Under pressure from the good performance of regulated savings, life insurers are seeking to optimize the return on their funds in euros. The profession is exploring several avenues, including the mobilization of the PPB financial reserve and the renewal of the bond portfolio. These levers should take effect this year.
After more than a decade of deflation, interbank interest rates have been rising since January. This reversal delights savers, especially those who invest in investments whose return is indexed to bond yields. On the other hand, insurers and banks are not too happy with this situation, even if it offers new opportunities on the financial markets.
Euro fund managers are faced with a particular dilemma: how to increase the coupon without harming the profitability of the portfolio? Insurers must solve this problem fairly quickly, otherwise they will suffer massive outflows and push members towards regulated savings books.
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Resist the revival of tax-exempt booklets
In recent months, the fight for the title of “preferred investment of the French” has turned slightly to the advantage of the Livret A. This product has taken advantage of the rise in rates to bring back savers and at the same time sink the collection of the’life insurance. After the doubling of the Livret A rate in August, this product captured 2.7 billion euros in September, a jump of 1000% compared to September 2021.
In all likelihood, the strength of the Livret A will continue for a few more months, with a further rate revision expected in February 2023. However, the resurgence of tax-exempt savings accounts – including the LEP and the LDD – should be put into perspective. Their improved yield remains insufficient to cover inflation.
In other words, even if regulated savings products serve a rate of 3 or 5%, the money invested in them will lose value.
ImportantThis paradox also concerns the euro fund for life contracts, whose remuneration should rise between 1.6 and 2% this year.
Such a return will not compensate for inflation expected at 6% according to Banque de France forecasts. In the absence of major changes, net outflows on euro funds will continue. To stop the bleeding,
ImportantInsurers call on members to diversify their investments and give more space to units of account.
Dip into reserves or renew the portfolio
To keep up with the pace imposed by the Livret A, insurers plan to raise the rate of return on their funds in euros. The majority of the assets in this fund are invested in government bonds. In theory, the yield on euro contracts should follow the same upward trend as the coupons. The reality is a bit more complex. The portfolio of life insurers is made up of bond securities acquired when the yield was at its lowest. Only a minority of these assets mature each year – between 1/6th and 1/8th depending on the institution.
Even if we replace these securities with newer, and therefore more profitable, bonds, the impact on the rate of the euro fund will remain low. To counter this inertia, insurers plan to mobilize part of the reserve formed with the provision for profit sharing. This safety mattress currently represents 5.4% of life insurance outstandings. The redistribution of these provisions in the form of a return will be spread over a few years.
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