July 31 (Bloomberg) -- MetLife Inc., the largest U.S. life insurer, said profit fell 78 percent as rising interest rates cut the value of the company’s derivatives.
Second-quarter net income dropped to $502 million from $2.3 billion a year earlier, New York-based MetLife said today in a statement. Operating earnings, which exclude some investment results, were $1.44 a share, beating the $1.33 average estimate of 20 analysts surveyed by Bloomberg.
MetLife, led by Chief Executive Officer Steve Kandarian, uses hedges to cushion fluctuations in stocks, bonds and currencies on an investment portfolio with more than $350 billion of bonds backing future payouts to customers. The yield on the 10-year Treasury rose 0.64 percentage point to 2.49 percent in the quarter.
“As the change in interest rates flows through income statements and balance sheets, we’re seeing the first impacts,” Cathy Seifert, an equity analyst at Standard & Poor’s Capital IQ, said by phone before the insurer posted results.
MetLife has advanced 47 percent this year to close at $48.42 today. Prudential Financial Inc., the No. 2 U.S. life insurer, is up 48 percent this year. Kandarian’s company gained 8 cents in extended trading at 4:38 p.m. in New York. MetLife released its statement after the close of regular trading.
Rising bond yields may help MetLife increase investment income, Seifert said. Rates rose after Federal Reserve Chairman Ben S. Bernanke signaled that some of the central bank’s stimulus could end in 2014. The Fed lowered its benchmark rate and has pursued three rounds of bond buying to jump-start U.S. growth after the 2008 financial crisis.
Net derivative losses were $1.1 billion, fueled by rising interest rates, foreign currency changes, and MetLife’s credit spreads, the insurer said today. Net derivative gains a year earlier were $1.4 billion, driven by falling interest rates.
Book value, a measure of assets minus liabilities, fell to $52.85 per share as of June 30 from $57.03 three months earlier, as net unrealized gains on bonds narrowed. The measure of gains on the bond portfolio, which isn’t included in net income, fell to $20.9 billion at the end of the second quarter from $31.8 billion on March 31.
Net investment income fell 2.2 percent to $5.1 billion. Variable investments, which include private equity and hedge funds, added $312 million before taxes, compared with $371 million a year earlier.
Operating profit for the Americas, MetLife’s largest region climbed 18 percent to $1.3 billion, led by results in the U.S. MetLife said “disciplined expense management” added to profit. The insurer cuts its adviser force by a third in the 15 months ended in May and is moving some jobs to North Carolina.
Kandarian, 61, is retreating from some life insurance coverage and reducing sales of variable annuities after low rates weighed on profits. The company is seeking to expand in lines of business that are less capital intensive, such as accident-and-health coverage.
In Asia, operating profit jumped 18 percent to $330 million. Some of the increase was fueled by fees as policyholders gave up fixed annuities in Japan.
Profit fell 7 percent to $125 million in Latin America, as MetLife incurred costs to expand the business. Operating earnings dropped 13 percent to $68 million in the Europe, Middle East and Africa region after MetLife recorded a writedown tied to proposed pension reforms in Poland.
The insurer is targeting return on equity of at least 12 percent by 2016, compared with an operating ROE of about 11 percent last year. To help reach that goal, MetLife is seeking to cut about $600 million of expenses, mostly in the U.S.
In April, MetLife lifted its dividend for the first time since 2007 after selling deposits to end its status as a bank-holding company overseen by the Fed. The company said this month that U.S. regulators reached the final stage of a process to determine whether it poses a potential risk to the financial system. MetLife has opposed the designation, which would subject the company to Fed oversight. Global regulators deemed the company systemically important this month.
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