Falling equity markets leads to falling life insurance confidence

Ernst & Young Life Insurance Index Q1 2009

The Ernst & Young Insurance confidence index fell even further in the first quarter of 2009, due largely to continued weak investment income. The contracting investment income in turn caused profits to shrink for the second consecutive quarter, the survey findings illustrate. The static confidence is in line with weaker business confidence across other financial services segments. During the quarter, life insurance confidence fell from a revised 48 points to 46.

This is the 23rd quarterly survey measuring confidence in the life insurance industry. The research is conducted by the Bureau for Economic Research in Stellenbosch.

Life insurance confidence is in line with sentiment in the other financial services sectors, with banking industry confidence at 37 points, and investment managers at 43 index points. Comments Tim Rutherford, insurance industry spokesperson at Ernst & Young; ‘On average this means that just less than half of all life insurers are trading satisfactorily, which is quite a steady result, given the turmoil in global financial services markets, and weak local economic factors.’

Continues Rutherford; ‘South African insurers have not thus far faced turmoil witnessed in US and European insurance markets, where major losses were incurred. However, weak local economic fundamentals are undoubtedly being felt, and emerging markets invariably feel the pain through currency depreciation and reduced growth prospects. But, so far, premium income growth has held up remarkably well for the life insurers.

Adds Rutherford, ‘Despite the relatively sound business fundamentals, confidence once again hit its lowest point yet in the six year history of the life index. We ascribe this to the declining financial services outlook, both globally and locally. Investment income and returns are severely knocked in an environment where equity markets are in a strong bear phase, with no sight of relief yet visible. The recent results reporting season indicated just how far investment income has fallen, making it difficult to achieve bottom-line profits growth

Furthermore, he points out, to some extent the sustained premium growth has been offset by growing lapse rates. This is probably indicative of the middle and lower income market segments, where unemployment and tighter interest rates have taken their toll. Letting a policy lapse in this segment is one of the easiest expenses to reduce, since there is no visible sacrifice. Lapse rates have been rising since the middle of 2008, and the expectation is that they will continue to remain high in the forthcoming quarter, a reasonable assumption in the current economic cycle.’

But, he adds, the buoyant premium growth is quite an achievement if one keeps in mind that credit demand has slowed to negligible levels. Banks have been struggling to retain profitability in their secured lending portfolios, such as mortgage lending, and hence have sharply tightened their credit lending policies. With this, a considerable source of new business opportunities has dried up for life insurers.

Other survey findings Include:
· A growing asset base – inflows growth exceeded outflows growth, indicating that overall, the life insurance sector is growing its asset book, a turnaround from recent times.
· Growth in surrenders moderated downwards in the 1st quarter, also providing relief in the form of maintaining assets on the book.
· Life insurers expect that they will employ fewer people in the 2nd quarter of 2009. Already, employment growth in the sector has slowed considerably since peaking in the 2nd quarter of 2008.
· Rising value of new business – through most of 2008, new business was not strongly profitable for the life insurers. That has changed in the first quarter of 2009, and the expectation is that this will improve further in the 2nd quarter.

Comments Rutherford’ We expect that costs are going to be a major factor through 2009. This is common across most business sectors, as companies adjust to tougher economic fundamentals. Currently, expenses growth remains in line with levels recorded over the last few years. But with bottom line profits contracting, there is going to have to be some attention paid to maximising efficiencies and ensuring the lowest possible cost base is achieved.

Concludes Rutherford; ‘Although times are extremely difficult for most corporates at this point, and despite contracting profits for life insurers, the business fundamentals remain sound. Premium growth is holding up well, the asset book is growing, and surrenders are at a manageable level. Life insurers will always remain dependent on equity and capital markets for a large portion of their returns, and provided the basic business remains sound; they will be well placed to benefit from renewed equity market growth, when it occurs.