Prudential & MetLife - Record Loss

They are two of the giants of the life insurance sector, and indeed two of the biggest names in US insurance entirely, but for MetLife and Prudential Financial these have been testing times.

Last month, MetLife, the largest life insurance company in the US by assets, which also has offices in both London and Brighton, announced that it had taken its biggest quarterly loss for a decade or more. Meanwhile, Prudential Financial, the second largest, recorded a $1.28 billion loss.

So what’s the problem? In theory, it shouldn’t have been this way. With the arrival of Donald Trump as US President, it was expected that life insurance companies would have been among the big winners with the prospect of Trump’s economic policies sending interest rates higher and offering notable relief to the insurers who had seen their profits tumble due to ultra-low bond yields in recent years.

However, for MetLife the opposite has been true – at least for now. The market swing meant that the company was rocked by a $3.2 billion derivatives hit, leading to its $2.1 billion loss for the quarter overall.

Meanwhile, Prudential Financial saw its figures hit by an opaque charge relating to its annuities business – as a result, net income fell from $740 million to $293 million.

Where does this leave them?  As MetLife’s loss was larger than anything it experienced during the financial crisis, it would be difficult for potential investors to dismiss. However, the bulk of its loss arrived because of the use of derivatives to ease the pain of lower interest rates – and when the swing occurred, the insurer was effectively caught out because the derivatives offered less income.

However, a report by The Financial Times suggests the figures may not show the total picture – and that things may not be as troubling as they seem. It points out that different accounting standards apply to derivatives and liabilities with derivatives marked to market, often leading to swings from quarter to quarter in GAAP net income; whereas liabilities appear more static in part because insurers have to lock in assumptions that were made when contracts were written.

As such, when interest rates rise, the cost for insurers through lower derivative values are reflected in the balance sheets - whereas the benefits may not be reflected in the accounts.

In the case of Met Life, the company is reportedly re-examining its hedging strategy; while Prudential Financial is said to be looking at reforms to make its GAAP figures increasingly meaningful. Indeed the Financial Accounting Standards Board has also suggested changes to revamp accounting practices.

For now, however, it seems that one set of negative figures may not hold the doom and gloom that first appears.