Life Insurance confidence recovers from a weak third quarter

In a quarterly survey released today, Ernst & Young reports that life insurance confidence recovered strongly from 75 index points in the third quarter of 2012, to 93 in the last quarter of 2012. This follows two consecutive quarters of dropping confidence levels, and takes the life insurers back to the very strong confidence levels that they enjoyed through 2011 and into early 2012.

Tim Rutherford, Life Insurance spokesperson at Ernst & Young makes the point that insurers have regained their status as being amongst the most confident across financial services companies, after the shaky third quarter levels. He adds that more than nine out of ten life insurers are satisfied with business conditions, ahead of long term average confidence levels.

This is the 38th quarterly survey measuring confidence in the life insurance industry. The research is conducted by the Bureau for Economic Research in Stellenbosch.

Life Insurance confidence recovers from a weak third quarter

The survey, which covers a broad range of financial services companies, found that financial services confidence was generally much stronger in the second half of 2012, with all of asset management, retail banking and life insurance rising in the last quarter of the year. Insurance sector spokesperson at Ernst & Young, Tim Rutherford comments that the life insurance sector was out of sync with the rest of financial services in the third quarter, but the strong recovery in the fourth quarter brings them back in line with the broader financial services sector.

The stronger confidence is in line with a very strong stock market through 2012, especially towards the end of the year. Tim Rutherford comments, ‘A significant portion of life insurer earnings are dependent on investment returns and investment income, so stock markets are very supportive of bottom line earnings.’

The strong life insurance confidence comes amidst weak overall economic growth, with a number of economists adjusting their growth forecasts downwards. Says Rutherford, ‘We saw some traumatic events in the third and fourth quarters of last year, and one would expect this to have impacted confidence negatively. Global ratings agencies at the very least placed South Africa on a downgrade warning, and the currency depreciation was reflective of negative investor sentiment. In this environment, it was very unlikely that we would witness a strong stock market rise as the year came to a close.’

Life insurance confidence was boosted by stronger premium earnings in the fourth quarter, recovering from rather weaker 2nd and 3rd quarter trading. Tim Rutherford adds that investment income will undoubtedly add an additional boost, which was not anticipated when the survey was conducted early in the fourth quarter; ‘Life insurers expected investment income growth to be flat. We think the strong equity market close will further support their bottom-line profits for the year. Profits growth was expected to be strong, driven by premium growth, but over and above that, the unexpected strong boost provided via the JSE should lead to a very good reporting season for the sector.’

Additional findings around cost growth are also noteworthy. In line with other financial services companies, life insurers are struggling to contain cost growth, despite a consistently falling headcount through 2012. Life insurers started shrinking their in-house employee numbers from the last quarter of 2011, and expect this to intensify into 2013. More recently, life companies are also cutting back on their agent numbers, although the cut-backs are far more moderate than they are in the case of internal employees.

Rutherford concludes, ‘A combination of strong operational earnings (premiums), coupled with an unanticipated strong stock market, has created a very favourable business environment for life insurers. The expectation is that this will continue into 2013, with strong premiums driving sustained high profits growth.’

About the Ernst & Young Financial Services Index

The Ernst & Young Financial Services Index Survey measures the performance of the banking; asset management and life insurance sectors on a quarterly and consistent basis and releases the information timeously. The survey is designed to assist in analysing trends in the asset management sector over the short run. Results reveal current and expected changes in asset managers’ business confidence, net inflows, fees and income, costs, profits and future outlook.

This is the 40th survey of asset managers 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 fourth 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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