The fund’s returns in euros have been declining for years. But the rise in bond yields should make it possible to reverse the trend this year. By Gilles Belloir, CEO of Placement-Direct.fr.
Who has never heard of the famous fund in euros of a life insurance contract? Guaranteed in capital at all times, it alone concentrates the majority of payments. During the first seven months of the year, it attracted exactly 59% of contributions to the tune of 52.3 billion euros, according to France Assureur. This figure, which has certainly been declining for several years, greatly exceeds the figures for regulated savings accounts (€22.2 billion for Livret A and LDDS), competitors whether we like it or not from the Eurofund.
If the euro-denominated fund preserves the interests of savers and can claim the preferred financial investment of the French, its results have suffered in recent years. For example, it averaged just 1.30% in 2020 and 2021, net of contract management costs but before social security contributions of 17.2%.
2.70% for the 10-year OAT at the end of September
The rise in interest rates we have observed since the beginning of the year changes the situation completely. For example, the French government’s 10-year OAT rate went from just over 0% at the start of the year to 2.70% at the end of September. A fund in euros, consisting on average of approximately 80% bonds, according to the analysis of Good Value for Money (GVFM), of which 40% are issued by governments and 60% by companies, is automatically very sensitive to their development.
The insurance company, which usually holds the bonds until they are repaid, uses the coupons to deliver the fund’s return in euros. It is then quite mechanical, an increase in interest rates is favorable to new investments by insurance companies and will improve the return on their assets.
However, the saver must be patient before the increase in the fund’s return in euros is significant, the time it takes for the company to reconstruct a significant stock of more profitable bond securities. The erosion of yields has been very slow, it is likely that their progression will be equally slow.
Reserves to increase yield
Unless the insurance companies decide to give it a boost. For this, they have a return reserve, called a provision for profit sharing (PPB). In recent years, life insurance companies have had the foresight to add significantly to this reserve. According to France Assureurs, at the end of 2020 it corresponded to a return of 5.4%. In other words, by taking over this reserve, insurers can, on average, improve the return on their euro-denominated funds by more than 1% per year over the next five years.
With the return of inflation and the increase in regulated bank books, it is likely that some insurers will decide to take the plunge in order to maintain the strong appeal of their contracts. The traditional period of announcing returns at the beginning of the year will undoubtedly be very interesting to follow. It should also restore savers’ appetite for comparing the best life insurance contracts on the market.