2023-05-09 03:02:44
After a rate hike of around 300 basis points in less than a year, insurance management is now facing a major challenge: Converge portfolio yield rates, particularly Life, towards current rate levels. The challenge is to remain competitive with other products (passbook A and term accounts) and thus limit redemptions. But this rise in rates and the flattening (or even inversion) of yield curves also constitute opportunities. Beyond solvency gains for those whose duration of assets was lower than that of liabilities (the famous duration gap), this context makes it possible to combine the financial and accounting objectives with the improvement of the return/risk profile of the portfolios.
The first opportunity, linked to the rise in yields, is to be able to arbitrate historical exposures, some of which are no longer in line with financial and extra-financial convictions. In fact, the disposal of positions that had become incompatible with these aspects and for the most part invested before the very sharp fall in rates in 2014, posed two dilemmas due to rates of return significantly higher than returns from reinvestments. The first related to the loss of financial income and the second to the realization of substantial capital gains potentially in contradiction with the accounting objectives.
However, the rise in market returns now facilitates the combination of financial or accounting objectives and compliance with management convictions in terms of choice of values or commitments such as the total exit from coal or the reduction of carbon intensity. wallets.
Reinvestments at yield levels close to or even higher than the positions to be sold
Indeed, with the rise in interest rates and the return of yields to levels that had not been reached since the last decade of ultra-accommodative monetary policies, reinvestments can be made at yield levels close to or even higher than those of positions you want to sell. Thus, the adjustment of the portfolios can be carried out without encumbering the financial incomes, even while improving them.
The other structural opportunity is inherent in the inverted configuration of yield curves. The relative rise in short rates makes positioning on short maturities of payment schedules significantly less costly in terms of yield, in absolute terms but also in relative terms compared to positioning on longer curve segments. Thus, improving hedging against short- and medium-term reinvestment risk, with smoothing and better balance of payment schedules, can now be done without affecting returns. This was not the case some time ago when the search for yield, at least positive, necessarily took precedence… Remember that 16 months ago, the curve for the French State was moving into negative territory up to 10 years! With the greater rise in short rates compared to long rates and beyond the rebalancing carried out by the reinvestment of bond maturities, this optimization of payment schedules in favor of short maturities can also be done through arbitrage of longer positions. , in particular those whose historical yield would be close to current yields.
In conclusion, the context linked to the rise in rates and the evolution of curves makes it possible to combine performance and accounting objectives with the improvement of financial, extra-financial and reinvestment risk profiles. A new situation which, however, requires dynamic and reactive management at all levels… far from the classic and historical “buy and hold” or “buy and maintain”.
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