I’m simple minded guy. So, one of the many things I don’t understand is this – if you call something a “hedge,” what that’s supposed to mean is that you locked in some value today and have protected yourself against future losses (and potentially missed out on future gains) on the value of some underlying asset.
Which brings us to MetLife. The big insurer said today that its net investment losses in the fourth quarter were $557 million. About $527 million of those losses were connected to derivatives.
Outside of derivatives, the investment portfolio itself was down 82%. “Strong performance from corporate joint ventures and hedge funds was offset by negative returns from real estate funds.” More evidence that pain from real estate investments will continue into the year.
It will be interesting to hear how transparently the company speaks about the derivative losses and the real estate portfolio – what the exposure is, what are the investments, etc.
Conference call Wednesday morning. We shall see.
INVESTMENTS
– General account portfolio yield increased
to 5.07%, up from 4.71% at
December 31, 2008 and 5.01% at September 30, 2009
– Net investment losses, excluding derivatives, declined 82% compared with
the third quarter of 2009
– Cash and short-term investments decreased to $18.5 billion, due in part
to increased investments in higher-yielding assets
Net investment income was $4.0 billion, up from $3.6 billion in the fourth quarter of 2008 and consistent with $4.0 billion in the third quarter of 2009. During the fourth quarter of 2009, variable investment income was above plan by $40 million ($0.05 per share), after income tax and the impact of deferred acquisition costs. Strong performance from corporate joint ventures and hedge funds was offset by negative returns from real estate funds.
Compared with the first three quarters of 2009, net investment losses continued to decline and, in the fourth quarter, were $557 million, after income tax. Approximately $527 million, after income tax, of these total net investment losses were derivative losses. The remainder was due to net losses and impairments across a broad range of asset classes, and was consistent with the company’s expectations.
MetLife uses derivatives — in connection with its broader portfolio management strategy — to hedge a number of risks, including changes in interest rates and fluctuations in foreign currencies. Movement in interest rates, foreign currencies and MetLife’s own credit spread — which impacts the valuation of certain insurance liabilities — can generate derivative gains or losses. During the quarter, an improvement in MetLife’s own credit spread contributed approximately $213 million, after income tax, to the derivative losses. Derivative losses related to the tightening of MetLife’s own credit spread do not have a direct economic impact on the company and reflect the reversal of derivative gains that occurred in late 2008 and early 2009, when MetLife’s credit spread widened. The remainder of the derivative losses was mostly due to increases in interest rates, which are, in general, offset on an economic basis across various assets and liabilities.
