Life insurer profits up despite a lacklustre 2011

Gareth Stokes, FAnews Online Editor

The JSE All Share index performed dismally through 2011. Share prices declined by 0.4% in a year dominated by tight credit conditions and concerns over possible debt defaults in Euro-zone economies. Investors in index ‘trackers’ were left mourning an unim

In keeping with the premise “insurance is sold and not bought” an insurance report is incomplete without an assessment of the domestic consumer. That’s why PwC’s presentation of report findings kicked off with graphs of GDP growth, formal employment and vehicle sales. The group confirmed an ongoing improvement in most of these measures through 2011 and continuing into the first quarter of 2012. Each of these measures point to improvements in net disposable household income… If households have more money available for discretionary purchases then the task of selling life insurance products should be that much easier. The big question is whether the country’s large life insurers took advantage of improving consumer sentiment to post better bottom line profits. A quick peak at the value of new business written (across the industry), new business margins and cash flow suggest that the answer to this question is a resounding “yes”.

Five performance measures pointed higher

“What we see in the numbers is that the domestic insurance industry [both life and short-term] is very resilient – we have seen profit and growth against the background of the global economic crisis and rising costs of regulation,” said Victor Muguto, Insurance Leader for PwC Southern Africa. He mentioned that most of the economic uncertainties plaguing insurers through 2011 remain unresolved and that the unfolding regulatory burden would continue until at least 2015.

Dewald van den Berg, associate director in PwC’s Financial Services Practice observed that most insurers entered 2011 with higher asset bases thanks to an impressive total return from equities in the preceding year. The first “results” slide in his presentation focused on a number of insurance sector financial indicators. PwC reveals that the five large insurers in the survey posted a 23% improvement in Group IFRS earnings for the year ending 31 December 2011. All of the insurers reported solid operating cash flows and group embedded value (EV) profits were up 16% on the previous year! But it was the group average return on equity (ROE) – which improved from 17% in 2010 to 19% last year – that was singled out as the best ratio to compare the insurance sector to banks or retailers. The five insurers reported EV – an industry measure of an insurance company’s worth – of some R191.2bn. “These financial ratios point to the operational excellence that the insurers achieved through 2011,” said Van den Berg.

For the layperson keen to gain an understanding of the sector, concepts such as value of new business written (up 23% over 2010) and margin on new business (2.6%) are more meaningful. An improvement in either of these measures is a valuable first step in insurer profitability. If you write more business – and the profit margin on that business is better – then (all else being equal) your bottom line should improve. The fact new business margin was up from 2.3% in 2010 points to an industry going after ‘good’ business. “An increase in volume and an increase in margin contributed to the 23% improvement in value of new business written,” said Van den Berg. “This result confirms that people have slightly more disposable income than over the past two years – and they can begin saving again.”

PwC also reported a 10% improvement in the present value of  new business premiums, from R129.3bn to R141.6bn. This is a measure of an insurer’s expectation of all the premiums it will receive (discounted to today) on all the business written over the period.

Commission change ‘works’ for insurers

Acquisition costs at each of the major insurers remained relatively stable over the past three years – fluctuating with new business volumes. PwC observes that the acquisition cost to annual premium earned ratio has improved across the board too. “This improvement could be due to a shift in product mix, because savings products attract a lower commission than risk products,” said Van den Berg. It could also stem from various changes in savings product commissions, introduced in 2009. Regulations forced a shift from up-front to as-and-when commissions in the savings product space, while commission on replacement annuities was abolished. Van den Berg was upbeat about these changes: “The regulation aligns the interests of the intermediary with those of the consumer to make sure that an appropriate policy is sold to meet the consumer’s needs.”

Although acquisition costs seemed under control, insurers struggled to keep their administrative and marketing costs in check. A comparison of long-term insurer expense increases versus CPI proved telling. Insurers had control of their costs until the middle of 2010, when their expenses started growing at rates well in excess of inflation. Why? The cost of additional human resources and information technology systems necessitated by SAM, King III and other regulatory interventions is already being felt.

Editor’s thoughts: Regulation impacts each and every stakeholder in the financial services sector… Ironically the cost of compliance – designed to protect consumers – eventually filters down to the self-same grouping. An interesting outtake from the 2011 PwC Major Insurer Analysis report is that acquisition costs as a percentage of Annual Premium Equivalent (APE) exhibits a downward trend... Are you concerned that acquisition costs are kept in check while compliance and other general expenses are rising at rates in excess of inflation? Add your comment below, or send it to gareth@fanews.co.za