The general increase in interest rates affects the markets and property investors. However, it could prove to be a winner in the medium term for savers holding funds in euros.
Rising prices may benefit life insurance-iStock-Jirapong Manustrong
Funds in euros, champions of fundraising
If interest rates, which have risen sharply in recent months, make banks and real estate investors shudder, they could provide new opportunities for life insurance contract holders. With a guaranteed capital, the fund in euros represents the majority of payouts on life insurance contracts. According to France Assureur, 59% of payments in the first seven months of 2022 were for funds in euros, for a total collection of 52.3 billion euros. Although it has been declining for several years, this collection exceeds that of regulated savings accounts (22.2 billion euros for Livret A and LDDS in the same period). However, the euro fund offered an average return of just 1.30% in 2020 and 2021.
An increase in the dividend can be expected
However, the global interest rate rise should be a game-changer for savers holding funds in euros. For example, the French government’s 10-year OAT rate, just above 0% at the start of 2022, was 2.70% at the end of September. A euro-denominated fund consisting on average of around 80% bonds will therefore be sensitive to these developments. However, investors should not expect a quick turnaround at a time when insurance companies are a significant holding of the most profitable bond securities.
Reserves to increase the attractiveness of contracts
In the current economic context, insurance companies are adopting several types of strategies. While some are opting for caution and gradually selling out of low-paying securities as they mature, others may dip into their profit-sharing provisions to boost returns on euro-denominated funds and maintain the attractiveness of their contracts. Profit Sharing Provision (PPB) is a relatively well-stocked profit reserve. According to France Assureurs, in recent years insurance companies have shown foresight by providing it significantly. Still, according to France Assureurs, PPB represented the equivalent of a 5.4% dividend at the end of 2020. By dipping happily into this reserve, insurers could in theory improve returns on euro-denominated funds by 1% a year for five years. With or without this boost, savers should see an increase in the performance of Euro funds in the coming months.