THE UKRAINIAN NATIONAL ASSOCIATION FORUM (06/16/02)

THE UKRAINIAN NATIONAL ASSOCIATION FORUM

The UNA: a quality fraternal society that offers quality products

by Robert E. Bruce

Following is the text of remarks delivered at the UNA's 35th Convention held in Chicago on May 24-28.

It has been my privilege to have served as the UNA's actuary for the last few years. I appreciate this opportunity to review a few actuarial items. A full report has been printed for distribution. Therefore, only a few of the highlights need be mentioned now.

My actuarial responsibilities include providing technical information to your leaders and reporting any unfavorable circumstances or trends. That has been done. There are no unfavorable points that need to be called to your attention. By the same token, I have an equal responsibility to report on favorable items. There are a number of such which deserve to be reported to you.

First, since the last convention, there have been a surprising number of regulatory changes. The rate of change continues to accelerate. Your leaders have met these challenges admirably. The high quality of leadership and the fine stewardship of your money have served the UNA very well. Quality is the keynote. You have a quality society, which offers quality products, backed by quality investments. The UNA is the best place in the world for members to hold money for future delivery.

Part of the quality picture is the safety margin that the UNA holds for the protection of its members. On over $63 million of assets, the UNA maintains a surplus of over $7 million. This represents a solvency ratio of 112.5 percent, which translates to protection of $112.50 behind each $100 of liability. By comparison, the average solvency ratio for comparable fraternal societies is 111 percent and the average for giant fraternal societies also is 111 percent. The giant commercial companies report 105 percent.

Beyond that basic margin, the UNA holds security valuation reserves of $655,000 to guard against adverse fluctuation of investments. There is no liability against that amount. Therefore, the UNA holds a total margin of safety for members of 13 percent. If a prospective member prefers to place insurance with a giant commercial company, remind that person of the higher margin of protection provided by the UNA.

In developing the surplus as of December 31, 2001, the UNA earned an operating gain of $307,000 in 2001. This is a very notable achievement, which brings great credit to your leaders. First, the losses of prior years were reversed. This is extremely important in an era of over-regulation. Second, the profit was achieved in contrast to the trend in the fraternal industry. The year 2001 was a down year for many societies. Death claims increased, expenses went up, capital losses were incurred and additional deposits were required to guard against capital losses. The fact that the UNA earned a profit in spite of those trends represents a fine accomplishment.

The profit in 2001 was especially important with respect to fraternal benefits.

The UNA is a fraternal society that exists for its ethnic and charitable purposes. These fraternal activities are supported by profits on life and annuity policies. Therefore, it is extremely important to develop insurance profits sufficient to sustain the fraternal objectives. To understand the sources of insurance profits, it should be recognized that there are only four possible sources of profit: interest, mortality, terminations and loading.

Of these sources, interest earnings are the largest and, therefore, the most important. In 2001 the UNA earned $1,763,000 of interest on life policies in excess of requirements. For annuities, excess interest amounted to $293,000. This fact sends a clear message that cash value life insurance and annuities will build assets on which excess interest will be generated. Asset growth is the key to the future.

Mortality is the second largest profit source. In 2001, $530,000 of mortality profits were generated because fewer deaths occurred than provided for by policy terms. Margins of safety provided by us as your actuaries and improving mortality will provide mortality profits, even though the amount generally may fluctuate from time to time.

The third source of profits arises on terminations. When a policy terminates, the reserve released is greater than the cash value amount paid (insurance laws require policy reserves to exceed cash values), thereby releasing a small amount to profits. Greater future profits will arise if the policy continues in force, so terminations are not to be encouraged. The UNA lapse rate at 2 percent is very favorable and indicates confidence in the UNA by its members.

The last source of profits is loading. Loading is the difference between the premium actually charged and the statutory net premium required by law for reserve purposes. The rates charged are determined by competition. The UNA cannot charge more than the competition. The difference is a margin for expenses which is insufficient for the UNA and all other insurers. No carrier reports a profit on loading. It is necessary to borrow against excess interest earnings and mortality savings. These circumstances are dictated by the industry and not the UNA. The important consideration is not that a loss on loading arises, but that it is sustained by other profit sources in a sufficient amount to sustain the fraternal activities.

Happily, in 2001, insurance profits of over $1,500,000 were sufficient to meet the fraternal activities and the costs related thereto and leave an operating profit of $307,000. It is recognized that some of the decisions which were necessary to develop that profit were very difficult. Your leaders deserve great credit for leading the UNA to a profit position.

The convention reports provide magnificent financial detail as to where the UNA stands and how it got there. But, what about the future? As your actuaries, we are required to make projections for 10- and 20-year periods, based on book and market values, according to at least seven interest scenarios prescribed by statute. Twenty-eight separate studies are required. The present book of business is carried forward under each of these scenarios to determine whether the assets will be sufficient and will be available to meet the members' claims as they arise.

The regulators recognize that the interest scenarios which they prescribe represent extremes of interest paths, no one of which will actually happen. However, if profits are generated under these extreme assumptions, it is apparent that the future will be assured under actual interest experience. The conclusion from these studies is that the present book of business on UNA policies will produce future profits. The average present value of future profits at $1,700,000 is excellent. Future profits will develop under the present managerial strategy of controlling expenses.

Further assurance as to the future is provided by a series of statistical tests and ratios that appear in the printed report. These are favorable to the UNA and speak for themselves. However, attention should be called to the gross rate of return on invested assets of 9.06 percent. This is the highest rate of return among fraternal societies of comparable size, giant fraternal societies or mutual companies with $10 billion of assets. A fine record.

The question will naturally arise in your minds whether this high rate of return was achieved at the expense of safety, quality or liquidity. The data in the report shows there was no compromise or sacrifice. The UNA holds a higher percentage of assets in mortgages, which provide a higher return; 98 percent of bonds are rated investment grade (highest) by the NAIC; and the average duration to maturity is a short six years, which will give the UNA an investment edge when interest rates rise.

The actuarial conclusion is that the UNA is a quality organization for which the necessary moves have been made by management to position it to meet the challenges of this century. The actuarial charge to the delegates is to take the message to the constituency that the UNA is the best place to hold their money for future delivery and all life and insurance needs should be placed with the UNA rather than an outside commercial company.

I thank you for the privilege of addressing you. It is an honor to serve as your actuary.

UNA recognizes Detroit-area graduates

WARREN, MICH. - Twenty students graduated from Immaculate Conception Ukrainian Catholic High School on Sunday, June 2. Among them were three UNA members, who received financial awards.from the Ukrainian National Association. The three recipients (center from left), Andrew Melymuka, Andrij Lawrin and Stephan Woloszczuk, are seen above during the graduation rehearsal with Principal Michaeline Weigle and UNA Auditor Dr. Alexander J. Serafyn.

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