Bloomberg News

MetLife Profit Surges More Than 10-Fold on Derivatives

October 27, 2011

(Updates with bank profit decline in the 10th paragraph, investment income in 14th and annuity gain in 16th.)

Oct. 27 (Bloomberg) -- MetLife Inc., the insurer whose plan for a dividend increase was rejected by the Federal Reserve, said third-quarter profit surged more than 10-fold on gains in the company’s derivative bets.

Net income advanced to $3.58 billion, or $3.33 a share, from $316 million, or 32 cents, in the year-earlier period, the New York-based company said today in a statement. Operating profit, which excludes some investment results, was $1.11 a share, beating the $1.08 average estimate of 19 analysts surveyed by Bloomberg.

Chief Executive Officer Steven Kandarian relies on MetLife’s derivatives portfolio to protect the insurer against market moves like declines in interest rates. The contracts have boosted results in quarters when rates declined, as they did in the three months ended Sept. 30. Due to accounting rules, MetLife’s derivatives also add to earnings when the company’s own credit spreads widen.

“The credit spreads blew out and so they revalued their derivative liabilities, and that runs through earnings,” said Doug Meyer, an analyst with Fitch Ratings. “You’re going to see that across the industry.”

Premiums, fees and other revenue rose 41 percent to $12 billion on sales outside the U.S. after MetLife’s $16 billion acquisition of American Life Insurance Co. in November. Book value per share, a measure of assets minus liabilities, climbed 14 percent from June 30 to $55.13 on Sept. 30.

Share Rally

MetLife advanced about 3 percent in extended trading at 5:42 p.m. in New York. The company had gained $2.48, or 7.5 percent, to $35.67 in regular trading, before results were announced. The 24-company KBW Insurance Index jumped 5.6 percent as European leaders agreed to expand a bailout fund to stem the region’s debt crisis.

MetLife posted total derivative net gains of $2.7 billion after tax in the third quarter, including a $1.3 billion contribution tied to the widening of its credit spreads. In the same period a year ago, MetLife reported $190 million of derivative net losses.

The yield on 10-year U.S. Treasuries plummeted 39 percent in three months to 1.915 on Sept. 30. That compares with a 14 percent decline in the same period a year ago. The cost to protect bondholders against a MetLife default more than doubled in the third quarter.

Bank Unit

Kandarian was ordered by the Fed to scrap his plans to resume share buybacks and raise MetLife’s dividend for the first time since 2007, the insurer said this week. MetLife is “well capitalized” and will seek approval for an increase early next year, Kandarian said in a statement. The company, which as an insurer is regulated by U.S. states, is seeking to limit oversight from the Fed by divesting banking businesses.

MetLife’s bank unit posted operating earnings of $51 million in the third quarter, a 50 percent drop from the same period a year earlier, due higher expenses, the company said. Operating revenue rose 4 percent to $425 million. MetLife Bank had $17.7 billion of assets and $10.7 billion of deposits at the end of September.

“MET was well positioned to return a sizable amount of capital to shareholders,” said Suneet Kamath, an analyst with Sanford C. Bernstein & Co., yesterday in a research report. “It is likely the case that the Fed is not granting any new approvals for any company until” the regulator completes a new round of capital tests, said Kamath, who has an “outperform” rating on the stock.

Fed Review

MetLife’s capital strength was examined by the Fed in March as the regulator reviewed 19 of the biggest U.S. financial companies. The Fed, which didn’t publish the test results, permitted dividend increases that month by firms including JPMorgan Chase & Co. and Wells Fargo & Co., while blocking a raise at Bank of America Corp. At the time, MetLife said it would present its plan to the Fed “later in the year” when it typically sets the annual dividend.

The insurer said this week it was keeping its annual payment at 74 cents a share.

Net investment income, including payments from bonds, declined 2.5 percent from last year’s third quarter to $4.26 billion, using Generally Accepted Accounting Principles. On an operating basis, the figure jumped 17 percent to $5.05 billion.

MetLife said “strong performance” from holdings of private equity and securities lending contributed to $400 million in so-called variable investment income.

Variable Annuities

Premiums, fees and other revenue in the main U.S. operations rose 9 percent to $7.7 billion. International premium and fees tripled to $4 billion on the Alico purchase.

Variable annuity sales jumped 84 percent to $8.6 billion. MetLife passed Prudential Financial Inc. in the first half to regain the top spot among sellers of variable annuities.

“They have arguably the most attractively priced product on the market, as Prudential kind of drew back a little bit last year,” said Randy Binner, an analyst with FBR Capital Markets.

MetLife took a charge of $117 million to adjust reserves as it uses additional data to identify cases where it hadn’t paid death-benefit claims. The company previously said the charge would be $115 million to $135 million.

--Editors: Dan Kraut, Dan Reichl

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

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net.


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