MetLife CIO: Interest Rate Hedging Likely to Pay Off

A program MetLife began in 2004 to hedge the risk of low interest rates is proving valuable today, Chief Investment Officer Steven Goulart told Best's Insurance News. Goulart said if the record-low rates continue into next year, the company will receive nearly $500 million of pretax income from all of the hedging that it has done.

Goulart said while the company did not anticipate rates would fall so dramatically, it understood the potential risks of that happening. "We understood what it would mean to our portfolio, and when we investigated what we would do about it, we discovered that adding protection at that time was very cheap." The other good news about this protection is it runs beyond 2020 and well into the next decade, he said. Since 2004, the company accumulated almost $50 billion in notional amount of interest rate protection, he said.

Goulart oversees about $460 billion in the MetLife general account and more than 750 investment and support professionals around the world and is one of only a few individuals in the world responsible for overseeing that much money. He joined MetLife in 2006 after starting his career in investment banking, and he was named CIO in May 2011.

Despite the low-interest-rate environment and the difficult economy, Goulart said he is very confident the company's general account is appropriately invested and will perform well.

"It's all about asset/liability management," said Goulart. "We have the right asset portfolio and certainly the right amount of assets to repay our liabilities. That's our critical function, to repay our liabilities and generate an adequate return to our shareholders."

To achieve that, Goulart said the investment management team seeks to understand the liabilities the company is generating on a daily basis and to develop investment strategies to match them. "We make sure we can always outperform those liabilities and return to shareholders an adequate return," he said.

A fundamental strength is the company's credit underwriting process that qualifies every fixed-income instrument it buys. Then, said Goulart, the company employs its enterprise risk management function, which helps to evaluate overall portfolio and economic risk. Finally, the company uses systems that help monitor and stress the portfolio risk limits, sector risk limits and asset-class limits that it sets.

Virtually all of MetLife's general fund is invested in fixed income. Almost $240 billion is in traditional fixed income: corporate securities in the United States and elsewhere, U.S. and foreign government securities, and municipals. About $170 billion is in investment grade corporates. Goulart said MetLife has divested more than $1 billion in sovereign debt of peripheral European countries that came to the company as part of its acquisition of Alico. Remaining is a modest position in Greece that is not liquid today, he said.

The company has about $76 billion in structured finance — residential mortgage-backed securities, commercial mortgage-backed securities, and asset-backed securities. It also engages in commercial and agricultural lending and private placements.

Audio of the interview with Goulart is available at http://www.ambest.com/media/media.asp?RC=194768

(By Ron Panko, senior associate editor, Best's Review: Ronald.Panko@ambest.com)