Investor sentiment lifts insurers confidence

1/22/2010 12:40:01 PM

EDWARD WEST

Finance Editor

CONFIDENCE in the life insurance sector continued to rise in the fourth quarter from its weakest levels at the end of 2008, after benefiting from better investor sentiment and stronger equity markets.

Ernst & Young said in a quarterly survey that close to three quarters of life assurers were satisfied with business conditions in the fourth quarter of last year.

Ernst & Young life assurance spokesman Tim Rutherford said this week the improvement in confidence in the latter half of last year was driven largely by improving stock markets, which aided the insurer’s income levels.

“The first half of last year saw sharply reduced investment income for the industry. This led to profit contractions, and in some cases even losses. However, this was to some extent offset by relatively buoyant premium income flows,” said Rutherford. The second half of last year saw a reversal of the trend, where revived investment income offset slowing premium income growth.

“Premium income contracted in the fourth quarter of last year, indicating that slow economic growth is starting to hurt the life insurance sector’s ability to attract new funds.”

Survey findings indicated there were sharp contractions in investment product inflows; further weakness in risk contract profitability; contractions in new business premium growth and an improvement in the lapse and termination rate. Surrenders had remained low. A combination of improvements in investment income offset the effect of the contracting premium income trends and deteriorating risk contract profitability, resulting in life insurers experiencing an improvement in the net profit losses in the fourth quarter.

“Even so, net profits continue to decline, and have been doing so for five successive quarters, with the expectation that profits will still continue contracting into the new year, despite the renewed investment income growth,” said Rutherford. “It may just be that slower premium growth may be the chief concern for life offices in the new year, rather than the investment income squeeze they faced last year.”

weste@bdfm.co.za