(Bloomberg) — MetLife Inc., the largest U.S. life insurer, says profit fell 78% as rising interest rates cut the value of the company’s derivatives.

Second-quarter net income dropped to $502 million from $2.3 billion a year earlier, New York-based MetLife says today in a statement. Operating earnings, which exclude some investment results, were $1.44 a share, beating the $1.33 average estimate of 20 analysts surveyed by Bloomberg.

MetLife, led by Chief Executive Officer Steve Kandarian, uses hedges to cushion fluctuations in stocks, bonds and currencies on an investment portfolio with more than $350 billion of bonds backing future payouts to customers. The yield on the 10-year Treasury (USGG10YR) rose 0.64 percentage point to 2.49% in the quarter.

“As the change in interest rates flows through income statements and balance sheets, we’re seeing the first impacts,” Cathy Seifert, an equity analyst at Standard & Poor’s Capital IQ, said by phone before the insurer posted results.

MetLife has advanced 47% this year to close at $48.42 today. Prudential Financial Inc., the No. 2 U.S. life insurer, is up 48% this year. Kandarian’s company gained 8 cents in extended trading at 4:38 p.m. in New York on Wednesday. MetLife released its statement after the close of regular trading.

Rising bond yields may help MetLife increase investment income, Seifert said. Rates rose after Federal Reserve Chairman Ben S. Bernanke signaled that some of the central bank’s stimulus could end in 2014. The Fed lowered its benchmark rate and has pursued three rounds of bond buying to jump-start U.S. growth after the 2008 financial crisis.

Cost cuts

Operating profit for the Americas, MetLife’s largest region climbed 18% to $1.3 billion, led by results in the U.S. MetLife said “disciplined expense management” added to profit. The insurer cut its adviser force by a third in the 15 months ended in May and is moving some jobs to North Carolina.

Kandarian, 61, is retreating from some life insurance coverage and reducing sales of variable annuities after low rates weighed on profits. The company is seeking to expand in lines of business that are less capital intensive, such as accident-and-health coverage.

In Asia, operating profit jumped 18% to $330 million. Some of the increase was fueled by fees as policyholders gave up fixed annuities in Japan.

Profit fell 7% to $125 million in Latin America, as MetLife incurred costs to expand the business. Operating earnings dropped 13%to $68 million in the Europe, Middle East and Africa region after MetLife recorded a writedown tied to proposed pension reforms in Poland.

U.S. oversight

The insurer is targeting return on equity of at least 12% by 2016, compared with an operating ROE of about 11% last year. To help reach that goal, MetLife is seeking to cut about $600 million of expenses, mostly in the U.S.

In April, MetLife lifted its dividend for the first time since 2007 after selling deposits to end its status as a bank-holding company overseen by the Fed. The company said this month that U.S. regulators reached the final stage of a process to determine whether it poses a potential risk to the financial system. MetLife has opposed the designation, which would subject the company to Fed oversight. Global regulators deemed the company systemically important this month.

Register or login for access to this item and much more

All Employee Benefit Adviser content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access