OREANDA-NEWS. Fitch Ratings says in a new report that it expects French life insurers to report lower operating profitability in 2016 after investment results declined in 1H16, driven by lower interest rates. We maintain a negative outlook on the sector.

The profitability of French life insurers in 1H16 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. We expect similar themes in 2H16, with overall profitability continuing to decline in 2017.

We expect insurers to only marginally cut crediting rates (below 2.1% on average) in 2016 as they strive to maintain business volumes and competitive expense ratios. However, this cut will not be sufficient to counteract the drag on earnings from low interest rates.

The business mix is shifting from traditional euro-denominated products (so-called "fonds euro") to unit-linked products. Fitch 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% 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.