Best’s Special Report: U.S. Fraternal Insurers Still Face Challenges, But Balance Sheets For Rated Fraternals Are Solid

OLDWICK, N.J.--(BUSINESS WIRE)--Despite ongoing challenges that have persisted for U.S. fraternal insurance companies over the past decade, the segment has continued to post favorable operating results on an aggregate basis, according to a new AM Best report.

The Best’s Special Report, “Balance Sheets of Rated Fraternals Solid Despite Growth Challenges,” states that operating income remained favorable in 2022 for the 67 U.S. life fraternal companies rated by AM Best, but was still lower than the segment’s 2021 results. Another positive note was the favorable premium growth in 2022 that carried through into the first quarter of 2023, which was driven by annuity sales.

However, the report notes that several gradual but significant challenges over the past decade will over time negatively pressure the ratings of U.S. fraternal benefit societies. These include changing demographics, which have led to declines in membership growth, challenges in expanding distribution—particularly as technology continues to create competition in the fraternals’ core market—and heightened technology costs.

First-quarter 2023 operating gains were $170 million for the segment, significantly lower than $381 million in first-quarter 2022, which suggests that bottom-line performance for 2023 could worsen from 2022. “However, mortality claims tend to be higher during the first quarter of the year—the winter months—so operating performance could improve if experience is favorable throughout the rest of the year,” said Edward Kohlberg, director, AM Best.

Fraternals’ operating results usually run lower than the rest of the life insurance industry’s; fraternals are tax-exempt, but their expenses tend to be higher than taxable organizations’ due to expenses associated with fraternal activities and policyholder dividends, resulting in lower operating gains and a lower return on equity than non-fraternals.

“The segment thus far has not been overwhelmed by an increase in mortality due to the pandemic, although some fraternals did see a rise in claims,” said Stratos Laskarides, senior financial analysts, AM Best. “The higher number of COVID-19 deaths has been somewhat offset by a decline in mortality from accidents.”

The fraternal segment has attempted to remain competitive with the broader U.S. life/annuity (L/A) industry by guaranteeing higher minimum interest rates on individual annuity business. Around 10% of the fraternals’ individual annuity accounts guarantee minimum crediting rates over 4%, higher than for the overall L/A segment, but this amount has declined rapidly since 2018, according to the report.

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=333294 .

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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