Earnings season is in full swing – and although GDP data came in at a better than expected rate today, we also had a sobering reminder that that does not flow equally to all firms, nor are all the tough times behind us. Today, MetLife Inc. reported a loss of $650 million for the third quarter, which were driven by losses in its investment portfolio.
The investment losses this quarter were a staggering $1.42 billion, compared with gains of $483 million in the 2nd Quarter of 2009. It is reasonable to wonder how a firm could have a $2 Billion swing in only three months. The answer is simple: they were bit by the derivative bug. As institutions continue to strive to hedge risks by using derivatives, these contracts can move against you, quickly, and cause significant net loss. That is what happened to Met Life this quarter. The derivative losses on swaps seem to have arisen from interest rate and forex transactions – not surprising since this is outside the core functions of the firm. Perhaps, it should be back to basics.
Life insurers make money by investing premiums before they must pay out when policyholders die or begin collecting on annuities. This strategy tends to work under normal market conditions – when there are not significant draws, or market turmoil. But, as we all saw, the market collapse of 2008 and 2009 decreased the value of their investments, which saddled MetLife and other insurers with hefty investment losses rather than profits.
While earnings for Met Life have clearly struggled all year, it is possible that tide is now reversing – the S&P 500 index rose nearly 15 percent during the third quarter, which could be a predecessor for investment profits.
Still, investors seemed disappointed with the results, sending shares down 52 cents to $36.32 in after-hours trading. Shares had jumped $2.68, or 7.9 percent, to close the regular session at $36.84 before the report was released. Clearly a sign the investment community had expected opposite results.
So where does Met Life go from here? A strong brand, with an extensive client list is not facing collapse, as there is no reason to believe there will be significant pay-outs in the near term. MetLife is viewed as one of the stronger insurance companies, weathering the economic downturn better than many of its peers. But, as the coffers have been drained due to these ongoing losses, in order to get the liquidity levels back to where they should be, we should expect Met Life will have to take on even more risk in the future, not less, in order to catch up to their expected pay-outs.
