AXA calls for 'repressive' US Fed bond buying to wind-up
"One of the reasons for which, not only me, but we as insurers, are comfortable with the fact that the Fed would start to taper is very, very simple: The long-term interest rates are too low," Mr de Castries said.
US Federal Reserve policy makers, led by chairman Ben Bernanke, are meeting on Thursday and will weigh up whether to slow $US85 billion in monthly bond buying that was meant to stimulate the economy.
The program has pressured investment income at insurers that hold fixed-income securities to back obligations, while rewarding borrowers with near record-low costs.
"The game which has been played over the last three years, it's financial repression," Mr de Castries said. "It's the savers paying for the rescue of the banking system."
Bond yields have jumped since Mr Bernanke said in May that the central bank could "take a step down in our pace of purchases". The rising rates have led to a rally in insurance stocks. A Standard & Poor's index of life insurers has jumped 16 per cent from May 21 through Tuesday, compared with the 1.7 per cent gain in the S&P 500. Paris-based AXA, which sells life insurance in the US, has surged 20 per cent. AXA teamed up with AMP for the $13.3 billion acquisition of the AXA Asia Pacific business two years ago.
Mr De Castries' comments echo remarks from other insurers. Executives at MetLife, Alleghany Corp and the General Reinsurance unit at Berkshire Hathaway have all said low rates are a burden for their businesses. Australia's QBE Insurance, which has a sizeable US business, has seen its shares largely flat over the same period, although analysts say it is impacted by swings in the Australian dollar.
"Central bankers continue to force liquidity in the banking system without any objective proof that it is helping," Alleghany chief executive Weston Hicks said in a letter to shareholders earlier this year that compared monetary easing to mediaeval bloodletting.
AXA has been increasing bets on corporate bonds and infrastructure debt, helping hold the company's portfolio yield steady, Mr de Castries said. About 45 per cent of AXA's $US635 billion general account was in government debt. Corporate bonds made up 31 per cent of the holdings, which back insurance liabilities, according to the insurer's website.
Mr De Castries said investments in bridges, toll roads and airports offer reliable long-term cash flow that match the duration of his company's liabilities. They also can protect against inflation.
"There is a huge need for infrastructure everywhere in the world, even in the mature-market countries where state budgets are so tight," he said. "Infrastructure is clearly a category where all the insurance companies and long-term investors throughout the world are looking."
The Federal Reserve has kept its benchmark rate near zero since December 2008 and has embarked on three rounds of quantitative easing to bolster the economy. In the third, the central bank has been buying $45 billion of treasuries and $40 billion of mortgage- backed bonds each month.
Terry Lillis, chief financial officer at Principal Financial Group, said last week that he's looking forward to the Fed scaling back purchases because the economy runs better when yields are higher, especially for long-term savers. A reduction in bond buying would be a sign that the economy is improving, he said.
Steve Kandarian, chief executive of MetLife, the largest US life insurer, said in March that low interest rates penalise savers and harm the ability of life insurers to offer some guarantees.
Mr Bernanke has said savers will benefit from an improving economy spurred by the central bank's stimulus efforts.
Individuals with fixed-income holdings may also own homes, run businesses, have jobs or hold stocks, meaning they benefit from a strong economy, he said.
"Only a strong economy can create higher asset values and sustainably good returns for savers," Mr Bernanke said last year.
Frequently Asked Questions about this Article…
AXA's CEO Henri de Castries said tapering would be welcome because long-term interest rates are currently too low. Reducing the Fed's monthly asset purchases could allow bond yields to rise, which would relieve pressure on insurers' investment income that depends on fixed-income returns.
In the article AXA used the term 'financial repression' to describe a period where central bank actions keep interest rates unusually low, effectively reducing returns for savers. AXA argued this dynamic transfers the cost of banking system rescue onto savers by depressing yields.
Since comments by Fed chair Ben Bernanke in May that purchases could slow, bond yields have jumped and driven a rally in insurance stocks. A Standard & Poor's index of life insurers rose about 16% from May 21 through the referenced Tuesday, compared with a 1.7% gain in the S&P 500, and AXA's shares surged around 20%.
The article describes the Fed's third round of quantitative easing, in which the central bank was buying a total of about US$85 billion per month—roughly US$45 billion of treasuries and US$40 billion of mortgage-backed securities—to support the economy.
AXA has increased allocations to corporate bonds and infrastructure debt to help hold its portfolio yield steady. According to the article, about 45% of AXA's US$635 billion general account was in government debt and 31% in corporate bonds, while infrastructure investments like bridges and toll roads offer long-term cash flows that match liabilities.
The article states insurers favor infrastructure such as bridges, toll roads and airports because they provide reliable long-term cash flow that matches the duration of insurance liabilities and can offer protection against inflation—important for meeting future policyholder obligations.
Executives at MetLife, Alleghany Corp (and its CEO Weston Hicks) and Berkshire Hathaway's General Reinsurance unit all said low rates are a burden for their businesses. For example, Alleghany compared monetary easing to medieval bloodletting in a shareholder letter, and MetLife said low rates penalize savers and limit insurers' ability to offer guarantees.
The article suggests that a reduction in bond buying would likely push yields higher. For everyday fixed-income investors this can mean better income returns over time, and, as Principal Financial Group's CFO noted, higher yields can indicate an improving economy that benefits long-term savers—though bond prices may be volatile during the transition.
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