Life insurance confidence remained strong in the first quarter of 2008, despite slowing business fundamentals and the fact that life assurers’ profits fell sharply, the latest Ernst & Young Insurance financial services index shows.

Tim Rutherford, the firm’s spokesman on this sector, blamed the slump in profit growth to a contraction in investment income and rising surrender values. General economic pressures on consumers are leading to premiums being squeezed.

The index released mid April showed that profits came under pressure in the first quarter as growth in outflows far outstripped inflows.

And unlike in the first quarter of last year, the index showed a considerable fall in investment income growth. It is expected to hold into the next few quarters, leading to a further squeeze in profits growth.

Global market turmoil, coupled with less favourable economic prospects in SA, had brought an end to boom investment income earnings.

In fact, investment income earnings turned negative in the quarter, implying contracting investment income earnings.

While premium income growth held up well in the first quarter, investment income turned sharply downwards in the first quarter of 2008. This had a direct impact on bottom line profitability.

It is the 19th quarterly survey conducted to measure confidence in the life insurance industry.

Life insurance confidence is now the strongest of all financial services sectors, ahead of the banking industry (78 points), and investment management confidence (77 index points).

“The other sectors of the financial services sector are reporting significantly weaker confidence on the back of declining economic fundamentals.

“Although life insurers remain so confident in their outlook, we noticed that in the banking and investment management sectors, a few quarters of negative fundamentals typically precedes declining confidence,” Rutherford said.

The life insurance sector lagged its other financial services peers in confidence levels for quite a while in 2004 to 2006, and “we may simply be seeing an extension of this trend,” Rutherford said.

He added that “for a while now, life insurers have seen investors switching their investments out of contractual savings into collective investments. That placed some pressure on premium growth, but the industry worked hard to offset these losses.”

Other findings illustrate that slightly slower premium income growth was accompanied by slowing new business premium growth.

He said last year was a particularly good one for premiums, “but it now appears that general economic pressures on consumers are leading to premiums being squeezed once again.

“We also notice that lapse rates are declining, which should be a boost for life insurers. However, what we are seeing is that policyholders are surrendering policies to a greater extent than they were in the past.

“The reason for this is the agreement between the national treasury and the life insurance industry, implemented in 2007, which makes it more worthwhile for policyholders to surrender a policy, rather than let it lapse, as they get a payment in exiting the policy, which was not necessarily the case in the past.

“If anything, declining lapses, coupled with rising surrenders leads to greater outflows for life insurers. This definitely affects the cost of doing business, and is not therefore a positive for the sector,” Rutherford said.

He also pointed out that “we notice that the first quarter of 2007 also saw a strong slump in profits growth, so there could be seasonal factors playing a role in such a sharp downturn in profit growth. But unlike the first quarter of 2007, there is a considerable fall-off in investment income growth, which looks likely to hold into the next few quarters, and thereby squeeze profits growth.”

In conclusion Rutherford said that “although life insurance industry confidence remains strong, the underlying economic fundamentals and life insurance index indicators suggest that life insurers prospects may not be in sync with their confidence levels.

“We expect, as is the case with the banking and investment management sectors, that declining economic fundamentals will lead to lower confidence in the quarters ahead.”