A.M. Best Special Report: Risk Retention Groups' Profitability Continues Amid Softening Market.

OLDWICK, N.J. -- The softening property/casualty insurance market may place increasing competitive pressure on risk retention groups (RRG) and captive insurance companies. RRG members may be lured to other insurers amid favorable market conditions, and RRGs likely will offer incentives to retain members, which could hurt an RRG's bottom line, according to a special report by the A.M. Best Co.

The report also stated:

* The extent of the impact will depend on the degree of incentives offered, but RRGs offer stability to members regardless of market conditions--a major factor in the high level of loyalty RRGs experience.

* A.M. Best rated RRGs showed a dramatic increase in profitability in 2006, bolstered by strong risk management and loss control programs--a hallmark of RRGs.

* A.M. Best assigned two ratings to RRGs in 2006, bringing the total of letter ratings on RRGs to 26 with a range from "A" to "B".

* RRGs are gravitating toward domiciles that are familiar with alternative risk transfer insurance vehicles, with flexible captive laws and a higher level of expertise.

* Continuing growth in the industry has brought rated RRGs' policyholder surplus to about $698 million and total assets to $1.91 billion--both up from 2005.

* RRGs are sustaining operating profitability, with an aggregate average combined ratio of 92.4. in 2006--lower than that of most traditional insurance companies.

* Medical malpractice (claims made) remained a significant portion of RRG business in 2006 at 43%, while other liability (per occurrence) remained virtually unchanged at 29%.

* RRGs benefit from niche market expertise; in most cases, management consists of executives drawn from the particular industry or business sector insured.

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Founded in 1899, A.M. Best Company is a full-service credit rating organization dedicated to serving the financial services industries, including the banking and insurance sectors. For more information, visit www.ambest.com.