French life insurers’ profitability continues to decline
French life insurers are expected to report lower operating profitability in 2016, after investment results, driven by lower interest rates, had declined in the set of first half results, as Fitch Ratings maintain a negative outlook on the sector.
French life insurers’ profitability in the first half of 2016 was hit by lower interest rates, which increased the value of liabilities related to long-term contracts, and companies strengthened their profit-sharing reserves in anticipation of a more prolonged period of low rates, said Fitch.
Fitch expects similar themes in results for the second half of 2016, with overall profitability continuing to decline in 2017.
Furthermore, Fitch expect insurers to only marginally cut crediting rates (below 2.1 percent on average) in 2016 as they strive to maintain business volumes and competitive expense ratios. It said this cut will not be sufficient to counteract the drag on earnings from low interest rates, however.
One of the contributing factors to this decline is the shift in business mix from traditional euro-denominated products (so-called ‘fonds euro’) to unit-linked products.
The ratings agency views this change positively as unit-linked business generates lower capital exposure to adverse movements in interest rates, equity and credit markets. Nevertheless, guaranteed products still represent 85 percent of French life insurers' balance sheets, on average, making earnings sensitive to interest rates.
“Investment guarantees in the French life market are low compared with those in some other European markets, and zero on new business. However, the duration gap between assets and liabilities is two to five years, leaving insurers exposed to lower reinvestment rates for asset proceeds at maturity,” said Fitch.
