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Curious times for insurers
Marc Ashton
Johannesburg - Confidence levels in the life insurance sector may be up, but this could belie less benign fundamentals in the industry.
According to a quarterly confidence index issued by the Bureau of Economic Research and auditor Ernst & Young, confidence levels rose to 76 points for the last quarter from 71 previously.
The survey attributed the confidence upswing to the improved economic environment as well as the rebound in equity markets.
Tim Rutherford, Ernst & Young's life insurance sector spokesperson, said: "For the first time in over a year, life insurers have indicated that profits are growing once again.
"These profits are supported by strong investment income growth, which was severely depleted in the midst of the global financial crisis, but has subsequently recovered.
"Profit trends improved vastly in the fourth quarter of 2009, but were not yet reflecting positive growth. This has shifted sharply in 2010."
Rutherford said that the extent of the recovery appeared to have surprised the industry, with a combination of revived premium income and stronger investment income supporting the bottom line. This was expected to result in "sustained profits growth into the second quarter".
Volatile earnings
While revived premium income and inflows may provide some support for the insurers, recent history has shown how volatile earnings for the sector are in relation to choppy equity and bond markets.
With that in mind, investors may want to heed the words of caution from Simon Pearse, CEO of Marriott Asset Management.
He warned investors may be in for a long haul and should not expect a short-term recovery. "Of concern is inflation remaining above 7% on average, while asset class yields are currently low at 2.2% from equity, 8% from property and 9% from bonds.
"These factors do not bode well for improved real returns in the years ahead," he said.
"The recovery from recession may take longer than is generally expected and investors should err on the conservative when anticipating levels of return from the various asset classes."
One insurance industry heavyweight brimming with confidence is the CEO of Alexander Forbes, Edward Kieswetter.
Kieswetter said on Thursday that he was positioning the financial services firm to double its earnings growth over the next five years.
He had board approval to spend an initial R235m to kickstart his strategic expansion campaign; a further R430m has also been earmarked for the drive, subject to the fulfilling of certain milestones.
Source: Fin24.com
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