Capital: What is the consequence of the current rise in sovereign bond rates on the euro fund?
Cyrille Chartier-Kastler, founder of Good Value for Money : The various central banks are indeed in the process of raising their rates. The yield on France's 10-year Treasury Bond (OAT) was, for example, 2.35% on June 16 (compared to 0.01% on average in 2021, according to Good Value for Money). The whole question here is whether we are not going to witness what I call the frog syndrome, with an excessively sudden rise in rates.
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For many months, the 10-year OAT (including euro funds are very fond of, note) was in negative territory. Of course, when it starts to rise to 0.50% or 1%, it becomes much more comfortable for insurance companies. Especially since, on average, they buy at a rate 0.75 points higher than that of the 10-year OAT. Thus, when the OAT is at 1.35%, companies buy at a rate of 2.10%, which is higher than the current return on their general assets, around 1.75% on average. In this context, insurers are therefore gradually increasing the return on their general assets.
Capital: Could a too rapid increase in rates be a threat to the euro fund?
Cyrille Chartier-Kastler: With an OAT at a rate of 2.50%, or even 2.75%, there would be the risk of disinvestment in the fund in euros in favor of other investments. In particular, we would see a very large gap between the return on funds in euros and that of the A booklet (based on inflation and, therefore, on the evolution of rates, editor's note). Finally, nothing would prevent asset managers from launching baskets of corporate bond issues with yields of 3% to 4%.
However, it is obvious that the companies which bought OATs last year at rates of -0.25%, 0% or 0.25% will be in a situation of capital loss. Admittedly, insurers generally keep their obligations until their term. But these capital losses would materialize only if the companies were forced to sell bonds in the face of redemption requests from savers.
But for the moment there is no danger in the house. Many insurers have been cautious in choosing not to buy negative rate bonds in 2021.
Capital: Are companies therefore safe from massive withdrawals from savers?
Cyrille Chartier-Kastler: All the uncertainty concerns the psychological movements that could take place in the near future. If savers tell themselves that the fund in euros is no longer earning anything, that inflation is permanently high and that interest rates are rising, companies may need to regulate outflows. That's not the case today.
Over the first six months of the year, outflows reached 8.8 billion euros from the euro fund. A larger outflow could take place in the fall if the OAT rate were to increase further. Same risk if, after the publication of the 2022 rates, the saver, disappointed with the return on his life insurancedecides to leave.
Capital: But won't the yields paid out increase sharply?
Cyrille Chartier-Kastler: It should be noted that, overall, OATs are purchased over a period of 8 years. The time for rising rates to trickle down to returns on general assets is very long. The euro fund is very well suited to a context of falling interest rates, provided that they do not go into negative territory. These conditions were met for 30 to 50 years. The fund in euros then served a return generated by the bonds purchased over the last 8 years with higher interest rates. A blessed situation for insurers.
In the current context where interest rates are rising, companies cannot catch up with the upward movement, but only run after them, crossing their fingers so that savers do not think that it is in their interest to exit the fund in euros.
Capital: Insurers should therefore send a message on their 2022 rates…
Cyrille Chartier-Kastler: Insurers will act in a totally dispersed order. There are as many different situations as there are companies and funds in euros. The companies which today have excess equity, a provision for profit sharing (PPB, reserves to be paid over the following eight years, editor's note) of 6 to 7% and many real estate investments in their euro fund can handle rising interest rates quietly. There are, it should be remembered, general assets which today yield 3%.
It is exactly the opposite for portfolios with very little PPB, which are fair in terms of equity and therefore find it difficult to diversify into equities, real estate, or well-rated corporate bonds. Insurers are therefore not at all equal with regard to the rise in rates.
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Capital: So what are your forecasts for the euro fund for 2022?
Cyrille Chartier-Kastler: Our average return expectation for traditional euro funds of individual life insurance contracts is within a range of 1.80 to 2%, or even 2.20%. A doubling of the average rate is therefore possible, since at the end of 2021, this rate was 1.08%. In addition to the rise in bond rates favorable to yields, some insurers could decide to use their provisions for profit-sharing in order to support performance and announce rates of around 2.10% or 2.20%. Symbolically, many insurers will choose to serve at least the Livret A rate (currently set at 2%). Which, by the way, is misleading because there are social security contributions and potentially entry fees to be borne on the guaranteed support.
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The bank insurers, who offered an average remuneration of 0.98% last year, with rates sometimes at 0.50% or 0.35% on their old contracts, will not increase their rates to 2% . So it's really going to be the big gap.
Capital: Given inflation in particular, do savers really have an interest in staying in the euro fund?
Cyrille Chartier-Kastler: The fund in euros will have a strongly negative return net of fees, social security contributions and inflation in 2022. In this context, it may be interesting to get out of it and invest in products that are resistant to inflation. , namely stocks and real estate. This is possible with life insurance, through units of account, but with high fees. To do this, it is better to favor a securities account or a stock savings plan (PEA).