MetLife Profit Slides as Hedge-Fund Investments Falter
February 03 2016 - 5:10PM
Dow Jones News
MetLife Inc.'s fourth-quarter earnings fell sharply, as it
wrestled with tough economic conditions in many parts of the world,
while low interest rates continued to work against insurers.
MetLife became the latest insurer to cite faltering performance
of private-equity and hedge funds as a factor in its earnings,
which were below analysts' consensus expectations.
The company also reported weaker profit margins in many of its
core insurance underwriting businesses.
The company, which is the largest U.S. life insurer by assets
and a major presence in many international markets, also cited a
stronger U.S. dollar. The continued strengthening of the dollar
leads to adverse currency conversions for global companies.
The New York company reported a 13% decline in its closely
watched operating profit, to $1.38 billion, or $1.23 a share. That
was down from $1.58 billion, or $1.38 a share, in the year-earlier
period. Operating income excludes realized capital gains and losses
in the companies' big investment portfolios and some other
items.
Wall Street analysts were expecting $1.36 a share.
In after-hours trading, shares declined 2.5%.
Net income fell 47% to $785 million, down from $1.49 billion.
Net income includes $231 million in net derivative losses,
reflecting changes in interest rates, stock markets and foreign
currencies. MetLife uses derivatives as part of a broad
asset-liability management strategy to hedge certain risks. This
hedging activity often generates gains or losses in net income that
are non-economic.
Total revenue was down 6% to $17.11 billion. Premiums, fees and
other revenue were off in many units, and by a double-digit amount
in at least two operations. In particular, the company's cited
deteriorating results in its auto-insurance business.
Chief Executive Steven Kandarian said that 2015 had been "a
challenging year overall," and noted that the company's surprising
news earlier this month of a plan to divest a large chunk of its
U.S. life-insurance business into a self-standing company
"demonstrates our willingness to take bold steps to maximize
shareholder value."
Like many insurers, MetLife keeps a sliver of its investment
portfolio in holdings that are supposed to earn more than the
high-quality bonds they mostly hold. Insurers earn a substantial
portion of their income from the investments they make with
customers' premium dollars, holding them until claims are due.
MetLife said its total net investment income was $4.8 billion,
down 7%. "Variable investment income" was $109 million, compared
with $325 million in the year-earlier quarter, "due to weak private
equity and hedge fund performance."
MetLife's disappointing results with hedge funds follows lower
third-quarter income on hedge-fund investments at American
International Group Inc. Last month, AIG Chief Executive Peter
Hancock said the company would make "a significant reduction" in
hedge-fund investments following "a very negative experience" in
2015.
Insurers have faced a major headwind in the protracted
low-interest-rate environment in the U.S. and many other parts of
the world. Many insurers invest a small amount of their overall
investment portfolio in alternative to bonds, including private
equity and hedge funds. Typically, they invest a percentage point
or two of the total portfolio, but the dollar amounts can be large
at the nation's biggest insurers.
Hedge funds lost 1% in 2015, according to hedge-fund-research
firm HFR Inc., underperforming the S&P 500, which fell 0.7%.
Portfolio managers faltered for many reasons, including bad bets on
energy and currencies and a too-heavy reliance on certain
stocks.
AIG has said its reduction in hedge-fund investments is geared
toward reducing volatility in the company's investment portfolio.
The move is part of a wide-ranging package of initiatives by the
company as it seeks to return $25 billion to its shareholders in
buybacks and dividends over the next two years, in the face of a
possible proxy fight by activist investor Carl Icahn.
AIG had approximately $11 billion in hedge funds at the end of
the third quarter of 2015, but that's relatively unimportant in its
overall $346 billion portfolio.
Write to Leslie Scism at leslie.scism@wsj.com
(END) Dow Jones Newswires
February 03, 2016 16:55 ET (21:55 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
MetLife (NYSE:MET)
Historical Stock Chart
From Aug 2024 to Sep 2024
MetLife (NYSE:MET)
Historical Stock Chart
From Sep 2023 to Sep 2024