A.M. Best Special Report: Demographic Changes Challenge U.S. Fraternal Insurers, But Earnings Stable for Now

OLDWICK, N.J.--()--Net premium growth among the U.S. fraternal insurance companies followed by A.M. Best fell 2.3% in 2016, and has averaged just 0.7% from 2011-2016. However, despite the effects of spread compression, the fraternal companies in aggregate have posted favorable operating results and net income every year since 2009, according to a new A.M. Best special report.

The Best’s Special Report, titled, “Fraternals Face Challenges, But Earnings Are Stable,” states that the pressures and challenges faced by the larger life/annuity (L/A) insurance industry, such as low interest rates and out-of-date distribution systems, are magnified for the fraternal society segment, as demographics have shifted to urban from rural and have led to low to declining membership growth. The fraternal society segment—20 companies as of 2016—reported flat to marginally declining net premiums written (NPW) over the past six years, following three years of fairly substantial growth from 2007-2010. For nearly half of the fraternal population, the allocation to annuities came to more than 70% of total NPW in 2016 (substantially higher than the insurance industry average), compared with just 25% in 2007, highlighting that the growth of annuities has occurred throughout a large part of the fraternal population.

This dynamic has shifted the overall business line profile of the fraternals toward more interest rate risk, as individual annuity and deposit-type contract reserves accounted for 46.0% of total reserves in 2016, compared with 41.2% in 2007. The same interest-sensitive premium increased to 64.2% from 51.7% during the same period.

Consistently favorable operating results have helped the fraternals increase their capital & surplus steadily over the last six years. Additionally, the lack of any substantial premium growth over the last few years has improved their overall premium leverage to 0.7% in 2016 from 1.1% in 2011, about half the L/A industry’s premium leverage of 1.5% in 2016.

Fraternals’ overall balance sheet quality remains sound, with generally lower levels of investment risk, given strong risk-adjusted capitalization levels that continue to support A.M. Best’s credit ratings. However, negative rating actions potentially could occur for those fraternals with declining membership, lower capitalization ratios, a business mix shifting toward heightened and substantial interest sensitivity and consistent operating losses that deplete capital.

To access a copy of this report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=262673.

A.M. Best is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2017 by A.M. Best Rating Services, Inc. and/or its subsidiaries. ALL RIGHTS RESERVED.

Contacts

A.M. Best
Jason Hopper, +1 908-439-2200, ext. 5016
Senior Industry Research Analyst
Credit Rating Criteria –
Research and Analysis
jason.hopper@ambest.com
or
Christopher Sharkey, +1-908-439-2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim Peavy, +1-908-439-2200, ext. 5644
Director, Public Relations
james.peavy@ambest.com

Contacts

A.M. Best
Jason Hopper, +1 908-439-2200, ext. 5016
Senior Industry Research Analyst
Credit Rating Criteria –
Research and Analysis
jason.hopper@ambest.com
or
Christopher Sharkey, +1-908-439-2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim Peavy, +1-908-439-2200, ext. 5644
Director, Public Relations
james.peavy@ambest.com