Stronger equity markets boost Life Insurance confidence

Life Insurance confidence continued to rise from its weakest levels – recorded at the end of 2008, as returning investor sentiment and stronger equity markets continued into the first quarter of 2010. This supported stronger financial fundamentals, as evidenced from recent financial reporting.

In a quarterly survey, the results of which were released today, Ernst & Young reports that life insurance confidence rose once again, albeit only moderately this quarter, from 71 index points in the previous quarter to its current level of 76. This means that close on three quarters of life insurers were satisfied with business conditions in the first quarter of 2010.

This is the 27^th quarterly survey measuring confidence in the life insurance industry. The research is conducted by the Bureau for Economic Research in Stellenbosch.

Life Insurance Confidence remains below pre-crisis levels

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Comments Tim Rutherford, Ernst and Young’s Life Insurance sector spokesperson, ‘ For the first time in over a year, life insurers have indicated that profits are growing once again. These profits are supported by strong investment income growth, which was severely depleted in the midst of the global financial crisis, but which has subsequently recovered. Profit trends improved vastly in the fourth quarter of 2009, but were not yet reflecting positive growth. This has shifted sharply in 2010.’

He continues, ‘ Premium income flows remained more or less robust through the second half of 2008 and into 2009, only shrinking briefly in the 4^th quarter of last year, but this has rebounded strongly in 1Q2010. This is in contrast to other financial services segments, where banking income contracted sharply throughout 2009, and asset management income which also shrunk and remained weak for longer than a year.’

‘It appears’, says Rutherford, ‘that life insurers only saw one element of their income growth shrinking, namely investment income. This was to some extent offset by sustained strength in premiums, bar for the last quarter of 2009.’

Other survey findings indicate that there was:
· a sharp recovery in investment product inflows;
· revived risk contract profitability;
· renewed growth in new business premium growth;
· continued improvement in lapse and termination rates; and
· sustained low surrenders.

Comments Rutherford, ‘ The combination of declining lapses and improving surrenders provided additional support to the overall inflows that life offices reported in the first quarter. Life insurers generally struggled to reduce lapse rates and improve surrender rates through 2009, when consumers were really feeling the squeeze of a contracting economy. But a renewed focus on converting surrenders into continued business has paid dividends for a number of life companies, and this was one of the key messages communicated from some life companies during their recent results reporting.

‘Given this boost’, continues Rutherford, ‘ net profits grew for the first time in over a year, after five successive quarters of profit contractions. Furthermore, the expectation is that second quarter profits will continue to grow at a strong pace, supported by the renewed investment income growth.’

Rutherford continues, ‘Life offices are making progress in keeping operational expenses steady, and this was another key theme reinforced during the recent reporting season. The first quarter of 2009 was the first time in two years that there was a net reduction in the distribution headcount. Whilst in-house employee numbers were static, there was a sharp reduction in distribution personnel.

Comments Rutherford again, ‘the contraction in agent numbers may appear to some to be somewhat surprising. However, we think that this could be a direct response to sharply slower premium income in the fourth quarter of 2009. Sales remuneration fell sharply in the 2^nd half of last year, and there was undoubtedly a focus on right-sizing in terms of slower premium intake.

Even so, says Rutherford, ‘sales remuneration rose sharply in the first quarter of this year, albeit off a low base, and following two successive quarters of noticeable contractions. Nevertheless, overall administration and marketing cost growth slowed from the previous quarter.

Rutherford concludes ‘Life insurers reported rising profits despite an expectation that profits would continue to decline, albeit at improving levels. The extent of the recovery appears to have surprised the industry, with a combination of revived premium and stronger investment income supporting the bottom-line. Strong investment income always provides a boost for life insurers’ profits, and the strong turnaround in equity markets has provided a much needed lift in earnings. The expectation is for sustained profits growth into the 2^nd quarter.’