In a poetic poke to the eye of the Fed's "lower for longer" interest rate policy intended to manage, in part, job creation, MetLife just announced a massive earnings miss and job cuts which the CEO attributed to lower investment income due to, you guessed it, low interest rates. According to MetLife's 2Q 2016 earnings release, the company reported operating earnings of $924 million, down 48 percent from the second quarter of 2015, and 47 percent on a constant currency basis. Operating earnings in the Americas decreased 42 percent, and 41 percent on a constant currency basis. The stock is being punished in today's trading session and is currently down roughly 9% (a mere $4BN of value destruction).
According to a report by Bloomberg, MetLife, the largest U.S. life insurer, plans to cut expenses by 11 percent as low interest rates squeeze investment income. Metlife's CEO discussed the company's cost cutting initiatives on it's earnings call:
The plan is to reduce annual costs by about $1 billion by the end of 2019 and will include job cuts, Chief Executive Officer Steve Kandarian said Thursday in a conference call without specifying how many workers will be dismissed by the New York-based company. The insurer had 69,000 employees at the end of 2015, according to its most recent annual report.
Central bank policies to suppress interest rates have reduced the income MetLife makes on a bond-dominated investment portfolio valued at more than $500 billion. The company said late Wednesday that second-quarter profit tumbled 90 percent to $110 million on a review of the prospects of a variable-annuity business that the CEO is seeking to exit as part of a proposed separation of a U.S. retail operation.
“In light of the significant headwinds our industry is facing, MetLife must do even more to avoid simply running in place,” Kandarian said. “We know this will require us to reduce headcount, which is never an easy step for an organization to take. Our overall goal is to be more efficient, so that we can better serve our customers and provide a fair return to shareholders.”
While this is indeed disturbing, as the incremental benefit of low interest rates evaporated long ago, we fear that MetLife likely has more to lose when interest rates actually start to rise. As we pointed out in a post entitled "Why The Fed Is Trapped: A 1% Increase In Rates Would Result In Up To $2.4 Trillion Of Losses":
What Dimon did not discuss is the P&L impact from the higher yields and dropping bond prices in the long end of the yield curve. And it is here, in the unprecedented duration exposure that central banks have forced everyone into, that the true risk resides.
How big is the risk? According to an analysis by Goldman's Charles Himmelberg, if rates rise by the Jamie Dimon-referenced 1 percentage point, the market value loss would be between $1 and $2.4 trillion!
So, while low interest rates are a convenient scapegoat for this quarter's poor performance we would warn investors that the bigger risk might just be what happens to MetLife when rates rise?