For the 53 million life insurance contracts that the French currently have, 2022 should not be a good year. Indeed, returns on Euro funds should all be negative in the face of galloping inflation. They should also not follow the latest interest rate hike, which would cause them to rise sharply. While we wait for the insurance companies to communicate the results of these funds within a few weeks, we will explain the complex mechanics, or rather the headwinds, currently blowing on this investment, whose outstanding amounts amount to more than 1,826 billion euros.
Remember: a few years ago, the death of the Eurofund was predicted due to the historic and sustained decline in bond yields, financial products that insurance companies hold mainly to earn interest on the savings entrusted to them. A decline which has taken the concrete form of dividends, which have gone from +5.8% in 1997 to +1.28% net of management fees only in 2021 (source: research firm Le Cercle de l’épargne). Result: with few exceptions, the insurance companies put themselves in a fight to promote units of account (UC), financial support invested in shares and which, unlike conventional Euro funds, does not include any capital guarantee. In other words, with them it is certainly possible to make gains when the financial markets are well oriented, but it is also possible to suffer losses when they are bearish.
Risk-taking driven by savers
For this “promotion” variable funds have been used over the years: it has thus no longer been possible to accommodate all its payments in the euro funds of many insurance companies (Axa, Prédica, Suravenir, etc.). In a slightly different logic, performance bonuses have arisen, which crescendo with the contract’s share of units of account, and which can be assimilated to a form of reward for taking risks (Axa, Swiss Life…). Not to mention the fees on payments, which may have been increased in an attempt to divert euro funds from diehards who still preferred to play the safety card for the risk (with the prospect of, not guaranteed, higher returns).
A brutal change of scenery
In 2022, the scenery changes. Inflation (which will appear in mid-2021) starts to gallop and the prices of bond products start to rise sharply: we had not seen that since the 1980s! Now the question is whether the 2022 returns that will be announced in early 2023 will continue to follow this unattractive trend. “strongly negative interest rates, which are a new and complex phenomenon for life insurance companies”, as Philippe Crevel, director of the Cercle de l’épargne, points out, or if, on the contrary, in light of this specific context, these interest rates will also benefit from this interest rate increase.
In fact, the insurance companies, in addition to the possibility of adopting a slightly more active management than before, can now take advantage of the rise in interest rates to buy bonds with interest rates that are significantly more attractive than in recent years. Problem: these new bonds only replace and will only gradually replace the old maturities. For example, Odile Ezerzer, director of Macif Finance Épargne and CEO of Mutavie, states that “About 10% of our bond portfolio matures every year”. On the downside, this means that despite the improvement enjoyed by bond markets, savers will have to wait several years to see a significant increase in returns from their Euro funds…
Avoid significant outflows that are harmful to all
“The whole challenge for life insurance companies is to avoid excessive outflows today and tomorrow, that is, a volume of redemptions that would force them to sell old bonds at a loss, a source of price loss. Such a situation would be unfavorable for the sector .” notes Cyrille Chartier-Kastler, creator of Good Value for Money, a website specializing in life insurance and financial investments. To avoid this dark scenario, you should know that the law has allowed to temporarily limit the freedom of savers by limiting cash withdrawals for a maximum of 6 months… But we are not there yet! And above all for not being there, the life insurance companies have an interesting card up their sleeve: that of the profit sharing provision (PPB), which would be “€71.5 billion, or approximately 4.87% of outstanding, all companies combined”, according to Cyrille Chartier-Kastler.
Use of profits set aside
What is it about ? Profits have been kept in reserve (and therefore not distributed in the years in which they were acquired) in order to cope with the years when the financial situation is complicated. This PPB, which varies from insurance company to insurance company (bancassurance companies, for example, have significant reserves built up, among other things, to the detriment of the rates paid on their contracts, etc.), must in any case be redistributed to insureds with a grace period of up to 8 years: “It is made for that, that is, to mitigate the moment when the net return on assets is lower than the average yield on 10-year government bonds, as is the case now”. emphasizes Guillaume Rosenwald, CEO of MACSF Retirement Savings.
An increase in yield that should be limited
By drawing on this reserve, “2022 rates excluding management fees could be between approximately 1.8% and 2.6%”, according to Philippe Crevel, which would be good news for savers. However, have no illusions: this redistribution, which is in no way pharaonic, will be progressive, that is, spread over several years. And “it will not run with inflation », according to Odile Ezerzer. In other words, even with a gradual and real increase in interest rates, savings invested in a Euro fund will continue to be in negative territory as long as inflation is at a high level.
In the background you can see the construction of booklet A
Another financial problem that the insurance companies have to deal with: the very large version of booklet A, whose current remuneration has never been so high for many years since now 2% excl. tax and social contributions. And it can rise to 3% next February, given the parameters to calculate this remuneration, i.e. beyond the returns of the best Euro funds on the market! What gives some insurance companies a hard time, although it is true that it is not fair to compare these two products, both their parameters (payment caps, fees, taxation, etc.) and their investment horizon are different. But according to Philippe Crevel, “Some savers will still take this step. In addition, the Livret A account already captures part of the savings intended for long products. A couple with 2 children can thus risk-free and tax-free place more than €100,000 today on boats liability A and liability for sustainable and solidary development”.
New strategies to capture new savings
Faced with this unprecedented situation, some insurance companies could be tempted, and this is good news, to change their tune and somewhat soften the rules that they themselves have put in place in recent years. Because in addition to an (unusual) wave of redemptions, which must be avoided at all costs, insurers must also continue to raise funds for two reasons. First, so that the “net” collection (ie the ratio of the benefits paid as a result of the withdrawals made, or the payment of death benefits to the beneficiaries and the premiums received) remains positive. Then, so that their portfolios can be more quickly exposed to interest rates that have increased significantly, which will thus allow the community of their policyholders to receive benefits more quickly.
Several hypotheses are currently on the table. The first, which is simple to implement and has the advantage of being completely understandable by all savers, would be “to lower or even cancel the fees on payments, because the guarantee from the Eurofund now costs less in equity”, emphasizes Guillaume Rosenwald. The second would be “to lower the current eligibility thresholds for Eurofunds, often conditional on an investment in units of account of 30% or 40% », predicts Édouard Michot, president of Assurancevie.com, who indicates “We already have signals in this direction”. As a reminder, the contracts that allow you to invest 100% of your savings in their euro fund, such as Garance Épargne (Garance), Afer (Abeille Vie), Multi Vie (Mutavie) or even Actépargne 2 (La France Mutualiste) currently very numerous. limited. The third could be the return of funds of the eurocroissance type, whose capital is definitely guaranteed and whose returns are supposed to be higher than those of euro funds, but whose counterpart is to be able to immobilize one’s savings for at least 8 years …
The 2022 returns, which will begin to be released in mid-January 2023, will be scrutinized more than ever.
