Life Insurers Remain Confident despite Contracting Profits

Ernst & Young Launches the Life Insurance Confidence Index -Ernst & Young Financial Services Index Q4 2006

The latest Ernst & Young Life Insurance confidence Index shows that life insurance industry confidence remains high, despite signs of contracting profitability, particularly in the key risk-business segment.

The index findings show that despite this, and a growing gap between net inflows and outflows, life insurance industry confidence remains high, with a reading of 100 index points recorded during the quarter, up from an already bullish 98 points in the previous quarter.
                                                                 
These are the findings of the 20th quarterly Ernst & Young Financial Services Index released today. The research and analysis of the study was done in conjunction with the Bureau for Economic Research (BER) at Stellenbosch University.  Confidence is measured by satisfaction with prevailing business conditions

Says Mike Kane, Financial Services partner at Ernst & Young: "Life insurers seem to be quite resilient in the face of their challenges. Whilst premium income growth has declined sharply in the quarter, and net profits growth has fallen in tandem, this has not hurt their confidence in general business conditions, with all life insurance participants in the survey indicating they are satisfied with current circumstances. This is in contrast to mid 2003, when only of the participants were content with circumstances."

Continues Kane; "Since then, confidence amongst life insurers has gradually risen, with the PFA rulings of last year only having a minor and short-term impact on their confidence levels. We think that with the National Treasury's statement of intent, the industry will be provided with more clarity around some key parameters. Even though these parameters may be more challenging than in the past, it will provide some certainty as to who bears which costs."

The survey goes on to find that investment income growth remains strong, having risen again during the quarter on the back of sustained strength in equity and capital markets, and this has served to boost the bottom-line of the industry. Comments Mike Kane; "To a large extent, the industry is offsetting some of the stagnation in its premium income book with gains from investment income returns. The real test may come about when markets cool, and investment returns start to contract."

On the plus side, there was noticeable improvement in lapses and surrender rates over the quarter, which to some extent, has offset the effects of sharply declining new business premium growth. The improvement in lapse rate trends follows strongly rising lapse rates through the first three quarters of 2006. Says Mike Kane, "We need to see how sustainable these improvements are. We have seen in the past that improvements in one quarter are not necessarily maintained in subsequent quarters, so it is too early to predict whether this is the start of a new trend, or merely a one-off improvement."

The survey also found that net profits growth declined in the fourth quarter. Through 2006, net profits growth has been erratic, with no clearly discernible trend. This is unlike the previous two years. In 2004, profit growth was high and stable, whilst in 2005, profits gradually increased through the year. Says Mike Kane again, "To some extent the net profits position of the life offices are being driven by investment income, which has offset inhibitors of profitability such as the declining margins on risk business.

The industry has experienced a long protracted squeeze in its risk business profitability, a trend which first emerged in 2005, and this has continued into 2006. In fact, throughout 2006, the risk business profit margins have actually shrunk, and at an increasing rate. Comments Mike Kane; "All life insurers have focused on this market segment, and as they have done so, so the profit margins have been squeezed accordingly.

The industry continues facing a net shrinking book. With the exception of one quarter in the last 3 years, since the surveys inception, the pace of outflows growth has exceeded that of inflows growth. Says Mike Kane; "Over time, this suggests that the life insurance book is contracting. There is a shift from life contractual savings products to unit trust type savings.  The life insurance industry, in turn, is largely refocusing its business to capture a greater share of the savings market."

Concludes Kane "Difficult trading conditions have not up to now dampened life insurance industry confidence. If anything, the industry remains very bullish about future prospects. There is an expectation that premium growth will return to strong levels in early 2007, and that net profits will remain strong. Generally, the life insurers tend to be optimistic about forthcoming quarters, but they have been cushioned by strong investment returns."