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MetLife Hedges Its Way onto a Perilous Path

NEW YORK ( TheStreet) -- Once upon a time, there was an insurance company that was so irresistible, it even had Snoopy the dog of "Peanuts" fame as its mascot.

In fact, this insurance company still uses quite a few "Peanuts" characters to project a consistent and friendly image about its line-up of insurance products. For years it's proved to be a very smart move.

Late in 2006, it signed an international agreement -- the first ever for this company -- with Peanuts Worldwide. This agreement gave it exclusive worldwide rights to use the PEANUTS characters to promote the company.

Like the smiling, dancing Snoopy, MetLife (MET - Get Report) frolicked its way to becoming one of the prominent brand names in the insurance industry.

In 2010 MetLife decided to purchase a global life insurance business from the then critically-wounded American International Group (AIG - Get Report), a behemoth insurer now infamous for losing big bucks selling credit default swaps.

AIG's fiscal profligacy and enormous derivatives business caused the then largest insurance company in the world to implode in 2008. It took the federal government to rescue it from insolvency.

MetLife's purchase from AIG is part of its plan to sell life insurance products in areas that are considered emerging markets. China, for example, looked promising and turned out to be profitable.

Yet when MetLife stepped into the earnings confessional last week it stunned investors with the news that in the second quarter its year-over-year earnings had plunged over 78%. That kind of stumble can be disastrous for a publicly-traded insurance company.

The company blamed the big earnings miss on net derivates losses it had booked during the quarter. MetLife utilizes derivatives to hedge a host of risks and unexpected natural and unnatural events.

For example many insurance companies like MetLife use futures and options contracts to protect itself or create a "hedge", against changes in interest rates, currency volatility or fluctuations in its investment portfolio.

One of the negatives that hurt MetLife and its earnings-per-share was a change in the company's credit standing during the second quarter.
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