Life Insurance confidence levels remain strongest in financial services

In a quarterly survey, the results of which were released today, Ernst & Young reports that life insurance confidence remains surprisingly robust in the third quarter, at 91 index points given the volatility of the investment market. This means that nine out of ten life insurers are satisfied with business conditions in the third quarter of 2011, marginally up from the previous quarter.

Tim Rutherford, Life Insurance spokesperson at Ernst & Young confirms that life insurance confidence levels remain the strongest in the financial services sector, and are noticeably ahead of asset managers, where only seven out of ten are satisfied with prevailing business conditions.

This is the 33^rd quarterly survey measuring confidence in the life insurance industry. The research is conducted by the Bureau for Economic Research in Stellenbosch.

Tim Rutherford comments, ‘The continuing strong confidence levels of life insurers are largely driven by sustained premium income, and remain high despite recent market volatility.’ He adds, ‘usually life insurance confidence is quite closely aligned to equity market strength. The third quarter of 2011 was an exception. However, the global stock market volatility that was experienced late in the third quarter appears not to have had an impact on the outlook for life insurers just yet, perhaps because the sharp falls in equities happened so late in the quarter.’

Rutherford continues, ‘Investment income contracted in the third quarter for life insurers, albeit only marginally so. Once again, this could be a result of the survey field work having been completed before the onset of renewed global market volatility at the end of September. On the other hand, investment income growth has fluctuated considerably for the last two years, with no clear directional trend visible. This is in stark contrast to the situation prior to the global financial crisis, when strong economic growth resulted in consistent investment income growth for the sector.

‘Even so’, he adds, ‘net investment income growth has been in positive territory overall, so has provided a visible boost to profits and to confidence levels.’

‘The real driver for confidence though, has been the very bullish premium income trends, which have largely remained robust despite lacklustre economic conditions.
This explains the divergence in confidence between asset managers and life insurers’ says Rutherford. Asset managers are even more reliant on equity markets as an earnings driver than what life insurers are, and have reported a noticeable decline in confidence since the end of 2010. Life insurers, on the other hand, have seen favourable trends regarding new business flows, and overall premium growth.’

Another major driver of life insurance profits is improved efficiencies. ‘We saw that in the third quarter, life insurers reported improving efficiency metrics (their administration ratio expressed as a percentage of premium income). In this regard, life insurers are not alone in the financial services sector. The banks have been focused on improving cost efficiencies ever since the outbreak of the global financial crisis.’

Rutherford continues, ‘Life insurers are in a stronger position to tackle their efficiencies in that they are currently benefitting from stronger revenue flows, unlike the banks, which have faced weaker income earnings since 2008. Most of the major life offices indicated that they are indeed focused on efficiency improvements, and will continue to do so over the next few quarters.’

Other survey findings include:
Ø Outflows grew marginally ahead of inflows during the third quarter;
Ø New business volumes remain strong, with expectations that this will continue into the fourth quarter;
Ø Strong improvements were made in bringing the lapse rate down, whilst there was a simultaneous improvement in policy surrenders; and
Ø Life insurers continue to increase both employee and agent headcount, as increased distribution resources require additional in-house administrative capacity.

Concludes Rutherford, ‘This was another strong quarter for life insurers, who have had a good 2011 thus far. However, the renewed concern stemming from investor uncertainty across the globe could yet trigger a considerable change in outlook in the fourth quarter. Thus far, the life insurance sector has defied the economic odds, by reporting consistent premium growth through a period where unemployment levels were high and household indebtedness similarly so. At the same time, they have focused their efforts on ensuring cost growth is manageable, and benefitted from strong tailwinds in the form of investment income earnings. Their fortunes in the fourth quarter will largely depend on how the global economy performs, in so far as it impacts South Africa.’