Confidence in Life Insurance Industry surges on strong Investment Income Gains
The latest Ernst & Young Insurance index indicates that life insurance confidence is at its maximum level. The latest quarterly findings were released today, with confidence rising from an already strong 90 points in the previous quarter, to 100 points currently. Comments Tim Rutherford, insurance industry spokesperson at Ernst & Young; "This is the strongest that confidence has been so far in 2007. The first quarter saw quite a fall in confidence levels, but these have since revived."
This is the 17th quarterly survey conducted to measure confidence in the life insurance industry. Life insurance confidence leads that of the banking industry (96 points), and investment management confidence (99 index points), although the point remains that they all remain equally strong.
Tim Rutherford believes that the reason life insurers are all satisfied with business conditions is because they have had a tremendous run with solid investment income in the third quarter. This accounts for a major portion of life offices' income, and even though the operations are in satisfactory shape, it is the strong investment income that is currently driving their returns.
Investment Income growth rose sharply in Q307.
Continues Rutherford; "We saw with the recent reporting season that most life insurers recorded strong investment returns, and in most cases, earnings were up in excess of 20%, (in the period to June 2007) in the case of the country's top 5 insurers. Even a volatile JSE in the third quarter did not dampen the industrys strong confidence." By the end of the quarter, the JSE had moved sideways, albeit with very volatile movements through the three months. Says Rutherford; "Generally the life insurers are quite pessimistic about their investment returns, and their forecast for the last quarter of 2007 remains subdued, despite the strong 3rd quarter investment income."
In addition to investment income, all life insurers registered growth in new business premiums. Says Rutherford again; "For the past two quarters now, life insurers have experienced strongly rising new business premiums. This indicates that the operational side of the business is in good shape, and is contributing to income growth."
Other findings include continued rising lapses. This is in contrast to the first three quarters of 2007, where consistent progress was made in the industry at reducing lapse growth rates. Comments Rutherford; "There appears to be a close relationship between sales growth and lapses growth. Whenever new business premium growth rises sharply, as it did this quarter, this is invariably followed by rising lapse rate trends in the periods thereafter. This may suggest inappropriate product sales, or misunderstanding on the part of clients, particularly in the newly emerging segments of the market, where financial literacy remains weak."
Another finding indicates that the size of the life book once again contracted during the quarter, with growth in outflows exceeding that of inflows. Rutherford points out that it has been a long ongoing struggle for life companies to grow the absolute size of the book. There have been very few quarters, since the index's inception, where inflows growth exceeded that of outflows, and hence allowed for a growing book.
The survey also found that despite higher investment income returns, net profits growth for the quarter fell quite sharply, largely due to strongly rising administration costs and marketing expenses. In addition, the industry saw a strong rise in employee growth during the quarter. Comments Rutherford; "There has not been a consistent trend in so far as employment growth goes. The industry has grappled with restructuring various parts of its business, and at least one of the big life offices is undergoing significant restructuring at the moment. To some extent this can be explained by a change in client needs, with life offices adapting to the changing consumer requirements. A large number of life companies indicated that they had increased employee numbers during the quarter under review, but continuous changes in structure could see this reversed again in the quarters ahead ."
Concludes Rutherford; "Although investment returns have spurred life offices in the first half of 2007, and this has continued (thus far) into the 2nd half of the year, the evidence suggests that solid operational growth prospects in life insurance continue. New business premium growth has hit an all-time high, with all life offices reporting increased premium through new business. The profile of the new business is undoubtedly changing in the investment product market, life offices have been quite flexible in adapting to the changing economic landscape. It is therefore no surprise that they remain bullish on 4th quarter prospects."
