Helping Members Address an Unprecedented Environment
It’s sometimes difficult to place a price tag on the value of a trade association membership. A trade association’s primary “products” – advocacy and information – are intangible. How much are NFCA’s efforts to promote the value of member societies’ contributions to individuals and communities to state and federal public policymakers and preserve the integrity of fraternals’ tax exemption worth to your society? And what about the handful of fraternals that are not members of NFCA? Don’t they get the benefit of the association’s advocacy efforts – financed by the dues dollars of member societies – for free?
The role of a trade group is to do for members what they could not do for themselves. Imagine your individual society trying to keep track of the myriad of bills and regulations moving through Congress, state legislatures, and insurance departments. Imagine your Board having to determine which threats are real and which are imagined. Imagine trying to marshal the financial and human resources to communicate your messages effectively to key elected officials. Even the largest societies would be hard pressed to deal with these challenges. Moreover, no society acting on its own could hope to effectively represent the diversity of the fraternal system. That’s why NFCA was created and that’s why the association is still as valuable and relevant today as it was over a century ago. Sure, there are always going to be a certain number of societies that take advantage of the “free ride” provided by NFCA members. But as we’ve seen in the past, the overwhelming majority of fraternal benefit societies renew their NFCA membership year after year because they receive real value for their dues investment and because they are committed to enhancing their own organization and the fraternal system.
But in tough economic times individuals and organizations take a close look at ways to trim expenses. We’re doing so at NFCA and we know that every member society is, too. That’s why we’re doing everything possible to make your membership more valuable by keeping costs down and expanding the quantity and quality of our membership benefits. In addition to our ongoing advocacy efforts at the state and federal level – efforts that are becoming even more challenging as state insurance departments take a much more aggressive approach to fraternal solvency regulation – in recent months NFCA has focused on pushing out more and more valuable information on a variety of fraternal and financial issues to member societies. We’ve created new “publications” such as Weekly Headlines, which provides a summary of the key news and editorial coverage of issues affected NFCA members, and expanded the distribution lists for State Roundup and Congressional Update – periodic bulletins that provide members not just information, but value-added analysis of what it means to fraternals and what they must do to comply with new laws and regulations. Sure, you could get the raw information on these developments from other sources such as State Net and Westlaw, but the cost to an individual society would be significant and the most valuable component – the NFCA insight into what the news means – would be missing.
Perhaps our most ambitious effort over the past few months has been our response to the financial crisis. We’ve reached out to regulators, successfully advocated for revisions to the laws governing pension funding, conducted one very valuable Webinar to help members deal with the reductions in the value of their surplus, and have a second teleconference on dealing with impaired investments scheduled for later this month (click here for more information and to register). These education sessions provide insight and information aimed specifically at fraternals. No other organization is offering this type of information. We also asked members to participate in a voluntary data call in an effort to determine the severity of the impact of the market downturn on the fraternal system and to offer assistance in the form of a visit from a Fraternal Consultant Response Team (FCRT) to those societies who may need one to develop a plan to effectively address the financial challenges facing them. While participation in the voluntary data call was limited, the results provide a unique look into how NFCA members – and indeed, perhaps many commercial life insurers – have been affected by the financial downturn and offers some idea for ways these organizations can address the situation. The following is a summary of the results prepared by the independent consultant NFCA retained to conduct the analysis.
Summary of Results and NFCA Recommendations
Our analysis showed clearly that the fraternal benefit system did not escape the effects of 2008’s financial market turmoil. Twenty member societies responded to our call for information about their investment portfolios and the results indicate a 17% loss of “solvency” due to the combined impact of realized investment losses and projected other-than-temporary impairment adjustments.
To measure “solvency” we selected the surplus ratio, which compares a society’s total assets to its liabilities. This calculation allowed us to isolate the changes in assets and surplus according to the reported data and then measure the change in the ratio. The surplus ratio was chosen due to its high sensitivity to losses which directly effect surplus, such as the credit-related investment activity during 2008.
Twelve of the twenty responding societies reported realized losses on investment activity through September 30th and thirteen societies project making year-end adjustments due to other-than-temporary impairments. These two factors for all twenty societies taken together would reduce their combined solvency ratios by 17.85%. Individually, the effects upon the surplus ratios range from an improvement of over 100% to a decrease of 61%. As a group, gross-realized losses and projected impairments amount to 8.45% of total surplus. Other-than-temporary impairment adjustments were projected at 2.5 times realized losses perhaps recognizing the absence of a market for these securities and/or the societies’ reluctance to sell off assets at impaired prices.
Twelve of the twenty responding societies reported realized losses on investment activity through September 30th and thirteen societies project making year-end adjustments due to other-than-temporary impairments. These two factors for all twenty societies taken together would reduce their combined solvency ratios by 17.85%. Individually, the effects upon the surplus ratios range from an improvement of over 100% to a decrease of 61%.
As a group, gross-realized losses and projected impairments amount to 8.45% of total surplus. Other-than-temporary impairment adjustments were projected at 2.5 times realized losses perhaps recognizing the absence of a market for these securities and/or the societies’ reluctance to sell off assets at impaired prices.
Partially mitigating this change would be a society’s ability to produce profitable results for 2008 and the size of its initial asset valuation reserve (“AVR”). Unfortunately, large credit-related investment losses might reduce the AVR balance to levels that would force additions in future years. This condition causes a carry-over of the remaining impact into 2009. Complicating some societies’ ability to absorb these losses and impairments might be their need for cash flow; regulatory risk-based capital requirements; and the interest rate environment; among other factors.
Turn to NFCA for Help
Based on the results of this analysis and conversations with executives from member societies, it appears that some NFCA members may need substantive assistance to address the impact that impaired investments and recognized losses have had on surplus. The NFCA recommends discussing your society’s specific situation with your accounting, actuarial and investment professionals; and can provide assistance identifying appropriate resources through our Fraternal Consultant Response Team program and the headquarters’ office. We may also be able to help fraternal executives explain the situation to Board members or identifying the steps necessary to enhance your society’s financial condition. If your society finds itself in such a situation, we urge you to put your NFCA membership to work for you by participating in the January 13, 2009, teleconference on impaired investments or by contacting the association to schedule a consultation with an FCRT. This confidential consulting service is provided at no cost to member societies and can be an important first step to finding the right answers that can restore your organization’s fiscal health. The tools you need to improve your society’s performance are at your fingertips. I urge you to take advantage of them by calling NFCA today.