MetLife Warns Low Interest Rates Threaten Profits
March 26, 2015 by Arthur D. Postal, arthur.postal@innfeedback.com
WASHINGTON – MetLife is warning shareholders that if low interest rates persist, it will not likely sustain its 2014 profitability, even after derisking and then expanding its variable annuity business.
But it is not all bad because the rest of the life insurance business is enduring the same difficulty, MetLife CEO Steven A. Kandarian said in the company’s annual report, released this week.
MetLife’s return on equity (ROE) for all of 2014 was 12 percent, the second year in a row that it achieved an operating ROE at the low end of its 2016 target range of 12 percent to 14 percent.
“Maintaining current return targets in a long-term low rate scenario would likely be a challenge for most businesses, particularly those in the financial services industry,” Kandarian said.
At the same time, Kandarian said MetLife has completed a precipitous downsizing of its variable annuity business because of risk concerns, and that with new products that constitute less risk, it hopes to expand its VA business this year by 50 percent compared to 2014.
Specifically, Kandarian said in 2011, MetLife issued $28.4 billion in VAs, most with lifetime income guarantees. By 2014, that issuance had dropped to $6.3 billion.
“We believe our strategic initiative to refocus the U.S. business is essentially complete, and in 2015 we are looking to resume growth in our annuity business through a range of products,” Kandarian said.
For example, he said, MetLife’s new guaranteed minimum withdrawal benefit VA, “FlexChoice,” has a better risk profile while still offering customers a competitive benefit.
However, Kandarian said that, even with a rebound in annuity sales, “we anticipate that VA risk will moderate over time.”
He said MetLife continues to emphasize growth in less capital-intensive protection products, “and expect the related businesses to grow at a faster rate than retail annuities.”
That means, he said, the amount of capital assigned to the annuity business by MetLife will decline over time.
This derisking will take place because MetLife will emphasize growth in so-called “protection-oriented products” will take place outside of the United States, specifically in emerging markets.
He cited MetLife’s 2010 acquisition of American Life Insurance Co. (ALICO) from a downsizing American International Group, as a key part of that.
He said MetLife’s emerging market sales grew by a 24 percent in 2014, or 14 percent excluding a large Mexico group contract. “We believe emerging markets will remain a growth engine for the company over the longer term, even as a strong dollar dampens the earnings contribution from non-U.S. markets in the near term,” Kandarian said.
This lower leverage and de-risking in its U.S. business has allowed the company to improve its operating ROE, Kandarian said.
This has allowed MetLife to generate full-year 2014 operating earnings of $6.6 billion, a 5 percent increase over 2013, and operating earnings per share of $5.74, up 2 percent from the prior-year period.
“This favorable shift in the company’s product mix should continue to improve our operating return-on-equity relative to the risk-free rate and reduce our cost of equity capital over time,” Kandarian said
As for macro issues, Kandarian said that, over the long term, MetLife believes the 10-year Treasury yield should be 4 to 4.5 percent based on the Federal Reserve’s 2 percent inflation target and expectations for long-term economic growth.
He said MetLife is assuming that the 10-year Treasury yield normalizes by year-end 2017, but he also cautions that he sees “risk of a lower-for-longer environment for interest rates.”
