MetLife Earnings: Higher Interest Rates Boost Recurring Investment Income

No-moat-rated MetLife’s MET second-quarter results were largely in line with our expectations as the company reported adjusted earnings of $1.49 billion, or $1.94 per share in the second quarter, compared with $1.66 billion, or $2.04 per share in the second quarter of the previous year. The company paid a quarterly dividend of $0.52 per share in the second quarter, which represents a 3.2% dividend yield as of the current stock price. The adjusted book value per share, which removes the impact of accumulated other comprehensive income, was reported at $53.5 per share, up 2% compared with $52.3 per share in the second quarter of the previous year. We are maintaining our $63 fair value estimate for MetLife after incorporating the second-quarter results.

The impact of higher interest rates can be clearly seen in the recurring investment income of the company, as it was reported at $4.8 billion in the current quarter, compared with $4.1 billion in the same quarter of the previous year. The annualized rate of recurring investment income for the firm is approximately 19% higher than the average in the past three years. The maturing fixed-income assets of the company were yielding 4.5% as of the second quarter, and these assets are being rolled at a significantly higher new money yield of approximately 6.0%. The difference between maturing yield and new money yield should further increase recurring investment income in the upcoming quarters.

The company reported variable investment income of $221 million in the current quarter compared with $389 million in the second quarter of the previous year, primarily driven by higher returns on private equity, which was more than offset by lower returns on real estate equity funds. The current VII for the company is below the company’s normalized guidance of $500 million quarterly VII. We expect the weakness in the variable investment income to persist in the upcoming quarters, given the pressure on market valuations.