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Life insurance confidence remains subdued on lower investment returns

19 January 2009 Ernst & Young

The Ernst & Young Insurance confidence index remained low in the fourth quarter of 2008, due to the sustained weak business fundamentals and weak investment income, which in turn kept profits growth subdued (albeit positive), the latest survey findings illustrate. The static confidence is in line with weaker business confidence across other financial services segments. During the quarter, life insurance confidence moved sideways, from 51 to 53 index points.

This is the 22nd 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, slightly ahead of the banking industry, (50 points), and investment managers (49 index points). Comments Tim Rutherford, insurance industry spokesperson at Ernst & Young; ‘This is in contrast to the last few quarters where confidence among life insurers trailed that of other financial services sectors, probably reflecting that overall, the life operations are in good shape.’

Life Insurance Confidence Levels mirror a lower JSE Life insurance index
 (Click on image to enlarge)

Rutherford continues, ‘Confidence remains close to its lowest levels in the five year history of the index. There is a mixed bag of signals in terms of the underlying measures. Whilst the basic operations of the core business are in good shape, it is really investment income and earnings which are hurting the life insurance market at this point. This is not confined to our local market either – across the globe, life insurers are struggling to earn positive profits, when they depend quite strongly on equity markets for a sizeable portion of their income.’

Comments Rutherford, ‘ Premium income growth is actually faring quite well, which is perhaps at first glance surprising, given the general state of the economy. Squeezed consumer disposable income has hurt revenue streams across many sectors of the economy, most notably retailing and personal banking. It is therefore interesting that life insurers have not by and large faced as significant a fall-off in their new business premiums. ‘

On the other hand, he adds, ‘ Whilst new business premiums have held up steadily, there has been a spike in both lapses and surrenders throughout 2008. Hence the sales pipeline remains solid, but the ability of new policy holders to actually pay the monthly premiums is what counts, and that is where the industry is feeling some pinch. As a result, lapses have been rising through 2008. Furthermore, rising surrenders is symptomatic of squeezed consumers cashing in policies prematurely.

The survey also found that, like other financial services segments, costs continue to rise, ahead of revenue growth. Says Rutherford again, ‘ All financial services firms saw a slowing revenue growth trend from the beginning of 2008. However, costs continued to rise in the same period, in excess of the rate of slowing revenue growth. This pressured bottom-line profits across the financial services industry. Life Insurers were no exception, and their situation was exacerbated by contracting investment returns.’

He continues, ‘ Typically, the survey findings indicate that it takes a few consecutive quarters before financial services firms are able to respond to slowing revenue by cutting expenses. Often expenditure is difficult to cut back promptly. For example, IT and systems projects have long time frames, and cannot simply be halted overnight. Typically, these projects have to be completed, and costs may only slow by not committing to additional projects thereafter.’

Compounding the rising costs was rapid employment growth, which remained positive throughout 2008. Interestingly, hiring of in-house administrative staff is at very high levels, whilst agent hiring is only marginally positive. Life insurers had been cutting back on hiring of agents since the middle of 2007, but are now starting to hire again. Typically these are cyclical trends, and currently life insurers appear to be moving marginally back to boosting their agency force.

Rutherford points out that the combination of continued strong cost growth, coupled with contracting investment income, kept bottom-line profit growth only marginally positive in the fourth quarter. This is in line with recent trading updates from some of the large life companies, who have indicated that the basic operations are in good shape, but that profits are being squeezed by lower investment returns.’

In conclusion, says Rutherford, ‘ Life insurance industry confidence remained weak in the 4th quarter, despite the basic operations being in sound shape. Rising premium income growth has offset some of the impact of weaker investment income, and the fourth quarter saw welcome growth in the life book. Through most of 2008, life companies were faced with a contracting life book, as outflows growth exceeded that of inflows. That reversed in the last quarter of 2008, and provides some hope that 2009 may not be a poor one for the life insurance industry.’





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