Life Insurers Bet the House in Interest Rate Casino: Street Whispers

NEW YORK (TheStreet) -- Prudential Financial (PRU), Metlife Inc. (MET) and Lincoln National Corp. (LNC) are all up sharply since reporting second quarter earnings next week, having so far survived the extended low interest rate environment better than most investors had predicted.

Extended periods of low interest rates are a problem for life insurers since they invest the premiums they receive in fixed income instruments. As bond yields stay low for extended periods, insurers must reinvest maturing or called high coupon securities into lower yielding ones, reducing investment income.

MetLife, Lincoln National and Pru all outperformed expectations, however. MetLife and Lincoln also provided improved guidance for how they will perform in the low environment, even though rates have gone even lower since they provided their earlier guidance.

Both Lincoln and MetLife attributed their success to a hedging program, which sounds great, until you consider that hedges don't always work. Just ask JPMorgan Chase (JPM) which has attributed its roughly $6 billion in trading losses over the past two quarters to hedging-related mistakes.

MetLife Chairman President and CEO Steve Kandarian attributed the success of MetLife's hedges to a "forward-looking call in 2004 to start buying low rate protection when the 10-year treasury was trading above 4%. We are reaping the benefits today and we will continue to do so for a number of years to come."

But presumably Kandarian has known about this decision for eight years, so why wasn't it baked into his earlier, more pessimistic guidance? MetLife and other life insurers have been able to raise prices on their products to offset some of the hit from low rates, but directional market bets are playing an important role in their success.

That should give pause to anyone looking to buy life insurance stocks on the theory that fears over low interest rates have been overstated.

-- Written by Dan Freed in New York.

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