MetLife CFO Says Variable Annuity Exposures Managed Well

A. M. Best
December 8, 2008

NEW YORK, Dec 08, 2008 (A. M. Best via COMTEX) -- Fourth-quarter earnings are expected to be impacted "by a significant decline in variable investment income and the poor equity markets," MetLife (NYSE: MET) said. As a result, it expects to report operating earnings ranging between a loss of $50 million and operating earnings of $150 million, compared with operating earnings of $1.2 billion in the fourth quarter of 2007.

Speaking at MetLife's annual investor conference in New York, Chief Financial Officer Bill Wheeler said MetLife had about $93 billion in assets in its U.S. VA business as of Sept. 30, with $76 billion held in separate accounts and about $17 billion in its general account.

About 40% of MetLife's in-force block of VAs have a living benefit rider attached, and most of these riders are guaranteed minimum income benefits, he said. About 80% of MetLife's living benefit rider sales in the third quarter were GMIBs. "We are known as the GMIB company in the marketplace," Wheeler said.

Amid sharply declining and volatile stock markets, some U.S. life insurers are taking hits to profits in their lucrative variable annuity business. Factors fueling the problems include lower fee income from managing clients' assets; big charge-offs related to the cost of acquiring new business and higher costs for hedging (BestWire, Nov. 3, 2008).

With the deteriorating stock markets, many of MetLife's GMIB annuity contracts are "in the money" for policyholders, he said. However, MetLife's exposure is manageable, and it hedges its exposure, he said. "We think it's a product which meets consumers' needs every well," Wheeler said. "We also think it is a product that is very well designed from a risk management point of view."

The company's first GMIB contractholder won't be able to annuitize for two years, he noted. "It's still a relatively young block of business."

Industry watchers and regulators are eyeing whether companies will be forced to boost reserves for these retirement-income products to ensure they can deliver on the guaranteed future payments to policyholders. That hinges on companies hedging programs (BestWire, Nov. 3, 2008).

As for reserves, MetLife is mainly a New York company so it's primarily governed by Regulation 128 when it comes to calculating reserves for riders on variable annuities, Wheeler said. It's "the most conservative statutory reserving methodology" that any U.S. regulator has created, he said.

Last Friday, the New York State Insurance Department said it is changing its formula for calculating VA reserves under Regulation 128, and it's now similar to the new standard the industry will adopt a year from now, known as VACARVM, according to Wheeler. With the New York regulator's change, MetLife's reserves are quite a bit lower, at $1.8 billion, Wheeler said, noting the company now has "a lot of extra cushion."

MetLife expects fourth-quarter net income to range between $1.2 billion and $2 billion, up from $1.1 billion in the same period a year ago. It said it will benefit from net realized investment gains of between $1.2 billion and $1.8 billion, reflecting "relatively modest credit losses and substantial derivative gains."

For the year, MetLife expects lower net income, ranging between $3.3 billion and $4.1 billion, down from $4.3 billion in 2007.

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