MetLife CEO Says Bernanke’s Easy Money a Tax on Savers
The Federal Reserve should pay more attention to the harm inflicted on savers by record-low interest rates, said Steven Kandarian, the chairman and chief executive officer of MetLife Inc. (MET), the largest U.S. life insurer.
“A policy of artificially low interest rates is a form of taxation on savers,” Kandarian, 61, said in his annual letter to shareholders. “This social cost should be considered more explicitly in debates over monetary stimulus.”
Fed Chairman Ben S. Bernanke has kept interest rates near record lows and started a bond-buying program to cut unemployment and boost the pace of growth after the deepest recession since the Great Depression. Low yields contribute to higher prices and reduced guarantees on some products offered by New York-based MetLife, Kandarian said.
“The current environment of extremely low interest rates is starting to have a meaningful impact on the ability of life insurance companies to offer certain guarantees,” the CEO said. The Fed “penalizes savers directly through low returns on bank deposits and other fixed-income instruments, and indirectly through lower crediting rates” on insurance products.
Bernanke has said that low returns for savers are a necessary cost of the central bank’s efforts to lead the economy out of the recession. Policy makers have held the main interest rate near zero since December 2008 and they estimate that the first increase will be appropriate in 2015.
Growth is still too weak for higher rates, and raising borrowing costs prematurely would “throw our economy back into recession,” further hurting savers, Bernanke told lawmakers Feb. 26 in his semiannual monetary policy report to Congress.
“The only way to get interest rates up for savers is to get a strong recovery,” Bernanke told the Senate Banking Committee. “And the only way to get a strong recovery is to provide adequate support to the recovery.”
Insurers invest premiums from customers in bonds and other assets to back future payouts. Yield from the instruments that exceeds customer payments can add to profits.
MetLife’s $517 billion portfolio includes more than $370 billion of fixed-maturity securities, and the insurer has hedges that have helped guard income against low bond yields. The company had an investment income yield of 6.99 percent on variable and universal life products in the Americas retail unit in the three months ended Dec. 31, which was 2.45 percentage points higher than the average crediting rate for clients. The so-called spread for deferred annuities was 3.02 percent.
Kandarian said in the letter that MetLife has raised prices and lowered guarantees on savings products including variable annuities and some forms of universal life insurance. The insurer’s new variable annuity, which lowered payout rates, may generate higher returns on capital, Kandarian said.
MetLife boosted Kandarian’s bonus by 40 percent to $4.2 million in his first full year as CEO, the insurer said in a separate document today. Kandarian’s total compensation rose to $13.7 million last year from $10.6 million in 2011.
MetLife gained 0.3 percent to $38.18 at 11:51 a.m. in New York. The shares have advanced 16 percent this year.
Insurance executives including the head of Berkshire Hathaway Inc.’s General Re unit and Alleghany Corp. CEO Weston Hicks have cited the risks of low rates. Hedge-fund manager David Einhorn has said the stimulus efforts aren’t useful and may lead to inflation.
Kandarian, who became CEO in May 2011, is focusing on products that are less risky and have lower capital requirements. He’s scaled back from savings products such as variable annuities while focusing on protection offerings such as accident and health insurance.
“In a period of prolonged low interest rates and potentially higher capital requirements for large life insurance companies, we must achieve the correct balance” between savings and protection products, Kandarian said in the letter.