July 31 (Bloomberg) -- MetLife Inc., the biggest U.S. life insurer, posted a second straight loss on investment writedowns, hedging declines and losses from an improvement in the firm’s own credit spread.

The second-quarter net loss was $1.4 billion, or $1.74 a share, compared with earnings of $946 million, or $1.26, in the year-earlier period, the New York-based company said yesterday in a statement. Net realized investment declines jumped more than 10-fold to $2.6 billion after tax, driven by derivative losses on interest-rate hedges and the increasing likelihood the insurer will make good on liabilities.

Chief Executive Officer Robert Henrikson is bracing MetLife for further losses on its fixed-income portfolio. He issued debt and sold new shares to raise capital and last year boosted cash holdings to guard against a liquidity crunch. That prevented MetLife from suffering as many downgrades as Hartford Financial Services Group Inc. and Lincoln National Corp., while diluting shareholders and limiting investment returns.

“The hedges hurt during a positive market,” said David Havens, managing director with Hexagon Securities LLC. “But being unhedged in a down market is even more painful.”

The insurer rose $1.29 to $33.57 yesterday in regular New York trading. MetLife’s 3.7 percent slide this year on the New York Stock Exchange compares with a 45 percent gain at Prudential Financial Inc., the second-biggest U.S. life insurer, a 3.5 percent increase at Hartford and a 7.7 percent advance at Lincoln.

Beating Estimates

Operating profit, which excludes some investment results, was 88 cents a share, beating the average estimate of 69 cents by 16 analysts surveyed by Bloomberg.

Impairments on fixed-income assets were “consistent with the company’s expectations,” MetLife said. Gains in the value of other holdings pushed up book value per share, a measure of assets minus liabilities, by 18 percent since March 31 to $30.60. Gross unrealized losses on fixed-maturity securities, which include portfolio declines that aren’t counted against earnings, narrowed 32 percent to $19.5 billion in the three months ended June 30.

MetLife said results from “variable” holdings, which include private-equity, real estate and hedge-fund assets, were $102 million below the company’s plan. The results were $321 million lower than plan in the first quarter, and in May Chief Financial Officer William Wheeler said full-year results would fall short of projections.

Investment Income

Net investment income, which includes dividends, payments on bonds and the variable holdings, declined about 14 percent to $3.7 billion in the second quarter.

Life insurers, which often invest premium for decades before paying claims, are facing writedowns on home loans, corporate debt and commercial mortgages as individuals and companies struggle to repay obligations. Chief Investment Officer Steven Kandarian said last month that “the worst is yet to come” for commercial property loans as defaults may rise for two to three years after the economic slump subsides.

Wheeler boosted MetLife’s cash holdings in the second half of 2008 to ensure the company had ample liquidity as credit markets froze. That strategy pushed down interest income and contributed to a $544 million first-quarter loss, the insurer’s first since 2001. Markets improved this year, allowing MetLife to sell bonds and use its cash to buy higher-yielding securities like corporate debt.

Trim Expenses

Cash and short-term investments fell 30 percent in three months to $21.3 billion. Investments rose 2.9 percent to about $325 billion.

MetLife is seeking to trim $400 million in annual expenses as corporate clients, hurt by the slowing economy, reduce staff and cut back on benefits spending. The insurer eliminated 1,000 jobs in the first quarter and announced in this month it would combine its two biggest businesses, uniting the sale of policies for companies and individuals in the U.S. under the management of William Mullaney.

Henrikson promised in May not to “waste a crisis” and reiterated he’s looking for acquisitions to extend MetLife’s lead over rivals. The company is expanding in variable annuities, the equity-linked retirement accounts that produced losses and drained capital across the industry. MetLife claimed the top spot in U.S. sales of the products in the first quarter as rivals scaled back their offerings.

Variable annuity deposits rose 27 percent to $4.51 billion in the second quarter from the same period a year ago. Premiums, fees and other revenues advanced 3.5 percent to $8.38 billion.

‘Flight to Quality’

“There’s clearly been a flight to quality and MetLife has clearly been a beneficiary of that,” said Steven Schwartz, an analyst with Raymond James Financial Inc.

Lincoln posted a third consecutive quarterly loss, and Hartford, based in the Connecticut city of the same name, a fourth. The two firms, whose results have been hurt by variable annuities and fixed-income writedowns, accepted U.S. bailout funds this year as the government expanded its Troubled Asset Relief Program.

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. Prudential, which returned to profitability in the first three months of the year after recording a $1.1 billion 2008 loss, is scheduled to report second-quarter results on Aug. 5.

MetLife had a profit of $3.2 billion in 2008.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net.

Last Updated: July 31, 2009 00:00 EDT