Kaplan University | Economic Indicators | GB540 – Unit 5 Assignment | | By: Marylin Cortes | 10/9/2012 |

MetLife, Inc. is a global provider of individual insurance, employee benefits and financial services with operations throughout the United States and the regions of Latin America, Europe, and Asia Pacific. MetLife, being an insurance company, have different types of resources of revenue besides just collecting insurance premiums and as such they rest on on several macroeconomic factors for its growth and survival. When certain things happen in the economy, it has a direct impact on the financial health of company, even worldwide. It is important to take the economic indicators in consideration to safeguard its financial future.
To better understand this terminology, economic indicators are repetitions of a similar measurement or counting process at regular time intervals. The intervals may be days, weeks, months, quarters, or even years. Thus, each reported value of an indicator not only provides information about the examined element at a particular time, but how the indicator value differs from the equivalent measure in prior or subsequent time intervals. All industries are different, and they may rely in different indicators to analyze further those factors that can impact its future and its global expansion.
MetLife operates in the United States with different types of services. The main divisions include: insurance products, retirement products, Corporate Benefit Funding, and Auto and Home. These products can be affected by different economic factors such as GPD (timing - coincident), unemployment (countercyclical), consumer confidence, interest rates, economic and wages, stock market (timing – lagged), and demographics.
GPD - The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period (Investopedia). In addition, it affects all aspects of the economy and it is also affected by it. The United States economy grows at a level of 2.5 to 3 percent every year. It is said that a percentage higher than this is unattainable and it can increase inflation. To the contrary, if the economy shows lower levels or negative levels, it means that the economy is grown slow. The Markets with increasing levels of income and wealth typically present growth opportunity for insurance companies. As gross domestic product (GDP) and per capita GDP grow, so does the overall level of insurance premiums sold.
Understanding the GPD is important because, if done right, it increases an insurer's ability to generate revenue. Achieving growth first requires insurers to carefully investigate the market to determine where opportunities for growth exist. To find growth opportunities, insurers should keep a close eye on levels of income and wealth, demographic factors, distribution trends, and market demands.
Unemployment Rates – High unemployment in United States affects from an individual level to a national one. The economic costs of unemployment are probably more obvious when viewed through the lens of the national checkbook. Unemployment leads to higher payments from state and federal governments for unemployment benefits (in excess of $320 billion through the end of 2010), food assistance, and Medicaid. At the same time, those governments are no longer collecting the same levels of income tax as before - forcing the government to borrow money (which defers the costs and impacts of unemployment into the future) or cut back on other spending (perhaps exacerbating the bad economic situation) (Investopedia).
It is also worth noting that companies pay a price for high unemployment as well. Unemployment benefits are financed largely by taxes assessed on businesses. When unemployment is high, states will often look to replenish their coffers by increasing their taxation on businesses - counter-intuitively discouraging companies from hiring more workers. Not only do companies face less demand for their products, it is also more expensive for them to retain or hire workers. Higher taxes paid by insurance companies can also affect the costs of the products and services they offer. Consumer Confidence – The Consumer Confidence Index is published by the Conference Board every month and it is considered one of the most accurate indicators of consumer confidence. When there are more jobs, better wages, and lower interest rates, confidence and spending power increase. Survey evidence of consumer perceptions is valuable as a leading indicator. In general, the more optimistic consumers are, the more likely they are to spend money. This boosts consumer spending and economic output. Surveys of consumer confidence are conducted by private sector organizations such as the Conference Board in America and universities such as the University of Michigan. The results are presented in index form or as percentage balances (of consumers feeling more optimistic less those feeling less optimistic).
In the insurance industry, is dramatically influenced by the marketing and advertising efforts. At the time when the insurance industry, as well as other financial institutions is pulling back from investing in marketing and advertising, surveys show that advertising may be one way to regain or retain consumer confidence in financial institutions’ brands. When asked about their own banks, insurance companies and investment firms, 55 percent of consumer respondents who said they had seen more advertising for their financial institution reported having “complete confidence” in the financial health and soundness of their financial company and only 18 percent said they had “little or no confidence” in their company (Insurance Journal). Today consumers are driven by fear aligned to the weakening job and equity markets. Companies that will thrive in this climate of fear are those that manage consumer confidence through the turbulent times. Companies that deliver a message of value will be key to turning around the economy and determining who survives in the months ahead.”
Interest Rates –In the first quarter of 2012, MetLife, Inc. reported losses in net revenue of $174 million, which were driven by derivative net losses of $1.3 billion due mainly because of increases in interest rates, which also lead to lower credit spreads during that time period. MetLife uses derivatives in connection with its broader portfolio management strategy to hedge a number of risks, including changes in interest rates and fluctuations in foreign currencies. Movement in interest rates, foreign currencies and MetLife’s credit spreads, which impact the valuation of certain insurance liabilities, can generate derivative gains or losses. For this reason, the company has had to concentrate on its strengths and it is currently investing in launch a third-party asset management business that will build upon its expertise in select private asset sectors, including real estate equity, commercial mortgages and private placement debt.
Stock Market - Insurance companies derive income mainly from two sources: 1) income derived from policy sales (insurance policy and annuity sales) and 2) income derived from their investment portfolios. There are many factors to examine when looking at insurance companies. More than anything, both consumers and investors should concern themselves with the insurer's financial strength and ability to meet ongoing obligations to policyholders. Poor fundamentals not only indicate a poor investment opportunity, but also hinder growth.
But the financial crisis in previous years had nonetheless had an increasingly visible impact on the insurance industry, primarily through their investment portfolios, as the crisis spread and financial market valuations and the outlook for real activity deteriorated significantly. The rate of return on the funds is a key driver of the overall earnings for an insurance company. For this reason, MetLife must monitor and mitigate risks in the insurance sector. As the stock market has improved this year, the return for insurance companies such as MetLife, has been visible. MetLife’s years to date earnings are up 12%.
Demographics are very critical to the insurance industry. As a result of globalization, terrorist’s attacks, and deregulation, the insurance industry has gone through an incredible transformation over the past years. Demographics play one of the largest roles in affecting sales for insurance, particularly life insurance. As people age, they tend to rely more and more on life insurance products for their retirement. Death benefit policies ensure that beneficiaries are financially secure once the insured dies, but in more recent years, the insurance industry has made great headway in offering investment/savings type insurance products. Because baby boomers are quickly approaching retirement age, take a close look at the suite of insurance products that the company is offering and, from that, see if it stands to benefit from this large portion of the population getting older.
Using demographic information may allow your rating system to react prior to losses. In simplest terms, insurance of any type is about managing risk. MetLife collects insurance premiums from individuals and employers. An actuary analyzes demographic data to estimate the life expectancy of a person. This is why different characteristics such as age, sex, and other factors determine the amount of a premium. In the case of employer benefits for example, MetLife determines the demographics of a group to determine the costs of premiums to be charged.

References:
Insurance Journal (2009, March 9). Consumer Confidence in Financial Firms Influenced By Advertising. Retrieved on October 9, 2012, from http://www.insurancejournal.com/news/national/2009/03/20/98889.htm.
Investopedia (2007, September 19). What is GPD and Why is so Important? Retrieved on October 9, 2012, from http://www.investopedia.com/ask/answers/199.asp#axzz28qtfnUee.
The Economist (2006). Guide to Economic Indicators: Making Sense of Economic, sixth edition. [Books24x7 version] Available from http://common.books24x7.com/toc.aspx?bookid=15691.
The Cost of Unemployment to the Economy (2011, August 9). Retrieved on October 9, 2012, from http://www.investopedia.com/financial-edge/0811/the-cost-of-unemployment-to-the-economy.aspx#axzz28qtfnUee.