How Can Brexit Impact Metlife?

+6.45%
Upside
73.92
Market
78.69
Trefis
MET: MetLife logo
MET
MetLife

Following the United Kingdom’s vote to end its membership in the European Union last week, many investors have shifted to relatively safer instruments such as government bonds in response to the increasing economic uncertainty. This has caused government bond prices to rise and yields to decline. Yields on the 10-year U.S. treasury note fell below 1.5% for the first time since 2012, while yields on the U.K. benchmark government bond fell below 1% for the first time on record and 10-year government bond yields in Germany ended below 0%. This has major implications for the insurance sector, considering their investment yields and income are likely to decline. MetLife‘s (NYSE:MET) stock has fallen close to 15% over the past five days over post-Brexit uncertainty and fears of falling investment income owing to subdued interest rates and falling yields.

MetLife is expected to generate about one-third of its revenues from policy fees and investments in the global markets in 2016 with EBT (Earnings Before Taxes) margins of 15-16%. The risk of persistent lower interest rates will definitely impact both these metrics, considering fixed maturity securities and mortgage loans contributed almost 98% of Metlife’s net investment income in the first quarter this year. The company’s other investments include mortgage loans, real estate and real estate joint ventures, policy loans, equity securities, cash and short-term investments.met-13

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MetLife’s net investment income yields declined from 4.93% in Q2 2015 to 4.52% in Q4 2015 and 4.39% in Q1 2016. The yield on fixed maturity securities, which account for most of MetLife’s investments, dropped from 4.64% in Q1 2015 and 4.55% in Q4 2015 to 4.43% in Q1 2016. We expect Metlife’s net investment yield in the U.S. to rise to about 5.3% by the end of our forecast period. If it increases to only about 4.6% due to this economic uncertainty, there could be a downside of about 10% to the company’s valuation.

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