Life Insurance

Low Interest Rate Environment & Pandemic Pressure U.S. Fraternals

Net premiums written for the 73 U.S. life fraternal companies decreased by approximately 6% year over year in 2020 to $9.3 billion

This market segment report was provided by AM Best. Access the full report here.

OLDWICK, N.J.–(BUSINESS WIRE)–U.S. fraternal insurance companies posted a positive year in 2020 despite COVID-19 challenges and low interest rates, as well as difficulties in reaching current and prospective members, according to a new AM Best report.

The Best’s Market Segment Report, titled, “Low Interest Rate Environment and Pandemic Pressure Fraternals,” states that net premiums written (NPW) for the 73 U.S. life fraternal companies decreased by approximately 6% year over year in 2020 to $9.3 billion. However, results through the second quarter of 2021 show an increase of 4.6% compared with the same prior-year period. The three largest insurers—Thrivent Financial for Lutherans, Knights of Columbus and Modern Woodmen of America—have been the main drivers of performance, generating over three quarters of the segment’s NPW.

The COVID-19 pandemic has highlighted deficiencies and efficiencies in a number of operational areas for companies, including distribution challenges, prompting some companies to adapt quickly to changing distribution models. Despite the growth seen through second-quarter 2021, it still lagged the 10% growth in ordinary life insurance premiums seen in the broader life/annuity (L/A) industry, as the fraternal segment’s operating results tend to run lower than those of the overall L/A industry.

Keeping Competitive with the L/A Industry

The fraternal population has attempted to remain competitive with the rest of the L/A industry by guaranteeing higher minimum interest rates on individual annuity business. Around 16% of fraternals’ individual annuity accounts guarantee minimum crediting rates over 4%, which is higher than for the overall L/A segment.

However, this amount has been declining rapidly since 2018. U.S. fraternals have posted lower net yields than the L/A industry as a whole because of the segment’s more conservative investment portfolios, with much higher allocations to investment-grade bonds. Yields for the fraternal segment and the whole L/A industry dropped roughly 38 basis points in 2020 from 2019. Some fraternals, searching for additional yield, have been raising their allocations to BA assets marginally over the last five years, with investments in private equity coming at the expense of additional corporate bond investments.

The fraternal segment’s operating results decreased in 2020 from 2019 due to the effects of the COVID-19 pandemic and the resulting economic challenges. Higher operating expenses arose from systems upgrades and other IT improvements needed to support a work-from-home environment. While claims were higher for some fraternals, the segment to date has not been overwhelmed by higher mortality from the pandemic. Operating gains as of second-quarter 2021 improved to $587 million, from $411 million in second-quarter 2020.




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