The weight of equities decreases within the investments of insurers in favour of bonds, but that could change!

In recent years, insurance companies have reduced the proportion of equities in their investments in response to the restrictions imposed by the Solvency II directive, which penalises quite heavily equity investments.

“The nominal capital charge is 39% for equities listed in a country within the EEA (European Economic Area) or the OECD, and 49% for equities listed outside the OECD or not listed,” details François Beugin, Partner at Eight Advisory. Insurers have increasingly turned to less capital-intensive assets, such as bonds, to optimise the cost of capital of their asset portfolios, particularly their general euro funds.

“According to a study by the Institut Louis Bachelier, the optimal allocation – without restrictions – for insurance companies would be 27% in equities, whereas  with the application of the Solvency II Directive, it is currently 12%” emphasises François Beugin. However, the successive revisions of this directive – including the one currently underway for 2026 – tend to help insurers to invest in equities over the long term (provided they are held for 5 years or more), including in unlisted investments and therefore in private equity, with the capital requirement then being reduced to 22%.

This trend can also be seen in the additional occupational pension funds (FRPS), which where introduced in France in 2019 with the Pacte law and which are still pursuing similar strategies to insurers’. “In the last 2-3 years, the assets of FRPS have mainly been formed by transfers from the retirement portfolios of insurance companies. The transfer rules have incentivised insurers to take some of the assets from their general funds; the low interest rate environment prevailing at the time did not prompt them to significantly change these asset holdings, which are also generally still managed by the same teams as the life insurance portfolios,” adds François Beugin. However, one can reasonably expect that the proportion of equities in FRPS will increase in the long term to come closer to the European average, which has been around 35% for many years.

These developments could encourage insurers to continue their role as leading financiers of the French economy (almost half of their €2,500 billion assets are invested in French public or private debt or equities, equivalent to 43% of the country’s GDP), while they are already strongly committed to sustainable economic stimulus plans in the regions and the greening of these portfolios. Finally, spurred on by the good overall performance of the equity markets over the last 18 months (+40% for the CAC40 since September 2022), policyholders themselves are also contributing to this renewed interest in equities through their unit-linked investments, which accounted for almost half of new money by the end of 2023 and which, unlike insurers’ general “euro fund” assets, are almost 60% invested in equities.

Read the full article by Sandra Sebag published in Option Finance on May 2, 2024.