WASHINGTON — “Lower for longer” interest rates “are not going away soon,” MetLife Chairman and CEO Steve Kandarian warned this week.
U.S. life insurance companies will need to adapt to the low rate environment, he said.
Kandarian made his comments Thursday during MetLife’s quarterly conference call with analysts following the release of company’s quarterly earnings.
Kandarian cited Britain’s decision to exit the European Union as one reason he expects a protracted period of lower interests. Kandarian called that decision, “One of the most significant geopolitical developments in the quarter.”
Coincidentally, the Bank of England decided this week to cut rates to .25 percent, as well as expand its bond buying and set up a new funding scheme for lenders.
Fitch’s Rating Service, buttressing Kandarian’s remarks, said the BOE actions are “only likely to cushion, rather than fully offset, the shock to UK growth that June’s Brexit vote will cause… The balance sheet expansion goes beyond our expectations and includes innovative measures to mitigate potential unintended consequences of policy easing.”
During Thursday’s MetLife earnings call, Kandarian said that Metlife will begin reporting results separately for its Brighthouse Financial unit, a spinoff of its variable rate and universal life businesses, as of the third quarter.
He added that MetLife will disclose a detailed plan as to when the spinoff plan will take effect following its Sept. 27 board meeting.
The spinoff of that unit is part of MetLife’s plan to adjust to the projected protracted period of low interest rates, although that decision was also prompted by the fact that regulators, especially federal regulators, are moving to require higher capital standards for insurers, especially larger insurers.
Kandarian said that Brighthouse Financial will be reported in a standalone operating segment that will no longer receive credit for the broader diversification of MetLife’s consolidated U.S. retail universal life business.
As a result, projected earnings for variable and universal life business within the new Brighthouse Financial segment will be adversely affected, Kandarian said.
MetLife reported substantially lower second quarter earnings, mainly because of write-down on variable rate product assumptions due to the low interest rate environment and the after-tax non-cash charge of $2 billion.
Kandarian said a key part of the lower earnings was that variable investment income totaled $285 million in the quarter, which is below the guidance MetLife had provided as to projected earnings for the year.
He also said that private equity and hedge fund returns were both below plan, and that, given the performance of these segments year-to-date, it is likely that full year variable investment income will fall below the $1.2 billion low-end of MetLife’s earnings guidance.
The results and Kandarian’s comments prompted a substantive decline of more than 8 percent in MetLife’s stock price Thursday. The decline was as high as 11 percent in inter-day trading.
As to the UK, Kandarian said that, as far as its UK operations, MetLife’s hub in Dublin largely insulates the company from some of the Brexit financial fallout. From an investment perspective, “our U.K. exposure is limited to $17 billion with nearly all of those assets currency-matched with liabilities,” Kandarian said.
Strategically, MetLife remains committed to the U.K. as an attractive long-term market, he said. “More troubling is the referendum’s residual impact, mainly a global flight to safety that has put further downward pressure on interest rates with the 10-year Treasury yield near record lows,” Kandarian said.
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