MetLife Adds Privately-Placed Debt, Hedges Portugal
MetLife Inc., the largest U.S. life insurer, is expanding private lending to corporations as Chief Investment Officer Steven Kandarian seeks to bolster returns on the firm’s $443 billion portfolio amid near-zero interest rates.
“In four of the last five years, we’ve been the No. 1 asset originator in this sector,” Kandarian said today at a presentation in New York, where MetLife is based. “You get paid an illiquidity premium for holding these kinds of securities.”
MetLife increased its investment portfolio by about 25 percent with the purchase last month of American Life Insurance Co. for $16.2 billion. Kandarian said MetLife is drawing down the cash hoard built up for the acquisition and hedging bonds that Alico, previously owned by American International Group Inc., had accumulated in Portugal.
The insurer built private placements to $46 billion from about $35 billion at the end of last year’s third quarter, seeking higher-yielding assets than government debt and publicly traded corporate bonds as the Federal Reserve maintains near- zero rates. Historically, the privately placed debt pays as much as 50 basis points more than similarly rated corporate debt in the public market, and last year paid a premium of more than 70 basis points, Kandarian said in December 2009.
“You have lower losses in this sector, higher recoveries than public bonds, and that proved to be the case in this last economic downturn,” Kandarian said today. “It’s because you have very good downside protection, you have covenants and oftentimes collateral posted as well for these kinds of securities.” A basis point is 0.01 percentage point.
The Alico acquisition will help boost MetLife’s earnings next year, the company said. Operating profit, which excludes some investment results, will probably be $4.75 to $5.15 a share, compared with the average $5.02 estimate of 19 analysts surveyed by Bloomberg, MetLife said.
MetLife advanced 36 cents to $40.50 at 11:44 a.m. in New York Stock Exchange composite trading. The insurer has climbed about 15 percent this year, compared with the 17 percent gain in the 24-company KBW Insurance Index.
Chief Executive Officer Robert Henrikson is retreating from the market for long-term care insurance as he seeks to expand in more-profitable businesses. Alico’s presence in more than 50 countries allowed MetLife to add customers outside a U.S. life insurance market that the 63-year-old Henrikson described in March as “relatively slow-growth.”
Kandarian began altering MetLife’s portfolio in anticipation of the Alico purchase, buying $200 million of credit-default swaps to protect against declines in Portugal’s sovereign debt. MetLife has about $379 million in exposure to Portugal’s debt and $735 million to Greece, the firm said in the presentation today.
MetLife plans to boost holdings of investment-grade and high-yield credit. The company said today that investment-grade bonds, which account for 35.5 percent of its portfolio, will probably rise to about 36.75 percent of total holdings. Junk bonds may make up 5 percent of the portfolio next year, from 4.5 percent, MetLife said.
Cash and short-term holdings will account for 5.75 percent of investments next year, compared with 7.7 percent, the company said. U.S. Treasury and agency securities will decline to 7.5 percent of the portfolio from 8.3 percent, the insurer said.
Yields are hovering below 3 percent on the benchmark 10- year Treasury note and at about 4 percent on investment-grade debt, according to Bank of America Merrill Lynch index data. The average yield on junk bonds, rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s, is 8.01 percent, the index data show.
Buyers of BB debt, the highest-rated junk securities, include investors who typically allocate less to the bonds, said Andrew Feltus, a money manager at Pioneer Investment Management Inc. in Boston.
“The BB demand is being driven by crossover buyers, whether that’s a multisector fund or an insurance company,” said Feltus, whose $2.8 billion Pioneer High Yield Fund has outperformed more than 90 percent of its peers in 2010. “Someone that doesn’t have to be in high-yield, they’ll look at the relative value and say, hey, this looks pretty attractive.”
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