It could take until 2018 for the financial benefits of higher interest rates to outweigh their negative effects on MetLife Inc.'s derivatives book, according to company executives speaking during a conference call to discuss the quarter.
Fourth-quarter 2016 earnings included net derivatives losses of $4.95 billion, or $3.2 billion after tax, due to changes in interest rates, foreign currencies and equity markets, the company said in its earnings release.
If there is a new 100-basis-point increase in interest rates, the positive effect on the reinvestment of the investment portfolio would be tempered by lower derivative income, a MetLife executive said on the call in response to an analyst question on the near-term earnings impact of higher interest rates.
If interest rates spiked today, "the subsidy would be kind of a wash" in 2017, then be about $100 million in 2018 and $150 million in 2019, he said, as investment income climbs and derivative income decreases.
The executive added that it would take work in changing accounting standards overall to separate the value of the company’s derivative portfolio from book value.
"In total, asymmetrical and non-economic accounting drove approximately 94% of the derivative loss this quarter, [but] as denoted, higher interest rates are an economic benefit for MetLife," said CFO John Hele.
CEO Steve Kandarian added that the asymmetrical insurance accounting model marks assets like derivatives to fair or market value, while related insurance liabilities follow a longer accrual-based accounting model. The company had long purchased general interest rate hedges to protect against low rates and longer liabilities, such as long-term care, an executive noted on the call. As rates go up, those hedges produce less income.
However, executives stressed that with interest rates going up, the company has better buffers for its reserves and will benefit economically long-term.
The company also suffered some weaker-than-expected underwriting results in its U.S. retail business, Brighthouse Financial, which is still expected to spin off in the first half of the year, executives said. Underwriting slipped primarily due to the loss of the aggregation benefit in the universal life business and unfavorable mortality in the retail business.
MetLife's property and casualty earnings dipped because the auto insurance business' loss severity was higher, although claim frequency was close to expectations, the company said. It is continuing this year to take targeted rate increases in auto insurance.