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MetLife Net Falls 90% on Review of Annuities Slated for Exit

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MetLife Inc., the largest U.S. life insurer, said second-quarter profit tumbled 90% on a review of the prospects of a variable annuity business that Chief Executive Officer Steve Kandarian is seeking to exit. The stock declined in extended trading.

Net income dropped to $110 million from $1.12 billion a year earlier, the New York-based company said Wednesday in a statement. Operating profit, which excludes some investment results, was $0.83, missing the $1.35 average estimate of 13 analysts surveyed by Bloomberg.

Kandarian, whose term was extended in June, is looking to retreat from a U.S. retail business that sells individual life insurance and variable annuities, a capital-intensive operation that wasn’t generating the cash flow he desired. He sold a network of about 4,000 advisors to Massachusetts Mutual Life Insurance Co. in July. The goal is to focus on international operations and U.S. offerings that are provided through the workplaces, such as disability and dental coverage.

“Results were negatively impacted by market factors, our annual variable annuity actuarial assumption review and reserve adjustments,” Kandarian said in the statement. There has been significant progress, however, on the “planned separation of a substantial portion of the U.S. retail business,” he said.

Interest Rates

The variable annuity review resulted in a non-cash charge of $2 billion. Lower interest rates can require the company to change its assessment of future profitability on the retirement products, as can changes in customer behavior, such as when policyholders maintain contracts longer than the insurer had expected.

MetLife dropped 4% to $41.96 in late trading at 5:04 p.m. in New York. The insurer had declined about 9.4% this year to $43.70 as of 4 p.m. Results were released after the close of regular trading.

Life insurers have been pressured by the decline in U.S. Treasury yields, especially after U.K. voters decided to leave the European Union. The companies hold the bulk of their investment portfolio in bonds.

Prudential, Lincoln

Prudential Financial Inc., the second-largest U.S. life insurer, reported that second-quarter net income slipped 34% to $921 million. Lincoln National Corp. posted a profit of $325 million, down from $344 million during the same period a year earlier.

MetLife’s operating return on equity was 4.9% in the second quarter, compared with 10.2% in the same period in 2015. Book value, a measure of assets minus liabilities, rose to $70.18 a share from $67.10 at the end of March.

The Americas unit, MetLife’s largest division, reported operating earnings that fell 42% to $835 million driven by the variable annuity review. The retail unit contributed $184 million, a decrease from $690 million.

Kandarian has yet to announce whether he’ll pursue a spinoff, initial public offering, or sale of the U.S. retail division, which is to be led by Eric Steigerwalt. MetLife said July 21 that Steigerwalt’s company will be named Brighthouse Financial.

The business selling workplace coverage slipped 4.3% to $221 million. Profit at the Latin America division rose 10% to $128 million, aided by a large employee-benefit sale in Mexico.

Pension Deals

The corporate-benefit funding unit, which includes the business where employers offload pension risks to MetLife, contributed $302 million, down from $406 million a year earlier on lower investment margins and a reserve adjustment. The company, along with MassMutual won a deal in June to take on about $1.6 billion in pension liabilities from PPG Industries Inc., the maker of paints and coatings.

Profit at the Asia operation, led by Chris Townsend, slipped 39% to $259 million as the company focuses on reducing sales of yen-based life policies. The Europe, Middle East and Africa businesses, overseen by Michel Khalaf, reported earnings of $64 million, an increase from $50 million a year earlier, helped by lower expenses.

Investment income slipped 1.2% to $4.89 billion. The company’s portfolio was valued at more than $540 billion as of June 30.