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MetLife changes hedging strategy after billions in losses
May 4, 2017 / 3:04 PM / in 7 months

MetLife changes hedging strategy after billions in losses

NEW YORK, May 4 (Reuters) - MetLife Inc said it has changed its derivatives trading strategy after two consecutive quarters where losses from wrong-way bets hurt the insurer’s profits.

MetLife 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.

The insurer reported after-tax net losses of $602 million in the first quarter and $3.2 billion in the fourth quarter related to its derivatives portfolio. 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.

All major financial companies use a type of derivatives known as swaps to offset possible losses from changes in interest rates. However, rates have been at historic 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 expecting 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 related to a retail insurance business called Brighthouse Financial that it plans to divest. The company is awaiting regulatory approvals for the spinoff, which are unlikely to happen within the first half of the year, Kandarian said.

Reporting by Suzanne Barlyn; Writing by Lauren Tara LaCapra; Editing by Meredith Mazzilli

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