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MetLife Hurt by Low Interest Rates, Equity Market Declines

Sapna Bagaria

MetLife, Inc. MET, one of the largest life insurers in the United States, has come under pressure due to the ongoing market volatility led by the coronavirus pandemic.

MetLife, like other life insurers, is exposed to interest rates and equity market volatility. Low interest rates have been an ongoing headwind in recent years. Recently, the federal reserve slashed interest rates to 0% to boost the economy, which has been suffering due to the coronavirus pandemic. It is unlikely that interest rates return to pre-financial crisis levels and thus we expect MetLife to continue to face this headwind for the foreseeable future.

Year to date, the stock has lost 54% of its value compared with its industry’s decline of 49%. Other players in the same space such as Prudentia Financial, Inc. PRU, American International Group Inc. AIG and Lincoln National Corp. LNC have lost 58.2%, 62.4% and 70.6%, respectively, over the same time frame.

 

This period of low interest rates and risk asset returns is likely to weigh on MetLife’s income from its investment portfolio, increase liabilities for claims and future benefits, and escalate the cost of risk transfer measures, thus dragging profit margins.

We note that the company’s net investment income declined in 2017 and 2018. Though the same was up 2.6% in 2019, low interest rate environment might exert pressure on net investment income because of low investment yields.

The sustained low market returns can weigh on MetLife due to losses incurred in its general account and the impact of guarantees, including increase in liabilities, capital maintenance obligations and collateral requirements.  

The company has exposure to products like guaranteed minimum death benefits (“GMDBs”), guaranteed minimum withdrawal benefits (“GMWBs”), guaranteed minimum accumulation benefits (“GMABs”) and guaranteed minimum income benefits(“GMIBs”). The recent decline in equity markets will increase the company’s liabilities on these products and will consequently harm its net income.

Moreover, any of these events could also impair its financial strength ratings. Already the rating agencies are growing increasingly anxious about life insurers. On Mar 16, 2020, AM Best revised its U.S. life/annuity industry’s market segment outlook to negative.

A couple of days later, A.M. Best announced that it will develop a coronavirus stress test to measure the scope and complexity of potential losses for life insurers, and its bearing on their risk-adjusted capital levels, investment portfolios, reserve adequacy and other aspects of the risks borne by rated entities.

We note that Allstate Corp. has already got a negative rating action from Fitch ratings, which downgraded its outlook to stable from positive, due to its exposure to life insurance business.

Also, the company might see higher claims from increase in mortality due to the coronavirus-induced sickness. This will deteriorate the company’s underwriting margins as well.

Though MetLife has reduced its exposure to interest rate and equity market volatility by separating its U.S. Life Retail business into a distinct company named BrightHouse Financial Inc., it still remains one of the largest life insurers in the United States.

We believe it will be a rough ride for the company going forward. The stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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