Life insurance confidence falls, but remains solid
In a quarterly survey released today, Ernst & Young reports that life insurance confidence dropped to 81 in the second quarter of 2012, from 93 index points in the first quarter. This follows strong confidence levels in 2011 and into the first quarter of 2012, when confidence of life insurers remained at or above the 90 mark.
Tim Rutherford, Life Insurance spokesperson at Ernst & Young points out that life insurance confidence levels continue to be the strongest in the financial services sector, despite this fall. He points out that eight out of ten life insurers remain satisfied with business conditions.
This is the 36th 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 robust
Tim Rutherford notes; ‘The second quarter was a volatile one for financial services companies across the globe. The lack of resolution to the Eurozone crisis continues to wreak havoc on global equity and bond markets, and this has a direct impact on investment income earnings for life insurers. South African life companies were not immune from the consequential impact, and as a result investment income earnings slowed through the quarter.’
‘In addition, premium income slowed to a trickle during the quarter, and coupled with this, life companies also faced very sharp rises in benefit payments’, he adds.
The net impact on sector profitability was drastic, with a very sharp contraction in bottom line profits reflected in the quarter. Rutherford continues, ‘Life insurers have generally experienced strong uplift from a combination of strong investment income (stemming from rising equity markets), and reasonably strong premium income growth since the beginning of 2011. This changed in the second quarter, with both income streams slowing noticeably, whilst at the same time, outflows rose considerably.’
Rutherford also points out that the slowdown in premium growth came about despite solid new business growth. He comments that ‘surrenders were sharply up, and that would have hurt overall premiums, which appears to be the experience for many life offices. Lapses on the other hand, appear to remain under control, rising only minimally through the quarter.’
The confidence findings were not in sync with the JSE Life Index, which rose between April and June. Says Rutherford, ‘Generally, there is quite a strong correlation between life insurance confidence and the JSE Life index. We found that this was not the case in the second quarter, although the reason very likely lies in the fact that for most of the period, equity markets were largely in negative territory. Life insurers’ valuations are very strongly related to equity market movements and only in the last week of the second quarter was there a recovery in global equity markets. This was the period in which the local stock market rallied (lifting life insurance stocks in the process). The survey meanwhile was conducted much earlier in the quarter, providing a likely less favourable confidence reading amongst respondents.’
Other survey findings include:
- An expectation that slowing investment income will prove to be a temporary phenomena, with a strong rebound expected in quarter 3.
- Continued improvements in efficiencies, largely driven by ongoing declines in employee numbers;
- A large difference in inflows and outflows, with the total asset book shrinking as a result of a sharp rise in outflows, coupled with significantly slower inflows.
Rutherford comments, ‘The life insurance sector has been strongly focused on cost efficiencies through the last year, with a more urgent need to address appropriate cost structures emerging in 2012. Whilst life insurers mostly continued hiring through the global financial crisis, they are currently strongly focused around maximising efficiencies. This is particularly relevant given the drastic turnaround between net inflows and outflows, which places an additional strain on the bottom line of life offices.’
Rutherford concludes, ‘Conditions have undoubtedly toughened for the life insurance sector in the second quarter. More recently, global economic circumstances appear far more favourable, which at the very least, should provide support for investment income streams. Initiatives under way to streamline operations are also likely to positively benefit profits into the second half of 2012. However, life insurers have no control of GDP and employment growth, which remain critical for future premium growth. But the outlook for premiums appears weak, in line with slow GDP growth expectations.’
About the Ernst & Young Financial Services Index
The Ernst & Young Financial Services Index Survey measures the performance of the banking; investment management and life assurance sectors on a quarterly and consistent basis and releases the information timeously. The survey is designed to assist in analysing trends in the life insurance sector over the short run. Results reveal current and expected changes in banks' income, expenses, profitability, credit standards and investment.
This is the 36th survey of life insurers conducted in South Africa. The Bureau for Economic Research (BER) at Stellenbosch University conducts the research and analysis. For a more detailed discussion of the second quarter survey results, please consult the reports that are posted on Ernst & Young's website at the following address: www.ey.com/za
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