Axa CEO Invites Taper as End of ‘Financial Repression’Noah Buhayar and Zachary Tracer
Axa SA Chief Executive Officer Henri de Castries said France’s largest insurer would welcome steps by the U.S. Federal Reserve to scale back monthly asset purchases that have depressed bond yields.
“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,” de Castries said in a Sept. 13 interview in New York.
Fed policy makers, led by Chairman Ben S. Bernanke, are meeting this week and will weigh whether to slow $85 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,” said de Castries, 59. “It’s the savers paying for the rescue of the banking system.”
Bond yields have jumped since Bernanke said May 22 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 percent from May 21 through yesterday, compared with the 1.7 percent gain in the S&P 500. Paris-based Axa, which sells life insurance in the U.S., has surged 20 percent.
De Castries’s comments echo remarks from other insurers. Executives at MetLife Inc., Alleghany Corp. and the General Reinsurance unit at Berkshire Hathaway Inc. have all said low rates are a burden for their businesses.
“Central bankers continue to force liquidity in the banking system without any objective proof that it is helping,” Alleghany CEO Weston Hicks said in a letter to shareholders earlier this year that compared monetary easing to medieval bloodletting.
Axa has been increasing bets on corporate bonds and infrastructure debt, helping hold the company’s portfolio yield steady, de Castries said. About 45 percent of Axa’s 476 billion euro ($635 billion) general account was in government debt as of June 30. Corporate bonds made up 31 percent of the holdings, which back insurance liabilities, according to a presentation on the insurer’s website.
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 Fed 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 Inc., said in an interview 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, CEO of MetLife, the largest U.S. life insurer, said in March that low interest rates penalize savers and harm the ability of life insurers to offer some guarantees.
“This social cost should be considered more explicitly in debates over monetary stimulus,” Kandarian said in his annual letter to shareholders.
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.
“I know that people who rely on investments that pay a fixed interest rate, such as certificates of deposit, are receiving very low returns, a situation that has involved significant hardship for some,” Bernanke said last year. “Only a strong economy can create higher asset values and sustainably good returns for savers.”
De Castries spoke while he was in New York meeting with investors and the board of Axa’s U.S. subsidiary. The insurer is looking to expand in the country as baby boomers exit the workforce and individuals take more financial responsibility for their retirements. That need has become more pronounced five years after the collapse of Lehman Brothers Holdings Inc. threatened to bring down the financial system, hurting individuals’ savings, de Castries said.
“The prospects of the U.S. market are great for players like us, because the need for savings and the need for protection have not diminished with the crisis,” he said. “They have increased.”
One of Axa’s challenges in the U.S. is name recognition. The company, which operates in the nation through businesses including Axa Equitable, competes against firms such as MetLife and Prudential Financial Inc., which have a larger market share in products like variable annuities. Prudential, based in Newark, New Jersey, has its name on an arena in the city. MetLife promotes its brand on the side of a blimp, on a stadium and through mascots including comic-strip beagle Snoopy.
One of the “unexploited resources we have is the brand,” de Castries said. “This is something which we will have to gradually change.”