RRGs Report Financially Stable Results Through Third Quarter 2014

Transcription

1 RRGs Report Financially Stable Results Through Third Quarter 2014 This article originally appeared in Analysis of Risk Retention Groups Third Quarter 2014 Written by Douglas A Powell Senior Financial Analyst, DEMOTECH, INC. A review of the reported fi nancial results of risk retention groups (RRGs) reveals insurers that continue to collectively provide specialized coverage to their insureds. Based on third quarter 2014 reported fi nancial information, RRGs have a great deal of fi nancial 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. The financial metrics and ratios presented below have been materially impacted by a Contribution Agreement and a merger made by separate companies. First, a Contribution Agreement of an RRG that transpired in the first quarter On January 1, 2014, Attorney s Liability Assurance Society Inc., RRG (ALAS) entered into a Contribution Agreement with its parent, ALAS Investment Services Limited (AISL). ALAS assumed significant assets and liabilities of the parent. According to the filed first quarter 2014 statement of ALAS, as a result of the transaction, loss reserves historically ceded by (ALAS) to the parent... were reassumed by the company. More than $2 billion in total assets and more than $1.5 billion in total liabilities were contributed to ALAS. The most significant liability assumed by ALAS was $1.2 billion of loss reserves. The net capital 40 The Self-Insurer

2 Self-Insurers Publishing Corp. All rights reserved. contribution of this transaction was more than $513 million. The second transaction materially impacting the financial metric and ratios of RRGs was a series of mergers. On May 1, 2014, MCIC Vermont Inc. (A Risk Retention Group) executed two mergers. The parent of MCIC Vermont Inc., MCIC Vermont Holdings Inc., was merged into MCIC Vermont Inc. Also on May 1, 2014, 2014, The Medical Centre Insurance Company, Ltd. was merged into MCIC Vermont Inc. Then MCIC Vermont Inc. converted from a risk retention company to a reciprocal risk retention company, thus changing its name to MCIC Vermont (A Reciprocal Risk Retention Group). Balance Sheet Analysis During the last five years, cash and invested assets, total admitted assets and policyholders surplus have increased at a faster rate than total liabilities. 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. Since third quarter 2010, cash and invested assets increased 83 percent and total admitted assets increased 64.8 percent. More importantly, over a five year period from third quarter 2010 through third quarter 2014, RRGs collectively increased policyholders surplus 72.5 percent. This increase represents the addition of over $2 billion to policyholders surplus. During this same time period, liabilities have increased 59.7 percent. 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. Liquidity, as measured by liabilities to cash and invested assets, for third Short term Assets Net Admitted Assets Liabilities Policyholders Surplus 2010 Q Q Q Q Q3 quarter 2014 was approximately 65.7 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. This also indicates an improvement for RRGs collectively as liquidity was reported at 66.6 percent at third quarter 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. This includes reserves for any incurred but not reported losses as well as supplemental reserves established by the company. The cash and invested assets to loss and LAE reserves ratio measures liquidity in terms of the carried reserves. The cash and invested assets to loss and LAE reserves ratio for third quarter 2014 was percent and indicates an improvement over third quarter 2013, as this ratio was percent. These results indicate that RRGs remain conservative in terms of liquidity. 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 third quarter 2014 was percent and indicates a diminishment compared to third quarter 2013, as this ratio was percent. The loss and LAE reserves to policyholders surplus ratio for third quarter 2014 was 99.1 percent and indicates a diminishment compared to third quarter 2013, as this ratio was 80.6 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 reported direct premium written in eleven lines of business through third quarter RRGs collectively reported nearly $2.5 billion of direct premium written (DPW) through third quarter 2014, an increase of 2.1 percent over third quarter RRGs reported over $1.5 billion of net premium written (NPW) through third quarter 2014, an increase of 32.4 percent over third quarter $12 $10 $8 $6 $4 $2 $ March 2015 The Self-Insurer 41

3 The DPW to policyholders surplus ratio for RRGs collectively through third quarter 2014 was 68.1 percent, down from 91.5 percent at third quarter The NPW to policyholders surplus ratio for RRGs through third quarter 2014 was 42.8 percent and indicates a decrease over 2013, as this ratio was 44.4 percent. Please note that these ratios have been adjusted to reflect projected annual DPW and NPW based on results through the third quarter. An insurer s DPW to surplus ratio is indicative of its policyholders surplus leverage on a direct basis, without consideration for the effect of reinsurance. An insurer s NPW to surplus ratio is indicative of its policyholders surplus leverage on a net basis. An insurer relying heavily on reinsurance will have a large disparity in these two ratios. A DPW to surplus ratio in excess of 600 percent would subject an individual RRG to greater scrutiny during the financial review process. Likewise, a NPW to surplus ratio greater than 300 percent would subject an individual RRG to greater scrutiny. In certain cases, premium to surplus ratios in excess of those listed would be deemed appropriate if the RRG had demonstrated that a contributing factor to the higher ratio is relative improvement in rate adequacy. In regards to RRGs collectively, the ratios pertaining to premium written appear to be conservative. Income Statement Analysis RRGs collectively reported a $63.8 million underwriting loss through third quarter The third quarter result was impacted heavily by the underwriting loss reported by ALAS due to the Contribution Agreement the company entered into. The collective underwriting losses were offset by strong investment gains and other sources of income. RRGs reported an aggregate net investment gain of $209.4 million and a net income of $134.9 million. The loss ratio for RRGs collectively, as measured by losses and loss adjustment expenses incurred to net premiums earned, through third quarter 2014 was 80.2 percent, an increase over 2013, as the loss ratio was 68.5 percent. This ratio is a measure of an insurer s underlying profitability on its book of business. The expense ratio, as measured by other underwriting expenses incurred to net premiums written, through third quarter 2014 was 20.6 percent and indicates an improvement compared to 2013, as the expense ratio was reported at 23.7 percent. This ratio measurers an insurer s operational efficiency in underwriting its book of business. Contact us today to enhance your savings! UCS s PROVEN Solutions: Generate significant additional Plan savings? For every $100,000 in out-of-network medical bills we save our Clients on average $40,000! Reduce administrative costs? Scanning Plus can eliminate scanning & clearinghouse fees Impact stop-loss premiums Deliver service excellence The Self-Insurer

4 WE HAVE THE EXPERTISE AND A COLLABORATIVE CULTURE TO HELP YOU SUCCEED. Self-Insurers Publishing Corp. All rights reserved. Just having group benefits expertise is not enough. At AmWINS, we have taken specialization one step further by creating a practice that enables our team of specialists to collaborate with one another quickly, helping you give the best options to your self-funded clients. That s the competitive advantage you get with AmWINS Group Benefits. SPECIALIZING IN GIVING YOU MORE. March 2015 The Self-Insurer 43

5 The Only Complete Settlement Option in the Marketplace echo is the leading provider of electronic healthcare payment solutions, serving over 50,000 erisa health plans and fully insured groups through a single secure erisa, HIPaa and Core compliant system. What s Our secret? We: Consolidate multiple payments into one Deliver payments and benefit statements electronically Reward your bottom line from day one To learn more about echo HealTH, InC., ConTaCT mike HIndo Today info@echohealthinc.com echohealthinc.com 868 Corporate Way, Westlake, oh The Self-Insurer

6 Combined Ratio Loss Ratio Expense Ratio 2010 Q Q Q Q Q3 120% 100% 40% The combined ratio, loss ratio plus expense ratio, through third quarter 2014 was percent and indicates a diminishment compared to 2013, as the combined ratio was reported at 92.2 percent. This ratio measures an insurer s overall underwriting profitability. A combined ratio of less than 100 percent indicates an underwriting profit. Regarding RRGs collectively, the ratios pertaining to income statement analysis appear to be appropriate. Moreover, these ratios have remained fairly stable for each of the last five years and within a profitable range. Conclusions Based on Third Quarter 2014 Results Despite political and economic uncertainty, RRGs remain financially stable and 80% 60% 20% 0% continue to provide 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. It is important to note again that while RRGs have reported net income, they have also continued to maintain adequate loss reserves while increasing premium written year over year. RRGs continue to exhibit a great deal of financial stability. Douglas A Powell is a Sr. Financial Analyst at Demotech, Inc. your questions or comments to dpowell@demotech.com. For more information about Demotech visit Indigo Stop Loss Insurance: Minimize Your Financial Risk Prepare for the unexpected. Limit risk to your bottom line from unexpected insurance claims with our stop loss insurance. Please visit for more information. Self-Insurers Publishing Corp. All rights reserved Indigo Insurance Services, LLC is a subsidiary of Blue Cross Blue Shield of Massachusetts, Inc. March 2015 The Self-Insurer 45