MetLife expects to report first net income in year

MetLife Inc., the biggest U.S. life insurer, expects to report its first profit in a year in the fourth quarter as investments in private equity, hedge funds and other holdings recover.

Locally, MetLife has operations in Aurora.

Net income in the period will probably fall to $340 million to $485 million from $954 million in the fourth quarter of 2008, the New York-based company said today. MetLife, which used hedges to post profits last year as markets declined, accumulated $2.57 billion in net losses in the first nine months of 2009 as stock and bond indexes recovered.

Chief Executive Officer Robert Henrikson steered MetLife through the credit crunch last year by amassing more than $30 billion in cash, which he's been drawing down this year to boost returns. The company is looking for deals in corporate debt and structured securities, and Chief Financial Officer William Wheeler said private equity and hedge funds will beat the firm's forecast "substantially" in the last three months of the year.

"Investment results are going to be very good this quarter," Wheeler said today in New York at a presentation of the company's 2010 business plan.

MetLife rose 35 cents, or 1 percent, to $35.68 at 4:01 p.m. in New York Stock Exchange composite trading. The insurer gained 1.4 percent this year before today, after sliding 43 percent in 2008. Prudential Financial Inc., the second-biggest life insurer, is up 56 percent since Dec. 31 after dropping 67 percent last year.

Reversing Declines

MetLife said it expects to snap six straight quarterly declines in operating profit in the final three months of the year by posting earnings excluding investment results and derivatives of 90 cents to 95 cents a share. That compares with 19 cents in the last quarter of 2008.

Operating earnings may then advance to $4 to $4.40 a share for all of 2010, the company said today. The average estimate of 17 analysts surveyed by Bloomberg was $4.10 before the insurer released its forecast today.

Henrikson is seeking acquisitions outside the U.S. and expanding MetLife's business in products including dental insurance and variable annuities as rivals hobbled by the recession scale back. In the first nine months of the year, MetLife claimed the top spot in U.S. sales of variable annuities, the equity-linked retirement products, after trailing TIAA-CREF last year.

Forecast Withdrawn

Operating earnings per share slipped last year for the first time since 2001. In the first half, slumping stock and bond markets prompted Henrikson to withdraw the 2009 full-year profit forecast he gave last December. Equity indexes and bond prices have since recovered and analysts expect the insurer to make operating profit of $2.84 per share this year, compared with the $3.60 to $4.00 a share guidance that MetLife scrapped.

Results from hedges that use derivatives aren't included in operating earnings. Prudential, based in Newark, New Jersey, reported a $1.07 billion net loss last year and $1.26 billion in net profit in the nine months ended in September.

MetLife had about $22.4 billion in cash and short-term investments at the end of the third quarter, and said it expects to reduce the holdings by $3 billion to $5 billion in 2010 to get better returns from its $338 billion portfolio.

"Companies have been holding more cash because they were worried about liquidity," said Alan Rambaldini, an analyst with Morningstar Inc. in Chicago. "As they start to reinvest that cash as worries come down, that will naturally increase investment income."

Reducing Expenses

MetLife, which cut 1,000 jobs in the first quarter, said it met its goal of at least $400 million in annual cost savings one year earlier than it projected. The company now expects savings of $600 million by the end of 2010, it said. Operating return on equity will increase to about 10 percent in 2010 and probably improve in future years, Henrikson said. Book value will probably be $41 a share at the end of this year, MetLife said.

"Back-to-normal earnings performance will be in the 2011 to 2012 timeframe," MetLife said today in a slideshow.

Henrikson shunned government aid this year, as did Prudential CEO John Strangfeld, and the two executives are seeking to expand as bailed out rivals Hartford Financial Services Group Inc., Lincoln National Corp. and American International Group Inc. scale back. New York-based AIG, once the world's biggest insurer, is selling assets to help repay a bailout valued at more than $180 billion.

'Not a Problem'

MetLife has said it's better positioned to buy businesses outside the U.S. after the recession hobbled competitors. Henrikson said today the company may be interested in AIG's American Life Insurance Co. and, when an analyst asked whether $14 billion was too much to spend on a deal, he replied "the size is not a problem."

"There's no reason to believe that that or pieces of it would not be attractive to our growth," Henrikson said of Alico. "We're wide open to really attractive deals" that create value, Henriskon said.

MetLife is bracing for more losses from its $34.8 billion portfolio of commercial mortgages, even as the economic slump begins to ease. The company also held about $15.5 billion in commercial mortgage-backed securities at the end of September. Writedowns on these investments are not subtracted from operating earnings.

"We expect further losses" on commercial real estate holdings, Morningstar's Rambaldini said. "That's something they'll have to watch because they have above average exposure to those items."

Regulators Provide Relief

MetLife may move as much as $1 billion to one of its insurance subsidiaries to help maintain capital levels, Wheeler said. As the property market deteriorates, the company is facing an increase in capital required to back mortgage-related investments. That forecast is down from a "worst-case scenario" projection of $2.2 billion that Wheeler gave in October.

Wheeler said he expects a benefit to MetLife's capital ratios from a change in the way regulators project future losses on residential mortgage-backed securities held by insurers. The National Association of Insurance Commissioners replaced the use of ratings issued by firms like Moody's Investors Service with RMBS analysis by Allianz SE's Pacific Investment Management Co.

That change, which was proposed by a Washington-based life insurer association, may give MetLife a benefit of $900 million to $1.2 billion, Colin Devine, an analyst with Citigroup Inc., estimated at the conference while asking a question of the insurer's management today.

Devine's estimate may be calculated from Wheeler's projection that the relief will give MetLife 15 to 20 percentage points of improvement on the so-called risk based capital ratio, each point of which is worth about $60 million.