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) 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), 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.

Part of that story involved the federal government ushering MetLife closer to "too big to fail" status. Financial regulators use nicer terms like "systematically important" as a working euphemism.

Whatever the regulators call it, this puts MetLife under tighter government scrutiny. No company wants to be on the Fed's radar screen, and the management of MetLife protested the government's increasing oversight.

Of course that's not even close to a "natural disaster." But net derivative losses of $1.69 billion when compared to the year-ago quarter's net derivatives gains of around $2.09 billion is no small setback.

In the positive news category MetLife and SunTrustBanks ( STI) announced in a press release on Aug. 5 that SunTrust will finance commercial real estate mortgages originated and managed by MetLife Real Estate Investors.

Did you know about that newly created commercial real estate division of MetLife? It was news to me as well, and it includes a good size loan from SunTrustBanks to MetLife's new platform!

The loan is to be structured over three years with a possible total investment from SunTrust of up to $5 billion, subject to approval of each loan. The press release said that the structured loan "... reinforces SunTrust's commitment to commercial real estate."

"We welcome SunTrust as a client and partner as it brings strong regional and national expertise that complements our long-standing real estate investment heritage," said Steven J. Goulart, executive vice president and chief investment officer of MetLife.

Goulart said, "This unique partnership supports our larger strategy to provide innovative and reliable investment vehicles to our clients."

He was referring to MetLife's recent launching of an institutional asset management business to "... leverage its capabilities to invest on behalf of institutional clients."

The new business venture builds upon the company's confidence in its expertise and past success in originating both commercial mortgages and private placement debt.

It also introduces to more analysts and investors MetLife's experience with investing in real estate equities. With today's very low interest rates and with real estate recovering this may be a very smart idea.

In the second quarter of 2013 MetLife had total operating revenue of slightly more than $17 billion. This amount didn't include its disappointing investment results.

Operating earnings which also didn't include investment losses increased to $1.44 a share from the prior year's $1.34.

Book value of MetLife's stock, excluding accumulated other comprehensive income, fell 3% from the second quarter of 2012, mainly due to the net derivative losses that resulted in lower net income.

As you can see from the 1-year chart below MetLife's shares enjoyed a substantial move higher. But the quarterly revenue-per-share fell off a cliff in the beginning of the second quarter.

MET Chart MET data by YCharts

"MetLife delivered strong performance in the second quarter through favorable investment margins, expense discipline in the United States and good results in Asia," said Steven A. Kandarian, chairman, president and chief executive officer of MetLife during the earnings call.

"We continued to execute on our strategy by growing our top line in emerging markets and shifting our business mix toward lower capital intensive products. We expect our strategy will continue to increase shareholder value over time."

Like insurance companies who experience unusually high payouts as a result of natural disasters, MetLife will have to recover from its undesirable investment results. As the CEO indicated it will take some time.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of www.ChecktheMarkets.com.

Courtenay holds a Master's of Science degree in Psychology from California Polytechnic State University, and is a former senior vice-president of Investments for two major brokerage firms. He's been a fiercely independent investment "investigator" and a consulting contributor to the investment publishing world for over 30 years. In addition to his role as an investment publisher and analyst, he serves as a marketing consultant to the investment media industries.

In his role as a financial editor, he specializes in unique investment strategies, overlooked stock investments, energy and resource companies, precious metals, emerging growth companies, the prudent use of option strategies,real estate related opportunities,wealth preservation, money-saving offers, risk management, tax issues, as well as "the psychology of investing". Because of his training and background in Clinical Counseling and Psychology, he enjoys writing about investor behavior, the ┬┐herd mentality, how to turn investment mistakes into investment breakthroughs and the stock market's behavioral trends and patterns.