Life insurance confidence remains subdued

Ernst & Young Life Insurance Index 2nd quarter 2009

The Ernst & Young Insurance confidence index remained virtually unchanged from the first quarter of 2009, due largely to continuing weak investment income. The contracting investment income in turn caused profits to shrink for the third consecutive quarter, the survey findings illustrate. The static confidence is in line with weaker business confidence across other financial services segments. During the quarter, life insurance confidence moved from a revised 50 index points to 51.

This is the 24th quarterly survey measuring confidence in the life insurance industry. The research is conducted by the Bureau for Economic Research in Stellenbosch.

Life insurance confidence is considerably ahead of that of the banking industry confidence, which reached 39 points during the quarter, but considerably below that of investment managers, which rose to 66 index points.

Comments Tim Rutherford, insurance industry spokesperson at Ernst & Young; ‘The fundamentals for life insurers have not changed much in the 2nd quarter of 2009. By and large, the sector continues to be driven by continuing weak investment income. Despite more stability in global financial markets, investment income continues to fall, driven by significantly lower interest rates, which reduces interest earnings.’

Life Index Confidence Levels

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Continues Rutherford; ‘Although local economic fundamentals remain weak, they are not causing a major fall-off in premium levels just yet. Although premium income growth did slow somewhat in the 2nd quarter, it has overall, held up considerably well during the last few quarters. Even with the slower 2nd quarter premium income growth, the level is not out of line with 2007 / 2008 levels.’

Adds Rutherford, ‘ This is all the more remarkable because there continues to be a structural shift in consumer savings patterns. Historically, the life insurance sector was the dominant savings vehicle for consumers. This has changed substantially over the last decade, with savings products offered by a wider range of players providing alternative options for investors. As a result, the life sector has seen a reduction in demand for life related savings products. This was particularly the case in the 2nd quarter, with a sharp contraction in investment product related inflows observed.’

Furthermore, he points out, ‘the situation of investment-related business is not something that is expected to change, although life insurers have largely re-positioned themselves to provide a broader range of investment products. While the life companies do not necessarily lose out entirely, the flow of funds into life-specific investments has undoubtedly slowed. The expectation is that growth in investment related savings will be flat into the 3rd quarter.’

Rutherford also comments on the situation of life insurance across the globe: ‘Generally, interest rates are only marginally positive in most developed nations, and have fallen sharply in developing countries too. In this environment, all life companies have faced sharply falling investment income. Those companies that may have scored from having a low portfolio of listed equities last year, will now be faced with income contractions, given the low interest rates currently prevailing on bonds.’

Another reason for the subdued confidence lies in the fact that outflows growth rose quite sharply in the 2nd quarter, whilst inflow growth fell. Says Rutherford, ‘ Once again, life insurers face an environment in which the position is one of net cash outflows.’

Other survey findings include:
· A moderate contraction in surrenders in the second quarter, providing some relief from what may have been even higher outflow levels.
· Life insurers expected they would employ fewer people in the 2nd quarter of 2009, but in actual fact, the headcount kept rising. Most of the headcount was focused on growing the distribution capacity, but there was a continued increase in employee headcount too.
· On the plus side, there was a continued increase in the value of new business – through most of 2008, new business was not strongly profitable for the life insurers. That changed in the first half of 2009, and the expectation is that this will hold into the 3rd quarter.

Comments Rutherford ’ The life insurers have all focused on retaining business that may otherwise have been lost. It is often a lot more cost effective to persuade investors to retain their policies than to seek new business. This focus seems to have paid dividends in the latest quarter, although the expectation is that this may prove to be short-lived, with surrenders rising again sharply in the 3rd quarter.’

Regarding employee numbers, Rutherford points out that life insurance is the only financial services segment that is still growing employee numbers. Both banks and investment managers have seen a combination of staff attrition and retrenchment in some cases leading to shrinking headcounts. Life companies anticipate a small shrinkage in headcount in the 3rd quarter, whilst agency numbers will continue to grow sharply.

Concludes Rutherford; ‘ Confidence remains stable, albeit subdued for the life insurance sector, and this is not altogether surprising. Although investment income contracted at its sharpest level yet recorded in the six year history of the index, the first green shoots of economic recovery became evident during the 2nd quarter. This will benefit the life sector further down the line, provided the economic uplift continues. This in turn will allow life insurers to benefit from stronger investment income flows once again, which coupled with sustained premium flows, should provide for bottom-line growth.’