPW for RRGs is accounted for in the medical professional claims-made line of business. Through third quarter 2012, approximately 55 percent of DPW is medical professional claims-made. It is also the line of business with the greatest five year DPW growth in actual dollars. DPW for medical professional claims-made has increased over 16 percent, nearly $180 million, during the previous five year period.
The profitability of RRG operations is encouraging. RRGs reported an aggregate underwriting gain for 2012 of nearly $44 million through the third quarter 2012. RRGs collectively reported net income of over $185 million through the third quarter.
Further analysis reveals that RRGs, on a primary line of business basis, collectively reported financially stable results as measured by loss ratio, expense ratio and combined ratio. Moreover, RRGs collectively reported a net income for each of the five primary lines of business.
It is important to note again that while RRGs have reported net underwriting gains and net profits, they have also continued to maintain adequate levels of policyholders’ surplus while increasing DPW period over period. To summarize the reported results, RRGs continue to exhibit exceptional financial stability.