The impact of low rates is being felt across the economy. Some are good, but some are definitely bad, such as this dismal earnings report from Met Life earlier this month:
Aug. 4, 2016
MetLife Inc., the largest U.S. life insurer, plans to cut expenses by 11 percent as low interest rates squeeze investment income.
The plan is to reduce annual costs by about $1 billion by the end of 2019 and will include job cuts, Chief Executive Officer Steve Kandarian said Thursday in a conference call without specifying how many workers will be dismissed by the New York-based company. The insurer had 69,000 employees at the end of 2015, according to its most recent annual report.
Central bank policies to suppress interest rates have reduced the income MetLife makes on a bond-dominated investment portfolio valued at more than $500 billion. The company said late Wednesday that second-quarter profit tumbled 90 percent to $110 million on a review of the prospects of a variable-annuity business that the CEO is seeking to exit as part of a proposed separation of a U.S. retail operation.
<snip>
MetLife dropped 9.5 percent to $39.54 at 4:15 p.m. in New York. The company has tumbled 18 percent this year, compared with the 5.9 percent gain of the S&P 500 Index. Prudential Financial Inc., the second-largest U.S. life insurer, fell 4.3 percent to $72.84. Lincoln National Corp. slumped 4 percent. Lincoln and Newark, New Jersey-based Prudential also reported declines in second-quarter profit after markets closed Wednesday.
“The rate and economic environment is not conducive in allowing a company like Met to thrive,” David Havens, a debt analyst at Imperial Capital, said in a note. “It can certainly get by and remain a solid credit.”
Shifting Focus
The decision by U.K. voters to leave the European Union hurt insurers as financial markets responded to the referendum by pushing down interest rates in nations such as the U.S., Kandarian said. The company is projecting 10-year Treasury yields will increase to 4.25 percent by 2027, Chief Financial Officer John Hele said on the call. Thatoutlook is even worse than in November when the company said they won’t reach a “normalized” level of 4.5 percent for 11 years.
http://www.bloomberg...es-hurt-returns
I wonder how much of a "nudge" these CEOs are giving the Fed? I suspect some phone calls have been made.
When you get down to it, Met Life built their business on an assumption (that was well founded in long term history) of a fair real return on long term bonds. The Fed actions are so divergent from that assumption, and have endured for so long, that Met and other insurers may no longer have such a business model. The Fed is destroying an important segment of corporate america. I do not think such action is prudent.
Edited by Rich C, 26 August 2016 - 09:41 AM.
