Under pressure from the good performance of regulated savings, life insurance companies seek to optimize the return on their funds in euros. The profession is exploring several avenues, including mobilizing PPB’s financial reserve and renewing the bond portfolio. Those handles were supposed to go into effect this year.
After more than a decade of deflation, interbank rates have been rising since January. This reversal pleases savers, especially those who invest in investments whose returns are indexed to bond yields. On the other hand, insurance companies and banks are not so happy about this situation, although it offers new opportunities in the financial markets.
Euro fund managers face a particular dilemma: how to increase the coupon without harming portfolio profitability? Insurers need to fix this problem pretty quickly or they will suffer massive outflows and push members towards regulated savings accounts.
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Resist the revival of tax-free booklets
In recent months, the battle for the title of “the French’s favorite investment” has turned slightly in favor of Livret A. This product has taken advantage of the increase in rates to bring back savers while lowering the collection of’life insurance. After doubling the Livret A rate in August, this product achieved 2.7 billion euros in September, a jump of 1000% compared to September 2021.
In all likelihood, the strength of Livret A will continue for a few more months, with a further rate review expected in February 2023. However, the resurgence of tax-free savings accounts – including LEP and LDD – should be put into perspective. Their improved returns remain insufficient to cover inflation.
In other words, even if regulated savings products earn 3 or 5% interest, the money invested in them will lose value.
ImportantThis paradox also concerns the Eurofund for life contracts, whose remuneration should rise between 1.6 and 2% this year.
Such a return will not compensate for the expected inflation of 6% according to Banque de France forecasts. In the absence of major changes, the net outflow of Eurofunds will continue. To stop the bleeding,
ImportantThe insurance companies encourage members to diversify their investments and give more space to billing units.
Dip into reserves or renew the portfolio
To keep up with the pace imposed by Livret A, insurers plan to raise the return on their funds in euros. The majority of the assets of this fund are invested in government bonds. In theory, the return on euro contracts should follow the same upward trend as the coupons. The reality is a bit more complex. The holdings of life insurance companies consist of bond securities acquired when yields were at their lowest. Only a minority of these assets mature each year – between 1/6 and 1/8 depending on the institution.
Even if we replace these securities with newer and therefore more profitable bonds, the impact on the Eurofund’s rate will remain low. To counter this inertia, insurance companies plan to mobilize part of the reserve formed with the profit sharing provision. This safety mattress currently represents 5.4% of life insurance outstanding. The redistribution of these provisions in the form of a return will be spread over a few years.
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