Life Insurance confidence rose at its sharpest pace in three years, following a revival in investor sentiment and stronger equity markets in the 3rd quarter of 2009. Life insurance confidence rose two-thirds as life insurers seem satisfied with business conditions currently.The higher confidence was slightly surprising considering the continued weak business fundamentals.

Tim Rutherford, Ernst and Young’s Life Insurance sector spokesperson had this to say, ‘ Whilst there has been some improvement in their financial positions, life insurers nevertheless continued to report contracting bottom-line profits, in line with continuing investment income contraction. Indeed, the rate of contraction in net profits worsened during the quarter.’

‘In addition’, he continues, ‘ overall inflows are growing far more moderately than they were in the previous four quarters. Premium income growth slowed sharply in the third quarter, and the expectation is that this will continue into the last quarter of 2009. Although risk premium growth is holding up strongly, this is offset by:
· slowing investment product inflows;
· high and sustained contract terminations; and
· substantially slower new business premium growth.

‘As a result of continued contractions in investment income, coupled with the weaker premium income trends, life insurers experienced continued pressure in the 3rd quarter.’

‘Furthermore’, he continues, ‘ Outflows remain stubbornly high. Whilst there was some improvement in the benefits growth trend, surrenders rose strongly during the quarter, even though they remain well below long-term average levels. Primarily, the rising surrenders caused the overall rise in outflows growth.’

Despite contracting sales remuneration spending, life insurers continue to boost their in-house agent force. Says Tim Rutherford, ‘This suggests one of two things: either agents are selling less policies overall, despite higher numbers of agents, or this could be an adjustment to the legislation which kicked in at the beginning of the year, whereby commission is paid on an “as and when” basis, rather than on an upfront basis.’

He adds, ‘We are not seeing contracting premium growth, although this has slowed quite noticeably since the first half of 2009. Nevertheless, one would expect to see sales costs moving in tandem with premium growth trends, so the more logical conclusion is that the new commission payment legislation has resulted in slowing commission expenses for the industry.’

Other costs also continue growing at a solid pace, particularly administration and marketing expenses, despite a slow-down in employee growth.

The impact of slowing premium income growth and continued strong outflows growth continued to pressure life insurance profits during the 3rd quarter. Comments Rutherford, ‘This was the fourth consecutive quarter that profits have contracted, and in fact, the rate of contraction was the highest since the inception of the survey in 2003. This is in line with the recent reporting season where profits across the sector either shrunk or headline losses were reported.’

Says Rutherford, ‘ There is no sign of relief just yet as far as bottom-line earnings go. Whilst investment income contraction trends are improving, this has not resulted in improved profits for the sector. Even fourth quarter expectations amongst the survey participants do not indicate that profits will rise. Rather, the expectation is that positive investment income growth will help reduce losses for life insurers.’

‘To some extent, profits are under pressure due to a turn-around in risk business profitability, which contracted during the third quarter of 2009. This follows four consecutive quarters of moderate to strong profit growth, and indicates that competitive pressures may be rising in this product segment, as a result of subdued economic growth.’

Concludes Rutherford, ‘ Life insurance confidence does not seem to be in line with the business fundamentals. Although there are moves in the right direction regarding investment income trends, the operational business does not appear as promising. Premium income growth is likely to taper further downwards in the fourth quarter of 2009, although there are also expectations that costs and benefits will slow in tandem. However, growing the bottom-line will also be hampered by further contracting risk-business profitability, indicating that weak economic growth is hurting the sector.’