Life Insurer Confidence Revives in line with strongly rebounded inflows

The latest Ernst & Young Life Insurance confidence Index shows that life insurance industry confidence swung back sharply in the 2nd quarter of 2007, after taking a knock in the previous quarter. This was on the back of revived profit growth, coupled with inflows growth exceeding that of outflows, which has happened quite rarely over the last few years.

Tim Rutherford, lead insurance spokesperson for Ernst & Young says that life insurance confidence has been more erratic than the other financial services segments. 'Both banks and investment managers' confidence levels have remained in the 90 -100 index point range over the last three years. The same is not true for life insurers, whose confidence levels dropped to 83 last quarter. Nevertheless', he continues, 'confidence has remained relatively high for the life insurers over the past few years, given some of the difficult challenges they have faced.'

These are the findings of the 16th quarterly Ernst & Young Life Insurance 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.

The survey finds that the life industry has much to be confident about. Overall, their inflows are growing at a stronger pace than their outflows, which means that the size of the book is growing. Says Tim Rutherford,' Outflows growth has outpaced inflows growth over 11 of the 16 quarters that the Life Insurance index has been conducted. This does not bode well for the long term growth of the industry. Even with strong sales, which the industry has reported over the last two years, most life offices have still been faced with a contracting book size. This trend was quite strongly reversed in the current quarter, and we think that this also helped drive confidence levels higher.'

Other survey findings include:
* a strong turnaround in Net Profits, supported by rising new business volumes;
* revived risk business profitability, an area that was under pressure for much of 2006;
* subdued investment income growth.

Comments Tim Rutherford again, 'Investment income has been a strong saving grace for life insurers over the last two years especially. Strong equity markets, and rising corporate profits have resulted in significantly strong growth for the life insurers for a while now. While investment income growth has fallen back strongly, it is encouraging to see that the industry's bullish sentiment is now being driven by the operational side of the business, which should help see them through any market slowdown.'

One area where the life industry continues to grapple is in containing lapses and surrenders. Almost inevitably, strong sales growth results in an upward tick in lapses growth. This was certainly the case in the quarter under review. Comments Rutherford again, 'Towards the end of 2006, and into the first quarter of 2007, life insurers seemed to make strong progress with lowering lapse rates. It is an ongoing concern for the industry, and although the current reading indicates that matters are not at their worst, a lot of work remains to be done to get lapse rates on a declining trend line.'

Regarding surrenders, Rutherford points out that although they are on the increase, this is in line with expectations, and follows the agreement with the National Treasury. 'Investors have more certainty about their payout settlements, and are thus more likely to surrender policies than what they would have been up until now. It is thus not surprising that life insurers expect surrenders growth to accelerate in the forthcoming quarter.'

In terms of costs, there is no clear trend with regards employee headcount. Whilst on the direct marketing side, there has been continuous bulking up of the agent teams, in-house employee growth trends have been more erratic. Says Rutherford again, 'In the uncertain times of the past few years, it has been difficult for the industry to grapple with the structural changes that needed to be made, and get a feel for whether capacity needed to be boosted or reduced. The banking and investment management industries, on the other hand, have had a far more straightforward need to increase capacity, and headcount with that capacity growth.'

Sales remuneration cost growth also rose, with the rising new business premium income. Similarly, administration and marketing costs also rose, although overall, administration costs remain well contained, when expressed as a percentage of premium income.

Concludes Rutherford,' Unlike the bank and investment management segments of financial services, the prospects for life insurers continue to look strong. Banks are starting to see a downward trend in income growth, whilst investment managers have seen slower profit growth. The life insurers, on the other hand, have not up until now, benefited as strongly from the retail-led consumer boom that the country experienced since mid 2004. It appears that their time is only arriving, and life insurers are expecting an equally strong 3rd quarter. The industry has faced numerous structural challenges which have now largely been dealt with, and they are therefore better placed to benefit from economic growth in the quarters ahead'