OREANDA-NEWS. Fitch Ratings says positive net collections in 1H15 underpin the positive momentum in the French life insurance sector, although profitability remains under pressure from persistent low interest rates.

According to the latest statistics from the association of French insurers (FFSA), premiums collected by life insurers (euro-denominated plus unit-linked products) increased nearly 6% y-o-y to EUR68bn in 1H15. Net collection increased 16% to EUR12.3bn.

This positive performance is driven by several factors, including a large increase in sales of unit-linked products (40% y-o-y) as stock markets improved, and the attractive returns available on life savings products compared with bank products. Furthermore, from 1 August the French government has reduced interest rates on Livret A, France's most popular deposit product, to just 0.75%. We believe this will lead more savers to seek higher returns from longer-term life savings products in preference to such low rates on short-term deposits, resulting in a further boost to insurers' inflows in 2H15.

However, low interest rates continue to squeeze French life insurers' profit margins. The business mix of the market remains skewed towards guaranteed products (85% of reserves at end-2014). Although the guarantees are typically less onerous than in some other European life insurance markets, notably Germany, French life insurers still face the dilemma of cutting crediting rates to policyholders to protect their margins, or maintaining crediting rates to protect their market position but at the expense of margins. In 2014, most insurers largely maintained their crediting rates as the average return on euro-denominated funds fell only 0.3% y-o-y, to 2.5%.

Fitch expects insurers to only marginally cut crediting rates in 2015 as they strive to maintain business volumes and competitive expense ratios. This will exert pressure on margins as interest rates and expected returns on assets backing euro-denominated funds remain low. It will also limit insurers' ability to build buffers to protect their capital base in the event of rapid rises in interest rates that would reverse unrealised gains and erode capital.

French insurers' business mix is gradually shifting from traditional to unit-linked products, driven by customers' responses to low interest rates and higher stock markets. In the first five months of 2015, the net collection of unit-linked products was, for the first time, greater than for traditional euro-denominated products, according to the FFSA. This trend is positive for ratings as the unit-linked business generates lower capital exposure to adverse movements in interest rates, equity and credit markets.