What type of assets do insurers invest in?

Insurers’ investments, a key issue for their solvency

The solvency of insurers is based on their ability to honour the commitments made contractually to policyholders and the beneficiaries of policies. It depends on the extent of these commitments (coverage and protection offered to policyholders) and the resources that insurers can mobilise in response to them. To ensure they possess sufficient resources, insurers invest the funds entrusted to them by policyholders in different types of investments.

Strict rules govern these investments, both in terms of the type and distribution of the assets held and the average life span of the assets, because if the value of the assets declines, solvency is undermined. The Solvency II Directive, which entered into force on 1st January 2016, is based on a general principle of adjusting the level of insurers’ equity capital to the actual risks, of all types, to which they are exposed.

What type of investments do insurers choose?

With a total of €2.187 billion in outstanding financial investments at the end of 2015 (excluding immovable property assets), the insurance sector plays a leading role in financing the French economy.

The assets which insurers are authorised to hold as a reflection of their commitments are divided into the following major categories:

• bonds (and other debt securities): the bonds issued by States, local authorities and companies represent a significant proportion of French insurers’ portfolios (63% of insurers’ financial investments at the end of 2015), because their medium and long-term investment horizon corresponds to the duration of the commitments entered into by insurers for numerous products (life insurance, pension savings, etc.). The insurers also benefit from a clear view of the current expected yields of the bonds;
• listed and unlisted shares: shares offer insurers the prospect of high yields but the drawback is they are not guaranteed. Indeed, the levels of dividends are variable. The amount of capital gains from the disposal of shares depends on the influence of supply and demand on the market as well as the economic and financial context;
• deposits and loans;
• securities in monetary and non-monetary collective investment undertakings (CIU);
• immovable property assets: insurers invest in immovable property assets that generate rents (rental yields). To reduce the risk of properties remaining empty, insurers prioritise the quality of the buildings, their diversity (offices, shops, residential properties, etc.) and the rigorous selection of tenants. The choice of real estate investments is also based on the prospect of generating a profit when the property is eventually sold.

The structure of the asset portfolios held by insurers must satisfy the requirements for security (limitation of the impact of the market risk), liquidity (ability to dispose of the assets held at short notice) and profitability. To avoid the concentration of risks the regulations establish certain limits according to categories of assets.

The financial management policy of insurance companies

An insurer’s financial management policy is generally designed with several objectives in mind:

- adapting the allocation of assets to the commitments made, especially with regard to their duration and to the remunerations stipulated by the policies; ?

- protecting the insurer’s solvency margin and its equity capital;?

- generating revenues (financial income and profits made from the disposal of assets), which improve the group’s results and increase the amounts paid out to life insurance policyholders as part of the profit-sharing scheme.?

Insurers may subscribe to certain specific financial products in order to secure their financial result and limit market-related uncertainties.

What is Crédit Agricole Assurances’ investment strategy?

In the approach presented above, the Crédit Agricole Assurances Group has established an investment strategy combining the desire to protect the group’s solvency with the quest for recurrent returns from its companies’ portfolios.

The Crédit Agricole Assurances Group’s assets therefore break down in the following manner:

85% are “rate-based” assets (whose yields are based on an interest rate) and? 15% are diversification assets generating revenues via the dividends paid out (shares) and rents collected (property), with the possible addition of any profits made.? This breakdown provides the security required in terms of the recurrence of revenues and the expected profitability. It incorporates the ability to transfer acquired positions in a medium to long-term perspective, in line with the characteristics of the liabilities (premiums received) that are added to these portfolios.

To maintain the profitability of its portfolios, the Crédit Agricole Assurances Group pays particular attention to making the most of any opportunities that may arise due to economic developments. In this manner, after being the first investor to subscribe to bonds issued by unlisted companies (EuroPP) back in 2012, the Group is continuing to invest in the real estate sector but also in infrastructures delivering essential services (energy production and transmission, transport, etc.).

Sources: FFSA – Banque de France- Crédit Agricole Assurances