Life Insurance confidence remains robust
In a quarterly survey, the results of which were released today, Ernst & Young reports that life insurance confidence rebounded in the first quarter to 90 index points, after a marginally weaker fourth quarter, when confidence fell to 78. This means that nine out of ten life insurers were satisfied with business conditions in the first quarter of 2011.
Tim Rutherford, Life Insurance spokesperson at Ernst & Young points out that life insurance confidence levels are stronger than those of the other financial services segments, particularly banking, where only four out of ten banks were satisfied with prevailing business conditions.
This is the 31st quarterly survey measuring confidence in the life insurance industry. The research is conducted by the Bureau for Economic Research in Stellenbosch. Tim Rutherford continues, ‘After a weak fourth quarter of 2010, life insurers are revealing strong financial prospects again. Ironically, investment income contracted in the first quarter of 2011, but this marginal contraction was small overall, and profits rebounded from a weak fourth quarter 2010.’
Life Insurance confidence remains robust
(Click on image to enlarge)He adds, ‘Life insurance profits are largely correlated with stock market fortunes. Generally, stock markets, both locally and across the globe, have performed relatively well over the last two years, and have boosted bottom-line profits and also confidence of the life sector. The relationship weakened in the last two quarters, but remains nevertheless strong over longer time periods.’
In addition to investment income, premium income has also remained relatively buoyant over the last two years. In fact, South African life insurers only faced one quarter of contracting premium income trends, in 1Q10. This is quite unlike the scenario faced by banks and asset managers. Banks experienced sharp contractions in interest revenue, since the middle of 2008. ‘In fact’, says Rutherford, ‘ banks are only now very gradually recovering from the steep declines in income since the outset of the global financial crisis.’
‘Asset managers also felt the impact of significantly weaker investor confidence, at the outbreak of the global financial crisis, as a result of which net inflows turned strongly negative. However, given the relatively quick market correction, investor sentiment recovered remarkably soon thereafter, and asset managers reported strong inflows and bottom-line profits.’
Rutherford adds, ‘ Life insurers, on the other hand, did not face nearly the same level of volatility in earnings streams that the other financial services segments did, and as a result, confidence did not fall as sharply, nor did it remain subdued for very long. The latest quarter bares testimony to this, with life confidence being at close to double the levels of the banking sector.’
Other survey findings include:
· The first quarter saw a rarely observed period where inflows growth exceeded that of outflows;
· Life insurers are once again focusing on building their agent numbers, after cutting back continuously in 2010; and
· Employee numbers are falling, as life insurers, in line with other financial services companies (albeit to a lesser extent), are right-sizing their organisations in line with rising cost pressures.
Comments Rutherford, ‘Actually, life insurers have been quite fortunate relative to other financial services companies. Although their costs have continued to rise in line with growing regulatory pressures and wage costs, they have experienced less revenue pressure than what the banks have, for instance.’
Even so, there is a need to right-size their organisations, and recent mergers also means there is a need for rationalisation, as some duplicate business units are merged.’
Rutherford concludes, ‘ Overall, life insurers are well positioned for growth in 2011. The key risk is always stock markets, and the outlook for equity markets is not always easy to predict. Having said that, rising global commodity prices continue to push resource markets higher, and with South Africa’s relatively high mining & minerals index weighting, there is a strong likelihood that 2011 should continue to be robust. In addition, the overall asset base is rising, further supporting overall growth, and life insurers are strongly focused on looking north of South Africa’s borders to support that growth initiative.’
