MetLife Posts Third Straight Loss as Derivatives Slip (Update2)

By Andrew Frye
Bloomberg News
October 29, 2009

Oct. 29 (Bloomberg) -- MetLife Inc., the biggest U.S. life insurer, posted its third straight loss as the bond market rally that helped restore profits at smaller rivals weighed on results.

The third-quarter net loss was $620 million, or 79 cents a share, compared with net income of $630 million, or 83 cents, in the year-earlier period, the New York-based company said in a statement. Operating earnings, which exclude some investment and derivative results, were 87 cents a share, beating by a penny the average estimate of 17 analysts surveyed by Bloomberg.

MetLife extended its longest streak of losses since becoming a publicly traded company in 2000 as derivatives, which helped keep the firm profitable in last year's credit freeze, soured in the market advance. The insurer was forced by an accounting rule to book losses on the increase in the value in its debt in the third quarter, on the theory that it would cost more to buy back and retire outstanding obligations.

"There are a bunch of little things that kept their earnings down for the quarter," said Alan Rambaldini, an analyst with Morningstar Inc. in Chicago. The insurer slipped 58 cents to $36.26 at 5:04 p.m. in extended trading in New York.

Derivative losses, including the charge tied to the improvement in MetLife's own creditworthiness, were $857 million in the third quarter as credit-default swaps on MetLife dropped 299 basis points in the third quarter to 231 basis points. That followed a second-quarter drop of 326 basis points to 530 basis points, according to CMA DataVision. Impairments on fixed-income holdings cost the company $650 million.

Corporate Debt

Gains in the value of other holdings including corporate debt and mortgage securities pushed up book value per share, a measure of assets minus liabilities, by 27 percent since June 30 to $38.95 at the end of September. It was the second straight gain after falling for more than a year to $25.98 at the end of March.

Net unrealized losses on fixed-maturity assets, which include portfolio declines that aren't counted against earnings, narrowed to $1.4 billion from $13.9 billion on June 30. Unrealized losses are the difference between a security's market price and what the owner says it's worth. Impairments are taken when a company doesn't think an asset it owns will recover.

Life insurers, which held more than $2 trillion in bonds at the end of 2007, are struggling to restore profit to pre- recession levels as credit markets recover this year. Low- yielding cash piles that were accumulated as protection against portfolio declines last year have brought down investment returns, while defaults loom amid rising unemployment.


MetLife reported a $1.95 billion loss in the first half as interest-rate swaps soured after $3.21 billion in profit in 2008 when the insurer gained on the contracts. Prudential Financial Inc., the No. 2 life insurer, returned to profit with $177 million of net income in the first half after $1.07 billion of losses last year. Prudential is scheduled to post third-quarter results next week.

Premiums and other revenue at the MetLife business that sells coverage to companies, including retirement plans and employee benefits, slipped about 8 percent to $4.2 billion, while the unit's operating earnings dropped 21 percent to $311 million on lower investment income.

The business catering to individuals posted revenue of $2.2 billion, up 5 percent, on higher sales of whole and term life insurance, MetLife said.

Hedge Funds

MetLife said results from so-called variable holdings, which include private-equity and hedge-fund assets, were $45 million below the company's plan. In May, MetLife withdrew its forecast for $600 million of variable income in 2009, or $150 million a quarter, as returns from buyout funds tumbled. The insurer was $508 million below plan pretax in the first three months of the year and had zero profit in the second quarter on the investments. Real estate ventures weighed on results.

Third-quarter net investment income, which includes dividends, payments on bonds and the variable holdings, declined about 3.1 percent to $3.92 billion from the year-earlier period. It was the seventh consecutive quarterly decline.

MetLife turned to investors for capital last October and again in May and June, saying it could use funds for expansion as hobbled rivals, including Hartford Financial Services Group Inc. and Lincoln National Corp., scaled back. Chief Executive Officer Robert Henrikson, who promised in April not to "waste a crisis," is considering acquisitions outside the U.S.

Henrikson shunned federal aid, as did Prudential CEO John Strangfeld, and won a U.S. endorsement in May when the Federal Reserve's stress test revealed MetLife was adequately capitalized to withstand a prolonged recession.

MetLife is up about 25 percent in the last year on the New York Stock Exchange, compared with the 37 percent increase for Prudential.

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