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MetLife Suffers Due to Low Interest Rate, Eyes Recovery

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For MetLife, Inc. (MET - Free Report) , one of the largest providers of life insurance, persistently low interest rate has led to a decline in net investment income over the years.

Due to low interest rates, MetLife had to invest insurance cash flows and reinvest the cash flows (received from investments) in lower yielding instruments. Notably, net investment income has declined to $15.6 million in 2018 from $22.4 billion in 2013, implying a decline of 30%.

Moreover, borrowers tend to prepay or redeem the fixed income securities, mortgage loans and mortgage-backed securities in the company’s investment portfolio in order to borrow at lower market rates. This has led to a decline in investment income.

Also, some of the company’s products, such as fixed annuities expose it to interest rate risk. Low interest rates reduce margins on these products i.e. the difference between the amounts that MetLife is required to credit on contracts and the rate of return that it can earn on investments intended to support obligations under these contracts.

The difference between interest earned and interest credited (also called margin) is a key metric for the management of, and reporting for, many of the company’s businesses.

Low interest rate results in lower margin that leads to acceleration in amortization of certain intangible assets such as deferred acquisition cost (DAC) and Value of Business Acquired (VOBA).  Significantly lower margins have caused the company to accelerate amortization, thereby reducing net income in some periods.

Given the fact that low interest rate environment is here to stay, MetLife has taken recourse to other ways to protect its profitability. It continues to be proactive in its investment and interest crediting rate strategies as well as its product design and product mix. To mitigate the risk of unfavorable consequences from the low interest rate environment in the United States, MetLife applies disciplined asset/liability management (“ALM”) strategies, including the use of interest rate derivatives.

MetLife has also taken business actions, such as shifting the sales focus to less interest rate sensitive products. In addition, the company is well diversified across product, distribution and geography. Certain of its businesses reported within its Latin America, EMEA, and Asia (exclusive of Japan business) segments are not significantly interest rate or market sensitive and have limited sensitivity to U.S. interest rates.

The company expects its non-U.S. businesses to grow faster than its U.S. businesses and, over time, become a larger percentage of its total business.

This geographical divergence will substantially mitigate the negative impact of a sustained low interest rate environment in the United States.
Based on a near to intermediate-term analysis of a sustained lower interest rate environment in the United States, the company anticipates adjusted earnings to increase, although at a slower growth rate.

Year to date, MetLife’s shares have fallen 1.9% compared with its industry’s decline of 4.24%. Other life insurers that have been facing low interest rate headwinds are Prudential Financial Inc. (PRU - Free Report) , Lincoln Financial Group Inc. (LNC - Free Report) and American International Group, Inc. (AIG - Free Report) .

The stock carries a Zacks Rank #2 (Buy). Also, the stock has an impressive Value Score of A. Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 offer the best opportunities in the value investing space. The stock has witnessed the Zacks Consensus Estimate for current-year earnings being revised 1.25% upward over the last 30 days.

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