MetLife Says $10.9 Billion of Gains Erased in Bond Slump’
MetLife Inc. (MET), the largest U.S. life insurer, saw $10.9 billion in bond gains wiped out in the three months ended June 30 as interest rates rose, exceeding the decline in any quarter of the financial crisis.
Net unrealized gains narrowed to $20.9 billion on the portfolio of available-for-sale fixed-maturity securities, from $31.8 billion three months earlier. The tumble helped cut MetLife’s bond holdings about 4.8 percent to $356.5 billion.
Bonds fell in the second-quarter as investors weighed signs that Federal Reserve Chairman Ben S. Bernanke may scale back the central bank’s stimulus efforts. Yields on the 10-year Treasury rose 0.64 percentage point in the quarter to 2.49 percent. While the change allows New York-based MetLife to add securities paying more interest, the bond slump weighs on book value, a measure of assets minus liabilities monitored by investors.
With higher interest rates “we will see the near-term negative impact as it relates to bond portfolio valuations and ultimately book value,” said Cathy Seifert, an equity analyst at Standard & Poor’s Capital IQ.
Book value fell to $52.85 per share on June 30, from $57.03 on March 31. The insurer has traded between 50 percent and 105 percent of book value for most of the past three years.
MetLife climbed 6.1 percent to $51.47 at 4:15 p.m. in New York after posting second-quarter profit yesterday that beat analysts’ estimates. The company said today that full-year operating profit per share will probably exceed its previous guidance of $4.95 to $5.35 as Chief Executive Officer Steven Kandarian expands in Asia and Latin America and cuts costs in the U.S.
MetLife’s largest bond position is in U.S. corporate securities, with a holding of $109 billion. That was down $4 billion from the end of March, according to a document on the company’s website. Investments in foreign corporate securities slid 2.9 percent to $64.2 billion. The tables don’t say how much of the changes stem from security sales or market fluctuations.
The decline in bond values is “something that is not unexpected,” John Calagna, a spokesman for the insurer, said in a phone interview today. It’s a shift “that we account for in our asset-liability matching, and something that anyone who is a fixed-income investor, whether they’re an insurance company or not, is experiencing.”
Allstate Corp., the largest publicly traded seller of property-casualty coverage, said yesterday that book value per share declined 4.2 percent in three months, and Genworth Financial Inc. (GNW) said the measure fell 9.5 percent.
At Travelers Cos., the lone property insurer in the Dow Jones Industrial Average, the slump in book value per share was the largest in a quarter since 2008. The decline was driven by a $1.77 billion drop in net unrealized gains on Travelers’ $62.8 billion fixed-maturity securities portfolio.
“The impact of higher interest rates more than offset the very positive impact on book value per share of our strong earnings,” Travelers Chief Financial Officer Jay Benet said on a July 23 conference call discussing second-quarter results.
The unrealized gains don’t count toward earnings. Insurers often hold bonds to maturity, meaning they may not realize gains or losses tied to interest rate fluctuations. That contrasts with the treatment of bonds that are written down when a borrower’s creditworthiness deteriorates.
MetLife’s net unrealized losses widened by about $8.6 billion in the third quarter of 2008 and another $9 billion in the next three months amid the global credit crisis. The insurer issued stock in late 2008 as market declines pressured capital and the company’s share price plunged. That compares with a dividend increase this year and a share rally of more than 50 percent since Dec. 31.
Losses tied to deterioration in the creditworthiness of issuers are more worrisome than the more recent fluctuations related to interest rate movements, said Douglas Meyer, an analyst at Fitch Ratings. He said higher rates can help increase investment income at insurers and improve profitability on some products.
“The jump in interest rates, the way we look at it, it has a positive impact on the industry,” he said. “This will provide relief in terms of reserve adequacy, it will provide relief on reinvestment rates.”
A spike in rates of more than 5 percentage points could hurt insurers, he said. Clients might redeem products that offered lower yields (USGG10YR), forcing insurers to sell securities at a loss to meet withdrawal demands, he said.
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