(Adds details about history of hedging strategy)
By Suzanne Barlyn
NEW YORK May 4 MetLife Inc has changed
its derivatives trading strategy after two consecutive quarters
in which losses from wrong-way trades hurt the insurer's profit.
The largest U.S. life insurer has altered the "technique and
structure" of certain hedges to make the company less sensitive
to interest rate movements, Chief Executive Officer Steven
Kandarian told analysts on a call to discuss first-quarter
results on Thursday.
Operating profit beat analyst expectations, but included
after-tax net losses of $602 million related to its derivatives
portfolio in the first quarter. The prior quarter included $3.2
billion worth of such losses.
MetLife's derivatives losses largely pertain to its planned
divestiture of a retail insurance business called Brighthouse
Financial. Other insurers that reported results recently,
including American International Group Inc and
Prudential Financial Inc, have not had the same issues.
On the call, JPMorgan analyst Jamminder Singh Bhullar said
he was "a little surprised" by the losses, considering interest
rates did not move in a significant way against the type of
positions executives described during the first quarter.
Kandarian cited several factors in response: a rising U.S.
stock market, a decline in 10-year Treasury note prices, higher
rates for hedges, accounting standards that treat MetLife's
positions unfavorably, plus general "ineffectiveness" all hurt
the company, he said.
The "ineffectiveness" alone cost MetLife $139 million, Chief
Financial Officer John Hele said. Two-thirds of the losses were
"non-economic," meaning they reflect accounting standards
regarding how assets and liabilities are valued, rather than the
underlying health of the business, MetLife said.
All major financial companies use a type of derivative known
as swaps to offset possible losses from changes in interest
rates. However, rates have been at lows for a historic amount of
time, as the Federal Reserve and other central banks tried to
boost economies following the 2008 financial crisis.
The Fed began raising rates last year and hiked its key rate
target again in March, hurting companies that expected rates to
remain low for longer. Changes in market values can cause large
swings in earnings related to derivatives because of the way
companies must treat them under accounting rules.
MetLife's painful derivatives positions are largely a result
of positions it put in place to ensure Brighthouse would be
financially strong from a capital perspective, and the spinoff
would go smoothly. The company is awaiting regulatory approvals
for the spinoff, which are unlikely to happen within the first
half of the year, Kandarian said.
(Writing by Lauren Tara LaCapra; Editing by Meredith Mazzilli
and Matthew Lewis)