Investor optimism 'high' in insurance sector

Investor confidence in the life insurance sector remains strong despite a slight dip recorded in the third quarter, with the level of optimism still among the highest in the financial services sector, according to Ernst & Young.

In a quarterly survey, Ernst & Young yesterday said confidence had fallen from 91 index points in the previous quarter to 83, but sentiment was still strong compared to a year ago when the financial services sector around the world was reeling from the severe effects of the liquidity crunch.

This meant that eight out of 10 life insurers were satisfied with business conditions during the third quarter, said Ernst & Young insurance sector spokesperson Tim Rutherford. This was a significant improvement from a year ago, when the effect of the global liquidity crisis meant only five out of 10 were satisfied with business conditions.

Banks remain cautious about performance

Other companies in the financial services sector, particularly banks, remain cautious about performance, especially given the high debt levels facing their clients.

Another survey carried out for the second quarter found that life insurers were confident about profit growth despite slowing premiums.

"Despite the weaker investment income levels (during the third quarter), profits continue to grow in the life insurance sector, albeit at weaker levels," said Rutherford.

"Continued improvements in lapse rate trends, and relatively buoyant premium levels, have helped offset weaker investment income and rising surrenders."

Rutherford said among the positives, the income levels of the life insurance sector in the third quarter had rebounded strongly, while premium levels had been sustained by gains in lapse rates.

However, the erratic performance of the stock markets had not been good news for the sector, said Rutherford, noting that volatility on the JSE in the third quarter had resulted in sagging investment income.

Earnings, confidence levels, strongly correlated with stock markets

"Life insurer earnings, and hence confidence levels, are strongly correlated with stock markets. The third quarter of 2010 saw more volatility than the first half of 2010 and the second half of 2009. As a result, investment income was weaker; that directly impacts the bottom line of life insurers."

He said although the second quarter had seen the beginning of a slower investment income trend, this did not materially affect their earnings at the time. However, in the third quarter there had been a sharper contraction in investment income, in turn hurting profit growth.

"Nevertheless, profits continue to grow, just at slower levels than was the case earlier in 2010. However, any further contractions in investment income could start resulting in bottom-line profit contractions, particularly if premium income slows, as the life insurers have indicated they expect to occur in the fourth quarter," said Rutherford.

Lapse rates improve

Lapse rates, when policyholders cancel policies, had also improved. This could be due to firms being more selective in their client acquisition and point to proactive management of existing policies.

Rutherford said another finding of the survey was the growing shift in the business mix over the past year, as evidenced by the slowdown in the growth of risk related premium growth, while investment product premiums had held up well.

"This could be a delayed response to stronger equity markets in 2009. Investors possibly believed there may be benefit to returning to equity markets via life policy linked investments, and hence the increase in investment product related income," he said.

" In addition, life insurers are probably being more assertive in marketing investment related policies, after losing market share to asset managers and other product providers over the past few years," he said.

Source: Business Day