In response to the concerns related to low interest rates, MetLife Inc. (MET) expects its profits to decline in 2011, though MetLife does not expect the impact to be adverse.
 
According to MetLife’s estimates, if the interest rate on the 10-year Treasury Note remains 2.5% through 2011, MetLife’s earnings might reduce by about 20 cents per share in 2011.
 
Though MetLife has not yet issued any guidance for its full year 2010 or 2011, these estimates are considered as preliminary. MetLife is expected to provide its guidance at the annual investor meet to be held on December 6.
 
During the second quarter, MetLife reported earnings (excluding after-tax net investment gains and losses and discontinued operations) of $1.02 billion or $1.23 per share, which was significantly ahead of $723 million or $0.88 per share in the year-ago quarter.
 
In addition, management of MetLife expects operating earnings to grow by about 50% in 2010 and fall in the range of $3.3 billion to $3.6 billion or $4.00 to $4.40 per share.
 
Though MetLife foresees that the current interest rate environment will impact its profitability going ahead, it still believes that following the acquisition of American Life Insurance Co. (Alico), a unit of American International Group Inc. (AIG), MetLife’s bottom line will be significantly less sensitive to equity market movements and interest rates.
 
MetLife is expected to close the deal to acquire Alico for $15.5 billion in 4Q10, which was signed in March. Further, the addition of Alico is expected to add an estimated $1.5 billion to operating earnings in 2011 and $112 billion of assets, net of financing costs.  Moreover, the deal will more than triple the size of MetLife’s international businesses to over 40%.
 
We believe that MetLife remains concerned by the low interest rate environment, which is consistently stretching its spreads (interest earned less interest credited to policyholders), besides impacting earnings. As a result, the annuity operations, which had been experiencing spread improvement, have moderated in the last few quarters.
 
We believe that the Alico acquisition is expected to boost MetLife’s results, providing statutory capital and a modest upside in the operating earnings’ projection. In addition, we believe that MetLife is poised to propel its growth as the economy rebounds in the near to medium term.
 
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