Insurer MetLife has written down assets and radically revised its interest rate assumptions, highlighting the challenges the company and its peers face from low rates.
MetLife’s actuaries last week announced their new forecast for when the yield on 10-year US treasury bonds would hit a “normalized” level of 4.5%. Previously the insurer had predicted this would happen within three years, but it now does not see this level of yield until at least 2026.
In a research note published today, credit rating agency Moody’s said MetLife had also been forced to write down “less than $180 million” in assets on its balance sheet, “primarily because of deferred acquisition costs”.
The rating agency said the effects of low yields would be “more pronounced” in the near future, particularly as it expected investment income “to revert to more normal levels”.
“Each successive year of low interest rates increases the likelihood that companies will need to add reserves and/or write down assets.” —Moody’sAlthough the $180 million write-down is small compared to MetLife’s $474 billion in total assets, Moody’s analysts said the two items were “significant” as they indicated that “persistently low interest rates and volatile markets are negatively affecting MetLife’s profitability”.
“Additionally, a protracted period of low interest rates could lead to lower margins on a statutory basis, creating a need for additional reserves if rates remain low for an extended period,” Moody’s said.
Moody’s said that by extending its interest rate normalization assumption to 11 years, MetLife had taken a “conservative” view compared to many of its peers. This meant that if the 10-year treasury yield hit 4.5% sooner than MetLife expected, it would likely benefit. A conservative balance sheet would “somewhat mitigate” the effects of lower margins, the rating agency added.
A strong equity market in 2014 had “masked” the effect of low rates on insurance companies last year, Moody’s said. Weaker performance in equities and some alternative asset classes during 2015 had hurt more recent investment returns.
Fresh research by Cerulli Associates found that the changing interest rate environment was the top concern for US insurance companies. Alexi Maravel, associate director at Cerulli, said more insurers had been “preparing for the how and when” interest rates rise.
“While falling interest rates benefit fixed income investments from a total return standpoint, as bonds mature or are called by the issuer, insurers have to reinvest in even lower-yielding securities,” Maravel added. “Depending on the type and duration of the insurer’s liabilities, this reinvestment risk can be detrimental to the financial performance of the company.”
Moody’s analysts pointed out that, for each successive year of low interest rates, “the gap between earned rates and pricing/reserving assumptions” widens, increasing the likelihood of insurers requiring more reserve capital and being forced to write down asset prices “in significant numbers”.
Related: Why Bond Yields Are Lower for Longer & Hedge Funds ‘Can Survive a Fed Rate Shock’