There was a WSJ article \"AXA to Cut Costs to Boost Earnings; Record-low interes
ID: 2737210 • Letter: T
Question
There was a WSJ article "AXA to Cut Costs to Boost Earnings; Record-low interest rates have weighed on the earnings of AXA and other insurers" posted on our discussion board. AXA is a Paris-based insurance company. It released its four-year strategic plan on June 21, 2016. The plan aims to boost the firm earnings by cutting costs, expanding in higher -growth regions, and using digital technologies to offer more services. The investors were not impressed by the plan. But analysts at Jefferies Group said the plan "will be seen as realistic in the current yield climate". Answer: How would bond yields affect an insurance company's earnings? and why was AXA's strategic plan realistic?Explanation / Answer
The yield on bonds affect the earnings of Insurance companies as well as the premiums received by Insurance companies are invested in Bond portfolios. When the interest rates on bonds come down , the ineterest revenue on Bond investment also goes down. That way the interest rates on bonds affect the revenue earning in bonds.
As the revenue of AXA is taking a hit due to low interest rate regime, it is a prudent plan on their part to focus on cost cutting, getting more revenue from high growth regoins and increasing use of digital technology to reduce cost of service offering and offer more services to the clients. So the strategic plan of AXA is a sound plan to compensate for the loss of interest revenue by other means.
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