Capitalization reserve (France)

When rates fall, the bonds held by an insurer gain value. The temptation is then to sell them to book a gain and reinvest at a lower rate: the year's result improves, but the following years' yields deteriorate by as much. The capitalization reserve neutralizes this game. Gains realized on bond sales are paid into it instead of entering profit, and losses are drawn from it. It is shown within equity in the statutory accounts, but it cannot be distributed: it belongs economically to policyholders as much as to shareholders, since it represents anticipated future yields. It thus has a double effect: smoothing results and protecting policyholders' profit sharing against management that would consume the portfolio. Under Solvency II, it disappears as such in the economic balance sheet, where bonds are at market value, and reappears in the reconciliation reserve among the highest-quality own funds. It remains a useful indicator: a large reserve signals an old portfolio sold at a gain, and a depleted reserve signals sales at a loss, often to meet surrenders.